EMCC dossier on the European energy sector
Energy is vital for the continued functioning of industrial economies; as such, it is a sector that will always play a vital role in Europe’s economy. Moreover, the increasing demand for renewable energy sources – in light of rising prices of fossil fuels and growing calls for international action to reduce emissions of C02 – means that Europe’s energy sector, which has the highest level of use of renewable energies worldwide, has the potential to become the leading global player in an energy ‘renaissance’, with huge potential for employment and exports. However, the European energy sector is facing a number of challenges: renewable energy requires massive long-term investments, for which the capital is difficult to find; rising costs of fossil fuels; geopolitical risks; an ageing workforce and a lack of young people entering technical professions. This dossier aims to provide an in-depth analysis of the trends and forces shaping the sector. It provides a mapping report that gives an overview of the current state of the sector, company and cluster studies that look in detail at current practices, and future scenarios that investigate possible outcomes for the sector out to the year 2050.
The energy sector has been a crucial part of the economic development of Europe and of the institutional development of the EU, which was brought into being with the signing of the Coal and Steel Treaty in 1951 and the European Atomic Energy Treaty in 1957. The European Commission put the energy sector on the political agenda again in 1996 with the publication of its Green Paper Towards a European strategy for energy security and supply. The Green Paper stressed the twin challenges of Europe’s increasing reliance on imported energy and the threat of climate change. At the same time, the nationally regulated monopolies that constituted the gas and electricity sector began a process of liberalisation, with the aim of creating a competitive internal European market for energy.
The energy sector is a major economic player: in 2003, 16,000 companies, employing over 1.1 million people, generated a turnover of around €353 billion. The most specialised producer of energy in the EU is Slovakia: the sector accounts for nearly 15% of the added value and over 3% of employment in the non-financial segment of the Slovakian economy. The main contributors to the European sector are France and Germany: respectively, these countries contribute 16% and 23% of the total added value in the sector, and together employ more than 30% of the sector’s total workforce.
The European energy sector comprises three subsectors – electricity, gas, and steam and hot water supply.
- The electricity subsector is by far the largest. While demand for all three forms of energy is increasing rapidly, it is predicted that demand for electricity will rise the most; consumption in the EU25 rose by 22% between 1994 and 2004. In the EU, electricity is generated from a range of sources, nuclear and coal being the most important, followed by gas. (Typically, electricity generation companies diversify their mix of sources in order to secure supply and to be able to respond to price fluctuations.)
- Gas is mostly used for heating, generating electricity and a range of industrial applications. When burned, gas is cleaner in terms of its emissions of greenhouse gases; hence, the market for gas is expected to grow rapidly in coming years. However, the EU is greatly dependent upon gas imports; the geopolitical sensitivity of this fact was illustrated by the recent disputes over gas supplies between Russia and Ukraine.
- The steam and hot water supply subsector is the smallest of the three in economic terms, accounting for only 5% of the entire sector’s added value. Steam and hot water are used largely for industrial applications and district heating.
As indicated above, the EU is highly dependent upon imported energy, almost 50% of its energy consumption being sourced from outside the Union. This figure is expected to rise to 70% over the next 20–30 years. At present, all Member States, with the exception of Denmark, are net importers of energy. Europe’s present dependence upon imported energy could be eased by a transition to renewable sources of energy, a transition that could be facilitated by the introduction of trading in CO quotas. Such quotas permit power plants to emit a certain limit of CO. If a power plant needs to be able to emit more CO, it can buy some of the quota from other companies on the international market. Companies can hence reduce costs and boost revenue by reducing their carbon emissions. If the price of the quotas is raised in the future, carbon trading could – according to the European Commission – become one of the most important drivers of change in the energy market. A new trading scheme in greenhouse gas emissions was proposed by the Commission at the start of 2008; it is planned that the trading system will be harmonised across the Union.
Trends and drivers of change
The mapping report (pdf, 226kb) explores the current situation in the European energy sector – specifically in the areas of electric power, natural gas, and steam and hot water supply. For the most part, in Europe, oil has been phased out of the production of electricity, steam and hot water. Hence it is not a key focus of the mapping report. The report also outlines the key trends currently driving change in the European energy sector. These are detailed below.
