The UK and energy-intensive businesses

Last week brought more government thoughts on how to promote growth. It had the boost of an upbeat March gross domestic product (GDP) growth figure, although commentators worry about April as the tax rises come in. It announced some modest tariff cuts, continued with plans to slim the civil service and is looking for deregulation opportunities. Meanwhile, the week ended – and was dominated by – the need to rescue the UK's last steel blast furnaces.

The steel measures

Government policy was to shut down the UK blast furnaces which use coal and to subsidise investment in recycling steel scrap in new electric arc furnaces. Bi-partisan support for decarbonisation required these moves to hit net-zero targets. This was agreed by the previous government for Port Talbot and was in negotiation by the current one for Scunthorpe, the UK's last blast furnaces. Negotiations broke down over the extent of the subsidy. Seeing the owners taking actions preparatory to closing the blast furnaces the government passed legislation to give it extraordinary powers to intervene to ensure the furnaces remained in use.

The Steel Special Measures Act leaves the Scunthorpe steel works in the ownership of a Chinese company. It gives to the Business Secretary the right to demand information from the company, to hire and fire staff, to place orders, pay bills, make loans and direct the management if he dislikes the use or non-use of the assets. He acts for the company without being the owner or a director. Following enactment, the Secretary of State ordered the blast furnaces to be kept going. He now requires supplies of fuel and raw materials to be procured to feed the furnaces.

The underlying issue of net-zero policies

Scunthorpe steel struggles to compete against imported steel because UK energy prices are very high – and the works is dependent on imports of fuel and raw materials. Imported Chinese steel would be cheaper, which appears to have been the owner's plan.

Under net-zero targets, the UK needs to cut the carbon dioxide produced by high-energy-using industries such as steel. Faced with the reality that this means the end of all new steel making in the UK, the government decided to think again. The government has listened to those who argue a major economy needs to be able to make its own new steel, and who think national security requires access to domestic steel for weapons manufacture. If they now wish to save these blast furnaces for longer, they need to revisit this part of their net-zero strategy.

Replacing blast furnaces by electric-arc recycling means a gap in UK steel supply whilst the new facilities are built. It means fewer jobs. It means the need to import new steel where that is needed to meet specifications. The net-zero policy is said by its advocates to result in cheaper electricity, but so far in the UK it has helped drive prices higher as consumers pay for back-up fossil fuel plants for when there is no wind or sun. Electricity remains four times the retail price of gas per unit of energy, deterring people and business from switching from burning their own gas to using electricity.

The wider problems with energy prices

One of the UK's main refineries is closing at Grangemouth. Industries like ceramics and paper that use a lot of power are importing more and more of their product because of high energy costs. The decision of ministers to intervene to save a steel works raises the issue of might they do the same for other energy-intensive plants? So far. the argument runs that steel is a special case. The government buys much of the product directly or indirectly. It needs steel for railway track, public building construction, weapons and naval shipbuilding.

There are no signs of any big change in energy policy, with a swift transition to 95% of electricity coming from sources other than fossil fuels by 2030. There are less-specific policies to get industry to switch from gas and coal to electricity.

What might happen next?

The government should be able to keep the blast furnaces working. The government will need to agree the Chinese company exit from owning the business and will then look to see if another suitable private sector owner is available. It may nationalise it without agreement, requiring new legislation.

The events so far will damage UK/Chinese relations and lead to arguments about getting China out of other strategic industries. There will be large costs for the Treasury to cover whilst they sort out the business. This increases the budget pressures.

Energy costs a problem

The few tariff cuts announced are not big enough to make much difference, but they are a welcome indicator that the government does not want a tariff war and is not retaliating against US tariff rises. The work to shed overhead cost in the civil service is a small step on the way to restoring lost public sector productivity.

The Steel Act is a major change. To make it work the government will need to revisit energy policy to get energy costs down and will need to help the industry offer steel at competitive prices to possible new UK customers. Just getting taxpayers to pay heavy losses to keep open blast furnaces destined to close as part of wider net-zero policy is not sensible.