Crisis on Pause
Europe Still Needs a Green Industry Transformation.
Europe remains dependent on single suppliers for up to 50% of key resources such as rare-earth minerals and many prefinished goods:
Industry and government leaders feared the worst when Russia invaded Ukraine in February 2022 and subsequently cut back gas supplies to Europe. The disruption sent gas wholesale prices soaring, with increases of up to 22 times 2019 levels in Germany and more than 15 times greater in some other European countries. Many predicted rationing, rolling blackouts, and economic calamity.
Fast action by government and industry, in addition to some lucky breaks with the weather, forestalled catastrophe. Europe’s economy performed stronger than expected in 2022 (1.9% inflation-adjusted GDP growth in Germany over 2021, for example), but it would be a mistake to believe that industry will continue to simply “pull through.” The challenges to Europe’s energy system are structural, and the shift in gas supply from historically cheap Russian pipeline supplies to more costly liquid natural gas (LNG) imports highlights a major weakness. Gas is not the only issue...
Climate targets of the EU require emission reductions of 55% by 2030:
In 2023, the EU adopted a set of Commission proposals to make the EU's climate, energy, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. This will enable the EU to become the first climate-neutral continent by 2050.
The question now remains:
Will Europe’s energy crisis be remembered as the event that catalyzed a transformation or bemoaned as a major opportunity missed? The answer, which has enormous implications for Europe’s industrial economy, will start playing out in the coming months.
The energy crisis remains very much present, but within it lies opportunity.
A Crisis Averted…
While the dramatic energy price increases in 2022 (including peaks of more than €300/MWh for wholesale natural gas and more than €800/MWh for electricity based on day-ahead prices) largely caught industry by surprise, many companies reacted quickly and decisively to reduce consumption and, where possible, secure alternative sources (primarily LNG). These steps and a warm winter produced high gas storage levels of 75% across the EU in February 2023, a record for that time of year, and in some countries 40 percentage points over the storage levels of the previous year. LNG volumes are expected to rise as additional terminal capacity and contracted volumes become available.
That said, about half of industrial companies were forced to cut or temporarily suspend production, especially in the building-materials sector, which was also affected by supply chain shortages, rising mortgage rates, and an overall reduction in construction activity. A third of the companies surveyed by BCG in Germany in late 2022 had started to source raw materials and prefinished goods abroad, and 18% had shifted production to countries with better cost structure
…Is Not a Problem Solved
In the wake of the storm, it would be a mistake to assume that energy prices will simply return to precrisis levels. To fill the gap left by reduced gas supplies from Russia, Europe—and especially Germany—will need to rely heavily on LNG, resulting in an increase in imports of 20% to 40% in 2025 over 2021. LNG will likely set European gas prices for the foreseeable future, meaning the landed cost will depend on Henry Hub pricing (the industry standard), plus the transport cost and margin. The scenarios we analyzed show that Germany is suffering significant competitive disadvantage against other regions, not only in the near term but also through 2030.
LNG Import Scenarios increase by 2025, compared to 2021:
For companies that want to continue competing in Europe, the green transformation has turned from a growth opportunity into a strategic necessity.
A Real Opportunity
The kind of measures that Europe has already taken can help mitigate the worst effects of the current crisis but cannot overcome the structural disadvantages relative to the US and China. Europe needs to relevel the playing field—and find new sources of competitive advantage.
The obvious opportunities lie in green markets and green technologies, where Europe already has demonstrated capabilities. Given the growing number of companies with ambitious supply chain emissions-reduction targets, there is significant emerging demand for green products, including non-fossil-fuel alternatives to chemicals, steel, aluminum, and other materials. According to a recent study by BCG and the World Economic Forum, for example, as of November 2022, 1,957 companies had set certified, science-based emissions-reduction targets, and a further 2,103 had committed to set them - a substantial increase in many sectors. At the same time, scarcity is likely to be an issue for some critical green inputs. There is a notable gap between the commitment of downstream players to decarbonize their upstream value chains and the commitment of upstream players to provide the low-carbon materials needed to meet these targets.
While most European players so far have a cost disadvantage in fossil fuels and feedstocks, the same is not true for renewable ones, at least not compared with the pre-IRA US and China. For companies that want to continue competing in Europe, the green transformation has turned from a growth opportunity into a strategic necessity. Even industries with heavy export footprints, such as energy equipment or assembled goods, have an opportunity to move earlier than others to establish new rules of competition, though green markets will not fully replace traditional ones.
The Way Forward for Industry
To win in green markets, European companies need to take a leap of faith. A nascent market for green materials exists, but instead of waiting for the market to mature, companies need to develop it themselves. They should accelerate their own net-zero transformations and broaden their efforts from lowering emissions to commercializing sustainability by developing portfolios of green products, for consumers and other businesses. The good news is that our survey indicates most companies are already prioritizing green solutions. BCG and the World Economic Forum have set out a green go-to-market roadmap for commercializing sustainability. It has six steps:
- Design Green Product Portfolios: Companies should analyze future demand for sustainable products and assess how low-carbon materials can meet decarbonization goals. Different sectors will value the same product differently based on its decarbonization impact.
- Value Proposition and Branding: Develop products that reduce customers' emissions and enhance product value beyond environmental benefits. Emphasize emissions transparency and provide a product carbon footprint (PCF) for all products, as seen with BASF and ArcelorMittal's efforts.
- Engage Early Adopters: Target sectors and customers facing scarcity of green inputs, using partnerships to foster early market development. Examples include Maersk’s collaboration with green fuel providers and H&M for green logistics.
- Green Pricing Strategy: Set prices that reflect the scarcity and cost-effectiveness of green materials, considering new monetization models like subscriptions and pay-as-you-go to match products with their value.
- Market Development and Partnerships: Form collaborations with various stakeholders to scale the green market and address supply shortages, as IKEA did with mattress recycling. This approach helps companies be early movers in green transformations.
- Internal Transformation: Shift towards green market success by developing new organizational capabilities, structures, and incentives, requiring a comprehensive change in company mindset and internal collaboration.
