Delivering Competitive Industrial Electricity Prices in an Era of Transition

In recent years, concerns have grown that UK industry pays too much for its electricity, particularly compared to other European and international competitors.

Close examination shows a more nuanced picture, but also highlights some important differences between how the UK and some of its continental neighbours approach pricing for industrial electricity consumption, and how various costs are recovered from different parts of industry and society.

Since 2000[1], UK wholesale electricity prices have been mainly determined by the cost of operating gas plants built in the 1990s, given the UK’s highly liberalised version of electricity markets. Network costs were driven down by a simple regulatory formula. There was surplus capacity, no capacity-related payments, and little investment. Consequently, prices remained low as long as gas prices did – and rose sharply as fossil fuel prices escalated from 2004.

In parallel, the historic tensions between the government drive to introduce renewables and the regulated expenditure on electricity networks also led to congestion on the network, resulting in renewables (mainly in Scotland) paid compensation when not permitted to generate at their full capacity. This approach contrasted with some continental systems, where renewable support policies were better coordinated with investment in the overall network infrastructure and were more cost effective.

At a time when the UK government is focused on charting its future outside the European Union and driving economic recovery in the wake of the COVID-19 pandemic, this briefing summarises the extent to which industrial electricity prices in the UK are different to some of our key continental neighbours (Germany, France and Italy), sets out the key trends that explain those differences, and suggests recommendations to moderate the electricity prices paid by UK industry in the future.

[1]In this briefing, data presented for the UK often reflects GB only (excluding Northern Ireland), reflecting the separation between electricity markets in GB and Northern Ireland (which is part of the Irish Single Electricity Market). However, for the purposes of this report, GB and UK may be considered largely synonymous.