EU Energy Intensive Industries Lament Noncompetitive Environment

A tightening of the European Union Emissions Trading Scheme could have serious repercussions on innovation, as energy intensive industries could keep decreasing production and investments in the Old Continent, unless the European Union promoted an EU-wide, stable and predictable indirect compensation regime, said Alcoa in a recent conference in Brussels.  

Europe, which is the third region for aluminium production after China and CIS, could witness a decrease in local production. The aluminium industry in Europe is losing pace, as the Middle East and India are rapidly emerging.

“Since 2008, we have seen 24 producing facilities curtailed or closed” Simon Baker, Alcoa Europe President, explained. 

According to him, this had an immediate effect on European import dependency, which reached 51% in 2013, from 41% in 2008.

But there is a distinction to be made. In Europe, there are plants that are not exposed to EU climate policies and keep operating under historic contracts. These plants, which represent 30% of the production base according to Alcoa, are globally competitive. They are the ones with the lowest production costs after the plants based in Middle East and Asia. 

On the other hand, smelters exposed to EU policies are suffering.

“Producers exposed to EU policies are the least cost competitive on a global scale” Baker added.

According to Alcoa, the tightening of the ETS EUA could be needed for climate purposes, but it will further increase exposure of industries not able to pass through these costs. 

Eventual changes of the European Union Emissions Trading Scheme will also have a significant impact on the use of gas in the coming future.  

SOLUTIONS? 

The solution should be found on a European level, rather than on a national level, argued Baker, adding that the compensation regimes of some European countries are not enough to keep production in the Continent.

According to him, the state aids scheme available in a few Member States compensate “a minima” indirect costs, but don’t entail stable playing field across the EU. 

“Current state aid based compensation regimes give neither stable nor long term perspective to the industry” he argued, adding that these regimes are too dependant on national budgets that could change in the near future. 

Alcoa claimed the the two key policy changes are required to maintain an aluminium industry base in the EU. 

“Firstly, move to an EU-wide, stable and predictable indirect compensation regime. Secondly, ensure 100% free ETS allocation for benchmark plants direct emissions” he concluded, as reported in the presentation. 

BACKGROUND: EUROPEAN COMMISSION

Despite the significant decrease in carbon prices over the last years, the aluminium production was listed among the sectors and subsectors which are deemed to be exposed to a relevant risk of carbon leakage. In other words, the European Commission confirmed that the scheme for greenhouse gas emission allowance trading could have a negative impact on the sector. 

The EC launched in May 2014 a public consultation to gather opinions on different options for a system to avoid carbon leakage after 2020. 

‘The consultation focused on how many allowances should be dedicated to addressing the risk of carbon leakage post-2020’ reads the website of the European Commission.

The outcome is not clear and discussions continue, with obvious consequences on the use of gas in the coming decade.

BACKGROUND: ALCOA IN THE MARKET

Alcoa and other key players gave signs of vitality over the last weeks. 

The American company made clear it wants to expand its aerospace business. On December 15, it  clinched an agreement to acquire Germany-based Tital, a leading manufacturer of titanium and aluminium aerospace components. 

The deal comes as Boeing, second-largest defence contractor in 2013, expanded production.

‘The acquisition will strengthen Alcoa’s global position to capture increasing demand for advanced jet engine components made of titanium’ reads the note.

Sergio Matalucci 

Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci