UK Energy-Intensive Industries Under Pressure: Assessing Long-Term Investment Risks in a Shifting Energy Landscape

The UK's energy-intensive industries-spanning steel, chemicals, and glass- are facing unprecedented pressures from rising electricity costs, regulatory uncertainty, and the dual mandate of decarbonization and competitiveness. While recent policy interventions aim to alleviate these challenges, long-term investors must navigate a complex interplay of sector-specific vulnerabilities, evolving market reforms, and geopolitical risks. This analysis examines the financial and operational risks confronting these industries, drawing on sector-specific data and policy developments to assess the investment landscape.

Policy Shifts and Immediate Relief Measures

The UK government's Modern Industrial Strategy, announced in June 2025, represents a pivotal attempt to stabilize energy-intensive sectors. Key measures include the British Industrial Competitiveness Scheme, which will exempt over 7,000 businesses from environmental levies such as the Renewables Obligation and Feed-in Tariffs, potentially reducing electricity costs by £35–40/MWh from 2027. For sectors like steel and glass, the strategy also increases network charge discounts from 60% to 90% by 2026, addressing historical cost disparities with European competitors (the policy details above are outlined in the Modern Industrial Strategy guidance).

However, these measures are accompanied by regulatory uncertainty. The Review of Electricity Market Arrangements (REMA) and Clean Power 2030 Action Plan propose reforms such as zonal pricing, which could fragment wholesale electricity markets into up to twelve regional zones. While proponents argue this would enhance system efficiency, critics warn of volatility and uneven pricing outcomes, particularly for industries reliant on stable energy inputs, according to a Shell Energy analysis.

Sector-Specific Vulnerabilities and Adaptation Strategies

Steel Industry:
The UK steel sector, already paying 50% more for electricity than its French and German counterparts, faces a critical juncture. With electrification driving energy consumption to double in the coming decade, the industry's annual costs could rise by £37–50 million, according to a UK Steel report. To counter this, UK Steel has advocated for two-way Contracts for Difference (CfDs) to align prices with European benchmarks and expanded network charge compensation. These measures, if implemented, could mitigate short-term risks but require sustained policy clarity to attract long-term investment.

Chemical Industry:
The chemical sector, which has seen output decline by 23.2% since pre-COVID levels, is grappling with energy costs 60% higher than in the EU, according to a Chemical industry roadmap. While the industry has explored hydrogen and carbon capture and storage (CCS) technologies, adoption remains fragmented. The Chemical Industries Association (CIA) has called for exemptions from the Climate Change Levy and inclusion in the British Industrial Competitiveness Scheme to offset regulatory burdens. However, operational inefficiencies-such as 90% of process engineers reporting power equipment concerns-highlight lingering vulnerabilities, a Chemical Industry Journal analysis found.

Glass Industry:
The glass sector, contributing £2 billion annually to the UK economy, is advocating for energy efficiency incentives and trade remedies to counter high manufacturing costs. As British Glass notes, its "Power Decarbonisation" strategy emphasizes recycled materials and improved energy efficiency, but these efforts face headwinds from energy price volatility. The industry's moderate energy intensity (3% of UK industrial emissions) offers some respite, but long-term competitiveness hinges on scalable decarbonization solutions.

Broader Investment Risks and Strategic Considerations

1. Regulatory Uncertainty:
   The REMA reforms and zonal pricing proposals introduce liquidity risks for energy markets, complicating long-term project financing. Developers of both renewable and traditional assets must prepare for potential price disparities and delayed grid connections, despite the government's Connections Accelerator Service - a Shell Energy analysis highlighted these concerns earlier.

2. Global Competitiveness:
   The UK's energy-intensive industries remain at a disadvantage compared to continental Europe. For instance, the steel sector's reliance on gas-fired power exacerbates cost volatility, while the chemical industry's hesitancy to adopt bio-feedstocks or recycling technologies limits its low-carbon transition, as outlined by UK Steel and the Chemical industry roadmap.

3. Workforce and Supply Chain Challenges:
   Sectors like chemicals face a growing skills gap, compounded by Brexit-related trade barriers. Investments in digital transformation and AI integration are increasingly critical to maintaining operational resilience, a point underscored in the Chemical industry roadmap.

Conclusion: Navigating the Investment Landscape

For investors, the UK's energy-intensive industries present a paradox: policy-driven cost reductions and decarbonization incentives coexist with structural vulnerabilities and regulatory ambiguity. While the Modern Industrial Strategy offers immediate relief, long-term success depends on the government's ability to stabilize markets through REMA and Clean Power 2030 reforms. Sectors like steel and chemicals will require sustained support to bridge the competitiveness gap, while the glass industry's focus on efficiency and recycling offers a blueprint for sustainable adaptation.

Investors should prioritize companies with diversified energy procurement strategies, robust demand-side response mechanisms, and partnerships with emerging clean energy providers. However, caution is warranted in sectors where policy delays or fragmented adoption of low-carbon technologies could exacerbate financial risks.