Government abandons key reforms to deliver lower electricity prices for steel industry

12 March 2024

The Government has today formally abandoned the Green Power Pools policy proposal in its Review of Electricity Market Arrangements. 

The Review, known as REMA, is the Government’s flagship reform of the electricity market where it seeks to change key parts of how electricity is priced, how renewables are paid, and the Capacity Market. Power Pools have been adopted in France, Italy and Greece and were proposed by Government because of their ability to deliver a more efficient energy system and provide lower prices for industry. Major supporters of this model included energy systems experts Professor Michael Grubb of UCL, Aldersgate Group, Green Alliance and UK Steel to name a few. 

The Government confirmed that it will only proceed with a locational marginal pricing (Zonal LMP) model. Zonal LMP would separate the network into many individual zones, each zone with its own price to encourage new generation near demand and encourage power users to locate near existing generation. Steelmakers cannot relocate to lower-price zones and will likely be hit with higher wholesale prices for many years before new generation is deployed in their locality. 

Steel producers in the UK pay nearly two times as much as Germany and France’s industrial electricity prices. Over the past decade, the UK steel sector has suffered prices between 60% and 80% higher than in Germany and France. 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 further switch to electric arc furnaces, it is expected that the sector’s electricity consumption will roughly double. The Green Power Pool was one of the key proposals in the REMA consultation process which could have offered significantly lower power prices to trade-exposed, energy-intensive industries like steel, but this has now been cut. 

Frank Aaskov, Energy and Climate Change Policy Manager, UK Steel, said: 

“It is incredibly disappointing that the Government has dropped the Green Power Pool proposal, which promised to deliver competitive electricity prices for the steel industry. Government is missing a golden opportunity to ensure electrified, green steelmaking can thrive in the UK. 

“As the steel industry switches to electric furnaces to reach vital Net Zero targets, we must not lose sight of how important electricity costs are in the move to green steel. We paid £117 million more for our electricity in 2023 than our European competitors. Discarding the Green Power Pool proposal makes it unclear how the Government seeks to fix this.

"The Government has worked hard to deliver its Industry Supercharger package to reduce industrial electricity costs, only for it to go forward with wholesale market reforms which could increase power prices. This is like giving with one hand, while taking with another.”

Contact details Louise Young, Campaigns and Engagement Manager, UK Steel 07388 370176 | Lyoung@makeuk.org

About UK Steel: UK Steel is the trade association for the UK steel industry. It represents all the country’s steelmakers and most downstream steel processors. 

About the Review of Electricity Market Review (REMA): The REMA consultation process looked to assess and change the electricity market framework, with several key reforms being considered. This included the wholesale market, balancing mechanism, ancillary services, the Contracts for Difference scheme, and the Capacity Market. Crucially, it is reviewing how electricity was priced, where several options have been proposed: 

• Splitting the wholesale market into two separate markets: low-carbon power and dispatchable power. Green Power Pools were a component of this proposal, and the low-carbon variable market would be aimed at EII and vulnerable consumers in fuel poverty while access is expanded as more renewables are deployed. Prof Michael Grubb at UCL Grubb describes the Green Power Pool as a “combined volume of electricity from many renewable generators, made available to consumers directly rather than through the current wholesale market.
• Locational Marginal Pricing, where the national electricity market is split into many zones or nodes. The steel industry has been very concerned about the zonal/nodal pricing model, which risks significantly increasing power prices for steelmakers. It would involve introducing locational signals, where each node or zone would have its own price to encourage new generation near demand and encourage demand near the existing generation. However, as steelmakers cannot relocate to lower-price zones, they will likely face higher wholesale prices for many years before the new generation is deployed in their zone. Locational pricing would penalise steelmakers, is expected to increase their wholesale prices further, and is not recommended as a new model for the wholesale market.

 Green Power Pools research: 

• Professor Michael Grubb of UCL proposed the Green Power Pool, which was part of the REMA process, https://www.ucl.ac.uk/bartlett/sustainable/sites/bartlett_sustainable/files/navigating_the_energy-climate_crises_working_paper_4_-_green_power_pool_v2-2_final.pdf
• The Aldersgate Group has published reports on how the Green Power Pool could lower electricity prices for industry and vulnerable domestic consumers, https://www.aldersgategroup.org.uk/publications/post/electricity-market-reforms-can-slash-bills-for-strained-uk-households-and-businesses/
• Green Alliance has supported Green Power Pools, as part of a package for the steel industry and other energy intensive industries, https://green-alliance.org.uk/publication/building-the-future-a-faster-route-to-clean-steel/

 UK Steel published research in November 2023 on high electricity prices UK steelmakers experience: 

• Tata Steel and British Steel declared in 2023 that they will invest in electric arc furnace technology. To maximise the value of these investments the industry will need affordable electricity supplies.
• Steelmakers in the UK pay nearly two times as much as Germany and France’s industrial electricity prices. This is partly due to higher grid connection costs in the UK, which the Government could reduce further.

• 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.
• UK Steel makes four recommendations to cut prices:
  1. Implement the British Industry Supercharger package by April 2024
  2. Compensate industry for 90% of its network charges, matching French/German support levels
  3. Wholesale market reforms, which could include splitting the wholesale market
  4. Track industrial energy price disparities between countries

 The UK steel sector:  

• Produces 6Mt of crude steel a year, around 70% of the UK’s annual requirement (annual demand of 8.9Mt)
• Employs 39,800 people directly in the UK and supports a further 50,000 in supply chains
• The median steel sector salary is £39,637, 43% higher than the UK national median and 56% higher than the regional median in Wales, and Yorkshire & Humberside, where its jobs are concentrated
• Directly contributes £2.9 billion to UK GDP and supports a further £3.8 billion
• Directly contributes £4 billion to the UK’s balance of trade
• 96% of steel used in construction and infrastructure in the UK is recovered and recycled to be used again and again