High Industrial Energy Prices in the UK
Great Britain has the highest industrial prices in the G7, making it impossible for companies to compete internationally and potentially leading to the "de-industrialization" of the United Kingdom. Electricity prices are driven by wholesale fuel prices, especially natural gas, but also by taxes and "political costs". The problem is a "live discussion" within the government as ministers complete the government’s industrial strategy, which is to be published next week.
How Much Do UK Businesses Pay for Electricity?
The industrial power price in 2023 was 46% higher than the average of the 32 members of the International Energy Agency (IEA), a group that includes EU and G7 nations that account for 75% of global demand. According to IEA data, the UK paid an average of £258 per megawatt hour, higher than Italy (£218), France (£178), and Germany (£177), and more than four times the £65 paid in the USA.
Why Are Prices So High?
The main determinant is exposure to wholesale gas markets. The UK’s grid is underpinned by gas, and reliably does not fill the renewable energies and nuclear sources. Gas also determines the price on the electricity market, even if it is not the main source of power. The UK market uses a "marginal price system", in which the price is determined by the last and therefore most expensive electricity unit to satisfy demand at any time.
What Makes Up Electricity Bills?
The largest individual element of electricity prices is the wholesale gas cost, which makes up 39% of the bill. The next largest element is "network costs", which is imposed on the use, maintenance, and expansion of the network, making up 23% of the bill. Operating costs are 2%, and VAT is added by a further 20%. The remaining 16% of electricity bills consist of "political costs", levies, and payments introduced to subsidize the construction of renewable power supply capacity.
Long-Term Solution
The long-term solution preferred by successive governments is to increase renewable care and storage to reduce exposure to gas prices. The current administration has the goal of switching to a "clean power grid" by 2030 and reaching net-zero carbon emissions by 2050.
What Do Businesses Want?
Business groups are demanding that these political costs be canceled and transferred to general taxation. They calculate that a 15% price reduction would give them a chance to compete more effectively. Let Britain says that reducing the cost of invoices would reduce prices by 15% and also proposes a "contract for difference" for manufacturers’ electricity, a model borrowed from the renewable energy market.
Solution Proposal
According to the plan, the government would guarantee an "exercise price" for electricity 10% lower than the wholesale price. If prices are higher, the taxpayer would reimburse businesses, and if they are lower, the industry would repay the difference. Make UK estimates the cost to the exchequer at £3.8 billion but believes it would be cost-neutral due to increased growth. The alternative, it says, is a non-competitive manufacturing sector that is sentenced to decline.
Government Response
A government spokesman said: "Due to our sprint to clean power, we will get out of the rollercoaster of fossil fuel markets – protecting business and household finances with clean, local energy that we control."
