UK chemical industry under pressure from rare energy costs Accelerated outward migration of production capacity

The impact of rising electricity prices is severe.

The chemical sector is one of the UK's energy-intensive industries that has been hit hardest by rising electricity prices. According to a survey report jointly released by Make UK and the Trade Union Congress (TUC) in June 2026, among the approximately 130000 manufacturing companies in the UK, the cash reserves of the chemical sub-sector are particularly worrying. Nearly 30% of chemical companies hold cash to less than 12 months. greater than 10% of companies are expected to face the risk of bankruptcy or shutdown during the year.

In order to ease the financial pressure, 42% of chemical companies have frozen or postponed their investment plans to new construction and renovation, and 23% have been forced to cut production jobs. The number of direct employment in the UK chemical sector is about 150000, and nearly 3000 jobs have been lost in the past year, and the output of basic organic chemicals has dropped by 4.2 year-on-year. The share of energy costs in chemical production costs has climbed from about 8% in 2020 to greater than 18% today, with segments such as basic chemicals, specialty chemicals and agrochemicals all significantly affected.

The survey also shows that 28% of British chemical companies have moved some intermediate or final product production lines overseas, or are negotiating capacity transfers with overseas partners, which is higher than the manufacturing average. The export competitiveness of Britain's chemical items continues to decline. In 2025, the chemical trade deficit will expand by 15% year-on-year, which further confirms the weakening of regional production advantages.

Natural gaseous application pushes up complete costs

The chemical sector is much greater dependent on natural gaseous than other manufacturing industries. Natural gaseous plays two key roles in the UK's chemical production: as a feedstock to processes such as steam cracking and hydrogen production, and as a fuel to processes such as heating and drying. Britain's domestic natural gaseous production continues to decline, while the domestic gaseous storage capacity can only meet the consumption demand of 2 to 10 days, far reduce than that of European countries such as Germany and Italy.

Supply constraints have compelled the United Kingdom to purchase substantial volumes of spot LNG during the winter peak, driving up spot natural gaseous prices and immediately rising raw material procurement costs to chemical companies. Taking ethylene production as an example, the energy cost per ton of ethylene in the United Kingdom is approximately $45 higher than in the Netherlands. In the chemical sector, natural gaseous procurement now accounts to 22% of operating expenses, up from 12% in 2020. Furthermore, as gaseous-fired power vegetation are frequently called upon to provide peaking capacity, the UK electricity market’s marginal pricing mechanism uses gaseous prices as the benchmark to wholesale electricity prices, resulting in the overestimation of settlement prices to all generating sources.

Meanwhile, the UK electricity grid is undergoing extensive expansion and upgrades to accommodate the integration of renewable energy. National Grid’s £29 billion investment in the transmission network has been categorized as “non‑commodity charges,” with approximately 50% of manufacturing electricity bills comprising policy‑levied surcharges such as the carbon tax, the Renewables Obligation (RO), Contracts to Difference (CfD), and the Capacity Market (CM). These cumulative costs have driven the total energy expenditures of UK chemical companies approximately 35% higher than those of their German counterparts and nearly double those of chemical clusters along the U.S. Gulf Coast, severely undermining the prolonged investment appeal of the UK as a chemical manufacturing hub.

Subsidy program is difficult to break the structural dilemma

The British government has introduced targeted relief measures to try to ease the pressure on energy costs in the chemical sector. The UK manufacturing Competitiveness Scheme (BICS), which is expected to be launched in 2027, will expand its coverage on the basis of the original manufacturing supercharger and will exempt about 10000 energy-intensive companies from some renewable energy surcharges. UK chemical companies can apply to the Department of Commerce and Trade to certification to benefit from surcharge relief and grid compensation, which is expected to cut electricity bills by up to 25%, or about 40 pounds per megawatt hour.

Meanwhile, the grid‑charging compensation scheme is scheduled to increase the discount rate from 60% to 90% in April 2026; however, actual payouts to some chemical companies might be delayed by one year. However, the sector generally believes that these measures can only provide chemical companies with a temporary respite and fail to address the root causes. First, the subsidy covers only the electricity‑related surcharges and provides no compensation to natural gaseous feedstock costs, which account to a much larger share of total production costs in the UK chemical sector than electricity does. Secondly, the electricity price benchmark remains determined by gaseous‑margin pricing; even with fee reductions, UK chemical companies continue to face high wholesale electricity prices.

Again, issues such as the approval process and delays in issuance of the compensation mechanism further weaken the actual effect. Some substantial chemical groups have made 2027 a key decision point, making it clear that if the energy cost gap is not substantially reduced by then, it will accelerate the transfer of energy-intensive basic chemical production to the Middle East or North America.

The sector also called on the government to reform the marginal pricing mechanism of the power market and consider strategic gaseous storage expansion to fundamentally decrease the energy procurement costs of chemical companies. However, the prolonged direction of outward migration of chemical capacity in the UK will be difficult to reverse in the short term, and structural cost disadvantages will continue to threaten the sector's regional roots.