UK Steelmakers' Electricity Premium Over France Hits Three-Year High
UK Steel says the premium over French rivals has reached almost £30 per MWh as the Iran war lifted global gas prices
By AXY Politics Desk ·
Key points
- UK steelmakers now pay almost £30 per MWh more for electricity than French counterparts, the highest premium in three years, according to UK Steel analysis.
- The widening gap followed a surge in global gas prices after the US-Israeli war on Iran, because Britain’s electricity prices are set largely by gas.
- About 75% of British exported steel goes to the EU, a trade worth about £3bn, which makes the cost gap commercially important.
- UK Steel has proposed a capped electricity price estimated to cost about £51m a year, with the government paying when prices rise above the cap.
- Peter Brennan, UK Steel’s director general, says direct subsidies are the only option that would help steelmakers.
British steelmakers are paying almost £30 per megawatt hour (MWh) more for electricity than their French counterparts, the largest premium in three years, according to analysis by the lobby group UK Steel. The gap has widened after a surge in global gas prices linked to the US-Israeli war on Iran, leaving UK steel producers further behind European rivals on one of their biggest operating costs.
The figures matter because electricity is central to modern steelmaking, and the difference in power costs between countries can decide whether a mill wins or loses orders. For an industry that sells much of its output into the European market, a sustained cost disadvantage is not a minor accounting issue. It goes to the heart of whether British steel can compete, invest and keep plants running over the long term.
What the new figures show
According to the UK Steel analysis, the premium that British industry pays over France has risen to almost £30 per MWh. That is its highest level in three years. The gap had been falling over the previous three years and reached £18 per MWh last year, so the latest increase is a sharp reversal rather than a continuation of a steady trend.
The comparison with Germany tells a different story. According to the same analysis, the gap with Germany fell slightly this year to about £12 per MWh. Taken together, the two figures show that the size of the disadvantage depends heavily on which European market is used as the benchmark.
The figures also need context. The premium remains well below the £153 per MWh gap recorded in 2022, when Russia’s invasion of Ukraine triggered a crisis in the global gas market and power prices spiked across Europe. The current premium is high by recent standards, but it is far below the peak of that energy shock.
Why British electricity prices are tied to gas
The central reason for the British gap is the country’s reliance on gas to generate electricity. Britain’s wholesale electricity market generally operates on what is known as marginal pricing. Power plants are dispatched in order of their running costs, and the last plant needed to meet demand sets the price paid to all generators for that period. In most hours, that marginal plant is a gas-fired station.
The practical effect is that the wholesale gas price largely determines the electricity price, even when the power itself comes from sources that are much cheaper to produce, such as wind or solar. Wind and solar farms have almost no fuel costs, yet they are paid the prevailing market price, which gas sets. When gas becomes more expensive, electricity rises across the system, including for generators that burn no gas at all. This is why a disruption to fuel supplies thousands of kilometres away can feed directly into the bills paid by British factories.
The source material attributes the latest surge in gas prices to Iran’s closure of the Strait of Hormuz in response to Donald Trump’s bombing campaign. The Strait of Hormuz is a narrow waterway between Iran and Oman through which a large share of the world’s seaborne oil and liquefied natural gas passes. Because so much energy travels through it, any disruption there tends to push up energy prices globally, and countries that rely heavily on imported or internationally priced gas are especially exposed.
Why electricity matters so much for steel
Steelmaking is energy intensive, but the type of energy used has changed over time. Traditional blast furnaces rely mainly on coal and coke to produce iron. Electric arc furnaces, by contrast, melt scrap steel using large amounts of electricity. The source material notes that gas-fired power is crucial for cleaner steelmaking with electric arc furnaces. Such furnaces are central to lower-carbon production, because they can reuse scrap rather than starting from raw iron ore.
That creates a dilemma. The technology that cuts emissions depends on a steady and affordable supply of electricity. If power costs are high and volatile, the economics of electric arc production weaken, even when the environmental case for them is strong. For a country that wants to modernise its steel sector, the price of electricity is therefore part of the climate and industrial strategy, not just a cost line on a balance sheet.
How France and Germany compare
The gap with France is partly explained by how each country generates its power. According to the source, electricity prices in France are mainly determined by its nuclear reactors. Nuclear plants have high upfront construction costs but comparatively low running costs, so they can supply a large share of demand at a relatively stable price. That gives France a different pricing base from Britain’s gas-linked system.
