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Europe should innovate to save its industrial sector

European industry is now staring into an abyss of huge energy costs following Russia’s invasion of Ukraine

French President Emmanuel Macron hosted business leaders last week in a bid to keep European industries in Europe as they continue to weigh their options – and surely see that production in the United States and elsewhere would be much more affordable.

European industry is now staring into an abyss of huge energy costs following Russia’s attack on Ukraine, European Union sanctions and subsequent interruption in supplies of natural gas. And even when the Ukraine conflict is resolved, the savvy CEOs of European industrial giants know the potentially fatal problem will remain.

Europe’s paucity of conventional energy resources is structural, not temporary. Even as it imports greater volumes of liquefied natural gas (LNG) from terminals in Texas it is attempting to compete with an America that is increasingly placing its own interests first.

Can European innovation bring renewable energy and production online in time to save its industries? That is very much an open question due to the lead time and R&D needed for development of such a crucial resource as stable and affordable energy.

And as the Third Law of Thermodynamics states, energy is neither created nor destroyed, so getting more of it is constrained by the laws of nature itself. There is no easy fix.

For now, the outlook seems dire.

“It’s not about shutdowns. It’s pricing, it’s cost,” Christian Levin, chief executive officer of Volkswagen’s truck-making unit, told the press. On the spot market Europe is paying up to seven times as much as what natural gas costs in the US.

Germany, Europe’s biggest economy, has traditionally had a comfortable trade surplus, but that is shrinking due to imported energy costs and the shifting of chemical production outside the country. German producer prices jumped by an eye-watering 46 percent last month.

German plastics maker Covestro projects its fuel bill will top 2.2 billion euros this year, nearly four times the cost in 2020. Chemical company BASF, a legendary German industrial giant founded 157 years ago, has announced that it would be permanently reducing its operations in Europe to escape high energy costs. Its main production site in Europe currently uses as much natural gas as the entire country of Switzerland.

And it isn’t just industrial heavyweights. The country’s Mittelstand — small and medium-sized enterprises — are also buckling under the weight of energy prices. Like much of time-honored Europe, the German economy is underpinned by small, family-run businesses. Many Mittelstand companies are now seriously considering moving production abroad, according to a survey commissioned by the Foundation for Family Businesses in Germany and Europe.

Those who cannot afford to pay the monetary and organisational costs to move production to a new region might be forced to shut down.

And what could France’s Macron tell businesses to keep them on board? While urging them to stay the course he is also attempting to intervene in the US. Next month he will hold one-on-one talks with President Joe Biden, then travel to Louisiana, ostensibly to celebrate the state’s French heritage. But the agenda will centre on energy. French oil company Total owns a big LGN terminal in the state on the Gulf of Mexico.

Macron has complained about the high price of US gas and vows to bring up the issue with Biden. “The United States produces cheap gas but sells it to us at a high price,” Macron told French executives earlier this month. “And on top of that they have massive subsidies in some sectors that make our projects uncompetitive.”

While the French leader attempts to find some short-term relief on energy prices and tax policies, others say European innovation will have to seize the day and offer sustainable solutions.

Environmentally conscious experts were already pushing for the use of so-called green hydrogen before the energy crunch hit. The process splits water molecules into hydrogen and oxygen using electricity generated by solar, geothermal or hydropower. With the price of conventional energy soaring, the now-costly green hydrogen process could be more competitive in the real economy.

Macron can again point to energy company Total, which is teaming with AirLiquide to convert a former oil facility to create a bio-refinery producing renewable hydrogen, mostly for aviation fuel.

European Commission President Ursula von der Leyen is now making green hydrogen a large component of plans to break the bloc’s reliance on imported gas.

In a speech at a former coal region of Poland now producing renewable energy, she said “green hydrogen is essential to end Europe's dependence” on unreliable supplies. “That is why in our new plan, REPowerEU, we have doubled our 2030 target to produce ten million tons of renewable hydrogen annually in the EU. And we will also import another 10 million tons from abroad.”

With energy prices so high, investment in advanced processes such as waste heat recovery and co-generation also become feasible, but the benefits are far down the road. They offer little today to bring down high energy costs.

For now, some tenacity as well as clever innovation will be needed to keep European industry alive. It could be the biggest challenge the continent has faced since the end of WWII.

- Jon Van Housen and Mariella Radaelli are international veteran journalists based in Italy