Stable Energy Prices Are Key To Industrial Strategy

Energy prices are no longer a temporary headache, they’re shaping which countries can invest, innovate, and keep high-value manufacturing at home. I dig into why the UK’s energy costs sit so far above the United States and often above the European Union, and how that gap quietly turns into a productivity tax that shows up in output, hiring, and long-term growth.

We walk through the real economic mechanics: how energy price shocks compress production in energy-intensive industries, why volatility can be more damaging than a steady high price, and how businesses end up reallocating investment away from broad productivity gains and toward defensive energy-efficiency spending. I also unpack the “productivity up, growth down” paradox, where firm exits can raise average productivity while overall output and business dynamism weaken.

Then we compare the energy environments head-to-head. The US benefits from abundant domestic oil and gas and more stable industrial electricity prices, while the EU remains more exposed to imported gas risks and fragmented markets. The UK lands in a tough hybrid position: linked to European wholesale pricing, short on gas storage, slowed by grid connection queues, and lacking the subsidy scale seen elsewhere. From there, I lay out a practical policy direction focused on price stability: more storage, faster grid upgrades, long-term contracts for industry, targeted support for electrification and efficiency, plus scaling offshore wind and nuclear with simpler planning and regulation.

If you care about UK competitiveness, industrial strategy, supply chain advantage, or the future of clean energy investment, hit subscribe, share this with a colleague, and leave a review. Which change would move the needle fastest: storage, grid speed, or long-term pricing?

Transcript

Welcome And Why Energy Matters

SPEAKER_03 0:02

The number one podcast of supply trade advantage global trade and policy with Tony Hines. Listen, learn, lead.

Tony Hines 0:13

Hello, I'm Tony Hines, you're listening to Chain Reaction. It's great that you could drop by today. Got a great episode coming along in a few moments. Stick around, stay tuned, stay informed, stay ahead with Chain Reaction. Listen, learn, lead.

The UK Energy Cost Problem

Tony Hines 0:28

Now today I want to talk about energy and energy costs. And energy costs in the United Kingdom are the highest across Europe and much higher than they are in the United States. And of course that's holding back productivity and it's holding back growth. So if anyone in government listens to this, we need government policy that gets those energy costs right down. And it's as simple as that. And there are many ways to do it. We need supply, we need storage, and we need distribution. And the focus on those things will make it a much better system. And we need control and regulation over the bodies that simply increase prices. We need to keep those prices down and make sure that people get a fair deal. Because at the moment they're certainly not.

SPEAKER_02 1:22

Chain Reaction, the number one podcast about supply chain advantage, global trade, and policy. With Tony Hines.

Energy As A Structural Growth Constraint

Tony Hines 1:40

The global economy has entered an era where energy prices are not merely cyclical shocks, but structural constraints, shaping productivity, investment, and longer term growth. The UK, the European Union, and the United States face radically different energy price environments, and these differences are now powerful predictors of economic performance. High and volatile energy prices act as a tax on productivity, a drag on investment, and a filter on firm survival. They reshape industrial structure, redirect capital flows, and determine which economies can sustain competitive manufacturing and innovation. The argument is simple. Energy price stability is now industrial strategy.

How Prices Hit Output And Investment

Tony Hines 2:28

Let's look at the mechanisms how energy prices hit productivity and growth. Well there's a cost shock and an output compression. Energy is a universal input when prices rise sharply, marginal production costs increase. Output falls, especially in energy intensive sectors. So for example, the glass industry, steel production, pottery production, and lots of other industries. And there's potential GDP decline as well. IMF modeling shows that the Euro area shock of 2022 will reduce potential GDP by 0.8% by 2027, with larger losses in Germany and Italy. The UK's structural profile places it in a similar range. There's investment reallocation. High energy prices force firms to redirect investment away from general productivity improvements towards energy saving technologies. This raises energy efficiency about 3% in the Euro area, but slows broader productivity growth. The economy becomes more energy efficient, but less dynamically productive. Then there's firm dynamics and selection. Energy shocks accelerate industrial restructuring. Low productivity, energy intensive firms exit. Entry rates fall, business dynamism declines, and average productivity rises through the selection, even as total output falls. This is the paradox. Productivity up, growth down. Volatility is a growth killer. It matters more than the price level. Sudden spikes crush investment appetite, gradual increases allow adjustment, and stable energy markets encourage innovation and capital formation. In the United Kingdom, of course, one of the problems is we've had, I think, seven prime ministers in ten years, and the about turns that happen when governments change makes things less stable and less easy to create a certain environment for those firms in the economy.

US Advantage And Europe’s Exposure

Tony Hines 4:38

If we look at the comparative exposure of the United Kingdom versus the EU and the United States, it looks like this. The United States, the energy abundant economy. The US enjoys domestic oil and gas abundance, lower and more stable energy prices, strong industrial competitiveness in petrochemicals, manufacturing, and data center infrastructure. This results in near zero productivity drag from global energy shocks. If we turn to the European Union, it's the shock-exposed block. Europe faces high dependence on imported gas, exposure to geopolitical supply risks, large energy intensive industrial bases, fragmented energy markets, and the result is 0.8% potential GDP loss, with Germany and Italy hit hardest, as we said. In the UK, it's the hybrid case. The UK sits between the EU average and the most exposed EU economies. High reliance on natural gas, limited storage capacity, wholesale price exposure to European markets, lower investment rates than France or Spain, energy-intensive industrial clusters, ceramics, chemicals, and metals, all impacted. In France, 0.8 to 1% potential GDP drag, similar to the Eurozone, but without the scale of EU industrial policy, or the advantage of US energy abundance. The strategic consequences for productivity and growth? Well, the US has an advantage. It has cheap, stable energy, and it underpins higher manufacturing competitiveness, stronger investment, faster productivity growth, greater business dynamism, and the Inflation Reduction Act amplifies the advantage. If we look at the European continent, Europe's productivity slowdown is now structurally linked to high energy prices, slow investment, weak business dynamism, fragmented policy responses, and energy is no longer a cyclical issue. It's structural, it's a bottleneck. And the UK dilemma, the UK faces European style exposure without EU scale subsidies, doesn't have US style energy abundance, and it doesn't have German style industrial depth. This creates a strategic vulnerability. The UK must compete with economies that either have cheap energy or massive industrial support. So