Market liberalisation The ongoing liberalisation of European energy markets to permit greater competition and the creation of an internal European market have been the key drivers of change in terms of the shape of the energy sector. Liberalisation has consisted of three key elements: the replacement of regulated prices by market-dictated prices; freedom for consumers to choose their energy supplier; and an end to companies’ ownership of both electricity generation and transmission networks. (However, liberalisation has progressed slowly and unevenly across the Union, the energy market remaining highly regulated by comparison with other markets.) Liberalisation has resulted in increasing concentration, with the market being supplied by fewer, larger companies, which are can compete more readily in an international market. (Concentration is also the result of the saturation of most European energy markets: the only way in which companies can expand operations is through mergers and acquisitions.) Rationalisation has also ensued, leading to substantial numbers of jobs being lost: in the EU25, between 2000 and 2004, more than 16,000 jobs were lost – a drop in employment of 13%.
Pressure to reduce carbon emissions Concern about climate change resulting from industrial emissions of CO has moved to the top of the political agenda, both in the EU and internationally. In 2007, the EU set itself the legally binding targets of reducing greenhouse gas emissions by 20% by 2020 and raising renewables’ proportion of energy consumption to 20%, also by 2020. Political pressure has already resulted in the European energy sector acting to reduce its carbon emissions, by extending and developing the proportion of energy produced from renewable sources (‘renewables’), such as wind power, solar power and biomass. In addition to reducing carbon emissions and protecting Europe’s security of energy supply, it is likely that the conversion to renewables will halt the decline in employment in the sector, as these sources of energy are much more labour intensive than are nuclear energy and fossil fuels. The introduction of a trading system in carbon allowances, by effectively making the emission of CO more expensive, has the potential to further drive the conversion to renewables. Europe’s current global lead in renewable energy means that potentially it could develop a substantial export market in these technologies in the future
Rising demand for energy Europe’s demand for energy is projected to increase by at least 2% annually over the next 15 to 20 years. Meeting this rising demand will challenge the sector, given that it simultaneously has to reduce carbon emissions. It will also challenge consumers, as most likely it will result in rising retail prices for electricity and gas. Rising prices for electricity have already resulted in job losses for the EU’s most energy-intensive industries such as iron, steel and paper production; this continuing trend is likely to have a disproportionate impact on the new Member States, where energy-intensive industry accounts for a substantial proportion of the economy.
Outdated energy infrastructure The European energy infrastructure is outdated and needs to be renewed. In addition, conversion to renewables will require adapting the infrastructure. However, no extensive construction of energy infrastructure has taken place in the last 20 to 30 years, and the personnel who would have the skills to do so are now retired; this lack of skilled personnel (and insufficient numbers of young technical graduates) poses a challenge for the entire sector. It also requires the investment of substantial funds; to meet this demand, it is probable that new financial players, such as pension funds, will enter the sector.
New technological developments All major energy companies operating in Europe are increasingly focusing on developing renewable sources of energy: the total maximum generating capacity of renewable energy in the former EU15 almost tripled between 2001 and 2005. Some of these are yielding results already; others, such as the potential use of hydrogen to ‘fuel’ vehicles, are still in their early stages and their potential contribution is much debated. (Hydrogen is not a source of energy in itself; rather it acts as a carrier of energy produced from fossil fuels or renewable sources.) Another key area for technological development is in the field of energy efficiency and conservation. A major drawback in terms of research and development, however, is the high capital outlay required and the long periods – of more than 20 years – before the investment is recouped.
Company case studies
The study examined four companies that are key players in the European energy sector. These case studies highlight the challenges common to companies throughout the sector, and illustrate how companies have responded to changing circumstances.
- Iberdrola (pdf, 182kb), based in Spain with operations in Europe, North America and Latin America, is one of the world’s leading private energy utilities. It is also the world’s leading renewable energy operator, and adopted the concept of sustainable development as a core company value. Iberdrola is one of the leading forces behind the creation of the Basque energy cluster (described below).
