There is a way to pay for net zero while encouraging the energy-intensive businesses that the UK economy needs
By Sir Dieter Helm
Wednesday, February 19 2025, 9.00pm GMT, The Times
It is a sad fact that the UK’s industrial electricity prices are among the highest in developed economies — higher than in the European Union and about four times that of the United States. The inevitable result is that this country’s energy-intensive industries are uncompetitive.
No companies are flocking to the UK to gain access to the promised low energy prices, which were to be the result of switching from fossil fuels to renewables. On the contrary, what is left of UK energy-intensive industries are going for the exit. Grangemouth and Port Talbot are the latest in a long line, including the chemicals industry. The car industry is back to its volume of the 1950s.
Not all of this is, of course, the fault of energy prices. Brexit has accelerated the exit and reduced the attractiveness of inward investment. Higher labour costs, exacerbated in the autumn budget, and low productivity hardly help, as increases in capital gains taxes add to the competitive disadvantages.
All this has one happy consequence for Ed Miliband, secretary of state for energy and climate change: that UK territorial carbon emissions fall as the remaining energy-intensive industries fall, paralleling the falls in the industrial demand for energy. This allows the government to point to the fall in carbon emissions against GDP.
Sadly, much of this is smoke and mirrors. By switching from home production to imports, our territorial carbon emissions fall but not, of course, the emissions of the stuff we import instead, and the climate change they cause.
Part of the problem is that the 60-month sprint to net-zero electricity by 2030 is further increasing the relative cost of UK electricity. Far from being “nine times cheaper than fossil fuels” as Miliband would have us believe, the UK is on the world leaderboard for the highest energy costs, and doing much to make sure it stays there.
Contrast all this with the US. In Miliband’s world, energy-intensive businesses should be deserting the US in droves to get access to all those cheaper wind farms and solar panels in the UK. The US should be the global loser, and the UK the global winner, as well as the global leader on climate change. In fact, the UK is only a “leader” in mitigating territorial emissions but not in mitigating climate change. It is importing its carbon, and thereby causing higher emissions elsewhere.
The truth is that the US is streets ahead when it comes to energy costs — being the largest producer of oil in the world and having abundant and cheap gas give it a huge competitive advantage. It has so much gas that it was able to bail out Europe when Russian supplies were cut. Contrast that with the UK, which prefers to import its gas in more polluting liquefied natural gas form and by pipeline from Norway, while cutting off its own future sources of supplies in the North Sea.
How to get out of this mess? What is needed is an international competitive price of energy, and especially of electricity. How might this be achieved? The same way it was under the “bad old days” of the Central Electricity Generating Board (CEGB). Start with the price that would be competitive. How it was done in the UK (and in France) pre-privatisation was to charge industry the long-run marginal costs of energy, rather than the full fixed and sunk costs of the capacity.
Under the CEGB’s bulk supply tariff, there was an energy price and a capacity cost, to which was added, where appropriate, the transmission and distribution costs. Energy-intensive industry paid the first energy element, covering its variable costs, and it made some contribution to the capacity and network costs.
How could this be a sensible economic approach? Because everyone was better off with these industries rather than without them, as long as they made even a small contribution to the capacity and network costs. Think of the scenario where they are charged the full costs. Imagine that this is uncompetitive and the industries close down. Is everyone better or worse off? They are worse off, since these industries no longer contribute to the capacity and network costs — nor, indeed, to the wider economy. To head this off, set a competitive price by charging them the marginal costs and a little of the fixed and sunk costs.
This is how it was done from the late 1940s until privatisation. Privatisation eliminated the preferential treatment of energy-intensive industries and accelerated the deindustrialisation that was already under way from the 1980s. The process is exacerbated with the coming of renewables, which are almost all capital costs and have near-zero marginal costs. They are like water pipes and classic utilities.
The gap between the marginal and the full costs is ever greater. Under the CEGB approach, the result would have been a great benefit to energy-intensive industries. Under the current approach, there is no preferential treatment for energy-intensive businesses in global competitive markets. The paradoxical result is that, as industry retreats, there is a smaller base for recovering all these fixed capital costs.
If we start instead with the competitive price for large industrial users, then industry costs would fall very sharply. Better still, since the marginal cost of wind and solar is close to zero, it might then actually be true that the UK could be a cost-competitive location.
Differentiating the charging between energy-intensive industries and consumers is not straightforward. Why? Because in a liberalised market, why would a supplier charge less to one class of customer when it can get more money by charging the full price to others? But it is not as difficult as it seems because the government is now the central buyer for almost all electricity generated.
All the renewables and the nuclear are contracted to government, not to customers. Some of the gas isn’t, but it is only a matter of time before there will have to be a strategic gas reserve, contracted again through the government. If the government is the central buyer, it can be the central seller for the fixed and sunk costs. De facto, it already is. Hence it can operate a modern form of the bulk supply tariff.
Doing what is proposed above is good economics (it is efficient) and it is good for the climate. Not doing it means that much of what is left of energy-intensive industries in the UK is effectively finished. Worse, all the ambitions for the UK to become a “world leader” in artificial intelligence, data and quantum computing will be in jeopardy.
These new tech industries are the energy-intensive ones of the future. If the government thinks they will all be coming here for the cheap renewable electricity, it can think again if these renewables are priced on a common basis to all customers.
It is time for the government to get real about making sure that our energy-intensive industries are cost-competitive globally, and real about just how counterproductive for the climate the unnecessarily costly net-zero sprint is becoming. Offshoring emissions is bad for the climate, bad for the economy and bad for growth.
Sir Dieter Helm is professor of economic policy at the University of Oxford