Germany’s situation is different again. The source notes that heavily polluting coal still plays a large role in its generation. Coal and gas prices affect German power costs in different ways, and Germany’s electricity market is structured differently from Britain’s. The narrower gap with Germany this year suggests that British steelmakers face a different competitive position depending on the country they are compared with, and that no single benchmark captures the full picture.
Why the European market matters to British steel
The comparison with European rivals carries particular weight because the European Union is often the main market for British manufactured products. The source material says about 75% of British exported steel goes to the EU, a trade worth about £3bn. When British producers face higher input costs than competitors selling into the same markets, they risk losing contracts, accepting thinner margins, or both.
This exposure explains why the electricity gap is closely watched by the industry and by policymakers. Steel is also central to the government’s wider industrial ambitions. The source quotes Andy Burnham describing high energy prices as perhaps the biggest obstacle to his goal of “reindustrialising” the UK. In that framing, electricity costs become a question of economic strategy, affecting jobs, investment and the ability to supply domestic infrastructure, as well as the profitability of individual companies.
Government policy and the limits of current options
The source reports that under Keir Starmer, most of the costs that government policy had added to heavy industrial businesses’ electricity bills were removed last year. Those policy costs were a separate layer on top of wholesale prices, so removing them was intended to ease the burden on energy-intensive sectors. The latest figures show, however, that a policy reduction can be overtaken quickly when global gas prices jump.
According to the source, there are two main ways to push prices down further. The first is to build more cheap renewable generation, which would reduce how often gas sets the price. The source describes this as a challenge in the short term, since new wind and solar capacity takes years to plan, consent and build, and it cannot respond instantly to a gas price shock. The second option is to subsidise electricity prices directly, which would lower costs for industry while the wider system changes.
The proposed price cap and its cost
The director general of UK Steel, Peter Brennan, said direct subsidies were the only option that would help steelmakers. The lobby group has proposed a cap on prices that it estimates would cost about £51m a year. Under the proposal described in the source, the government would pay the difference when prices rise above the cap, while the industry would pay the government when prices fall below it.
This kind of arrangement is often described as a two-way contract for difference. It is designed to protect producers from sharp price spikes without giving them an open-ended subsidy when prices are low, because the industry pays back in those periods. For steelmakers, the main appeal is predictability. A known ceiling on power costs would make it easier to plan investment and sign long-term contracts when global gas markets are volatile. The central question for policymakers is whether a cost to public finances of about £51m a year is justified by the protection offered to a strategically important industry.
What to watch next
The outlook depends largely on the gas market. The source attributes the price surge to the disruption linked to the Strait of Hormuz. If that disruption eases, wholesale gas and electricity prices could fall, and the premium over France might narrow. If it continues, analysts may expect pressure on British industry to persist, which would strengthen the case for direct support. Forecasts of this kind are uncertain, because gas prices can move quickly in response to geopolitical events.
Several other developments are worth watching. The first is whether the government responds to the UK Steel proposal for a capped price. The second is whether renewable projects are accelerated, since that is the only route that would reduce Britain’s structural exposure to gas prices over time. The third is how competitors in France and Germany fare as their own energy markets react to the same global shock. Each of these factors could change the cost gap that British steelmakers face against their European rivals in the months ahead.
Questions and answers
Why are UK steelmakers paying more for electricity than French rivals?
According to UK Steel’s analysis, the premium over France has risen to almost £30 per MWh after a surge in global gas prices. Britain relies heavily on gas for power generation, and in its market the gas price sets the electricity price even for cheaper sources such as wind and solar. France’s power prices are mainly determined by its nuclear reactors.
What caused the rise in gas prices?
The source material attributes the surge in global gas prices to the US-Israeli war on Iran, and specifically to Iran’s closure of the Strait of Hormuz in response to Donald Trump’s bombing campaign.
What does UK Steel want the government to do?
UK Steel has proposed a cap on electricity prices estimated to cost about £51m a year. The government would pay the difference when prices go above the cap, and the industry would pay the government when prices fall below it.
How important is the EU market for British steel?
According to the source, about 75% of British exported steel goes to the EU, a trade worth about £3bn. That makes the EU the main market for many British manufactured products and a key reason the electricity cost gap matters.
Topics: UK steel industry, electricity prices, UK Steel, gas prices, France, Peter Brennan, industrial energy costs
Sources: The Guardian Politics