How can we maintain the competitiveness of energy-intensive industries and avoid inefficient subsidy races?

Across the European Union (EU), politicians and interest groups are calling for a rapid reduction in energy prices in order to support struggling energy-intensive industries. At European level, the ‘Action Plan for Affordable Energy’, presented on 26 February alongside the Clean Industrial Deal, sets out the European Commission’s thinking on how to lower energy prices in the short and long term, including by mobilising public money.

If some Member States subsidise electricity prices heavily while others are unwilling or unable to do so, this would most likely lead to costly distortions of competition. These would hamper both economic efficiency and efforts to combat climate change. The European Commission, which has exclusive competence in the field of state aid, must now propose a policy framework that avoids distortions and encourages investment in energy-intensive industries in regions where clean energy prices are low in the long term.

Electricity cost differences will persist

The price of electricity – the main energy vector of the future – will fall in the EU over the next few years, thanks to the increase in renewable energy, storage, demand flexibility and greater integration of networks between countries. However, large differences in electricity prices will remain: some regions of the EU with favourable wind and sun profiles will have much more affordable electricity. Globally, the differences will be even greater. Nuclear energy will not change this dynamic significantly, as it will remain relatively expensive.

As the long-distance transport of electricity and clean hydrogen will remain costly, cost differences will persist. Indefinitely subsidising electricity prices for uncompetitive industries is therefore certainly not a desirable option.

Targeted restructuring of value chains can be beneficial

For countries where electricity prices are likely to rise, the solution is probably to import energy-intensive intermediate products, while retaining the downstream parts of the value chains, which generally create more jobs and added value. In other words, EU countries subject to high electricity or hydrogen prices can retain their steel industry, but should start importing clean reduced iron sponge. In doing so, they not only improve the overall competitiveness of businesses, but also free up clean electricity to decarbonise non-tradable economic activities such as domestic heating and transport.

EU policy must balance economic efficiency with climate and resilience objectives

Consequently, European state aid rules must strike a delicate balance: ensuring the effectiveness of aid while avoiding subsidy races, but allowing subsidies that have significant positive effects on climate and resilience. To this end, the EU should only authorise State aid to energy-intensive industries at risk of losing their global competitiveness if at least one of the following four conditions is met:

1. Temporary price spikes: When electricity prices experience a temporary spike (due to transformation costs or temporary supply shortages), support for energy-intensive industries could be justified, provided that prices can reasonably be expected to fall back to a lower level within a short period of time.
2. Indirect benefits: The relocation of energy-intensive industries within or outside the EU (e.g. the steel industry) could lead to substantial indirect economic losses through knock-on effects in downstream industries (e.g. the automotive industry). In such cases, Member States wishing to grant subsidies should be required to demonstrate the positive externality of the aid scheme.
3. Climate protection: In certain sectors that are difficult to decarbonise, the EU is particularly well placed to develop clean technologies, thereby demonstrating their feasibility and reducing their overall cost curves and emissions. The Commission should define a list of clean goods and technologies for which electricity price subsidies are generally allowed. For greater efficiency, these subsidies should be financed and allocated at EU level, but where EU funds are insufficient, Member States should be allowed to use national funds (e.g. through “auctions-as-a-service”).
4. Resilience: For a very small number of products, imports, even from a diversified supplier base, can lead to excessively high resilience risks, justifying permanent subsidies. The Commission should define the products for which this is the case and, if their production is not competitive even in the most favourable regions of the EU, auction production subsidies. This would maintain a basic capacity that could be increased in the event of supply shocks.

EU regions with cheap clean energy may lack other conditions, such as a skilled workforce. But unlike the level of sunshine or wind exposure, policy can improve these conditions. The European Commission should identify regions with ‘high energy potential’ and, together with Member States and other stakeholders, implement a strategy for retraining and educating the workforce, in addition to a plan for building the necessary infrastructure. At the same time, other instruments can mitigate the negative effects on workers in regions facing the loss of certain industries.

With the approach suggested here, the EU has a real opportunity to harness the potential of its single market to build a more competitive, resilient and sustainable industrial future.

This opinion piece was first published in Table.Media’s Europe-Table-Briefing in English.

The German version of the text is available on the Jacques Delors Centre website.