The energy cost of economic growth: UK Industrial Strategy and mitigating electricity challenges for key industries
The climate for businesses located within the Great Britain electricity market that require large quantities of electricity to operate has been a challenging one in recent years.
On 23 June 2025, the Department for Business and Trade published The UK’s Modern Industrial Strategy (“the Strategy”), a document which sets out its ten-year plan for encouraging investment in UK businesses in certain target sectors.
Alongside the Strategy, the Government has published:
- a definitions list providing further detail on which kinds of business are considered to be included within these sectors (broadly based on categories within the UK Standard Industrial Classification of Economic Activities published by the Office for National Statistics); and
- sector plans that provide further details on the measures proposed across the target sectors (plans for five of the sectors have been published, with the remaining three “to follow”).
While the envisaged stimulus package is wide-ranging, the focus of this Law-Now is the measures proposed in the Strategy that are specifically aimed at mitigating barriers from the perspective of procuring electricity connections and electricity supplies.
Which businesses will directly benefit from the measures proposed in the Strategy?
The Strategy in general targets eight industry sectors that the Government considers to have the “highest potential” with respect to objectives including encouraging growth, attracting investment, increasing productivity, strengthening economic resilience and supporting net zero aspirations. These sectors are Advanced Manufacturing, Creative Industry, Life Sciences, Clean Energy, Defence, Digital and Technologies (such as datacentres), Professional and Business Services and Financial Services. Each sector is in turn exemplified by a number of “frontier industries” – e.g. the particular areas of focus within the Digital and Technologies sector include artificial intelligence, quantum technologies and cyber security.
The measures proposed in the Strategy are set out at a fairly high level at this stage. In some cases, it remains to be seen to what extent each target sector (or industries within it) are intended to benefit from each proposed initiative. However, there are some indications in the Strategy, which we have referred to below.
Proposed measures for mitigating energy challenges
The key “new” areas of support envisaged in the Strategy include:
- Reducing the cost of purchasing electricity: Electricity suppliers are required to pay (and so pass through to their customers) a number of “non-commodity costs” in addition to the wholesale price of the electricity they supply, including:
- certain “policy levies” / “final consumption levies” (funding Government energy market policy initiatives); and
- network charges (with respect to the transmission and distribution network infrastructure used to convey the electricity).
These constitute a significant proportion of the amounts that businesses pay for their electricity and have been cited as damaging the competitiveness of the UK for “elastic” power hungry industries that will react to international economics / market forces in terms of where they locate their premises.
In tandem with ongoing work to reduce the quantum of these levies in the long-term, the Strategy proposes initiatives to reduce the impact of these non-commodity costs on specific industries, to be funded via general taxation and/or envisaged enhancements to the UK Emissions Trading Scheme (“UK ETS”):
Measure | Description | Who will benefit |
| New exemptions from policy levies | Some energy-intensive industries already benefit from exemptions from policy levies (see the Government guidance on this here).
The Strategy proposes the introduction of a new “British Industrial Competitiveness Scheme” in 2027 whereby certain further industries will be granted exemptions from certain specific policy levies (being those used to fund the Renewables Obligation, Feed-in Tariffs and Capacity Market schemes).
It is estimated this would represent around a £35-40/MWh reduction in electricity costs. | The Government intends to consult shortly on the precise industries that will be eligible for this exemption and therefore the important question of “who will benefit” remains to be answered; the Strategy is clear, however, that it is envisaged that the relevant businesses will include at least those in the automotive, aerospace and chemicals sectors. |
| Enhanced relief from network charges for Energy Intensive Industries (“EIIs”) | Certain businesses are already eligible for a 60% discount on network charges under the “Network Charging Compensation Scheme” (part of the British Industry Supercharger package rolled out in 2024). The Strategy envisages an increase in the amount of that discount to 90% from 2026. | Certain energy-intensive industries (certificated as such in accordance with Government guidance). These industries include manufacture of various metal, ceramic, textile, rubber, plastic, battery and machinery products. |
- Reducing lead times for new electricity network connections: The electricity industry has been working fervently on regulatory reforms in the context of improving the process for securing / allocating network connections. In particular, the implementation of NESO’s Connections Reform package (see our previous Law-Now here) is underway. Chapter 2 of the Planning and Infrastructure Bill currently making its way through Parliament is designed to support that package, including by giving the Government powers to shape how network connections will be allocated in the future. The Strategy provides a little more colour on how the Government intends to utilise its growing powers to influence the allocation of grid connections:
Measure | Description | Who will benefit |
| Government prioritisation of high-value projects for grid connections | The Strategy proposes the creation of a new “Connections Accelerator Service” by the end of 2025, providing support to relevant demand projects seeking grid connections. | Demand projects that are “major investments” or that the Government deems to be “strategically important”, to “guarantee high-quality jobs” and to represent the “greatest economic value”. There is little detail in the Strategy on the types of development that may qualify in this regard – though it is indicated in the contemporaneous Industrial Strategy Zones Action Plan that key sites in freeports and investment zones are likely to qualify. |
The Strategy also provides an update on a number of in-train regulatory initiatives that may assist with mitigating the energy challenges faced by target sectors:
- Electricity Market Reform: Electricity industry stakeholders are awaiting with great interest the Government’s much-anticipated proposals on its Review of Electricity Market Arrangements (“REMA”; see our previous Law-Now here). Broad aspirations of the potential reforms include bringing down electricity costs in the long term, though there are likely to be some “winners” and “losers” e.g. if zonal pricing is introduced in electricity wholesale markets going forward. The Strategy envisages that the policy development phase of the REMA will conclude “shortly”. At the time of writing, rumours abound on where this will land.
