Back to the future: Energy shocks, manufacturing pressure and M&A dynamics
We have been here before. Energy shocks. Rising costs. Weak growth. Falling confidence.
The 1970s all over again? Not quite. This time the system is more interconnected, the shocks are more complex, and the implications for manufacturing and distribution businesses are more immediate, more strategic and more personal.
What we are experiencing is not a single crisis. It is a stacked shock: Russia’s invasion of Ukraine structurally repriced European gas; conflict in the Middle East and the Iran shock have also reminded markets how quickly oil and LNG (Liquefied Natural Gas) risk premia can return; supply chains remain fragile; and interest rates, while easing, are still above the ultra-low levels on which many balance sheets were built. For manufacturers, this creates pressure from every direction at once: input costs, transport, working capital, wage demands, customer pricing and valuation multiples.
Timeline of major energy shocks
The current environment is not a single crisis. It is a sequence of interconnected shocks that continue to influence energy pricing and business confidence.
1. The UK energy cost penalty
Before the latest shock cycle is even considered, UK manufacturing already starts from a structurally disadvantaged position. The UK is now one of the highest-cost locations for industrial electricity in the developed world. That is not a marginal issue. For energy-intensive operators, it is a board-level competitiveness issue. The DESNZ (Department for Energy Security & Net Zero) data, highlighted by Full Fact, shows that in 2024 the UK had the highest industrial electricity prices among IEA (International Energy Agency) members for which data was available, both including and excluding taxes.
For large industrial users, recent analysis of government and Eurostat data indicates UK prices of around 25.3p/kWh, roughly 125% above an EU median of about 11.25p/kWh and more than five times the Finnish level in the same comparison.
The ONS (Office for National Statistics) has reported that UK industrial electricity prices have consistently sat above the IEA median over the last decade; in 2023 they were 46% higher than the IEA median.
International comparisons regularly show UK manufacturers paying multiples of the electricity price paid by competitors in the US and China. Even where methodologies differ, the conclusion is consistent: the UK is not just expensive; it is structurally uncompetitive for power-intensive manufacturing. This matters because electricity is no longer a passive overhead. For paper, tissue, packaging, chemicals, metals, plastics, food processing, cold-chain logistics and distribution, power prices now influence the production footprint, capital allocation, customer pricing, acquisition strategy and ultimately whether UK capacity remains investable.
This matters because electricity is no longer a passive overhead. For paper, tissue, packaging, chemicals, metals, plastics, food processing, cold-chain logistics and distribution, power prices now influence the production footprint, capital allocation, customer pricing, acquisition strategy and ultimately whether UK capacity remains investable.
Average non-domestic electricity prices in the EU and UK by consumption size (including taxes and subsidies)
2. The energy shock has not passed
The immediate post-pandemic and Ukraine shock was severe, but the more important point for owners is that prices have not normalised to the old baseline. The UK economy has absorbed a multi-year fossil fuel shock and is now exposed to a further geopolitical risk premium from the Middle East.The IFS (Institute for Fiscal Studies) has noted that wholesale gas prices rose three-fold in real terms between 2021 and the final quarter of 2022.
The ECIU (Energy and Climate Intelligence Unit) estimates that the UK spent around £140bn on wholesale gas between 2021 and 2024, around £90bn more than if pre-crisis costs had continued.
ONS analysis shows the real industrial impact: between Q4 2021 and Q4 2024, GVA fell 28.9% in paper products, 30.2% in petrochemicals and 46.5% in basic metals and castings.
The latest Iran-linked energy shock has again exposed the UK’s vulnerability to global gas markets. Reuters reported in May 2026 that wholesale British gas prices were around 45% above pre-conflict levels, with the household price cap expected to rise 13% from July 2026. Industrial contracts are not identical to domestic tariffs, but the signal is the same: wholesale volatility is returning.
For manufacturers, the practical effect is brutal. Energy price inflation does not only hit the utility bill. It feeds through raw materials, transport, packaging, subcontract processing, maintenance, customer credit risk and inventory funding. A business may think its direct energy exposure is manageable, but still find its margin eroded through the supply chain.
Average electricity prices for medium non-domestic consumers in the EU and UK
3. Renewables: The honest timeline
The long-term direction of travel is clear: more renewables, more electrification, more storage, more network investment and less exposure to imported fossil fuels. But the timeline matters. Owners cannot build a 2026-2028 strategy on the assumption that cheap, abundant renewable power arrives quickly enough to solve today’s margin problem.
