Power Struggle | December 9, 2013 Issue - Vol. 91 Issue 49 | Chemical & Engineering News
Volume 91 Issue 49 | pp. 20-21
Issue Date: December 9, 2013

Power Struggle

BASF and other European firms could be hit with hundreds of millions of dollars in additional energy costs
Department: Business
Keywords: energy, Europe, gas, prices
[+]Enlarge
PRICE SURGE
If Europe removes an exemption from electricity fees, it would cost BASF up to $540 million more annually to run its complex in Ludwigshafen, Germany.
Credit: BASF
This is a picture of an energy plant at BASF’s Ludwigshafen site.
 
PRICE SURGE
If Europe removes an exemption from electricity fees, it would cost BASF up to $540 million more annually to run its complex in Ludwigshafen, Germany.
Credit: BASF

Kurt W. Bock, BASF’s serious-looking chief executive officer, cracks a smile when chatting with journalists about the planned reunion of the 1970s English comedy outfit Monty Python and a reprisal of their sketch known as “The Ministry of Silly Walks.” But the stern look quickly returns when Bock begins discussing the rising cost of energy in Europe and a new threat from the European Commission (EC) to end major electricity cost breaks for chemical firms.

Bock met with reporters in London at the end of November as part of an offensive by the chemical industry across Europe to push back against rising energy and electricity costs at a time when prices in competing regions, such as the U.S., are stable or falling. Disparate forces such as hydraulic fracturing, or fracking, in the U.S.; the phaseout of nuclear power in Germany; and renewable energy promotion in Europe are conspiring to lessen the chemical industry’s competitiveness in the region.

Chemical firms are currently shielded from the full cost of producing electricity in Europe, including costs associated with operating the power grid and installing solar and wind energy infrastructure. The lifting of such protections would cost the European chemical sector hundreds of millions of dollars, companies say, a major burden when they are already disadvantaged on the international stage. Electricity costs about twice as much in Europe as it does in the U.S., and natural gas costs more than three times as much.

The EC’s beef with the cost exemption is that it might amount to state aid and distort competition. Commissioners will make their decision in the coming weeks. Without the exemption, BASF says that it will have to pay as much as an additional $540 million per year to run its giant headquarters complex in Ludwigs­hafen, Germany.

“Ludwigshafen is essentially competitive,” Bock says. “You wouldn’t just walk away. That is not our intention. But we will fight for a better regulatory framework to stay competitive.”

Bayer, the second-largest German chemical maker after BASF, is also lobbying against removal of the energy-cost exemption. In a recent breakfast meeting with members of the European Parliament in Brussels, Bayer executives complained that removal would double the firm’s annual electricity cost in Germany to $545 million.

The European Chemical Industry Council (CEFIC) argues that additional energy costs would drive chemical sector investment out of Europe. “What we are now being faced with is life-threatening,” says Peter Botschek, CEFIC’s director of energy. “The commission will decide if we will continue on this high-cost option, which is repelling investment, or if we take the other perspective of new investment.”

Even if the energy-cost exemption stays in place, there is evidence that potential chemical investment in Germany is being put off by high energy prices, says Germany’s chemical industry group, known as VCI. According to a recent VCI study, foreign investments by German chemical firms are greater than those at home for the first time since 2001. “The current level of investment in Germany is only sufficient to maintain 85% of the current manufacturing stock,” Botschek says. It is shrinking, and he blames high energy prices.

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COMPETITION PROBLEM
Europe sees some of the highest prices for natural gas. NOTE: Prices generally reflect domestic wellhead/hub prices or prices for gas imported via pipeline. Some nations, such as Japan and South Korea, have higher prices because they import liquefied natural gas. SOURCE: American Chemistry Council
This line graph shows the prices of natural gas in various countries.
 
COMPETITION PROBLEM
Europe sees some of the highest prices for natural gas. NOTE: Prices generally reflect domestic wellhead/hub prices or prices for gas imported via pipeline. Some nations, such as Japan and South Korea, have higher prices because they import liquefied natural gas. SOURCE: American Chemistry Council

Concerns about high energy costs are not restricted to Germany. A recent survey by the U.K.’s Chemical Industries Association (CIA) of its more than 100 members found the cost of energy to be the biggest problem today for British executives.

And trade associations from the U.K., Germany, and the Netherlands in recent weeks have all publicly aired concerns that their members will have to manufacture chemicals outside of Europe as a consequence of national and European Union energy policies.

“Without urgent action on energy costs … I fear the general optimistic outlook of our members will fade,” says Stephen Elliott, CIA’s chief executive. Alan Eastwood, CIA’s economic adviser, adds that he expects charges relating to renewable energy installation to add significantly to U.K. electricity prices through 2020. The chemical industry has been promised exemptions from these charges, but given the EC’s current stance, “that’s by no means a certainty,” he says.

A sting in the tail for European chemical firms in recent years is that as their energy costs have been rising, those for their U.S. competitors have been falling. The availability of natural gas from fracking has unleashed a flood of investment in new chemical capacity in the U.S. Projects that would once have been executed in Europe are now heading to the U.S. An example is an ammonia plant that BASF plans for the U.S. Gulf Coast, CEFIC’s Botschek says.

But for much of Europe’s chemical industry, fracking appears to be out of reach: The governments of France, Germany, and the Netherlands, among others, are holding back on fracking permits because of public concerns about safety and the environment.

Germany would have at least a 10-year supply of shale gas if it used fracking, but the government is not providing new permits, according to Bock. “There is lots of concern in Germany that fracking would be a big mess,” he says. Among European countries, only the U.K. so far appears to have both industrially relevant reserves of shale gas and a government backing its extraction.

Although widespread fracking in Europe is still years away, if it happens at all, in the shorter term Europe’s energy system has “structural issues” that need to be solved, Bock says. He cites an unbalanced mix of energy sources, the high cost of investment in renewables, and an inefficient electricity grid as pushing up the cost of energy. The German business group BDI recently calculated that Germany’s shift to renewables and planned exit from nuclear energy would cost more than $440 billion.

A key problem in Germany, Bock says, is that it has moved into renewables without fully managing grid stability or ensuring a supply of energy at times when the sun is not shining or the wind is not blowing. “We have asked for a more efficient and more productive system, a better grid, and better coordination with European energy policies. It has to be tied in with the networks of our neighboring countries,” he says.

Instead, what BASF and other companies may get is a further hike in energy prices via a removal of their electricity-cost exemption. Bock might laugh at “The Ministry of Silly Walks,” but he and other executives are finding the policies laid down by energy ministries across Europe to be anything but a joke.

 
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