Strategy & Management

Energy Costs and the European Chemical Industry

EC Debates Legality of Subsides for Energy-Intensive Manufacturers

13.12.2013 -

Competitive Edge - The European chemical industry would like to be exempted from any additional energy costs stemming from state subsidies of renewables. Without being freed from the need to pay surcharges on their electricity bills to pay for the development of renewables, it fears its energy intensive plants will in the long term suffer a damaging loss of international competiveness.

The German system under which producers with energy intensive sites making chemicals and other products like steel and cement are excused from renewables-related payments is seen by the industry as providing a benchmark. Much of the costs of renewables subsidies have been shifted in Germany onto the shoulders of residential electricity consumers.

"We consider exemption systems like that in Germany as being necessary where European countries are going down the path of subsidized development of renewables as a source of energy," says Peter Botshek, energy, health, safety and environment director at the European Chemical Industry Council (Cefic), Brussels.

Relief from the costs of renewables development could be incorporated within a uniform energy policy across the European Union, which would prioritize the need to alleviate the energy costs of key manufacturing sectors like chemicals. However Cefic's strategy of pushing for German-style exemption schemes in the face of the strong growth in the subsidies for renewables is beginning to become unstuck.

Reform In Germany

Following the German general election in September, the prospective partners in a new coalition government - Christian Democratic Party (CDU) and Social Democratic Party (SDP)-have been thrashing out an agreement on a reform of the 2011 Renewable Energy Sources Act (EEG).

The EEG lays down rules for both feed-in tariffs that grid operators must pay for renewable energy and exemptions for energy-intensive manufacturers from surcharges imposed on electricity consumers to pay for the tariffs. The difference between the feed-in tariffs and the market value of the energy provided by renewables has amounted to an annual subsidy of around €20 billion. Heavy electricity users like commodity chemical producers may now have to pay a larger share of the subsidy bill following a deal by the coalition partners.

At the same time, the European Commission is investigating whether the EEG exemptions for producers of petrochemicals and base chemicals and other energy-intensive manufacturers are legal under European Union rules on state aid.

Inappropriate State Aid?

If the Commission's investigations conclude that the exemptions are inappropriate state aid, it will then carry out a further examination about whether they breach competition rules. The result could be that by early next year not only will the Commission prohibit the exemptions but also demand repayment of the EEG surcharge reductions amounting to millions of euros.

"If the Commission decided that European regulations had been broken to that extent it could do a great deal of financial harm to the German chemical industry," said Kurt Bock, chairman of BASF and Cefic president, at a press briefing organized by his company in London in November.

BASF, the world's chemicals company, could stand to lose considerable sums merely as a result of possible changes to the EEG introduced by the coalition government partners.
They could, for example, abolish a provision in the legislation which grants relief from surcharges for self-generation plants like the two the company has at its main site at Ludwigshafen, Germany.
"That would add as much as €350-400 million to the costs of the running the plants, which would make them uneconomical," said Bock.
He stressed that the biggest danger of an abolition of the exemptions for energy-intensive plants would be that they made the German petrochemical and base chemicals sector uncompetitive internationally and handicapped in their ability to attract investment. Bock's statements in London echoed views he expressed at the Cefic general assembly in Munich in October where he warned about the impact of high energy costs on the future of the German and the European chemical industries.
BASF Demands Level Playing Field
"If the new German government's reform of the renewables schemes is not done properly, it could have dramatic consequences for the international competiveness of the German industry," Bock stated during a panel discussion of experts at the assembly on energy costs. "The European chemical industry must have a level playing field internationally with energy issues. We are a global industry competing against companies outside Europe as well."

He stressed the need for a more closely integrated energy sector in Europe. A disjointed market has led to Germany, for example, paying neighboring countries to take excess output from renewable sources like wind and solar power which could not be absorbed by its domestic users.

"Belgium has been shutting down gas-fired power plants because it has been able to get energy from Germany for nothing," said Bock at the Munich meeting. "We are in favor of a more European approach on energy policy. Yet what we are seeing is a fragmented one in which EU countries are following their own agenda and setting their own priorities."

Chemical industries in countries like the UK have been trying to persuade their governments to set up for heavy electricity users' exemption schemes from renewables surcharges similar to the EEG system in Germany.

"We would like to achieve levels of exemptions similar to those in Germany, where energy intensive industries are paying only 5% of total costs of the development of renewables," Nick Sturgeon, energy, trade and competiveness director at the UK Chemical Industries Association (CIA), told a press briefing in London in October.

The CIA is seeking compensation for the extra energy costs passed on by power companies as a result of having to pay an obligatory basic feed-in tariff for renewables. It also wants rebates for higher electricity prices resulting from the building in the country of new nuclear power capacity.

Shale Gas Expectations

The association is also strongly supporting moves by the UK government to encourage energy companies to start drilling for shale gas in the country with the aim of commercial production before 2020.

"Shale gas will not be a magic bullet in the UK," said Steve Elliott, CIA chief executive. "But the reserves of it in the country are large enough to have an impact on energy prices and to boost the chemical industry. A UK energy policy which did not take into account shale gas would not be credible,"

"We expect that as a result of exploration drilling next year, commercial production schemes will go ahead to come on stream by 2018," he added.

Cefic believes that shale gas production in the main European countries with shale gas reserves-like France, Denmark, Sweden, Germany, Netherlands, Poland, Romania and the UK-- will put downward pressure on gas prices, although not to the extent it has in the US where gas prices are around half to a third lower than in Europe.

"It would be unrealistic to expect gas prices to drop as much as they have in the US because of shale gas," said Bock at the BASF press briefing in London. "But additional supplies of gas from shale gas reserves will introduce more flexibility in the European gas market."

"The UK government is more supportive of shale gas production than the German government is," he continued.

Wintershall, BASF's oil and gas subsidiary, had been using fracking techniques in Germany for extracting natural gas from tight reservoirs with the aid of pressurized water, sand and chemicals.

"In 50 years we have not had one single incident of fracking causing ground water pollution," Bock explained. "Yet the German authorities will not give us a permit to drill for shale gas because of the public's worries about fracking."

The shale gas boom in the U.S. had highlighted the vulnerability of energy intensive sectors, like chemicals, in Europe to competition from countries with low-cost energy resources.

Europe needs to develop its own shale gas supplies to underpin the future of its own base chemicals sector. But it also requires measures to protect the chemicals industry from the long-term additional costs of establishing a decarbonized economy.