Warning of High Industrial Electricity Prices: The British Crisis and Germany's Energy Predicament

Introduction

When British manufacturers warn that if industrial electricity prices are not reduced, annual losses could reach £85 billion, German industry should see it as a mirror. The UK's problems — natural gas pricing mechanisms, policy costs loaded onto electricity bills, and slow grid connections — also exist in Germany, and in some respects are even more pronounced. The Federation of German Industries (BDI) has long emphasized that energy costs have become one of the biggest threats to the competitiveness of German manufacturing.

Background

In July 2024, the British manufacturers' association Make UK and Ecotricity jointly released a report titled 'From Crisis to Stability: The Future Energy System for Manufacturers.' The report shows that 90% of manufacturers have seen at least a moderate increase in energy bills since 2022; 13% of companies said further increases would threaten their viability; if manufacturing activity falls by 13%, the UK economy would lose £85 billion annually. The report calls for shifting electricity policy taxes to general taxation and accelerating structural reforms of the electricity market, among other measures.

Analysis of Deep-rooted Causes

The core mechanism behind high industrial electricity prices in the UK is highly similar to that in Germany:

1. Marginal pricing mechanism: The UK electricity market is priced at the margin by natural gas, preventing the cost advantages of low-carbon electricity from being passed on to consumers. Germany also adopts marginal pricing based on the European Power Exchange, and despite renewables accounting for over 50% of generation, natural gas power still dominates price formation. 2. Policy cost loading: The UK adds policy costs such as renewable energy subsidies onto electricity bills. Germany has similar EEG surcharges (though they have declined in recent years), as well as grid fees and carbon costs, making industrial electricity prices several times higher than in the US and China. 3. Aging grid infrastructure and slow grid access: The UK faces long connection queues. Germany likewise experiences curtailment of renewable energy due to lagging grid expansion, and the southern industrial regions rely on wind power transmission from the north, leading to high congestion costs.

These structural factors together cause Europe's industrial electricity prices to be among the highest globally and highly volatile.

Impact on German Industry

As the manufacturing center of Europe, Germany is a direct victim of high industrial electricity prices.

• Loss of cost competitiveness: After deducting rebates, German industrial electricity prices are still about twice as high as in the US and about 30% higher than in France. For electricity-intensive industries such as chemicals, steel, and paper, energy costs can account for 10% to 20%, directly eroding profits and investment capacity.
• Risk of investment outflow: In recent years, German chemical giant BASF and steel company ThyssenKrupp have expanded production in North America or China, with energy costs being a major consideration. If electricity prices remain high for a long time, Germany may face deindustrialization, especially in energy-intensive basic industries.
• Pressure on innovation and transformation: Although Germany is vigorously promoting hydrogen and electrification, high electricity prices keep the cost of processes like power-to-hydrogen prohibitively high, delaying industrial decarbonization. Meanwhile, even small and medium-sized enterprises that intend to invest in energy efficiency improvements are postponing due to squeezed profits.## Europe and Global Implications

Germany’s situation is not isolated. The entire European manufacturing sector faces an energy cost disadvantage. While the EU Carbon Border Adjustment Mechanism (CBAM) attempts to level carbon costs, it is ineffective against electricity price differences. France benefits from nuclear power stabilizing electricity prices, but other EU countries remain under sustained pressure. This could lead to a shift in industrial focus within Europe and accelerate the restructuring of the global manufacturing landscape—regions with low electricity prices such as North America, the Middle East, and China are attracting European capital.

Moreover, high electricity prices also undermine European companies’ first-mover advantages in global green industrial products (e.g., low-carbon steel, green chemicals). Without cost-controllable clean electricity, Europe’s “green manufacturing” label will lack market competitiveness.

Long-term Trend Assessment

Over the next 3–10 years, Germany’s industrial energy landscape will face several key turning points:

1. Electricity Market Reform: The German government has discussed abolishing marginal pricing, introducing “nodal pricing,” or applying special electricity tariffs for industrial users, but political resistance is huge. The UK case may accelerate discussions at the EU level, but substantial progress may take more than 5 years. 2. Direct Supply of Renewable Energy: Large enterprises are increasingly bypassing market electricity prices through Power Purchase Agreements (PPAs) or self-built renewable energy plants. However, small and medium-sized enterprises lack bargaining power and still rely on the public grid. 3. Hydrogen Economy Lagging: Green hydrogen is seen as the ultimate solution for industrial decarbonization. But if electrolytic hydrogen production costs cannot decrease due to high electricity prices, Germany’s 2030 hydrogen targets will be missed, forcing reliance on imports. 4. Industrial Restructuring: Energy-intensive enterprises may further relocate, and German manufacturing will tilt towards high added-value, low-energy-consumption sectors such as specialty manufacturing, engineering machinery, and automotive electronics. This is not entirely pessimistic, but it requires supporting policy frameworks.

Conclusion

The UK’s figure of £85 billion in losses should not be viewed as an isolated incident. It reveals the structural pain of European industry during the energy transition. If German manufacturing is to maintain its leading position, energy costs must become a core issue of national industrial strategy—not only through subsidies but also through fundamental market design reforms. In the next decade, energy competitiveness will be as important as technological competitiveness.