EU Must Contain Energy Costs or Risk ‘Deindustrialization’

Jan 21, 2014 11:40 am ET

(Updates with EON comment in seventh paragraph.)

Jan. 21 (Bloomberg) -- Europe must get a grip on energy prices to protect growth and stop its industry from fleeing abroad, according to two top policy makers.

The region needs to reduce the cost gap with the U.S., where a shale-gas revolution has slashed prices, European Union Energy Commissioner Guenther Oettinger told a conference in Berlin via a video link from Brussels.

German companies and consumers are shouldering costs of as much as 24 billion euros ($32 billion) a year for clean-energy aid, the country’s Economy and Energy Minister Sigmar Gabriel told the same event. Europe’s biggest economy has reached “the limit” with renewables subsidies and must contain power prices or risk “deindustrialization,” he said.

Germany has been one of the most ardent advocates of ambitious carbon-reduction policies that have helped drive up Europe’s power prices at more than three times the rate of inflation. Chancellor Angela Merkel has made reforming renewable-energy subsidies to reduce the cost of the country’s switch from nuclear power the top priority of her third-term government, which took office last month.

Elsewhere in the region, Spain, Italy, Portugal and the Czech Republic have slashed aid for solar power. U.K. Prime Minister David Cameron is looking for ways to reduce utility costs after the opposition Labour party promised to freeze bills if it wins the general election in 2015.

Costly Biomass

Europe has “experienced an above-average development of power and gas prices,” just as the U.S. benefited from declining costs, said Oettinger, who will tomorrow help outline the EU’s new climate target.

Energy prices for German households are “at a problematic level,” Leonhard Birnbaum, management board member of EON SE, the country’s biggest utility, said today at the same conference.

Merkel could reduce prices by cutting back fees and taxes that make up more than half of the electricity bill, Oettinger said. Germans pay more for power than residents of any EU nation except Denmark.

Germany must focus on the cheapest clean-energy sources as well as efficient fossil-fuel-fired plants, Gabriel said. The country will keep pushing wind and solar power, the most cost- effective renewable sources, he said. Biomass energy is too expensive and its cost structure hasn’t improved, he said.

Gabriel, who last month assumed control of the biggest energy overhaul of any developed country, is overseeing the shuttering of Germany’s atomic fleet by 2022, ordered by Merkel after the Fukushima nuclear disaster in Japan.

Welcome Change

He will seek to limit aid paid to operators of land-based wind turbines to no more than 9 euro cents a kilowatt-hour in 2015 and reduce the expansion to about 2,500 megawatts a year, according to a ministry document prepared for a meeting of Merkel’s coalition on Jan. 22-23. Developers will get paid subsidies at the current rate if their units are authorized before tomorrow and enter operation this year.

While Germany seeks to contain increases in power prices, the government can’t promise that bills will decline, Gabriel said.

Oettinger said he welcomes Gabriel’s proposals to change German energy policy and make it more compatible with EU regulation. While the European Commission is probing German power fee rebates to companies from Bayer AG to Linde AG on concerns they may be illegal, the EU will have to greenlight some aid that’s “necessary” to keep its industry competitive amid low energy prices in the U.S., Oettinger said.

‘Creeping Emigration’

The rebates are key to safeguard Germany’s industry and slow its outflux, said Ulrich Grillo, the head of the BDI industry federation that represents about 100,000 companies including Volkswagen AG and Siemens AG.

“Already today one can prove that there’s a creeping emigration among the energy-intensive industries,” Grillo said at the event.

Retail power prices have risen 65 percent and natural gas by 42 percent between 2004 and 2011, more than double the inflation rate of 18 percent during the period. That’s according to a draft report by the commission on energy developments in Europe that will be part of a package released tomorrow.

--With assistance from Brian Parkin in Berlin. Editors: Alex Devine, Will Kennedy