Energy costs and industrial competitiveness

Large gaps have opened in the costs of energy to business in different parts of the world. This has left industry in some regions at a disadvantage.

| 8 min read

Manufacturing in particular needs a lot of energy to make things, as much transformation of raw materials and assembly of components requires intense heat to melt, mould and weld. Ceramics, bricks, steel blast furnaces, aluminium smelting, glass making and others are particularly fuel intensive, whilst petrochemicals and fertilisers need fossil-fuel feedstock.

The European Union (EU) pays around three times as much as the US for its industrial gas and is struggling to replace the cheap Russian gas it used to rely on by pipeline. A lot of Europe’s gas now arrives as liquefied natural gas (LNG) in tankers requiring expensive transportation and liquefaction, where the US has cheaper pipeline gas.

The wider Europe is an area of high energy costs, with the US providing much cheaper energy to industry from its own oil and gas fields. China too has found ways to lower its energy costs, and to take advantage of cheaper imports of oil and gas from sources from which the West will not buy.

Electricity also reveals a wide range of prices. German electricity prices to business are around 80% above the US and 200% higher than China. China has kept her prices down by reliance on relatively cheap coal as well as an array of hydro and renewables facilitated by government subsidy. Electricity is used a lot for powering production lines and now for electric arc steel making.

All three main centres of manufacturing – China, the US and Western Europe – have governments following a policy encouraging more renewable electricity and electrification. There remains a very long way to go.

Electricity presently accounts for just over a fifth only of energy used. Most people and businesses still rely heavily on oil and gas for transport, heating and industrial processes. Electricity generation itself still uses a lot of gas and coal around the world. The International Energy Agency (IEA) puts renewables at 30% of electricity generated, with solar contributing 5.4%, wind 7.8% and hydro 14.2%. It forecasts this rising to 42% of the total by 2028, with the largest rises in solar more than doubling to 12.6% and wind increasing to 12.2%.

At current levels of electrification, wind power only represents 1.6% of total energy and solar 1.1%. Even if the IEA’s ambitious targets for growth in solar and wind are met, they will still be a single figure percentage of total energy production. It seems likely the world will be using more oil and gas in 2030 than today despite the increases in renewable power, as energy-hungry countries such as China and India burn more fossil fuel to power their growth. Whilst advanced countries are working hard to eliminate coal, some emerging countries will continue to be dependent on it for longer.

Balancing energy policies with price

Of the three main industrial areas, Europe has as a matter of policy settled on more expensive energy to meet climate goals, whilst the US and China both battle to keep energy costs under more control as part of their industrial strategies.

All three main areas would claim to want to balance three main objectives in their energy policies. They wish to pursue environmental objectives, reducing air and water pollution and cutting carbon dioxide. They wish to keep energy affordable for consumers and for business. They wish to have secure supplies for their home purposes. There are tensions between and within these aims. Compromises or judgements must be made.

China has been keener on reducing dangerous emissions to air and water than on carbon dioxide reduction. Europe has given priority to getting Russian oil and gas out of its supply chains at the cost of higher prices and less supply. The US has continued to issue oil and gas permits to keep prices down despite its carbon dioxide objectives.

The Europeans have given greater priority to the carbon dioxide target than China or the US.

There is a central contradiction between the aim of affordable energy and the environmental imperatives. One of the ways to get people to use less fossil fuel and to switch to renewable electricity is to put up the cost of fossil fuel by taxes and regulations. As it will take a long time to get everyone to switch to electricity for heating and transport, the higher prices and costs make consumers poorer and industry less competitive in this period.

The Europeans have given greater priority to the carbon dioxide target than China or the US, and are using the price mechanism much more to try to move people out of using so much fossil fuel. As a result, there are forces to deindustrialise Europe and to import more from the US and from China. Germany now depends much more on imported US LNG, and much of Europe’s investment in solar and wind is based around Chinese imports of the equipment.

Europe is now having a debate about whether to impose tariffs as well as a carbon border adjustment tax on imports from China, given the comparative advantage China enjoys from much cheaper energy.

Are renewables cheap?

Some argue that accelerating the investment in solar and wind energy would mean access to much more low-cost electricity, a move that could help competitiveness. It is true that the costs of putting in solar and wind energy have come down as production is scaled up. It is also true that the solar and wind energy they harness does not have a fuel cost.

Others counter by saying that these costs and prices do not include the costs of providing stand-by fossil-fuel generation for days when the wind and sun lets you down, nor the running costs when the coal or gas plant must be fired up to keep the lights on. There are arguments over the life of a wind turbine and the maintenance costs. There is discussion of much more investment in large battery storage and conversion of green energy into hydrogen, which would also add to costs and would need accounting for.

What can be agreed is that we are not in the next few years going to get to a world where there is an abundance of wind and solar such that renewables of themselves bring down world energy costs decisively. Renewables should get cheaper as the economies of scale come through, and as there is more sunk cost in the capital equipment needed to deliver the power. France has had some advantage over other European countries in electricity after investing heavily in nuclear reactors, and Norway now gets some advantages out of heavy commitment to hydropower.

The most competitive?

For the next few years China and the US will continue to have a marked competitive advantage over Europe due to much cheaper energy in general and electricity in particular. US President Joe Biden has continued some of President Trump’s policies to exploit more US domestic oil and gas, which has helped keep domestic gas prices down. China has increased all kinds of energy availability and has bought more fossil fuel from authoritarian states at discount prices. China has talked the talk on ‘net zero’ but has continued to raise its own carbon dioxide output and to make full use of coal and gas as well as of wind and solar. China has stayed focused on the need for affordable supplies to keep industry competitive. This policy seems set to continue.

As a result, industries that are heavy users of energy and feedstock will struggle more in Europe. It will drive Europeans to more protectionism to cling on to what they have. Germany’s crucial car industry is already struggling with the pace and cost of change to electricity from petrol and diesel vehicles at the same time as having to worry about the availability and cost of energy for its factories. We should expect more tariffs soon from both the US and the EU to combat Chinese exports.

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Energy costs and industrial competitiveness

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