Analysis by Bank Austria Economics:
Energy saving and restructuring support European industry

  • In 2014, industrial enterprises in the EU paid more than twice as much for power and gas than US competitors
  • Differences in the energy price are declining only slowly, the gap to energy costs of US competitors is becoming even larger
  • In Europe, deindustrialization accelerated due to below-average growth of product demand and above-average growth of productivity in the production process 
  • Energy saving and restructuring are strengthening the efficiency of European industry 
  • Success in spite of competitive disadvantages: In 2013, the EU export surplus with energy-intensive products reached EUR119bn

Europe has made the decision to gradually replace imported fossil fuels with renewable energy sources and, as a consequence, reduce CO2 emissions in a cost-effective way. In the long term, these energy saving targets ensure a sustainable energy supply in Europe. In the short term, however, the European energy market is repeatedly losing its balance in this transition phase, which increases the risk of being of disadvantage to competition, particularly for energy-intensive industries. Furthermore, the energy price discussion in Europe has become more delicate in recent years – on the one hand, there are the EU climate targets and the cost-intensive European energy transition, on the other hand, there is the shale gas boom in the US. Whether – and, if yes, to which extent – the competitiveness of the European industry is affected by the turbulences on the energy market, was analyzed by the Bank Austria economists in a current analysis.

It is a fact that an EU industrial enterprise had to pay far more than twice as much (converted) for power and gas than US competitors in the first half-year of 2014. At the same time, the international price gap increased successively.

Energy price differences are declining only slowly
The energy price discussion with regard to the competitiveness of the European industry focuses on electricity and natural gas, since their prices are formed on a regional, mostly national, level. Oil is playing a smaller role in this discussion, as this resource basically follows the global price level. For electricity, in particular, Europe is facing major price differences within the community, which are mainly caused by different taxes and charges, particularly for the promotion of renewable energies. Thus, in the first half-year of 2014, an industrial enterprise with medium energy usage paid 16.5 cents on average per kilowatt hour of electricity in Italy and Germany, 12.3 cents on average in the EU-28, and 7.2 cents in Sweden and Bulgaria - compared to that, 11 cents per kilowatt hour in Austria. Bank Austria economist Günter Wolf says, "From a European point of view, the high prices by international comparison are certainly more problematic than the price differences within the community, which have toughened location competition in the EU. Even though energy prices in the EU and the US will become more in line in the medium term – mainly due to rising production costs in shale gas production – it will happen slowly at best, and will put price competitiveness at risk for years."

The relatively high power price increase in the EU can probably be stopped after 2020 only. The prerequisite is that sufficiently high productivity gains are possible in power generation in order to offset the financing cost for the restructuring of European energy supply towards renewable energies. At the same time, electricity prices in the US will follow gas prices upwards over the next years, although at a slow pace only. This means that the price gap between the EU and the US will become even larger over the next years.

Deindustrialization in Europe accelerated
While energy prices are only one out of many location factors, they can present a major cost problem for energy-intensive enterprises. With energy costs, restructuring pressure in the European industry has risen and has accelerated the deindustrialization process. The contribution of the industry to overall economic value added of the EU-28 has declined from an average of 17 percent to 15 percent in the last ten years. Nearly half of the share decline concerned energy-intensive industries, which in total contribute less than a fifth to industrial value added. Stronger declines in value added were recorded by the stone, ceramics, timber, and paper industries, while the steel industry hardly lost in importance and the chemical industry was even able to achieve share gains. In total, the production focus of the European industry has clearly shifted towards less energy-intensive sectors.

Energy saving and restructuring are strengthening Europe’s industrial efficiency
The relatively high energy price level and growing restructuring pressure have eventually caused a sustainable innovation procedure, which strengthens competitiveness. Due to cost pressure, enterprises were forced to develop and implement more energy-efficient technologies. Finally, energy efficiency has increased, not only among energy-intensive EU industrial branches.

In total, European enterprises and households have become more energy-efficient in the last two decades. Since the middle of the 1990s, overall energy consumption increased by 2 percent and economic performance by 34 percent in the EU-28, which means that energy intensity has declined by 24 percent. Consumption reductions and efficiency gains of the industry were considerable. In the same period of time, the branch achieved a real value added increase of 17 percent using 14 percent less energy – energy intensity has declined by 27 percent. Energy efficiency has increased in nearly all EU industrial sectors, while the relatively highest savings were achieved in energy-intensive sectors, the steel industry, the chemical industry and glass and ceramics production. Including the paper industry, the sector still consumes about 70 percent of energy of the EU-28 industry.

Success in spite of competitive disadvantages
Basically, the deindustrialization process is the result of below-average growth of product demand and above-average growth of productivity in the production procedure and is only to a limited extent a sign of potential competitive disadvantages of the sector. While the loss of global export shares over a longer period of time can be connected to competitive disadvantages, it rather reflects structural shifts in global trade towards new markets that are growing above average. From 2002 to 2013, the global export share of the EU-28 in the segment of energy-intensive products declined from about 21 percent to 17 percent, in dollars. In the same period of time, the share of Asia (without Japan) increased from 23 percent to 35 percent.

The EU foreign trade results underline the positive effects of the restructuring pressure, which has rather strengthened than weakened competitiveness of the European industry on the whole. The foreign trade balance of energy-intensive products from the EU has shown a plus for more than ten years and has even improved further over the last years. In 2013, the export surplus in this segment reached EUR119bn, while the total surplus amounted to EUR55bn. It is worth noting that, in spite of the growing gap between EU and US energy prices, the EU export surplus of energy-intensive products has even increased from 2008 to 2012 and only declined to the ten-year average of about EUR24bn (about a quarter of the total EU trade balance surplus with the US of EUR92bn) in 2013 due to the relatively high export minus of steel and chemical products.

Günter Wolf of Bank Austria concludes, "Even though the turbulent energy price development of the last years has not caused major distortions in the EU industrial structure so far, Europe’s energy markets need political attention more than ever. On the one hand, potential international competitive disadvantages might occur only in the course of time. On the other hand, energy prices are also closely tied to climate targets as well as security of energy supply."

Inquiries: Bank Austria Economics & Market Analysis Austria
Günter Wolf, Tel.: +43 (0) 50505 - 41954;
E-Mail: guenter.wolf@unicreditgroup.at