Energy costs threaten UK's manufacturing sector competitiveness

The United Kingdom’s manufacturing sector is grappling with soaring energy prices, raising concerns about the country’s ability to maintain its status as a leading industrial hub. A recent report by the Confederation of British Industry (CBI) in collaboration with Energy UK highlights the significant challenges faced by businesses due to high energy costs, which are stifling investment and threatening economic growth.

Rising energy prices stifle investment

According to the report, nearly 40% of businesses have been forced to cut back on investment because of a sharp rise in energy prices. The issue spans industries, from chemical producers to pubs and restaurants, all of which are struggling to cope with energy costs that remain significantly higher than pre-crisis levels. Business electricity costs in the UK are currently 70% above those seen before Russia’s invasion of Ukraine, while gas prices have climbed 60% during the same period.

The report warns that without targeted actions to lower energy costs, “the risk of job losses, production cuts, plant closures and offshoring will increase.” Additionally, the UK’s ageing gas and electricity networks, coupled with outdated regulations governing energy supply, are exacerbating the problem.

Competitive disadvantage in global markets

The UK’s industrial energy prices are among the highest in the developed world, standing nearly two-thirds above the median of countries in the International Energy Agency (IEA) and the highest among G7 nations. Medium-sized businesses in particular face electricity costs that are around double the EU median, according to the report. While non-domestic gas prices are in line with those in the EU, they remain considerably higher than in nations like the United States and Canada.

“This acts as a brake on ambitions for economic growth”, the report said. It also noted that businesses are being deterred from investing in the transition to clean energy, which could bring long-term benefits and align with the UK government’s net-zero agenda.

Calls for reform and government action

The CBI and Energy UK are urging ministers to take decisive action, including a comprehensive review of the UK’s energy needs and reforms to improve efficiency across gas and electricity networks. This review is seen as essential to spur investment and reverse the trend of deindustrialisation that is already becoming evident in some sectors.

Louise Hellem, chief economist at the CBI, emphasised the urgency of the situation, pointing to its impact on key industries. “You can see it already in the chemicals industry, which has seen several closures”, she said, describing the current period as a “pivotal moment” for shaping the UK’s industrial strategy.

The report highlights that even progress made to reduce energy costs for some businesses has been limited in scope. Last year, the government introduced measures to reduce electricity prices for 7,000 of the country’s heaviest energy users by up to £40 per megawatt hour, a move aimed at making costs more competitive globally. However, Dhara Vyas, head of Energy UK, expressed concern that this assistance does not extend far enough. “Thousands of businesses outside the ringfence would continue to be hampered by high energy bills”, she said.

Industry demands broader solutions

While recognising the government’s efforts to lower domestic energy costs, Vyas stressed that the support provided to industrial users was insufficient and carried costs for other bill payers. She underscored the need for systemic reform of the energy market. “Lowering prices for all businesses is fundamental to the UK’s growth story”, she said. “Our aim will not be just about how to reduce bills. It will be the first of its kind to take a fundamental look at the energy market and the regulations to see how it can become more effective.”

The government has acknowledged the issue, with a spokesperson highlighting ongoing efforts to tackle the energy cost crisis. “We’ll shortly publish the response to our consultation on eligibility for the British Industrial Competitiveness Scheme, which will reduce electricity bills by up to 25% for over 7,000 businesses, and our Supercharger package of support will cut businesses’ electricity costs by up to £420m per year”, they said.

Warning signs for UK trade

The challenges facing UK manufacturers are reflected in trade figures, with a record £248.3bn deficit in goods reported for 2025 – £30.5bn higher than the previous year. While a growing £192bn surplus in services partially offset this gap, the data underscores the vulnerability of the UK’s manufacturing base.

As the government pushes forward with its industrial strategy, the calls for broader and more inclusive reforms to address energy prices will likely shape the next phase of the UK’s economic policy. Without decisive action, the UK risks a decline in industrial output and global competitiveness, potentially jeopardising its position as a manufacturing powerhouse.

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