A view from London

Raine Newton-Smith, head of the Confederation of British Industry, said recently that 40% of UK firms were holding back on investment due to high energy bills. Earlier this year Jim Ratcliffe, owner of petrochemicals group Ineos, said energy prices were killing the UK’s chemical industry.

Energy-intensive industries, mainly operating in international markets, include paper products, petrochemicals, metals and inorganic products such as cement, ceramics and glass. In the UK, the combined output of these sectors has fallen by one-third since 2021 and is now at its lowest level since data started to be collected in 1990. It’s not just the UK. The European Central Bank reports that euro area manufacturers are increasingly relying on imports, rather than domestic production, for energy-intensive intermediate goods.

US electricity prices are low partly because of America’s abundant domestic supply of cheap gas. The same cannot be said for France or Germany, which, like the UK, import fossil fuels. The UK’s unusually heavy dependence on gas helps explain why UK industry and consumers pay more for electricity than those in France and Germany.

In 2024, gas accounted for 30% of UK electricity generation, 16% in Germany and just 3% in France. Germany has a diversified mix of energy generation, with more than two-thirds coming from coal, solar and wind. France generates almost 70% of its electricity from nuclear.

EU members produce on average almost 50% more electricity than the UK on a per capita basis. Sweden and Finland are the leaders, with the lowest prices among the EU and by far the highest per capita electricity generation.  These countries combine renewables and nuclear to generate around four times as much electricity per person as the UK.

The UK’s reliance on gas means it is often expensive gas that sets the price for all electricity due to Britain’s system of marginal pricing. The final unit of supply needed to meet demand sets the price for all electricity sold. So even if 99% of demand is met with cheaper low-carbon energy, the gas plant that is required for the last 1% will set the price. In 2021 gas power stations accounted for 43% of UK electricity output but set the system price 97% of the time. In comparison, gas sets the marginal price for electricity in the EU 36% of the time. In France, with its huge nuclear capacity, gas sets the price only 7% of the time.

Policies designed to encourage decarbonisation have also added to electricity prices – though this effect is dwarfed by the impact of higher gas prices. The renewables obligations, the feed-in tariffs and the climate change levy collectively account for about 10% of industrial users’ electricity bills. Fewer exemptions are available from these levies than for comparable schemes in Germany, France and the Netherlands.

In the UK, all electricity-related costs are included in the customer bill. In other countries some components — mostly policy — are paid through general taxation. This applies both to domestic and industrial energy prices.

Renewables accounted for just over half of all UK electricity production last year, up from 2.5% in 2000. At the same time, the cost of renewable energy technology, such as solar panels, has fallen precipitously. So if the UK technology is getting cheaper and the UK is producing more green electricity, why aren’t bills lower?

A number of factors are at work. First, consumers and industry are still paying for renewables that came online several years ago when costs were higher. Under the contracts for difference system, operating since 2014, each vintage of contract guarantees energy suppliers a ‘strike price’ for the next 15 years; earlier strike prices, set up to nine years ago, at a time when costs and risks were greater, were higher than more recent ones. Second, land, labour and capital are major costs for renewable producers, and, unlike green technology, they’ve risen in price. Third, and most obviously, solar and wind are subject to the vagaries of the weather and are frequently offline. Renewables need backup capacity, storage, transmission and system balancing, the costs of which are added to bills.

The government recently set out measures to reduce costs for some industrial users of electricity. Next year the government plans to reduce electricity network charges for industrial businesses and in 2027 it will exempt about 7,000 energy-intensive businesses from some green levies.

Such measures are palliatives, not a cure since they shift the incidence of higher electricity costs to other energy consumers or to taxpayers. Gas prices could, of course, fall further and, in the meantime, the technology for renewables and battery storage is getting cheaper. Other costs, however, continue to rise while a huge programme of investment in Britain’s energy system lies ahead. Renewables offer the ultimate prospect of cheap, secure energy. Getting there will take time and a lot of capital.