Government heeds steel industry warning, shelves zonal pricing plans

10 July 2025

UK Steel has today welcomed the Government’s decision to rule out proposals for zonal electricity pricing within the Review of Electricity Market Arrangements (REMA), after Secretary of State Ed Miliband recognised the need to protect the security and competitiveness of the UK steel sector.

Depending on how zonal pricing would have been implemented, it could have increased industrial electricity prices by more than 10%, undoing the cost-saving measures announced in the Industrial Strategy. UK Steel was particularly concerned about the lack of cost-benefit analysis, impact assessments, and in-depth assessment of potential shielding options to demonstrate that the steel industry would not be worse off under zonal pricing.

The decision follows warnings from UK Steel, highlighting the risks zonal pricing would have posed to energy intensive industries like steel. Under zonal pricing, steel producers – who are tied to existing sites originally chosen for proximity to raw materials, transport and workforce – would have faced higher electricity costs simply due to their location. With UK steelmaking suffering from US tariffs and long-term electricity prices up to 50% more than French and German costs, this would have threatened UK jobs, investment, and the investment needed in decarbonising the sector.

Gareth Stace, Director-General at UK Steel, said:

“We are pleased that the Government has listened to industry warnings and ruled out this risky proposal. Zonal pricing would have penalised existing industrial sites, driving up electricity prices, further damaging our ability to thrive, foster jobs, and undermining much needed investment in steelmaking.
“Electricity prices for the UK steel sector are among the highest in Europe. UK Steel warned that zonal pricing would have created a ‘postcode lottery’ for industrial power prices, conflicting with the Government’s own ambition to reduce power costs for British industry.
“As the industry transitions fully to electric arc furnace technology, price competitiveness will become even more central to the sector’s future. While today’s decision provides clarity on the direction of electricity market reforms, the Government must ensure that the alternative to zonal pricing, reformed national pricing, supports rather than hinders industrial competitiveness.”

Contact details

Louise Young, Campaigns and Engagement Manager, UK Steel 

07388 370176 | Lyoung@makeuk.org

Government decision:

Government takes decision to reform the existing national pricing system rather than split the country into different zones.

Electricity price disparity:

Steel production is incredibly electro-intensive, and power 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.
Currently, the UK steel industry’s electricity use is equivalent to that of 800,000 homes, and an electric arc furnace uses approximately 0.5 MWh of electricity per tonne of steel.
In September 2024, UK Steel revealed stats showing that that UK steel producers pay up to 50% more than competitors in France and Germany, adding £37 million to UK steel electricity costs. The price disparity is predominantly driven by higher UK wholesale costs and partly greater network charges.
UK Steel analysis shows 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.
In the Industrial Strategy, the Government has increased compensation for network charges to 90% in line with European competitors, following UK Steel’s recommendations. UK Steel estimated that this would save the sector £6.5/MWh. This will reduce power prices by an estimated £6.5/MWh and save the steel industry £14.5m per year.
The Government had not released any cost-benefit analysis, impact assessments, and in-depth assessment of potential shielding options for zonal pricing. However, initial Government analysis suggested that wholesale prices could increase for the steel industry by over 10%.
The Labour Government stated in its manifesto that “British industry is also held back by high electricity costs, which has often made investing here uncompetitive. Labour’s clean energy mission will drive down those bills, making British businesses internationally competitive [...]”.

On zonal pricing:

Through the Review of Electricity Market Arrangements (REMA), DESNZ considered splitting the GB electricity market into separate zones, also known as zonal or locational pricing. Currently, the GB electricity market is national, meaning that wholesale electricity prices are the same across the country. Zonal pricing would instead create 3-12 separate electricity markets across the UK, where electricity prices would be determined in each.
The aim is to create an incentive to locate new renewable generation closer to electricity demand users to reduce the need for (1) network expansion and (2) constraint payments. Constraint payments to generators are made when there are physical constraints on the network (e.g. the transmission cables cannot transfer more power from Scotland to England on windy days).
However, splitting the electricity market into separate zones creates uncertainty for investors in new power generation and consequently increases the cost of capital for renewable energy projects. This could mean that “locational pricing becom[es] a net cost to the system”, as noted in the Government analysis. As a result, RenewableUK, the trade body for the on- and offshore wind industry, has urged DESNZ not to pursue zonal pricing alongside SolarUK, Global Infrastructure Investor Association, Offshore Energies UK, and Scottish Renewables.
The steel industry has similarly expressed concerns about zonal pricing, as it will penalise steel producers and EIIs due to their existing locations, which they cannot change and were often chosen due to access to raw materials. With a switch to electric arc furnaces, it is expected that the sector’s electricity consumption will roughly double. Competitive electricity pricing is, therefore, paramount to the steel industry’s growth, competitiveness, and profitability.
Cornwall Insights estimated that due to the complexity of zonal pricing reforms, it would have been unlike to be implemented before 2030. The long implementation time of zonal pricing creates uncertainty around future electricity prices, which dampens investment in the steel industry and overall industrial electrification.
The steel industry would likely be placed in higher-price zones, damaging its competitiveness and adversely impacting decarbonised electric steelmaking. The analysis procured by the Government concluded that “On average, demand weighted wholesale prices are slightly higher in the locational pricing factual than the national counterfactual. Prices in high demand zones show price increases compared to a national pricing counterfactual. […] This leads to increased consumer costs from wholesale pricing, as consumers have to pay more for their energy usage in some zones”. This led UK Steel, MakeUK, British Glass, Ceramics UK, and Community Trade Union to urge DESNZ to reconsider introducing zonal pricing in a public letter in late 2024.