- Connections end-to-end review: Ofgem opened its end-to-end review of electricity network connection processes in November 2024 (see our previous Law-Now here). If incentives for network companies to deliver connections promptly and on appropriate terms are enhanced along the lines anticipated, this may improve the environment for targeted sectors seeking network connections. The Strategy confirms the intent for Ofgem to publish the outcomes from this review by the end of 2025.
- Compensation for indirect UK ETS costs: Certain specific large energy users (as identified in Government guidance) are already eligible, under the “Energy-Intensive Industries Compensation Scheme” for reimbursement of a proportion of their energy costs based on the amounts priced in to the wholesale market cost of electricity with respect to the liability of electricity generators under the UK ETS regime. The Strategy notes that the Government will review the scheme to ensure it dovetails with the introduction of the UK Carbon Border Adjustment Mechanism, anticipated for 2027.
Mitigating energy challenges for datacentres
One type of development where we see challenges in securing economic and reliable power at their most acute is datacentres. The Digital and Technologies sector plan published alongside the Strategy provides some further insights into the measures envisaged to mitigate these challenges:
- As referenced above, the sectors/sub-sectors that will benefit from reductions to non-commodity costs on electricity bills appears to remain in flux and is subject to further upcoming consultation. The focus appears to be on industry/manufacturing but it remains to be confirmed whether there is any short/medium term prospect of data centres (AI or otherwise) being targeted for such reduced power costs.
- The Government’s January 2025 AI Opportunities Action Plan introduced proposals for “AI Growth Zones” to foster the development of AI datacentres. The sector plan highlights the impact that historic underinvestment in electricity network infrastructure has had on connection lead times for datacentres, and confirms “improving access to power” as a key part of this initiative.
- The sector plan notes that the Government is looking at reforms to nuclear power regulation to facilitate co-location of small modular reactors with energy-intensive facilities like datacentres.
- The Government also points in the sector plan to planning reforms allowing datacentres to request to be treated as Nationally Significant Infrastructure Projects, and to be eligible for fast-tracked planning decisions.
Comment
The Strategy will no doubt overall indicate a welcome direction of travel to UK-based developers and investors of projects with large energy demand. The proposals are however light-touch at this stage, and stakeholders will be watching the follow-on consultations with interest for confirmation of the industries / sectors that will benefit.
The Strategy has been published against a backdrop of significant and growing interest among large energy users and owners / managers of large energy in using sites in ways to avoid electricity non-commodity costs, as well as ways to meet the challenges of limited grid connection capacity and of green power consumption. Efforts in this regard are typically focussing on:
- directly connected self-generation; and
- the use of third-party licence-exempt electricity suppliers, either from on-site generation projects or wider “smart grid” / “microgrid” private wire networks with the potential for multiple directly connected generation and storage.
Both of these approaches circumvent grid supply non-commodity costs by virtue of avoiding the involvement of a licensed supplier and avoiding the involvement of the licensed networks. Developing regulatory mechanisms for (limited) licence-exempt supply over the grid (such as the Balancing and Settlement Code modification proposals P441 and P442) are also of interest.
The proposals in the Strategy for new and enhanced reliefs from electricity non-commodity costs may provide a welcome alternative avenue in this regard, at least for the specific industries that ultimately benefit from these measures. However, it is interesting that the intent appears to be to continue to limit both the industry scope of these schemes and the non-commodity costs that they avoid. For example, the British Industrial Competitiveness Scheme appears to be limited to relief from RO, FiT and CM levies – there is no mention in the Strategy of the levies funding the Contracts for Difference regime.
Access to grid connections is now a critical limiting factor for businesses across all sectors, and has consequently become a high-profile political issue.
There has been significant speculation around how the discretions and influences of NESO, Ofgem and the Government may be exercised in the newly reformed network connections processes. The Strategy appears to indicate a willingness on the part of Government to intervene proactively in the allocation of grid connections to accelerate connections for demand projects that it considers to be “strategically important”. Industry will be eagerly watching to see which of the target sectors and frontier industries will be earmarked as the prime candidates for this preferential treatment.
