Power companies want help on prices to keep clients in Europe

Wed Jun 5, 2013 5:12am EDT

* Some heavy industry already choosing U.S. for new projects

* Utilities say costs could rise for consumers if more business is lost

* Utilities call for clearer signal from EU policy

By Barbara Lewis

BOLOGNA, Italy, June 5 (Reuters) - Europe's squeezed utility firms say they cannot cut prices to stop their big industrial clients moving to the United States, where fuel costs around a quarter as much.

Losing the business of heavy energy users, such as chemical giants, cement and steel makers, could force the power companies to put up prices for households, hurting consumer budgets and making it harder for Europe to spend its way out of recession.

While U.S. energy companies have been able to cut prices because of a shale gas boom, utilities say the answer in Europe is a clearer regional energy policy to guide investment and to end green subsidies they blame for swelling fuel bills.

"We need (heavy industry). If energy prices are too high for them, either we need to subsidise or the (European Union's) energy strategy is wrong," Johannes Teyssen, the CEO of German utility EON, said at a utilities conference in Bologna, Italy.

"It would be a big mistake to forego energy intensive industry."

Some big companies are already moving west.

In March, Austrian steelmaker Voestalpine said it would build a plant in Texas to capitalise on the U.S. shale gas boom. German carmaker BMW has also said energy costs were decisive in choosing a site in Washington state to build an energy-intensive plant.

Others also say energy is a major factor and they are working on energy savings, through measures such as insulation.

"Energy costs contribute to our variable costs in Europe, and all around the world. Further increases in energy costs in Europe can lead to reduced competitiveness and future investment," said Ian Hudson, president of the Europe, Middle East and Africa at chemicals company Dupont.

Wholesale gas prices have fallen in Europe, but the European Commission says industry still pays four times more than its peers in the United States. Electricity, generated from gas, coal, renewables or nuclear fuel, can be twice as expensive in Europe.

In the United States, shale gas extraction, using hydraulic fracking, a process that critics say can cause earthquakes, has delivered low gas prices. U.S. gas prices fell below $2 in early 2012, but are now around $4

Many doubt the shale gas revolution can be repeated in Europe, where geology and geography are more challenging and public concern about the environmental implications of extracting gas from shale rock are higher.

INDEBTED

But Europe's utilities say they have no room to cut costs and have no money for necessary upgrades to the power grid.

Their profits have shrunk as economic crisis and an EU-drive for more energy efficiency have depressed energy demand.

Many of them also have massive debts from a wave of consolidation before the 2008 financial crisis, which is forcing them to sell assets, cut costs and lay off staff. The 20 firms in the Euro Stoxx Utilities index alone have a combined debt of some 400 billion euros, ThomsonReuters data show.

Losing energy intensive industry would make matters worse. It accounts for around 70 percent of energy demand in Europe's largest economy, Germany, said Peter Terium, CEO of German company RWE AG who sees a risk of a major shift away from Europe.

Losing big energy clients might also force them to push up the cost for domestic consumers, who are already paying more.

Prices vary across the region, but in the biggest economy Germany, industrial consumers pay around half what households pay for electricity, according to industry data.

NO MORE SUBSIDIES

Utilities say they need help through a new EU energy policy.

They say the problem with the current policy is that government subsidies to encourage green power are passed on to power bills, which push the cost up for industry and households.

Governments can decide individually how much to charge so the policy is unevenly applied throughout Europe and the utilities say the subsidies, for example for putting solar panels on the roof of a house, are often more generous than the market rate.

Instead, they want reform of the Emissions Trading Scheme, the EU's market for carbon permits, to make it a stronger alternative to subsidies and engineer a market-based shift to low carbon or green energy.

The European Union has a goal to increase the share of green energy from around 10 percent of use in 2011 to 20 percent by 2020 as it seeks to cut emissions and curb reliance on imported fossil fuels, which have a negative impact on the trade balance.

EU Energy Commissioner Antonio Tajani told the Bologna conference that Europe was committed to cutting energy costs and developing regional sources of energy, including shale gas.

A draft of his department's action plan for the steel sector has raised the prospect of lowering taxes and levies on energy.

"We need more industry," Tajani said, referring to an unofficial goal he shares with some other commissioners to get 20 percent of Europe's gross domestic product from manufacturing. "Without good energy policy, it's impossible to achieve it."