Europe is losing out because of the wide energy price gap with the US

There is much discussion on Europe’s competitiveness and how the region is losing out to other countries with much lower energy prices.  As Pilita Clark of the Financial Times reports, the IEA’s chief economist is of the opinion that Europe is going to have difficulties for the next couple of decades, because the price gap is serious damaging competitiveness.  After reading this article, please refer back to a report prepared by the European Council for an Energy Efficient Economy in May 2013 on competitiveness and energy efficiency that there is a wrong focus on prices and that there is a need to look at alternate strategies to get costs down.  And as was further discussed this week at an IEA event on industrial energy efficiency, there is a need to think about value and not just costs.  Particularly have a look at the presentation by Catherine Cooremans.

Energy price gap with the US to hurt Europe for ‘at least 20 years’

High gas and electricity prices will continue to plague Europe for at least 20 years, damaging the competitiveness of industries that employ almost 30m people, the world’s leading energy forecaster has warned.

In findings likely to inflame claims EU climate change policies are damaging the bloc’s manufacturers, the International Energy Agency said Europe will lose a third of its global market share of energy-intensive exports over the next two decades because energy prices will stay stubbornly higher than those in the US.

A number of EU countries have embraced green energy subsidies, shunned nuclear power and resisted the shale exploration that has fuelled a manufacturing renaissance in the US, prompting growing anger among industry leaders who say this has been a recipe for competitive ruin.

Fatih Birol, the IEA’s chief economist, said environmental policies alone had not pushed up energy costs but the price gap between the EU and the US was going to last much longer than some expected.

“This is a new thing and it’s structural. It’s not a one-off,” he told the Financial Times.

“Europe didn’t realise the seriousness of this competitive issue,” he said, warning the situation raises concern for the almost 30m people working in heavy industries such as iron, steel and petrochemicals across the continent.

European gas import prices are currently around three times higher than in the US while industrial electricity prices are about twice as high, creating an energy price gap Dr Birol said would last “at least 20 years”.

Although industry leaders blame the region’s ambitious climate change policies – especially generous renewable energy subsidies – Dr Birol said he had “great respect” for the EU’s climate actions and it was a mistake to say they were chiefly responsible for the bloc’s dilemma.

“Too much of the blame for Europe’s high energy prices is being directed at its ambitions on climate change while the main factor – the high cost of imported energy – is being all but ignored,” he said in a speech to London’s Imperial College where he elaborated on the IEA’s analysis of the problem.

“Even renewable subsidies, which have become a serious burden in some markets, are still far from being the dominant factor in price formation,” he said.

It was important to recognise the big role natural gas played in electricity generation in Europe, which has yet to experience anything like the US shale boom that has driven down prices.

Still, Europe alone cannot solve the climate problem he said, explaining that even if the continent stopped emitting greenhouse gases completely in 2030, it would not stop the trend towards dangerous levels of global warming.

Rather than continuing to see energy policy as a struggle between competitiveness and climate change action, Dr Birol said Europe needed to to find a way to address both concerns.

This could include a bigger role for nuclear power and shale gas production, encouraging more energy efficiency, and renegotiating natural gas import prices, now that two-thirds of import contracts are due to expire in the next 10 years.

In addition, he said there was a need to address the “perverse outcomes” driven by poorly designed renewable subsidy programmes, as well as the collapse of the carbon market that had made coal fired power generation more attractive.

“Europe needs to pay more attention to the competitiveness agenda while keeping the climate agenda alive,” he said.