The UK Policy Playbook

Tony Hines 7:08

let's take a look at policy. What must the UK do? Well, the first thing is to stabilize energy prices. The single most important policy lever is price stability, not price suppression. Expand gas storage capacity, accelerate grid investment, reduce exposure to spot market volatility, and support long-term contract for industrial users. Treat energy efficiency as industrial strategy. Energy efficiency is not environmental policy. It is productivity policy. Targeted support for energy saving capital investment, incentives for industrial electrification, accelerated rollout of heat pumps and district heating, and build a competitive clean energy base. The UK has to reduce structural exposure by scaling offshore wind and nuclear, reforming grid connection queues, and supporting domestic supply chains for batteries, EVs, and hydrogen. It has to restore business dynamism. Energy shocks reduce firm entry and growth. Policy must reverse it. Lower barriers to entry, support scale-ups in energy intensive sectors, and improve access to capital for industrial innovation. Align industrial strategy with energy reality. The UK cannot replicate the model of the US. It can't have cheap energy in the same way. Or the EU model of massive subsidies. It must build a hybrid strategy, stable energy prices, targeted industrial support, accelerated innovation, and strategic sector prioritization. The global economy is reorganizing around energy price stability. The US has it, Europe doesn't, and the UK must decide which future it wants. Energy prices are now the foundation of productivity, the driver of investment, and the arbiter of industrial competitiveness. The countries that secure stable, affordable energy will lead the next wave of growth. Those that don't will fall behind. This is the new politics of productivity.

SPEAKER_02 9:17

Chain Reaction, the number one podcast about supply chain advantage, global trade, and policy. With Tony Hines.

Tony Hines 9:34

When it

Price Comparisons And The Storage Gap

Tony Hines 9:35

comes to the difference in energy prices between the United States, the EU and the UK, it looks like this. In Europe, somewhere between thirty-five and forty five dollars. And in the United Kingdom, forty-five to fifty-five dollars per megawatt hour, wholesale prices linked to the EU. When it comes to electricity, a similar picture emerges. Electricity, for industrial electricity, that is, is about 17%. And in the United Kingdom, $180 to $220 per megawatt hour. And when it comes to households, the United States pay about $130 per megawatt hour. European Union $250 to $300 per megawatt hour. And the United Kingdom, wait for it $300 to $350 per megawatt hour. So industrial electricity in the United States costs less than half of the UK. They have much more competitiveness in the manufacturing sector, with higher investment and faster productivity growth. In the EU, industrial electricity is two to three times the US level, gas prices three to four times US level. That causes a productivity drag, investment diversion to energy efficiency, and slower growth. And in the United Kingdom, it's more exposed, with UK industrial electricity 20 to 30% higher than the EU average, and UK households electricity is amongst the highest in Europe. UK gas prices track EU wholesale markets, but are 10 to 20% higher due to limited storage and market structure. So it's fairly obvious what needs to happen. We need more storage, we need to be more efficient, we need to lower those prices, and we need to diversify sources of energy. Energy price volatility is holding the UK back, along with limited gas storage, slow grid connections, policy instability, and lack of subsidy scale. The UK storage is about 1% of annual demand, whereas it's 25% in the European Union. And the connectivity queue is five to ten years for renewables. Policy instability, frequent reversals increase risk premiums by one to two percentage points, and there's a lack of subsidy. The UK 20 billion, across Europe 650 billion, and in the US 350 billion.

UK Strengths Plus What To Fix

Tony Hines 12:43

So what advantages could the UK unlock? Well, offshore wind, it's a leader. It needs to expand its nuclear programs, it needs long-term industrial contracts, it needs to modernize the grid. It needs to target industrial support, and it needs simplification of those regulatory policies. Planning delays need to be cut from five to seven years to about one to two, and faster deployment of energy and industrial projects. The UK problem is not capacity, it's energy price exposure and policy architecture. With stable prices, faster grid connections, and coherent industrial strategy, the UK could convert its natural advantage into US style competitiveness and EU-style resilience.

Next Episodes And Final Sign Off

Tony Hines 13:55

We've got some good episodes coming your way in the next few weeks.

SPEAKER_01 13:59

And one to look out for is my conversation with Tom S. Nadrowski, the author of Mineral War. He showed his insights and his expertise to help us understand what it means for the future. So don't miss it.

Tony Hines 14:19

Also, don't forget to catch up on the business news every week out on a Saturday for that weekend review of what happened in the past week.

SPEAKER_02 14:28

Chain Reaction Business News with Tony Hines. All things impacting global trade, supply chain advantage, and policy this week.

Tony Hines 14:43

Until then, plenty of episodes to catch up on. There's over 370 now. So if you haven't heard them, drop by, have a listen. Seek out the ones you're interested in. I'm Tony Hines, I'm signing off, and I'll see you next time in Chain Reaction. Take care. Bye for now.

SPEAKER_03 15:04

Chain Reaction, the number one podcast of supply chain advantage, global trade and policy with Tony Hines. Listen, learn lead.

Tony Hines 15:17

Chain Reaction has listeners in 140 countries in over 1900 cities on six continents around the globe. And we're glad to have you with us. Thanks for listening.