Rising gas prices threaten industrial sector

Europe is facing an energy crisis, and although it is expected to be temporary, the suffering in the industrial fabric is beginning to take its toll. The price of natural gas is reaching record highs, putting the European and Spanish industrial sector at risk. According to the latest data from GasIndustrial, an association that brings together the gas-intensive industry, the price of gas rose by 381.2% between August 2020 and August 2021.

Why are prices rising?

The path that leads to that answer runs through the winding global gas market: from a controversial gas pipeline in the Baltic Sea to gas deposits in Asia, from gas tankers that suddenly veer in search of the highest bidder to traders negotiating the price of gas in the Netherlands or the crossovers between supply and demand in the wholesale electricity market in Spain.

The gas problem began last summer. In July and August 2020, gas prices were so low in Europe due to the Covid-19 crisis that halted production and industries that it was not profitable for the United States to produce gas and send it to Europe. Many shale gas mines (extracted through fracking) stopped production while waiting for the situation to recover. But in the autumn and winter of 2020, demand was reactivated, and supply fell short. LNG needs three to four months to respond to demand, it is always delayed, especially due to a logistical issue, the movement of gas tankers. In addition, the long winter emptied reserves in the northern hemisphere. Asia is now hoarding 70% of global LNG and paying for it at the price of gold. The deficit that Europe had at the end of last year has been dragging on throughout 2021.

In addition, the production of the gas pipelines is at half speed. Gas has not been flowing at the rate expected through pipelines in Russia and Norway, which supply 60% of European consumption. It is true that they have had maintenance problems this summer, but, according to Gonzalo Escribano, director of the Energy and Climate Programme at the Elcano Royal Institute, “one can speculate whether the Norwegian shutdowns are opportune just at the best time for them to raise prices, or one can speculate whether Russia is playing geopolitically to open Nord Stream 2 and that Europe recognises Crimea as Russian territory”

In recent years, the fracking gas ‘revolution’ in the United States has driven down natural gas prices. Spain bet big and is the country with the most LNG storage capacity in Europe and right now the one that is receiving the most LNG tankers. To the point that for several months in 2019 Spain imported more gas from the US than from its traditional Algerian supplier. Now 46% comes from Algeria and 53% by gas tankers from the United States, Russia and Nigeria mainly. But the problem here is that international markets rule, so the price is influenced by it. You don’t pay the same price for gas from the US as you do from Algeria, for example. In addition, Europe has multiple sources of energy to supply itself, but it depends on all of them when there are peaks in demand. It is at these times that the most expensive type of energy, usually gas, is the one that sets the price of the entire market. The problem is that hardly any gas is produced in Europe, which leaves us in the hands of external agents such as Russia. In the long term, Europe’s goal is to depend on renewable energies to get out of this dependence on gas and abroad.

The consequences of the increase in the industrial sector

In fact, this increase in gas has a direct impact on the Spanish industrial sector, since 64.9% of the gas consumed in Spain is consumed by industry, with a capital importance in specific sectors such as steel or textiles, the price crisis is beginning to impact industrial companies that have seen their gas bills increase from 4,500 million euros in 2020 to 18,000 million euros in 2021. The industrial sector is very concerned to see the measures taken by some industries to face the crisis. Companies such as Sidenor or Fertiberia have already reduced production processes to deal with the effects of high energy prices. So what many see as something “positive”, the drop in demand for gas by the sector is, on the contrary, something very worrying because it endangers competitiveness and puts the country’s industrial fabric on alert.

“The increase in the energy bill of brick and tile factories puts the competitiveness of companies at risk, compromising their viability and continuity,” said the Hispalyt employers’ association in the brick and tile industry sector in a statement. According to the latter, the structural ceramics industry is experiencing a complicated situation, as an energy-intensive sector, due to the escalation in the prices of electricity, natural gas and emission rights experienced throughout 2021.The agri-food industry also issues a warning. The UPA Castilla y León organization has denounced the extreme situation in which chicken farms in the region find themselves in the face of the abusive rise in the price of gas, which is the main source of energy consumption in this producing sector. They have warned that profitability in a sector with already tight margins is very difficult.

During the conference “The effect of the price of energy on industry” organized by the Energy Commission of Industrial Engineers of Catalonia, Blanca Losada, industrial engineer and president of Fortia Energía, warned that “The bill has multiplied by four in a month, and this generates risks in companies that have a lower capacity to cushion these dynamics”. According to Losada, if this happens, it could lead to the “destruction” of the business fabric in both the energy and production chains and therefore “decrease” competitiveness and competition in the future. Losada claims that industry must be “key” to the energy transition and that it is a matter of lowering the fuel purchase bill in exchange for generating added value to the entire industrial and supply chain.

But are there solutions to the rise in gas prices?

One of the problems that the industry has is that it cannot electrify many of its processes and, therefore, its dependence on gas is greater. The industry has very little flexibility in gas and its management capacity is very limited because it depends on the fiscal measures taken politically. For Losada, the increase in energy prices “has changed the fiscal landscape”: the VAT charged on electricity transactions during a completed year could be 5,000 million euros and she stresses that the figures faced in the electricity tax or the municipal tax for the occupation of sun and subsoil are currently far from those that would occur in a situation of operation with normal prices.  She reminds that reviewing taxation was already part of the suggestions that the group of experts to analyse the reform of the energy system three years ago and that has been partly done with the shock plan approved by the Spanish government last September.

So, this dependence on gas is the biggest problem for the industry to face the energy crisis. While fiscal measures must be taken, the industrial sector must also take action in the renewable energy system and reformulate the annuities received by the owners of renewable energy production plants,  without affecting theirs to the recovery of their regulatorily recognized costs.

However, there is an ideal solution for the sector that will meet these three points and at the same time take it out of its energy dependence on natural gas: the hybrid solar panel. In fact, this solar technology will allow industries with a very high demand for hot water in their industrial process, such as the textile industry, to get out of this dependence on gas. The hybrid solar panel with aHTech technology produces hot water and electricity simultaneously with an efficiency of 89%, the highest on the market. With this dual production, the company will be able to meet its hot water, and heat needs in industrial processes while also producing electricity for its smaller energy needs, such as those in its offices. In addition to being able to move away of its dependency, it will comply with the European obligations imposed on industries within the framework of the European Union’s Decarbonisation Plan.