By Guy Chazan
When Ed Miliband, leader of the UK’s opposition Labour party, promised in
September to freeze energy prices if he won the country’s next general
election, it caught Britain’s business elite by surprise. It should not
have done.
In stark contrast to the US, where gas prices fell to 10-year lows last
year, the question of rising energy costs is coming to dominate the
political agenda in Europe. It is an equally hot topic in Japan, which is
having to rely on expensive imported gas as it shuts down its nuclear
reactors. In many countries, it is becoming one of the defining issues of
our time.
It is a problem that not only affects hard-pressed consumers struggling to
pay their bills amid recession and economic hardship. It is also hurting
European industry, which is becoming increasingly outspoken on the subject.
Business leaders blame the growing burden of environmental levies and
renewable energy subsidies.
Jim Ratcliffe, chief executive of Ineos, one of the world’s largest
chemicals groups, says the danger is that some companies, especially
manufacturers, will move to places where energy is cheaper.
“Its fine being very, very green, but not if you are interested in
manufacturing,” he says. “The UK is already disadvantaged on the wholesale
cost of energy, and then it puts taxes on it. Anybody who’s an energy user
is just going to disappear.”
European companies say high energy costs mean they are less competitive
than their counterparts in the US, where the shale boom has led to lower
natural gas prices and heralded an industrial renaissance.
The gap in competitiveness was the central theme of a summit of EU heads of
government in Brussels in May, when the European Commission revealed that
gas prices for industry fell by 66 per cent in the US between 2005 and
2012, whereas they rose 35 per cent in Europe.
That price difference is leading to some doom-laden pronouncements.
“There is no near-term cure for Europe’s energy price gap with the US – be
it in shale gas, liquefied natural gas or US imports,” says Johannes
Teyssen, chief executive of German utility Eon. “Companies will continue to
move overseas as a result.” European policy makers should focus not on
correcting the situation but [on] not making it worse”, he adds.
Japan pays about five times more for its natural gas than the US and has
become a lot more dependent on the fuel since it started shutting down its
nuclear reactors after the 2011 Fukushima disaster.
Its utilities rely on expensive imports of LNG, crude oil and coal to
replace nuclear, which once accounted for 30 per cent of electricity
generated in Japan. The government has allowed them to pass some of the
extra cost to consumers. In August, the price of electricity in Tokyo was
15 per cent up on a year earlier.
In Europe, the debate centres on the so-called energy ‘trilemma’. European
energy policy has been designed to pursue three objectives: mitigating
climate change by reducing carbon dioxide emissions, achieving security of
supply and making sure energy is affordable to consumers.
In the years before 2008, the imperative of preventing global warming
loomed largest. The EU adopted ambitious goals for cutting carbon and
sourcing more and more energy from renewable sources such as wind and solar.
The world is different now. The 2008 financial crash, the ensuing eurozone
debt crisis and the weak recovery that followed have changed the parameters
of the debate and made it harder for policy makers to balance what are
often mutually conflicting goals.
“There’s been a tangible shift in Europe,” says Roger Reynolds, a utilities
specialist at Exane BNP Paribas in London. “The balance has now moved away
from reducing emissions at any cost to the question of affordability.”
That shift has happened despite any softening in the scientific consensus
on global warming. Indeed, opinion has, if anything, hardened.
The latest report by the UN’s climate panel said global warming on the
ground, in the air and in the oceans was ‘unequivocal’. The panel added
that scientists are 95 per cent certain that humans are the ‘dominant cause’.
There is little evidence that the public is becoming more sceptical about
climate change, certainly in Europe. What has changed is that consumers are
less willing to foot the whole bill for policies to mitigate global warming.
The shift in the debate is most conspicuous in Germany, where the
Energiewende –“ Chancellor Angela Merkel’s historic drive away from
polluting fossil fuels and nuclear power towards wind and solar – has left
German consumers with among the highest prices for electricity in Europe.
Germany plans to raise the percentage of renewables in the electricity mix
to 35 per cent by 2020 and 80 per cent by 2050. This compares with 23 per
cent last year. But there is a huge price tag. The cost of the renewable
energy surcharge, which is placed on all consumers’ bills, is expected to
jump this year from €14.1bbn to €20.4bn euros, according to one estimate.
The German environment ministry says the total cost of the Energiewende
could reach about €1tn.
Some big energyy-intensive companies have managed to win exemptions from
the surcharge. But much of Germany’s Mittelstand – the network of
family-owned businessses that are the bedrock of the economy – are required
to pay.
Peter Atherton, uttilities analyst at Liberum Capital, says: “Modern
industrial economies are predicated on robust, affordable and competitive
energy and you mess with that at your peril.”
Germany’s big power suppliers, such as Eon and RWE, are also suffering from
the alternative energy boom.
Germany’s renewable energy law, the EEG, prioritises solar and wind power
over coal and gas in the grid, which means that the many conventional power
stations that have nothing to do on sunny and windy days are no longer
profitable to operate.
In one of the most perverse outcomes of the Energiewende, Germany’s CO2
emissions actually rose last year. That is because the shale gas boom in
the US prompted many local power generators to switch from coal to gas as a
feedstock, leading to a huge influx of cheap North American coal into Europe.
As a result, coal plants have become cheap to operate and modern, efficient
gas-fired power plants have been shuttered. The failure of the EU’s
carbon-emissions trading system has not helped.
Grard Mestrallet, chief executive of GDF Suez, says over the past five to
six years about 50,000MW of gas-fired capacity in Europe ‘equivalent to 50
nuclear plants – have been closed down or mothballled by 10 of the
continen’s biggest utilities.
That, he adds, has “implications for energy securityâ€, namely there may
not be any gas plant available to provide peak power in northern Europe
when the wind is not blowing and the sun is not shining.
GDF Suez is one of nine big European utilities that recently appealed for a
complete rethink of European energy policy. Europe, argued Mr Mestrallet,
was ‘destroying its energy industry through a lack of consistency,
coherence and wrong decisions by the European Commission and by individual
governments’.
He called for a reduction in subsidies for renewables, saying they should
be limited to ‘technologies that are not mature today – such as tidal and
wave power’.
It is not such an outlandish idea. Spain has cut its non-fossil fuel
subsidies and other governments are thinking of doing the same.
“There have been a lot of good intentions,” says Eon’s Mr Teyssen of
Europe’s energy policy. “But things are now getting out of control.”
Eon and other European utilities have been lobbying Brussels to ease state
aid rules so that governments can provide ‘capacity payments’ – effectively
a subsidy for gass-fired plants. This would allow power companies to keep
such plants as back-up for calm grey days.
Such an approach has plenty of opposition and the likelihood is that the
energy policy debate will continue to rage for years to come.
“The cost of energy is becoming a key battleground for policy makers,
utilities, renewables developers and consumers,” says Mr Reynolds at Exane
BNP Paribas.
“It’s becoming a real struggle to strike the right balance.”
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