Europe’s factories braced for power price squeeze

Factory squeeze industry.JPG

This article is part of our special report Energy efficient buildings : Powering Europe.

EU member states are expected to close a deal on the bloc's proposed energy efficiency directive by the end of June amid worries over the consequences it could have over the price of electricity in Europe's factories.

Read here an interview on how energy prices affect the energy-intensive industry of non-ferous metal manufacturers in Germany.

Factory owners are unnerved by EU's the upcoming energy efficiency directive, which is set to be agreed at the end of the month.

One of the biggest changes that the bill could bring is an obligation on power utilities to save 1.5% on their customers' energy bills annually – including large energy consumers like chemical plants and metal factories.

Factories are the single largest users of electricity in Europe, according to the Buildings Performance Institute Europe, and they fear the savings obligation on power utilities will be passed on to them, squeezing already tight profit margins even further.

Higher energy bills

Higher up the supply chain, power utilities argue they should be able to pass on the extra costs to their industrial customers.

“Governments have to deliver energy savings, but want low energy prices,” said Nicola Rega of Eurelectric, the electricity industry association in Europe. “The concern is that energy companies will end up paying for everything ,” he added, saying that there is no guarantee power utilities will be able to recuperate the cost through consumer bills.

If this was to happen, factories which use a lot of energy in their manufacturing processes will have to suffer the consequences of the price spikes.

In Germany, electricity prices are forecast to double by 2020 as a result of the governments' nuclear phase out and subsidies for renewable energy.

But while energy-intensive industries have so far been able to withstand those, they may now be reaching a breaking point.

In May, metal manufacturer Voerdal, the third largest aluminum smelter in Germany, filed for insolvency, immediately prompting warnings from industry representatives. “The production of metals is jeopardised by high energy prices that are no longer competitive at international level,” said Ulrich Grillo, chairman of the metal manufactures group WirtschaftsVereinigung Metalle (WVM).

Sparing the manufacturers

Factories that count among Europe's biggest polluters have asked exemption from the EU’s emissions trading scheme for carbon dioxide, which they described as an “energy capping” and “de-industrialisation” law.

In May, big energy users, including steel and aluminum producers, received the EU's green light to obtain compensation from national governments for the extra costs resulting from the ETS. Such state aid is supposed to help factories switch to more energy-efficient modes of production.

Chemical giant BASF agrees and favours what it describes as 'a bottom-up' approach where energy-efficiency improvements at factory level are constantly monitored by external auditors.

In fact, those industries have already started doing their part in improving energy efficiency.

"We already have high energy prices and we are in a global competition," said Wolfgang Weber, Vice President for EU Government Relations at BASF. "We already think about what is the most efficient way to build a product and where – geographically and geologically," he told EURACTIV.

To keep Europe's factories going, Weber proposed scrapping caps on energy demand altogether in exchange for increasing investment in energy efficiency. "We need a clear signal that industrial energy demand should not need to be capped," Weber said.

Nicola Rega, energy expert for power utilities group Eurelectric, said he understood the position of energy-intensive industries. "For them, the cost of energy is so important that they do everything they can to optimise their system and improve efficiency."

If the energy efficiency directive was passed without changes, big industries would inevitably end up paying more, he said. "In the power utilities' energy savings obligation scheme, they will have to pay higher energy prices – and thus pay for the implementation of the schemes -, but they will not necessarily benefit from energy efficiency services," Rega said.

Rolf Kuby, chief of the Brussels bureau of WVM – WirtschaftsVereinigung Metalle federation,representing the economic concerns of  the non-ferrous metal industry in Germany told EURACTIV in an interview that energy savings for energy-intensive industries are already incentivised by the Emissions Trading System (ETS) and should therefore not be imposed by the Energy Efficiency Directive.

No one-size-fits all for all member states

The extent to which the energy-intensive industries will be affected depends on how member states are implementing the proposed energy-saving scheme at national level, according to Bogdan Atanasiu, from the Performance Institute Europe (BPIE).

In Germany, for example, factories are exempted from the cost of renewables (the so-called feed-in-tariffs of the German government) that is usually transmitted to end-users. 

Eurelectric's Nicola Rega said It all comes down to the industry structure of each country. "There are different implications when it comes to the impact of cost, considering some countries, such as Germany, have more intensive energy industries, whilst in the UK, the industry is focused on commercial businesses."

Power utilities put their clients into three different categories: industrial, commercial and residential. But this client portfolio varies form one country to the other, so their positions might clash when it comes to deciding which category they should pass the extra costs to.

Going carbon-neutral

Maureen Lally, of energy service provider Trane, believes companies usually see the benefits for themselves.

Taking Gillette's factory in Poland as an example of voluntary revamping, she said: “They didn't have a government telling them what to do, they did it on their own.”

Thomas Bauwens from industry association PlasticsEurope, agrees. "At times of crisis, energy efficiency at production sites is already a prerequisite to reduce costs and is even increasingly becoming a marketing argument," he says. "Most businesses are already engaged in reducing energy consumption and such moves are likely to become more attractive in the future."

Supermarket chains are also taking their own steps in improving their energy efficiency. “Their customers won't spend money in their stores if they think they are wasting energy and not servicing their community,” Lally said. If they want to be considered a leader in their field and set an example, they can even go carbon-neutral, like Microsoft has recently announced.

But the challenge might be bigger in the aluminum and the chemical sector, which consume more energy.

Power utilities eye new business models

For power utilities, the new EU rules could radically change their business model, currently focused on selling energy, to selling efficiency services – a change which, they claim, will reflect in end users' electricity bills.

Bogdan Atanasiu, of BPIE, says all market forces have to move together at once, so that energy companies get a guarantee they will be able to change from selling energy to selling mostly energy efficiency services.

"You cannot impose this change onto energy retailers. This problem is complex and the only solution is to stimulate the energy services market," Atanasiu said.

Europe aims to reduce its primary energy use by 20% by 2020, a target which is not legally binding.

The Energy Efficiency Directive was proposed by the European Commission in mid-2011 as part of its effort to reach this objective.

The 20% target will not be reached, unless the EU more than doubles its energy savings efforts.

In its draft directive, the Commission proposed individual measures for each of the sectors that could play a role in reducing energy consumption, including a controversial obligation on energy companies to reduce their deliveries to customers by 1.5% each year.

  • 5 June 2012 and 13 June 2012: Trialogue meetings (excluding the regular non-political, technical meetings) between the Council, Commission and Parliament.
  • 1 July 2012: Danish presidency ends.

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