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UK industrial electricity costs higher than US, Europe

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Companies say it is making net zero switch harder

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High prices also hitting competitiveness, investment

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By Kate Holton and Susanna Twidale

BRIDGNORTH, England, Aug 28 (Reuters) - In the cradle of

the industrial revolution, Britain's only aluminium coil mill

has spent millions of pounds to save energy, reduce its carbon

footprint and shield itself from some of the highest electricity

costs in the world.

But when Bridgnorth Aluminium's electricity use slips below

the threshold to qualify for a government subsidy that helps

businesses with their bills, it cranks everything up again to

avoid missing out on the financial payout.

"Our finance guy sat us down at the end of the year and said

it's okay to leave the lights on a bit more now. Which is kind

of weird and counterproductive," Adrian Musgrave, the head of

sales at Bridgnorth Aluminium, said.

This paradoxical situation stems from Britain's sky-high

electricity costs, coupled with the piecemeal support successive

governments have given to big industrial power users.

According to the International Energy Agency, large energy

intensive companies in Britain paid about four times more for

electricity last year than U.S. businesses, and more than double

competitors in France and Germany.

Besides hitting competitiveness and contributing to

stubbornly high British inflation rates, power prices have acted

more generally as an obstacle to Britain's shift towards cleaner

energy and the government's goal of hitting net zero by 2050,

according to more than 25 industry figures including business

owners, energy managers and policy experts.

They said high power costs have stripped companies of the

cash to invest in more efficient machinery, deterred them from

moving to lower-carbon electricity sources, and prevented some

from competing with foreign rivals to make the wind farms,

pylons and batteries needed for a net zero future.

"This is the number one barrier to delivering net zero in

the UK at the moment," said Rachel Solomon Williams, head of the

Aldersgate Group, which works with companies and government on

policies to help them decarbonise. "It will materially hinder

net zero if we can't do something about electricity costs."

Britain's new centre-left Labour government sees the energy

transition as a way to fuel much-needed economic growth, with

the creation of highly skilled manufacturing jobs and innovative

companies that can export their expertise.

FOSSIL FUEL ROLLERCOASTER

Prices are higher in Britain than most countries because

even though it generated more than half its electricity last

year from cheaper renewables such as wind and solar, the price

is almost always set by gas, which is more expensive.

Wholesale electricity prices are set every 30 minutes by the

cost of the last energy source used to ensure demand is met. So

even if wind, solar and nuclear provide 99% of the power needed,

if gas-fired plants are needed to hit 100%, then gas sets the

wholesale price for every buyer and seller alike.

On top of that, part of the cost of building renewables and

upgrading the energy network comes from electricity bills,

rather than from tax revenues, with levies making up about 40%

of the average bill.

Other countries in Europe use the same marginal cost pricing

structure in wholesale electricity markets but in France, for

example, the vast majority of its power comes from nuclear

meaning gas sets the price less frequently.

To bring costs more in line with big European markets, the

British government has proposed removing 90% of grid network

charges for the most intensive energy users, up from 60% now.

At Bridgnorth, staff have been trained to minimise energy

usage, lights dim when part of the factory is not being used,

and the design of the furnace fans is being changed so smaller,

less energy intensive motors can be used.

It gets a chunk of its power from a nearby anaerobic

digestion plant that creates clean energy from food waste and

would like to build a solar plant on site and take other steps

to make its electricity more efficient, but that would push it

below the threshold for government support.

It would also like to recycle scrap to build a circular

economy but high energy costs have curbed its ability to invest.

"Our monthly spend on energy is 1 million pounds ($1.35

million), so you quickly understand the importance of factoring

energy into our strategic thinking," Musgrave said.

Bridgnorth is part of the British Industry Supercharger

scheme, where companies making core products such as steel,

glass and chemicals - and spending more than 20% of their

economic output on power - are exempt from green levies and most

network costs.

Bridgnorth, which makes large sheets of rolled aluminium,

carefully tracks how much it produces, and its energy costs, to

avoid dropping below the 20% threshold - and losing 3 million

pounds a year in support.