- The UK’s clean power plans require a dramatic build-out of wind, solar, grid capacity, storage and flexible generation. Grid connection delays, planning constraints, supply-chain bottlenecks and financing requirements remain significant execution risks.
- The Tony Blair Institute has warned that long-duration storage, clean dispatchable generation and carbon capture are advancing more slowly than hoped. Without them, integrating high levels of renewables becomes more complex and expensive.
- Even optimistic transition scenarios still require gas or other firm capacity to cover low-wind, low-solar periods. That means UK electricity prices may remain exposed to gas-price volatility for longer than many owners would like.
- The renewables build-out is therefore not just a market story. It depends heavily on government intervention: planning reform, grid investment, contracts for difference, industrial exemptions, carbon policy, storage support, nuclear/SMR policy and the practical delivery of clean dispatchable generation.
Policy callout: British Industrial Competitiveness Scheme (BICS)
The Government announced that more than 10,000 manufacturers could see electricity bills cut by up to 25% from April 2027, principally through exemptions from the indirect costs of the Renewables Obligation and Feed-in Tariffs, with wider scheme elements following. That is welcome and commercially relevant. But if it does not arrive until 2027, eligibility will matter, and even after relief the UK is likely to remain a materially higher-cost energy location than the US and many Asian competitors.
The conclusion is uncomfortable but necessary: renewables are part of the long-term answer, but they do not remove the need for immediate strategic action by energy-intensive manufacturers.
Renewable transition timeline
Renewables represent the long-term solution, but the transition remains dependent on infrastructure investment, technological progress and government intervention.
Strategic response framework
Businesses treating energy as a strategic issue rather than simply an operational cost are more likely to protect margins and create value.
5. How energy-intensive businesses need to react
The winners in this cycle will not be the businesses that simply hope prices fall. They will be the businesses that treat energy, capital and M&A as linked strategic variables:
- Treat energy as a strategic input, not an overhead line. Owners should understand contracted price, renewal exposure, pass-through mechanisms, peak-load profile, network charges, metering quality and the operational cost of downtime.
- Stress-test the business under severe scenarios. Know the effect on EBITDA and covenant headroom if energy costs rise 30%, if demand falls 15%, or if customers resist price increases for two consecutive quarters.
- Invest in efficiency, automation and AI-enabled operational controls. Energy monitoring, heat recovery, variable-speed drives, predictive maintenance, production scheduling and yield improvement can protect margin faster than waiting for national infrastructure to catch up.
- Revisit pricing architecture. Inflationary environments punish slow price discipline. Indexation, energy surcharges, shorter quote validity, minimum order quantities and customer profitability reviews all become more important.
- Review footprint and utilisation. In high-cost energy markets, under-utilised capacity becomes dangerous. Consolidating production, sharing sites, outsourcing non-core processes or acquiring volume to fill capacity can be more effective than incremental cost cutting.
- Strengthen liquidity early. Working capital absorbs the shock before the P&L fully shows it. Raw-material volatility, stock-build decisions, customer delays and supplier tightening can consume cash quickly.
- Consider M&A proactively. Acquisitions can unlock purchasing power, shared infrastructure, customer diversification, better asset utilisation and management depth. A sale, partial sale or strategic partnership can equally be the right answer where the capital requirement has outgrown the owner’s risk appetite.
6. The consequences of not reacting
The risk for many owners is not immediate failure. It is gradual strategic erosion: margin compression, delayed investment, weakening customer service, reduced lender confidence and a valuation gap that only becomes visible when the business is already under pressure.
In practical terms, doing nothing can mean lower EBITDA, higher leverage, weaker covenant headroom, loss of key staff, customer concentration risk, inability to fund automation, reduced buyer appetite and a forced sale at the wrong point in the cycle. In every downturn, value does not disappear. It transfers from the unprepared to the prepared, from the reactive to the strategic, from the overleveraged to the well-capitalised.
The conversation most owners are avoiding
Most business owners I speak to now fall into one of two camps. They either know they need to act but have not yet decided how, or they are hoping this passes and quietly losing ground.
The difference between those outcomes is usually one conversation.
At Moore Kingston Smith Corporate Finance, we work with owners and operators of manufacturing and distribution businesses to provide a clear, commercial view of where their business sits in the cycle and what their real strategic options are. That may mean preparing for a sale, pursuing an acquisition, restructuring for resilience, raising capital, exploring a strategic partnership or simply pressure-testing the plan before the market does it for you.
If you want a clear, commercial view on where your business sits in this cycle, and what your real strategic options are, now is the time to have that conversation.
