By Professor David Bailey
27th January 2026

Writing off manufacturing is a mistake Britain can’t afford

Why high energy costs are a policy choice, not an economic destiny -

and why manufacturing still matters far more than some would like to admit.

Tim Leunig’s recent Observer piece, “Britain can’t rely on cheap solar but this shouldn’t put our economy in the shade”, makes a familiar argument: Britain’s energy costs are structurally higher than those of sunnier, more resource-rich places like Texas, and therefore energy-intensive manufacturing will inevitably migrate elsewhere. We are encouraged to accept this with equanimity, reassured that the UK can thrive as a service-led economy.

This argument is seductive in its simplicity and deeply flawed in its implications. It understates the economic value of manufacturing, misunderstands the nature of modern industrial economies, and misdiagnoses why UK energy prices are so persistently high. Most importantly, it risks turning policy failure into economic fatalism.

 

Manufacturing isn’t a relic: it’s an economic multiplier

The article treats manufacturing as a declining legacy sector whose loss can be shrugged off. This view ignores how manufacturing functions in advanced economies today. Manufacturing is not just about “making things”; it is a high-productivity anchor around which innovation, exports, skills and services cluster.

Manufacturing punches well above its weight. It accounts for a disproportionate share of business R&D, export earnings and productivity growth. Countries that retain strong manufacturing bases (think Germany, South Korea, the US) do not do so out of nostalgia, but because manufacturing drives economic resilience and technological capability.

Crucially, modern manufacturing is inseparable from services. The line between the two has blurred into what economists increasingly call ‘manu-services’: design, software, data analytics, logistics, systems integration, maintenance and lifecycle support. These services are not footnotes to manufacturing, but increasingly integral to it.

Take aerospace, automotive, advanced machinery or energy equipment. The factory floor is only one part of a much larger value chain that includes engineering services, digital monitoring, finance, and long-term service contracts. But here’s the rub: when manufacturing leaves, these high-value services often follow. Writing off manufacturing therefore means hollowing out precisely the kinds of knowledge-intensive services Britain claims to excel at.

 

A service economy still needs things to be made

Leunig’s argument leans heavily on the idea that the UK can simply specialise further in services. But services do not float free of the real economy. They depend on physical capital, supply chains, and industrial ecosystems.

Even sectors like finance, consultancy and tech benefit from proximity to advanced industry - not least because manufacturing provides demand, technical problems to solve, and skilled labour pools. An economy that designs but never builds risks becoming structurally dependent on others for production, innovation and strategic capability.

Recent shocks, from Covid to geopolitical tensions, should have taught us that resilience matters. Countries that cannot produce critical goods, from energy infrastructure to medical supplies, discover very quickly that markets alone do not guarantee security or affordability.

 

UK energy prices are high - but not for the reason claimed

The Observer article frames high energy prices as a geographic inevitability: Britain lacks abundant sunshine and cheap land, therefore energy must be expensive. This misses the central issue.

The UK’s electricity prices are high primarily because electricity prices are tightly linked to gas prices, not because renewables are intrinsically costly. Britain’s wholesale electricity market is set by the marginal price (usually gas-fired generation) even when renewables supply much of the power. As a result, expensive gas sets the price for everyone.

This means UK electricity prices closely track volatile international gas markets. When gas prices spike, electricity prices follow - regardless of how cheap wind or solar generation might be at that moment. This is not an unavoidable law of economics; it is a market structure.

Ironically, this system undermines one of Britain’s genuine strengths: its world-leading offshore wind sector. Cheap renewable electricity exists, but consumers and businesses often fail to feel the benefit because gas remains the price-setter.

 

High costs are a policy choice, not a natural condition

If high energy prices were purely about sunshine, many European countries would face the same disadvantages. Yet UK industrial electricity prices are consistently among the highest in comparable economies.

Other countries intervene more aggressively to protect industrial competitiveness, reform market structures, or decouple electricity pricing from gas. The UK has been slower and more hesitant, often preferring to explain outcomes as inevitable rather than political.

This matters because energy-intensive industries make long-term investment decisions. When firms see persistently high and volatile energy costs, they do not just shut plants: they stop investing. Skills decay, supply chains fragment, and recovery becomes harder.

 

What Britain could actually do

There are credible, practical steps the UK could take to reduce energy costs and support industrial competitiveness:

• Reform electricity market pricing to decouple from global wholesale gas prices, for example by having a strategic gas reserve.
• Shift policy levies away from electricity bills and into general taxation, reducing the penalty on electrification and industrial power use.
• Accelerate grid investment and storage, allowing cheap renewable power to flow where it is needed and reducing reliance on gas during peaks.
• Provide stable, targeted support for energy-intensive industries, not as subsidies for inefficiency but as a bridge during the transition to cleaner, cheaper power.

None of this requires abandoning climate goals. On the contrary, aligning decarbonisation with competitiveness is really the only way to make net zero economically durable.

 

Conclusion: manufacturing decline is not inevitable

The most troubling aspect of the Observer piece is not its diagnosis of energy challenges, but its resignation to industrial decline. Britain’s high energy prices are not an act of God. They are the result of choices. And choices can be changed.

Manufacturing, entwined with high-value services, remains central to a productive, resilient economy. Writing it off risks locking Britain into a low-investment, low-growth future where we consume innovation rather than create it.

The real question is not whether Britain can compete with Texan sunshine. It is whether Britain has the ambition to fix the systems it controls, and to stop mistaking policy failure for economic fate.

 

Professor David Bailey works at the Birmingham Business School.