Competitiveness and clean energy, the challenge of European industries

The European Union 2050 net zero target for climate neutrality, aiming at a zero net greenhouse gas emissions market, has been confirmed in the working agenda of the new European Commission, in office since 1 December.

We live in an era where the effort to tackle climate change is affecting everyone without exception: from private to public, from transport to construction, from industry to customers, we are all called to step up to the challenge. However, a tighter bond between the power sector and energy-intensive industries leaves us with big questions marks in regard to system, social and economic sustainability.

In 2021, manufacturers accounted for more than 27% of the EU’s total greenhouse gas emissions, and the EU today continues to heavily rely on fossil energy sources; the most polluting choice is the one on which we mostly depend on non-EU supplies. We are increasingly seeing supply shortages, price volatility and disruptions in the value chain. Electrification and decarbonisation are therefore key to reducing both emissions and dependence on conventional sources. But how?

How to boost competitiveness through energy: a study

To maintain the industrial sector’s competitiveness, it is necessary to reduce energy costs, which are a significant part of total production costs. Unexpected increases or fluctuations in the energy component can have repercussions on the cost of the final product.

Is it possible to improve the competitiveness of the industrial sector and achieve decarbonisation objectives at the same time?

Enel Foundation answered this question in a studycarried out in collaboration with Compass Lexecon and the European Roundtable on Climate Change and Sustainable Transition (ERCST). The study explores the technical and economic potential of the direct and indirect electrification of EU industries, resulting in some recommendations on the best scenarios to pursue.

By analysing the technical needs and energy consumptions of the most relevant manufacturing sectors, key technologies and applications to decarbonise heat production processes common to all sectors have been investigated. It emerged that by 2035, 90% of these processes will have at least one alternative decarbonised solution technically available.

The focus then shifted to analysing the economic potential, concentrating on seven energy-intensive sectors (food and beverage, paper and cellulose, chemical products, steel, aluminium, glass and cement), for which we created a model where sectors’ competitiveness and cost gaps are compared to the reference technology which they could use to electrify production processes.

The study proves that the economic competitiveness of decarbonised production process solutions can be easily achieved in the food and beverage, paper and cellulose and low-temperature chemical sectors.

Overcoming economic and regulatory barriers

For the first time, thanks to interaction with the European energy-intensive industrial associations, the analysis did not focus only on the technical-economic barriers, but took into consideration the additional barriers to the development of decarbonisation solutions for manufacturers. When studying the obstacles to industrial decarbonisation, sector-specific critical issues emerged, such as technological, infrastructural, regulatory or bottlenecks related to the value chain.

Two, among many aspects, are specifically worth paying attention to in order to guarantee a level playing field for industrial operators: firstly, the need for a stable regulatory framework regarding greenhouse gas emission quotas (EU ETS) and the carbon border adjustment mechanism (CBAM), with enhanced tools to offset indirect costs incurred by EU industries; secondly, the alignment of fiscal and parafiscal components between electricity and gas tariffs.

Considering that for some industrial applications, previous measures relating to the electrification of production processes may not be sufficient to achieve the 2030 and 2040 decarbonisation objectives, the study stresses the need to take into consideration specific incentives for industrial decarbonisation, especially for the hard-to-abate ones which are more exposed to international competition (for example, cement, aluminium, iron and steel or high-temperature chemicals).

Incentives should be mainly provided through European programmes or funds and national state aid, rather than introducing further changes to the current electricity market design (EMD). We look in particular to EU funds, which do not alter the playing field between companies located in different local areas, regions and member states.

The roadmap to industrial electrification

The EU State Aid Guidelines review should therefore prioritise industrial decarbonisation needs, including processes and investments in technologies to facilitate the transition to clean energy. To achieve this objective, the new guidelines should adopt a balanced approach, which can intervene on investments (CAPEX) and operating expenses (OPEX).

It is necessary to accelerate and encourage electrification through the development of renewable energy by facilitating its permitting flexibility programmes (such as Demand Response) and more modern and resilient electricity networks.

Another important aspect to incentivise the hard-to-abate sector to decarbonise their processes is the opportunity to introduce green quotas for made-in-Europe. These mechanisms can activate a virtuous cycle, since they are believed to create a demand for European industrial products (for example, steel and cement) powered by clean energy (such as electricity from Public Purchase Agreements with renewable energy, heat pumps).

Furthermore, in regard to sustainability in public procurement, to ensure that European companies can compete on equal terms, criteria that are not solely based on price should be introduced, along with guarantees of energy origin.

In conclusion, while the transition towards clean energy is possible for the industrial sector in the EU, it is a revolution that needs adequate regulatory and economic support to converge climate ambitions with industrial competitiveness, safeguarding the reference markets of various manufacturing industries.

This article is a contribution from a member or partner organisation of Friends of Europe.