- Swedish-owned Vattenfall (pdf, 286kb) is the fourth largest generator of electricity, and the largest provider of heat in Europe. The proportion of energy the company generates from renewable and CO–neutral energy techniques is much higher than the EU average. Vattenfall foresees challenges ahead in terms of recruitment, so has put considerable thought into company initiatives to attract suitably skilled staff.
- German company E.ON (pdf, 268kb) formerly operated in a number of fields, ranging from real estate to telephony. In the space of a decade it refocused its business to concentrate solely on electricity distribution. Its company strategy combines growth in market position with a reduction in its CO emissions.
- Danish company Vestas (pdf, 268kb) has been manufacturing wind turbines since the 1970s, and hence is a pioneer in the industry. As wind turbine production increases worldwide, Vestas foresees increasing competition for skilled personnel. It also predicts a huge increase in the proportion of electricity generate from wind, in part due to the setting of targets for renewable energy in China, the US and the EU.
Energy clusters – Czech Republic and Spain
The study looks at two ‘clusters’ of energy production and development. Regional clusters have become increasingly important in the European energy sector. They aim to facilitate the cooperation of companies in ensuring a competitive and sustainable energy sector and so creating jobs and value for the region.
Basque cluster, Spain
Based in Bilbao, the Basque cluster comprises 83 members, the largest being the Spanish company Iberdrola. The driving force behind the creation of the cluster was the Basque Department of Industry, Commerce and Tourism, which still plays a key role in developing and financing the cluster organisation. The cluster aims to make the Basque Country a centre of competence within the energy sector, to develop company groups that have the capacity to lead in the international market, and to develop the region into a world leader in energy efficiency and sustainability. The emphasis placed by such cluster organisations in the region would also appear to have played an important role in the overall regeneration of the Basque economy over the past decade.
The Basque cluster study (pdf, 396kb) is available online.
Envicrack, Czech Republic
The Envicrack cluster is located in Ostrava in the Czech Republic. The cluster focuses on pyrolysis, the production of heat and power from waste; in doing so, it addresses the twin challenges of waste management – an increasing problem, given the strong economic growth in the country – and climate-friendly energy production. Despite its very specific initial focus, other parties operating in the field of renewable energy have begun to join the cluster. The project is largely funded through EU Structural Funds, through the Czech Ministry of Industry and Trade. The experience of the cluster points to the importance of public funding for such initiatives, given the expense of the research and development activities that play such a key role in cluster projects.
The Envicrack cluster study (pdf, 396kb) is available online.
The study drew up four scenarios (pdf, 356kb) that project the possible future development of the energy sector between the present and the year 2050. The key variables in constructing the scenario were the anticipated extent of international agreements to reduce CO emissions, and the level of technological development of energy production. The exercise assumes a number of assumptions for to all scenarios: increasing demand for energy, depletion and rising prices of fossil fuels, the risk of international conflict, and ongoing market liberalisation.
- Scenario 1: Business as usual This scenario foresees increased dependency on fossil fuels, dramatically rising energy prices, and damaging consequences from uncontrolled climate change.
- Scenario 2: Renaissance Technological breakthroughs in renewable energy production make such energy sources economically competitive with fossil fuels. The resulting surge in renewable energy activity generates substantial employment and eases energy prices.
- Scenario 3: Evolution The presence of international agreements on CO reduction encourages the steady development of renewables and carbon-neutral technologies. In the absence of any dramatic breakthroughs, prices will still rise. However, the overall shift to a renewable energy-based global economy will benefit Europe, which already enjoys a leading position in these technologies.
- Scenario 4: Revolution Binding international agreements on CO reduction force the rapid development of renewables. Moreover, smalls-scale decentralised energy generation facilities are introduced, profoundly changing the shape and size of the energy sector. By 2050, around 90% of Europe’s total energy and heat production comes from renewable sources, resulting in low energy prices and rapid economic development.
Further information sources
A number of other information sources regarding the energy sector are available, including recent published works.