High electricity prices are a barrier to profitability - even more so when industry has electrified
Electricity intensity
Steel production and processing is a highly energy intensive process, with energy making up a substantial proportion of the cost of converting globally priced raw materials into finished steel products for consumers. Steel production’s energy-intensive nature leads to high electricity consumption, and these costs can represent up to 180% of steel producers’ Gross Value Added (GVA) in the UK. With a switch to electric arc furnaces, it is expected that the sector’s electricity consumption will roughly double.
Paying up to 50% as much
The average price faced by UK steelmakers for 2024/25 is £66/MWh compared to the German price of £50/MWh and French price of £43/MWh. This indicates a price disparity of £16-22/MWh, meaning the industry will pay £37-50 million more for their electricity than European competitors.
Higher wholesale prices drive the price gap
The main driver of the price disparity is now wholesale electricity costs, driven by the UK’s reliance on natural gas power generation. Further reforms are needed to reduce wholesale electricity prices for the steel industry, such as an ARENH-like industry tariff or wholesale market reforms.
Network charges still a barrier
The previous Government introduced a 60% compensation for network charges, which is lower than the 90% offered by Germany and France, leaving industry facing network charges up ten times that of their European counterparts. The new Government can increase this to 90% and bring network charges in line with European competitors.
Future steel's needs
An electric arc furnace (EAF) uses roughly 0.5MWh of electricity per tonne of steel. When the industry has fully electrified, its consumption will roughly double, but the sites switching from blast furnace to EAF will see their power use almost quintuple. This is why we need affordable electricity now and in the future.