Reforms to the UK electricity market pose a threat to industry and investment, ministers said

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Some of Britain's biggest trading groups have warned the government that proposals to split the UK electricity market so that prices vary by region could drive up producers' costs and deter investment.

UK Steel, Make UK, RenewableUK and the Global Infrastructure Investor Association have written to ministers saying they are concerned that proposals developed by the Conservative government could “increase the risks of deindustrialisation”.

“We recognize that dividing the UK into multiple regional price zones would undermine investment in low-carbon energy and risks penalizing the UK’s energy-intensive industries with higher electricity costs,” said the letter, sent on Friday and submitted to the Financial Times.

The message comes at a sensitive time for the new Labor government, which is trying to demonstrate Britain's attractiveness to investors ahead of its global investment summit on October 14. Recipients included Energy Secretary Ed Miliband and Jonathan Reynolds, Business Secretary.

The proposed reforms are part of wider potential changes to the electricity market, first pushed forward in 2022, to adapt to the shift to renewable energy sources such as intermittent wind and solar power. The Labor Party, which is strongly committed to renewable energy, has yet to set out its position on this.

There is currently a single national wholesale price for electricity in the UK. The proposals include an option to split the market so that wholesale prices vary by region depending on supply and demand.

Proponents argue that this could make the market more efficient and keep system costs low by encouraging consumers to use electricity when there is plenty of power nearby, rather than leaving it idle, as often happens.

Guy Newey, managing director of Energy Systems Catapult, the innovation hub, said the market needed “urgent reform” and added: “Zonal pricing is already common practice in a number of international markets and has reduced costs for consumers.”

Ultimately, supporters argue that the move could encourage industry to relocate to areas with abundant renewable electricity, such as parts of Scotland, while developers could expand in areas less well supplied with renewable electricity because they could command higher prices there.

However, trade associations fear the proposals would result in higher prices for industries that use large amounts of electricity, such as steel, glass and ceramics. They would also increase the risks faced by renewable energy developers, they said.

“A mile-long steel mill simply cannot get up and walk away to access lower electricity prices elsewhere,” added Frank Aaskov, director of energy and climate policy at UK Steel, in a separate comment on the letter.

“This is before we consider the billions that will be invested in the operation, not to mention the workers that could be left behind.”

The industry, which is turning away from fossil fuels, has long complained about the comparatively high costs of electricity. Both Tata Steel and British Steel are closing coal-fired blast furnaces in the UK and switching to electric arc furnaces.

Jon Phillips, chief executive of the Global Infrastructure Investor Association, noted that global investors are “looking for long-term, low-risk investments that generate stable returns.”

He added: “The introduction of zonal pricing. . . It risks undermining the government's ambitions to attract more international investment to the UK. It is important that energy policy provides the long-term stability that investors are looking for.”

A UK government spokesman said it was reviewing responses to the consultation on the issue and would “ensure that any planned reform options focus on protecting bill payers and encouraging investment”.

“Our new industrial strategy will deliver long-term, sustainable growth across the UK by supporting our industries and encouraging private investment in our economy,” they added.