Spanish chemical industry in good health, EU funds helped to alleviate crisis – trade union

MADRID (ICIS)–The Spanish chemical industry has resisted the onslaught caused by the energy crisis in Europe, with producers benefiting from the ‘Iberian exception’ which has lowered their input costs, according to an industry executive at the country’s main trade union CCOO.

Alfredo Villafranca, lead for industrial policy for the Madrid region at CCOO, said EU post-pandemic recovery funds have been utilised by the authorities and companies alike as an opportunity to re-industrialise the Spanish economy.

The US Inflation Reduction Act (IRA) which was passed in August has caused concern among some European chemical executives who are worried that generous tax breaks will make the EU less attractive for these type of investments.

According to Villafranca, these fears are unfounded because the EU has been planting green economy seeds for decades and they will ultimately pay off, while the US is basically new to the show.

IBERIAN EXCEPTION WORKING
In June 2022, the Spanish and Portuguese governments received EU approval for a gas-to-power price cap which changed the way the two countries calculated electricity prices. This had been long resisted by the utility companies which benefited from charging electricity with the most expensive feedstock entering the system at any given time.

While the system makes little sense, the two Iberian countries secured this exception given that they have almost non-existent grid connections with the rest of the EU.

The system worked and the rate of inflation in Spain has fallen sharply since the system was implemented. Despite its success, the EU will not be extending it through the rest of the 27-country bloc.

Outside of the EU, the UK – which has a comparable system – may mull the implementation of similar measures.

In December, the rate of inflation in Spain stood at 5.5%, down sharply from rates of over 10% seen during the summer, and well below the 20-country eurozone, which averaged 9.2%.

Energy-intensive chemical companies have benefited from the system as well as individual consumers, said Villafranca. The measures not only improved corporate balance sheets but they also helped companies to avoid any significant restructuring which would increase unemployment.

“The Iberian exception has greatly helped lower electricity prices, benefiting every single consumer. The surprising thing with the measure is that previous governments in Spain always said the way electricity prices were calculated could not be changed because it came from Brussels,” said Villafranca.

“Until one government decided it had to do something due to the financial pain a badly calculated electricity price was putting on the economy. Spain and Portugal’s coordinated action brought the desired results, and the system was changed: utility companies are still doing great financially.”

CHEMICALS: COULD BE WORSE
The Iberian exception has allowed Spain’s energy-intensive chemical producers to benefit from reduced electricity prices which are lower than the rest of their direct EU competitors.

As a result, the Spanish chemical industry has avoided a hit from the energy crisis. Pharmaceuticals have been doing well for some years now, and the industrial chemicals side is now going through something of a revival spurred on by the Green Deal and EU funds, said Villafranca.

“An example is the two big petrochemicals producers Repsol and Cepsa [Spain’s old majors] and their investments in hydrogen or renewable fuels. They have the financial muscle to do what they must be doing, and that sets the tone for smaller companies who will also benefit,” said Villafranca.

According to Spain’s chemicals trade group, sharply higher selling prices pushed total industry sales to €91bn in 2022, up 18% compared with 2021, although the volume sold was almost flat as growth in 2H 2022 was affected by the war in Ukraine and its knock-on effect on energy.

For Villafranca, the most important indicator is employment which has remained stable.

EU FUNDS: THIS TIME, ACTUALLY USED
GDP growth in Spain last year was greater than expectations with a 5.5% increase on 2021, despite an increase in volatility and slump in consumer confidence after the war broke out.

Around 1% of the growth seen came from EU post-pandemic recovery funds, the so-called Next Generation funds, according to Spanish analysts.

Spain and Italy, where tourism was badly hit by the pandemic in 2020 and 2021, are set to be the largest recipients of the funds – in loans but also, for the first time, in grants – to usher in green and digital economies.

Of the €140bn Spain is set to receive from the EU, €75bn will be grants. According to the Spanish government, by December around €31bn of the funds had already trickled down to projects in the country.

“Historically, Spain has only used 39% of the EU funds it had available, which is a poor record. However, this time round both institutions and companies have rushed to present viable projects, and the money is coming in,” said Villafranca.

“We will need to see how many of these projects come to fruition in the end but, for now, Spain has all pre-conditions to succeed in the new, renewable energy economy: we have more sun and wind than any other country in Europe,” said Villafranca.

“Importantly, the industries propped up by the EU funds will create qualified employment and a potential seismic change in Spain’s services- and tourism-based economy. This could radically change the landscape and I hope that, as a country, we seize this opportunity.”

IRA VS GREEN DEAL
The IRA put in place by the US is certainly the largest climate change-related legislative package to date. Although the US has arrived late to the green party, analysts agree that the tax breaks contemplated and the sectors propped up will improve emissions in the second-largest global producer of emissions.

Alarmed by the flurry of investments announced since the bill was passed, some have urged the EU to relax state rules which prohibit tax breaks such as those in the IRA.

This has raised fears of intra-EU competition where countries with less room to manoeuvre with budgets will lose out to large, financially safe countries.

Martinez does not share immediate concerns about investments which could see investments shift from the EU to the US because of the IRA.

He said the EU has for years been at the forefront of the green economy, and the current wave of investments in the US would not change that.

“What the EU is currently doing may not be as spectacular as the IRA-induced investments in green projects, given those state-aid rules. But I see it in another way as well – the IRA-related wave of investments, will it last?” said Martinez.

“As we have seen, climate change policy in the US can be very politicised, and there is always the potential a new Administration could reverse course: this already happened in 2016 [when newly elected President Donald Trump pulled out from the Paris Accord],” said Villafranca.

“The EU may be right now investing smaller than the US, but the seeds here have been planted for decades now. The green economy will be the economy in a few decades, but the EU’s actions have been already working on the change to decarbonise, and they will pay off.”

Interview article by Jonathan Lopez