U.K. Government Has Proposed A £600 Million Package To Help Its Steel Companies Go Green

Key takeaways

• Runaway energy prices in the U.K. have made the cost of industry prohibitive over the past couple of years. This is of particular note for steel mills which sometimes use carbon-intensive blast furnaces. These companies have to factor in the cost of carbon pricing on top of increased energy costs
• The U.K. government is offering £300 million each to the two remaining companies that run blast furnaces in the country. That investment alone is unlikely to be enough to save the companies from financial fallout in the coming years
• The U.K.’s energy grid needs an overhaul to escape this most recent predicament. Most plans call for domestic renewable energy investments for both savings on energy costs and carbon emissions

Early this week, the U.K. government reportedly offered two of the country’s domestic steel plants £300 million each to make their operations green. We are still waiting on news of acceptance from either company.

The reason for the subsidization is multifold and largely hinges on inefficiencies in the U.K.’s energy market. Even with a total of £600 million on the table, it may not be enough to save the domestic steel industry unless there are further overhauls to the nation’s energy grids.

Here’s how Q.ai can help.

Which U.K. steel companies are involved?

There are multiple steel companies in the UK, but the two companies involved in this green bailout are actually foreign-owned. British Steel is owned by a Chinese company called Jingye Group, and the other steel company – Tata Steel – is owned by the Tata Group, an Indian multinational conglomerate.

These two companies run the last four blast furnaces in the UK. There are two in Lincolnshire, on England’s central east coast, and two in Port Talbot, which is in south Wales.

Why are U.K. steel companies asking for money?

Energy prices peaked in the U.K. this past Fall. While they have been falling in recent weeks, they’re still projected to be more than double what they were prior to 2021 this year. Steel companies use a ton of energy. These specific types of furnaces use an energy process that is bad for the environment, pushing their costs even higher in the UK’s energy ecosystem.

Let’s look at why energy costs have been so high for these particular companies.

The war on Ukraine

When Russia invaded Ukraine in early 2022, all types of sanctions were placed on Russian oil. This has pushed up energy prices across Europe, including in the UK, even though the sovereignty never imported large amounts of Russian oil to begin with.

The U.K. is experiencing price hikes at a worse degree than the rest of the continent because of the way its energy system is set up.

The U.K. energy market has long had issues

Not only does the U.K. not produce enough of its energy to be self-sufficient, but it also doesn’t have a robust system to store energy. This makes it far more susceptible to price swings in the larger international market as it has to buy energy just in time.

This on-demand business model for public services tends to happen in privatized fields, leading some people to trace the UK’s ill-equipped energy ecosystem back to Margaret Thatcher’s policies in the 1980s.

Brexit has also had an impact. Before the pandemic, Brexit could be considered the wedge driving a gap between the U.K. and European energy planning processes.

The pandemic’s toll on a fragile energy market

The pandemic exacerbated Brexit’s impact. As businesses froze operations and people stayed home, demand for gas went down. Decreased demand was a greater problem in the U.K. where there are limited ways to store energy. Many domestic plants had to halt operations, causing massive monetary losses.

Then, in 2021 when people started interacting and working in person, demand spiked. With no energy stores to compensate for this sudden increase in demand, prices rose at a startling pace.

The fallout from Russia’s invasion of Ukraine couldn’t have come at a worse time for the UK’s energy markets, as imports of energy across the board suddenly became more expensive even if they didn’t come directly from Russia. With its lack of stores, the U.K. was at the mercy of current market rates.

The breakdown in operations was a systemic problem that preexisted the global tragedies of the past few years, but the pandemic and geopolitical conflict have shone light on the system’s flaws.

Rising carbon prices

On top of high energy prices, the furnaces in Lincolnshire and Port Talbot are also subject to large carbon pricing bills. The smelting process required to make steel with blast furnaces requires burning large amounts of coal, which releases enormous amounts of carbon dioxide into the atmosphere.

Net effective carbon pricing in the UK, measured in real British pounds, went up by 10.6% between 2018 and 2021. This increase is meaningful to businesses like steel companies, especially when they’re operating on blast furnaces, one of the least green ways to make steel in terms of carbon emissions.

Asking for financing to cover green projects isn’t just a matter of covering the budget for a temporary initiative. It’s a matter of reducing costs over the long term, as carbon pricing will only increase as time passes.

What would funding achieve?

There are only two main ways to make the steel production process green. The first is to produce steel using hydrogen, as Sweden has proven can be done. The other and more likely option in the U.K. is to install electric arc furnaces.

The U.K. produces roughly 40% of its electricity via natural gas, so installing the electric arc furnaces won’t necessarily solve the problem with energy prices. The reduction in carbon emissions achieved by switching from coal could be undermined by using natural gas to produce electricity.

Some politicians, especially in Wales, are advocating for further government support in establishing green energy sources for these new furnaces. There is a proposal for a wind farm in the Celtic Sea, and if politicians are successful, they could get assistance in making the wind farm’s energy available for the new furnaces at the steel mills.

Will £600 million be enough?

Outside of hopes for a wind farm freeport in the Celtic Sea, the government is already looking to issue £600 million to equip British Steel and Tata Steel U.K. with new furnaces.

Tata has reportedly been slightly ruffled by the offer. It has been warning the U.K. government that the future of its operations in the country is tenuous for some years now, asking for £1.5 billion for its Port Talbot site alone just last summer.

It goes without saying, but £300 million is nowhere near the £1.5 billion requested.

Some industry experts have suggested that £300 million is probably enough to replace one furnace, but not two.

Another problem isn’t necessarily the money but the end solution. Earlier in January 2023, Sanjeev Gupta’s Liberty Steel announced that it would be slowing production. Some of its sites will be idled, and jobs will be lost.

Liberty Steels uses electric arc furnaces. Even still, high energy costs and cheap foreign steel imports have contributed to production cuts. There may need to be more than just switching the furnaces to solve the problem.

This makes the proposed wind farm freeport and other paths to securing domestic, renewable energy important for the U.K. moving forward.

The bottom line

Of all the energy strains felt across Europe, pricing in the U.K. is some of the most painful. If the country cannot find a way to adjust its energy sector to be better prepared for periods of slowed and increased demand, it may lose some industries along the way.

You don’t have to wait for the U.K. to green its energy grid before making environmental investments of your own. Start today with a Clean Tech Kit from Q.ai.

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