How energy costs are impacting businesses

Q: What’s the state of play with energy prices and what’s your best guess at what might happen in 2023?

Marc-Antoine Eyl-Mazzega (Director of Center for Energy & Climate, IFRI): Last year we had gas prices in Europe that were six times higher on average than in the United States. But gas prices started to fall last November because of a combination of good weather and a lot of available liquefied natural gas (LNG), alongside lower demand.  

With that decrease in gas prices, there was an immediate repercussion on electricity prices because the two are linked in Europe. Ever since then, we have seen this major relief in both gas and electricity prices across Europe.

It looks like it will probably continue provided all other aspects which might have an impact stay where they are. What do I mean by that? We are still facing major threats. Russia could reduce pipeline gas supplies to the remaining NATO countries, such as Turkey or Hungary, which have not been cut. Or they could still reduce or cut off LNG supplies to Europe, which would have an impact on markets.

China will also have an impact. Last year China helped us to have access to a lot of LNG because they dramatically reduced imports. With the end of lockdowns there, and the reopening of the economy, you would expect Chinese LNG imports to increase. The question is at what pace. Lastly, one has to watch for technical outages, and weather in exporting countries.

Mathieu Mougard (Energy & Environment Partner): It’s clear in what Marc-Antoine explained that there are some positive aspects compared to six months ago. But there is still a lot of uncertainty and we don’t know where energy prices will go for sure.

We are coming out of this winter, or at least in 2023 in Europe, with even less Russian gas than last year. That’s because there was still Russian pipeline gas up until summer, but then it all more or less ended. How are we going to offset that?

We are lucky because we still have a lot of gas and storage. So that will provide a cushion, as well as being able to receive a little bit more LNG and pipeline gas. Lastly, we have the energy savings. On the savings side, you have to distinguish what is weather related and what is not, and what is production related and what is not.

With lower gas prices, production in the petrochemical sector, glass sector and paper sector is going up again. But there is still a structural systemic reduction in demand that should continue to compensate, and not only for individuals. I think that is very positive.

Philippe Bozier (Public Infrastructure and Project Finance Leader): The key thing is that volatility has really become a factor, especially for electricity prices in Europe, which has not been the case until now. The industry is starting to realise that electricity might become a very volatile commodity. That has triggered changes in consumption behaviour.

That’s what we’re seeing now with a rush for corporate power purchase agreements (PPA). Before companies were looking into corporate PPAs in order to clean up their electricity supply and be able to showcase accelerated decarbonisation results. Now they are more interested in having a predictable electricity bill.

Q: The C-suite barometer identified switching employees to remote working and introducing a company-wide energy efficient plan as the top two actions being taken among respondents to combat energy prices – are these the right areas to be focusing on?

Marc-Antoine Eyl-Mazzega: There are different views on teleworking; obviously if you are in the service industry it clearly helps. But the key energy demand is not in the service sector – it is in energy intensive industries. What we have seen here, sadly, is that some production went down or was stopped simply because the energy costs were too high, or because there were high energy costs coupled with supply chain problems.

I think the industry has already started major energy efficiency investments, conversely to what we see in North America. That’s because in North America electricity and energy prices have always been low, but in Europe they’ve always been slightly higher.

I think a lot of major industries have used the recovery funds, which were at zero interest rates and provided by most governments in Europe, to trigger larger modernisation investments. We will see the results of those in a couple of years.

As Philippe mentioned, there will now be a drive towards corporate PPAs in Europe. These corporate PPAs will become much more complex because they will not just cover a certain amount of electricity every month or every year – they will try to cover every hour and day in the year. This will come with higher costs, but the key for an industrial player is to have predictable supplies, even if it comes at a higher cost. The premium is worth it when you consider the incredible spikes we’ve seen.

Mathieu Mougard: There is a big push and pressure on governments to help. In Germany, big companies – especially electro or gas intensive ones – pushed the government for support with measures, such as implementing LNG, threatening to move production out of the country if support was not provided.

What we see in the C-suite barometer data is that the bigger the company, the more prepared it is to combat rising energy prices. It appears the energy crisis has potentially accelerated big companies’ plans to change to renewables, have an efficiency plan or adapt their plants and consumption quickly.

Big companies have the structure and the people to define an action plan and the finance to implement it. It’s trickier for smaller companies because they may not have the right people or competencies to do it. But what we find is that energy intensive businesses have not waited for the crisis to take energy efficiency measures; they have started to implement them.

Philippe Bozier: So there’s really a gap now widening between large and small companies. The situation is really, really difficult now for small and mid-size companies. That’s because if you have one factory and you want to implement energy saving measures in your production process, it basically means you have to shut down the production for a number of weeks, which a mid-size company cannot afford to do. For a group that might have multiple production sites and the ability to switch and manage production, it’s much easier.

Q: Just over a third of respondents identified that they were switching their energy supply to renewable sources to help with rising costs – is the energy crisis helping to accelerate the transition to renewable energy?

Marc-Antoine Eyl-Mazzega: It was already happening and now it will definitely accelerate. Every large industrial player will seek to have its own dedicated electricity supply from renewables. But it’ll come with huge challenges for two reasons. One is the permitting. It creates hurdles and while there are attempts to ease that, how successful this will be remains to be seen.

There will also be competition for access to electricity between the final consumption items such as high temperature heat, or machines, and hydrogen. At the same time, according to the new European legislation, the Fit for 55 package, companies need to decarbonise not only their electricity, but also their hydrogen.

And that has to be based on renewable electricity. You will have a double pressure to develop these renewables – first, for the electricity system and the electrification of end users, and second, for hydrogen. So there will be a lot of pressure and the ability to deliver will be a major obstacle and stumbling block. As we speak, there is still a lot of coal and gas in electricity systems which will have to be phased out. Renewables will also be used to offset this.

Mathieu Mougard: Renewable capital expenditure takes time because of the permitting and then the building of the new assets. What will be the priorities? Electrical vehicles, renewable energy for industrial, clean hydrogen – everything may be seen as equally important. The supply may have some difficulties following all these trends to switch from oil and gas to renewable power.

We are mainly speaking about electricity sources, but we still have oil and gas too. Here the switch to electricity – especially the electrical vehicle – will take time. We saw that in Germany where they refused to agree to the EU ban on new fossil fuel cars from 2035. So, yes, we are definitely seeing an acceleration in renewables from the energy crisis – but one that is moving so fast it is creating a lot of bottlenecks.

Q: How will the energy crisis affect climate change?

Mathieu Mougard: We have spoken about renewables already, but there’s also a push towards mitigating the risks of climate change, which is a bit different from one geography to another. Europe still wants to push for it even though there is a supply issue. For example, we kept or reopened some coal mines, power plants and gas power plants.

You can do nothing without energy, so you have to decide your priorities. If we want to push for climate protection, it will bring some supply issues. It’s a driver that needs to be taken into account, because the push for renewable energy not only partially secures both the supply and price, it’s good for climate change too.

More information

Current and past editions of the C-suite barometer are available to read online here. For more dedicated insight on energy, please visit our blog.

More on IFRI’s work on energy and climate can be found on its website.