A government spokesperson said Britain was investing to get

the country "off the rollercoaster of fossil fuel markets".

"After a decade of inaction on industrial energy prices, we

are slashing the electricity costs for thousands of businesses

by up to 25%, making them more competitive and unlocking

growth," they said.

'THIS IS JUST BONKERS'

Bridgnorth Aluminium is not alone in struggling to stay

competitive while navigating the shift to net zero emissions

when faced with such high electricity prices.

Just over a mile away is Grainger & Worrall, a pioneer in

the world of "gigacasting", a technique adopted by electric

vehicle makers such as Tesla to cast large, lightweight

structural parts in one go.

It makes casts out of sand and, to eliminate waste, it

recycles it, but that takes huge amounts of energy.

"It's making us less and less competitive, which is bizarre,

but it is the right thing to do," Chief Executive Duncan

Eldridge said. "What it means is that we are spending more money

on electricity, and less money on capital investment."

For Amtico, a flooring company in Coventry also in Britain's

historical industrial heartland, energy costs became so high it

crunched the numbers to see if it could find alternatives to the

grid, Chief Executive Jonathan Duck said.

The conclusion? The cheapest option was to build a gas-fired

heat and power plant on site - still paying for gas but avoiding

many of the fees and levies that make up nearly 60% of

electricity bills for industrial users.

"I'm kind of scratching my head going, well, this is just

bonkers, because the structure of the market is encouraging me

to set up my own gas-fired power station, when that shouldn't

really be the future," he said.

Amtico chose not to build the plant, because it did not feel

"morally right".

And in the Welsh capital Cardiff, 7 Steel UK, which uses an

electric arc furnace to make the low-carbon steel that goes into

wind farms and electricity pylons, takes a radical approach.

When wholesale prices get too high, it simply switches off

its thunderous furnace, sometimes halting production for days at

a time. Last year, due to high costs and sluggish demand, the

furnace only operated at just over 70% capacity.

"Decarbonisation work in the UK is reliant on steel, yet we

don't seem to be really grasping that concept," said Gabriella

Nizam, 7 Steel's head of sustainability.

'IN SURVIVAL MODE'

To stop non fossil fuel power generators making excessive

profits from high electricity prices, the government introduced

a windfall tax on them in January 2023. It is due to end on

March 2028.

Successive governments have also looked at how to break the

link between gas and electricity prices, including by offering

renewable energy directly to consumers in a green power pool

rather than through the wholesale market.

Michael Grubb, an energy policy expert at University College

London, said while the government had acknowledged this could

work, it was untried and considered too radical.

"Their priority was trying to get maximised investment," he

said.

Green energy advocates and many policy experts say Britain

is in the expensive investment phase of its energy transition,

and prices will come down when more renewables come on stream

and gas is used less to meet demand.

But for now, it is complicating the energy transition.

Britain had early success in cutting emissions, building one

of the world's biggest offshore wind sectors to phase out coal

over the past 15 years. It is now aiming to generate at least

95% of its domestic electricity from low-carbon sources by 2030,

with 65% coming from non fossil fuel sources last year, data

from Ember showed.

To reach net zero, Britain needs its heating, transport and

manufacturing industries to switch away from fossil fuels, but

these sectors are also deterred by high electricity costs.

Japanese carmaker Nissan ( NSANF ) says its British plant has

the highest electricity costs of any of its facilities

worldwide, threatening its ability to make EVs there.

IHG, one of the world's biggest hotel companies,

says its British hotels have struggled to follow those in Europe

and southeast Asia in adopting hot water heat pumps to cut

emissions, because the running costs are prohibitive.

Many of the companies Reuters spoke to, particularly in

heavy industry, question how long they can keep going when high

electricity costs prevent them from investing to keep up with

international rivals.

"We are constantly in survival mode," 7 Steel's Nizam said.

"We will eventually get there, but the question is what will be

left of the sector by that time?"

($1 = 0.7402 pounds)