UK Steel calls for extension of Government energy support

14 December 2022

• Electricity prices have risen to over £1,500/MWh this week, over 30 times the historical average, forcing some steelmakers to cease production temporarily

• The Government is expected to announce soon what further support it will provide to industry in the face of spiralling energy costs once the current Energy Bill Relief Scheme (EBRS) ends in March
• UK Steel is asking the Government to confirm an extension and improvement of the EBRS for energy intensive industries providing certainty that the steel industry can operate competitively in the year ahead.

Commenting on the energy prices, Director General of UK Steel, Gareth Stace, said:

“Massive electricity price spikes this week have all but broken the Energy Bill Relief Scheme, which aims to shield industry from sustained unsustainable price levels. Electricity prices are at 30 times their historical average this week, forcing some steel companies to cease production at key times during the day. This is simply not sustainable for the steel sector. A long-term solution will be found in infrastructure investment and fundamental market reform, but in the interim we need a bridging solution that ensures UK steel producers can make steel at the same cost as their European competitors.

“The steel sector is looking to the Government to announce that it will continue to cap electricity and gas prices for vulnerable sectors, such as steelmakers, when it publishes its review of the EBRS, expected before the end of the year. Critically the price cap must be updated to reflect new market conditions and actions being taken in competitor countries. The German Government is already planning a scheme for all of 2023, where it will guarantee wholesale electricity prices at €130/MWh, well below the UK’s cap of £211/MWh. The UK Government should match this to ensure our industry’s ability to compete.

“Without the continuation of the EBRS, our estimates show electricity prices being double those of German industry’s next year, leading to reduced production, shrinking market share and increased imports. Prolonged and frequent halts to production could become the norm, negatively impacting productivity, and leading to a decline in steel production in the UK.

“The Government must extend the support scheme, otherwise the UK steel sector will be wholly exposed to ravages of volatile energy markets with predictably grim consequences.”

Notes

• 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.
• The price of electricity directly impacts competitiveness and which price UK steel producers can sell their steel on the global market. It also affects the ability to attract investment and, longer-term, to decarbonise.
• The UK steel industry’s electricity use is equivalent to 800,000 homes, and gas use is comparable to 400,000 homes.
• Wholesale electricity prices rose to £1,585/MWh on Monday 12th December, between 5pm and 6pm. Average wholesale prices for the past seven days were £385/MWh, significantly above the historical average of £45/MWh for 2013-2020.At £1,585/MWh for electricity, means that to make a tonne of steel, which currently is sold for approximately £600 per tonne, the electricity alone would cost a whopping £750, even before adding costs of wages, raw materials to make the steel and significant other business costs.
• The Energy Bill Relief Scheme (EBRS) is scheduled to end 31st March 2023, without which steel producers will face full market prices. The EBRS capped wholesale prices at £211/MWh for electricity for companies on fixed-price contracts or provided a maximum discount of £345/MWh for companies on variable contracts if prices exceeded the market cap.In comparison, the German Government is preparing a scheme which will guarantee an electricity price of €130/MWh for 70% of power consumption for the whole of 2023, ensuring German industry can continue to operate competitively across the wider European market.

Policy recommendations to Government:

• Targeting of the EBRS towards vulnerable industries: The Energy Bill Support Scheme (EBRS) should continue and be targeted towards the most vulnerable and exposed industries, such as the steel industry, and cap electricity prices at £160/MWh (equivalent to the German £120/MWh for 70%). A more targeted EBRS should also remove the maximum price support of £345/MWh. The EBRS provides certainty and guarantees a maximum electricity and gas price, which minimises disruption to production and allows steel producers to compete in the global steel market. Without its continuation, the electricity price difference between Germany and the UK will increase to an estimated £135/MWh, resulting in uncompetitive UK production costs. The Government must take account of what governments in competing countries are introducing and aim to match those schemes.
• Publish consultation response and increase the renewable exemption rate: The Government has consulted on increasing the exemption rate for renewable levies for eligible EIIs and proposed to increase the exemption rate from the current 85% to 100%. This would be in line with policies in France and Germany. However, the Government has yet to publish its response, creating uncertainty and increasing prices for industry. Government should quickly confirm the new exemption rate of 100% and implement it as soon as possible in 2023.
• Reduce network charges: In light of the upcoming electricity network reforms and the significant benefits energy intensive industries bring to the grid, new exemptions should be introduced similar to German/French style network cost reductions. With a model like Germany’s, a 90% exemption is provided for all three elements of network charging (transmission, distribution, and balancing).