Green transition of UK steelmaking requires government subsidies for energy bills

The decarbonization drive in the steel industry in the UK will require government support to compensate for the high energy prices in the nation, UK Steel, the trade association for the country’s steel industry, said in statement seen by Fastmarkets on Monday November 13.

UK steel industry to become more energy-intensive
In the past several months, two key UK steelmakers, British Steel in England and Tata Steel in Wales, have both announced ambitious plans to replace their old blast furnace-basic oxygen furnace (BF-BOF) based steelmaking capacities with electric-arc furnaces (EAFs).

Scrap-consuming EAFs could be a strong alternative to the prevailing integrated steelmaking business model in the UK, given the country’s large surplus of steel scrap and the lack of domestic consumers for such material, Fastmarkets understands.

But at the same time, UK Steel expressed concerns about how the decarbonization transition could undermine the competitiveness of British steelmakers because of the high prices they must pay for energy.

“Steelmakers in the UK pay nearly twice as much as Germany and France’s industrial electricity prices. This is partly due to higher grid connection costs in the UK, which the government could reduce,” UK Steel said.

The average non-household electricity price faced by UK steelmakers in 2023 was about £113 ($138) per MWh. In Germany and France, the corresponding price was around £61 ($75) per MWh.

“That’s a price gap of £52 [$64] per MWh, meaning that we will pay £117 million [$143 million] more for our electricity this year than our European competitors,” UK Steel said.

The energy-intensive nature of steel production leads to high electricity consumption, and these costs can represent as much as 180% of steel producers’ gross value added (GVA) in the UK. With a switch to electric-arc furnaces, it would be expected that the sector’s electricity consumption would roughly double, UK Steel said.

Currently, UK steelmaking is mainly by BF-BOF production, which is less energy-intensive than using the EAF-route.

According to the World Steel Association, about 89% of a BF-BOF’s energy input comes from coal, 7% from electricity, 3% from natural gas and 1% from other gases and sources. In EAF steelmaking, the energy input from coal accounts for 11%, electricity 50%, natural gas 38% and 1% from other sources.

Measures suggested
To protect the British steelmaking industry and ensure a level playing field for it to compete with other steelmakers globally, UK steel has suggested measures to curb electricity costs for energy-intensive industries (EIIs).

Notably, the association has urged the UK government to compensate industry for 90% of its network charges, matching the levels of such support in France and Germany. Also, UK Steel suggests tracking industrial energy price disparities between countries.

The association has also emphasized the need to implement the British Industry Supercharger (BIS) package by April 2024. The BIS package was supposed to include three measures, such as an increase in the subsidy under the existing EII Renewable Levy Exemption scheme to 100% from 85%.

Second, there should be a new full exemption from the indirect costs associated with the British Capacity Market, UK Steel said. Finally, it proposed a compensation scheme for the charges paid to use the UK national electricity grid, through the EII Network Charging Cost Compensation Scheme.

The BIS package was introduced in February 2023 and was intended to reduce electricity costs for EIIs by £20 per MWh by 2025, to bring electricity costs for EIIs in Britain closer into line with those in the world’s major economies.

UK steel industry in figures
The UK produced just 6.10 million tonnes of steel in 2022, down by 15.6% year on year, according to World Steel Association data.

Primary steelmaking in the nation was now represented by British Steel, Tata Steel and Celsa.

British Steel has installed capacity for 4.3 million tonnes per year of pig iron, and four BFs at its ironmaking site in Scunthorpe, northeast England. The company produces sections, wire rod, rail, beam and plate. But of the four BFs at the site, only two were still operational, according to industry sources.

Tata Steel Port Talbot, in south Wales, is equipped with two BFs with combined capacity for 5 million tpy and two basic-oxygen furnaces with capacity for around 4.8 million tpy. The site at Port Talbot produces hot-rolled and cold-rolled coil, as well as tubes.

Both companies have plans to switch to EAFs.

Celsa Group in Cardiff, also in south Wales, has two EAFs with total capacity for 1.2 million tpy. The company is focused on long steel production.

Published by: Julia Bolotova