INSIGHT: Elevated Europe energy prices challenge business cases for some green projects
LONDON (ICIS)–Higher energy prices in Europe are providing a challenge to the business cases of some green and decarbonisation projects compared to the competitiveness of similar investments elsewhere in the world.
Gas prices have fallen in Europe since the economic “nadir” of October 2022, as an analyst at S&P Global put it on Tuesday, with a mild winter allowing costs to fall back to levels seen in early 2022 before Russia’s invasion of Ukraine sent energy markets into turmoil.
Overall values remain substantially above levels regarded as normal before 2021 and, with decreasing feedstock competitiveness compared to many other regions elevating the already high cost of producing chemicals in Europe, conditions are continuing to chill for local players.
This period of high costs and low demand comes at a point when players are under increasing pressure to reduce the greenhouse gas impact of their operations, in terms of the power used at facilities and in the materials produced there.
Companies are having to balance decarbonisation goals with adapting to the circular economy and challenges such as electrified cracking.
“Given the current energy prices, a lot of the business cases are simply not there at the moment,” Bernd Elser, Accenture’s global lead for chemicals and natural resources, told ICIS.
While initial discussions in Brussels around the energy crisis were focused around how to build up stocks and get through the winter, the loss of most of the Russian natural gas that made up almost half of the EU’s energy needs represents a paradigm shift for the region.
With that current volatility unlikely to recede to more normal levels in the next couple of years at least, this also presents a challenge for chemicals players planning projects and attempting to secure financing.
“It’s very difficult for companies to put their finger on what is a reasonable and defendable EBITDA level because in this volatile environment if you change two or three assumptions, numbers could go down meaningfully,” Martin Bastian, head of chemicals at investment bank Houlihan Lokey, said in December.
“So, I think you need to have more visibility on how energy and raw material prices as well as demand are going to look. I think once we get through a quarter or two you will have more visibility,” he added.
For nascent sectors such as green hydrogen, which has potential as a fuel for the transportation sector and a chemicals feedstock and a power source, Europe is a far more expensive place to develop that infrastructure than sunnier, lower-cost regions like the Middle East.
“The whole idea of the [European] Green Deal builds on the net-zero transition, and we all know that for the chemicals sector a lot of that is related to electrification, of processes, steam crackers, renewable energy for hydrogen,” Elser said.
The cost of renewable hydrogen on a monthly power purchase agreement basis with a five-year tenor in Germany is around €7/kg or higher in Germany, according to ICIS data, while current production costs in Saudi Arabia currently stand at around $2.41/kg, according to the King Abdullah Petroleum Studies and Research Center (KAPSARC).
Production costs are not the same as pricing, but the disparity between European and Middle Eastern production costs remains pronounced.
“If you look at Europe right now, there are lots of announcements from green hydrogen players, but without subsidies, most of these are not very competitive. When green hydrogen gets competitive is through solar,” Clariant chief Conrad Keijzer said, speaking at last year’s GPCA forum.
The disparity in business cases for decarbonisation investments in Europe and in other parts of the world has been exacerbated by a lack or urgency on the part of European Commission policymakers in delivering the investment set out when the Green Deal was announced in 2020.
“Thus far, only a fraction of the funds available as a part of the EU Green Deal have been allocated,” Elser said.
“Last year at the Cefic General Assembly there were a lot of discussions highlighting the disconnect between the net-zero ambition and the building out of renewable energies, and that disconnect remains 12 months later,” he added.
The slow pace of investment, possibly driven in part by the costs and uncertainties of the pandemic followed by the Ukraine war, are particularly impactful to the chemicals sector and other energy-intensive industries.
“For a successful net-zero transition, chemicals and other heavy industries need massive amounts of renewable energy, and that has not materialised yet,” Elser said.
DIVERGING PATHS ON
The situation in Europe has been complicated further by the development of the Inflation Reduction Act (IRA) in the US, which stands as a more subsidy-driven alternative to the more regulation-focused European Commission approach.
The generosity of some of the frameworks within the $369bn package is such that Commission President Ursula von der Leyen has attacked the IRA as presenting an unfair barrier to trade.
The framework has the potential to shift value chains for developing sectors such as electric vehicles across the Atlantic, she said.
“There is a risk that the IRA can lead to unfair competition, could close markets, and fragment the very same critical supply chains that have already been tested by COVID-19,” she said in a speech in December 2022.
BASF chief Martin Brudermuller has been vocal about the superiority of the IRA for companies compared to the Green Deal.
“The European Green Deal… is not encouraging to generate these business cases, while the IRA in the US is the opposite, it is creating a business case to facilitate transformation, whereas in Europe you generate regulation to enforce transformation,” he said in December.
The measures are already starting to ripple through the market, and drive company investment plans, according to Elser.
“Whichever company you talk to, they are already fully aware of the Inflation Reduction Act (IRA), have in many cases indirectly linked it to projects in their planning, and have significant confidence that they will get co-funding or other support from the IRA,” he said.
There are numerous ambitious decarbonisation projects already underway in Europe, and it is likely that solutions such as cleaner hydrogen and ammonia will become the replacements for conventional fuels in areas such as transportation.
Higher energy prices and current bank hesitancy around lending to energy-intensive sector players, along with the more carrot than stick-based approach of the US stimulus programme, do make the rationale for some of these projects in Europe more difficult than would have been the case a few years ago.
The EU has long been accustomed to a leadership role in setting the decarbonisation agenda but, with the rollout of the US plans, the Middle East looking more seriously at green investment and ambitious spending in Asia, it may be necessary to re-examine its current approach or lose ground.
“With no clear view on when electricity will become competitive in Europe, the IRA could be a game-changer, especially when viewed against the context of energy prices in Europe and the track record of the EU Green Deal thus far,” Elser said.
“It will be hard for Europe to reignite investment,” he added.
Insight article by Tom Brown.
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