High Energy Costs Plaguing Europe

From New York Times

By Stanley Reed

On Dec. 19, Voestalpine, an Austrian maker of high-quality steel for the auto industry, announced that it would build a plant in North America that would employ natural gas to reduce iron ore to a kind of raw iron that would then be used in the company’s European blast furnaces.

Asked whether he had considered building the plant in Europe, Voestalpine’s chief executive, Wolfgang Eder, said that that “calculation does not make sense from the very beginning.” Gas in Europe is much more expensive, he said.

High energy costs are emerging as an issue in Europe that is prompting debate, including questioning of the Continent’s clean energy initiatives. Over the past few years, Europe has spent tens of billions of euros in an effort to reduce carbon dioxide emissions. The bulk of the spending has gone into low-carbon energy sources like wind and solar power that have needed special tariffs or other subsidies to be commercially viable.

“We embarked on a big transition to a low-carbon economy without taking into account the cost and without factoring in the competitive impact,” says Fabien Roques, head of European power and carbon at the energy consulting firm IHS CERA in Paris. “I think there will be a critical review of some of these policies in the next few years.”

Both consumers and the industry are upset about high energy costs. Energy-intensive industries like chemicals and steel are, if not closing European plants outright, looking toward places like the United States that have lower energy costs as they pursue new investments.

BASF, the German chemical giant, has been outspoken about the consequences of energy costs for competitiveness and is building a new plant in Louisiana.

“We Europeans are currently paying up to four or five times more for natural gas than the Americans,” Harald Schwager, a member of the executive board at BASF, said last month. “Energy efficiency alone will not allow us to compensate for this. Of course, that means increased competition for all the European manufacturing sites.”

The expansion in renewables will probably ensure that Europe will meet its target of reducing greenhouse gases 20 percent from their 1990 levels by 2020. But it has been a disappointment on other levels.

For one thing, emissions continue to rise globally. In a sense, Europe is likely to have exported its emissions to places like China, where polluting economic activity continues to increase while the European economy stagnates.

A striking indicator that the European effort has not achieved all that it intended to is the continued rise in the burning of coal, by far the biggest polluter among fossil fuels.

The International Energy Agency, a Paris-based group formed by consumer nations, recently said that coal was likely to catch up with oil as the world’s largest source of energy in a decade.

Much of the increase in coal use can be blamed on China and India, but not all of it. Europe has increased its coal use this year, and that has led to an increase of about 7 percent in carbon dioxide emissions from power generation, according to IHS. Coal use is increasing in all regions except the United States, the I.E.A. said.

Current European energy policies were mostly shaped when the European economy was booming. In the grim economic climate of today, spending big money on renewables can seem like a luxury. Spain — once a strong supporter of renewables — has sharply cut funding.

The British government, another big backer of clean energy, recently struck a compromise. It promised to soak consumers for billions of pounds of subsidies for renewables like wind power and even new nuclear power plants, but it also gave a cautious green light to shale gas drilling in hopes of finding a cheaper source of natural gas.

A British consumer advocacy group called Which? recently pegged the costs to British consumers of decarbonization and new energy infrastructure at more than £100 billion, or $161 billion, and said that “persistently rising energy prices” were putting “intense financial pressures” on the public. In Germany, renewables subsidies are already adding 10 percent to 15 percent to bills, according to IHS.

Europeans cannot help noticing that the United States has managed, through the shale gas boom, not only to slash natural gas prices but also to cut carbon dioxide emissions to a 20-year low as utilities have shifted from coal to natural gas, which produces much less carbon dioxide.

What can Europe do? If it wants to make a bigger dent in carbon emissions, it needs a serious carbon price — not the current €7, or $9, per metric ton — that has little effect on business decisions. It might also consider a tax on carbon consumption to make sure it is not achieving its goals through deindustrialization. But such measures might make Europe even less competitive unless they are adopted globally.

Dieter Helm, a professor of energy policy at the University of Oxford, thinks that Europe could get a much bigger bang for its euro by putting some of the funding going into uncompetitive existing technologies into basic energy research that might produce much better clean technologies in the future.

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