Next Govt must ‘get to grips’ with soaring energy costs for UK steel

Posted on 28 Nov 2019 by The Manufacturer

UK steelmakers could potentially face worsening competitiveness conditions as electricity costs are set to soar and despite “repeated warnings” by industry to the government energy regulator.

UK Steel plant steel foundry - image courtesy of Depositphotos.
“Electricity represents the largest cost after raw materials” – Gareth Stace

UK Steel has slammed the independent gas and electricity regulator, Ofgem, in light of the government watchdog’s decision to ramp up electricity costs as part of its Targeted Charging Review.

The steelmaker said Ofgem had “completely failed” to heed its warnings “time after time” that increased electricity prices significantly hinder the UK steel industry’s ability to remain competitive against its European counterparts, who are charged far less for the utility.

It added that initial analysis of Ofgem’s energy reform proposal suggests electricity prices could increase by up to 10% for many in the energy-intensive industry, resulting from more than doubling of network costs.

UK Steel director general, Gareth Stace, said industry’s bootless cries had “fallen on deaf ears” and demanded that the next government in power after the General Election on 12 December “get to grips with this immediately”.

‘Time after time’

In October, UK Steel published  The Energy Price Gap: A New Power Deal for UK Steel  in which it called for a “level playing field” on energy prices, so that British steel companies can compete in a new trading environment created by Brexit.

It found the UK pays on average 62% more than Germany for electricity and around 80% more than France – this, in an industry where “electricity represents the largest cost after raw materials,” said Stace.

He added that the disparity for steelmakers in the UK has cost the industry £47m this year, at a time where “the sector is already facing wider market uncertainties and trading difficulties”.

UK Steel recommended a nine-point plan as part of its Energy Price Gap findings, to ensure industry jobs are protected and to give the steel industry the “best possible foundation to thrive”.

‘Fallen on deaf ears’

The UK steel industry employs 32,000 people - image courtesy of Depositphotos.
The UK steel industry employs 32,000 people – image courtesy of Depositphotos.

Electricity currently represents the largest single cost after raw materials for many steel producers, with average annual costs of £125m, UK Steel said.

Higher energy costs equal higher steel prices resulting in “more imports from China and Russia”, it added.

This, in turn, increases greenhouse gas (GHG) emissions and “prevents the UK from truly reducing its emissions to net zero, if it cannot control how its steel is produced”.

In June, the UK became the first major economy in the world to pass laws to end its contribution to global warming by 2050.

British steel producers also pay on average £50 per megawatt-hour (MWh), compared to £31 in Germany and £28 in France, according to UK Steel’s Energy Price Gap report. The difference between German and UK electricity costs is the equivalent of £47m a year to the sector, it added.

“Disproportionately high” power prices reduce available capital and deter inward investment, ultimately endangering UK steel production and jobs, said Stace.

As part of its broader discussions with government, the steel industry has committed to reinvesting any savings as a result of state action on the electricity disparity back into UK operations.

The UK steel sector in numbers:

  • Produces 8 million tonnes of steel a year, around 80% of the UK’s annual requirement
  • Employs 32,000 people directly in the UK and supports a further 52,300 in supplies chains and local communities
  • The average steel sector salary is £36,000, 28% higher than the UK national average and 46% higher than the regional average in Wales, and Yorkshire and Humberside where its jobs are concentrated
  • Makes a £1.6bn direct contribution to UK GDP and supports a further £3.9bn
  • Makes a £3.2bn direct contribution to the UK’s balance of trade
  • 96% of all steel used in the UK is recovered and recycled to be used again and again

‘Get to grips’

Global Steel Industry - UK Manufacturing Steel Foundry Factory Metal Stock Rolling Rail - image courtesy of Pixabay.
The global steel industry will continue to remain a fundamental necessity to an industrialised, modern economy – image courtesy of Pixabay.

“We have, time after time, alerted Ofgem of the direct impact of their proposed reforms on the steel sector, but unbelievably our warnings have fallen on deaf ears,” said Stace.

“The independent regulator has completely failed to take industrial concerns into account and is set to worsen the business environment for UK steelmaking and energy-intensive industries.

“The UK steel sector already faces network costs up to eight-times higher than their competitors in France and Germany.

“Ofgem should have been working to lower network costs for energy-intensive industries, not to increase them. We are looking for policies that increase investment in British industry, not discourage it.

“It is evident that the UK steel sector is facing significant challenges at present, and it is therefore extremely disheartening that Ofgem now adds to this with their network cost increases. This is the wrong decision and runs completely counter to any ambition for a coherent industrial strategy in the UK.

“Decisions of such magnitude should not be left entirely in the hands of a regulator with no ability for government to intervene to correct counter-intuitive proposals such as this. The next government must get to grips with this immediately.”

China’s Jingye Group announced earlier this month that it had signed a contract to save British Steel, where around 25,000 jobs have been hanging in the balance since the UK steelmaker was placed into compulsory liquidation in May this year.

The Chinese steelmaking firm plans to invest £1.2bn into the company and would seek to “preserve thousands of jobs in a key foundation industry for the UK,” according to reports by the BBC.

It did not, however, specify precisely how many jobs would be saved as part of the turnaround.

British Steel currently employs some 4,000 people in Scunthorpe and Teesside alone, and at the time of its collapse, it was estimated around 5,000 British jobs were under threat, and another 20,000 in the supply chain.

You may also enjoy reading…

By Rory Butler, Staff Journalist