1、March 2024Mastering the Challengesof Energy Costs in EuropeHow industrial companies survivethe deindustrialization in EuropeStrategy&Companies need to improve their energy resilience strategy to survive.To succeed in the long-term,a recalibration of the entire business strategy is requiredElevated e

2、nergy prices and increased market volatility not only caused profits to decline(-14%since 2018)but also pose a risk of deterring investments(-9%vs.pre-crisis)Energy prices have recovered after the peak in 2022.Gas spot prices recovered to 12/MWh above pre-crisis level1,while volatility of last 12 mo

3、nths is 4x the level of 2019Most firms have responded with short-term levers,while substantial levers have remained untouched.Inflation&volatility remain the top two concerns for CEOs in 2024The energy crisis has been a challenge to industrials,some of which were already suffering from supply chain

4、disruptions and lower demand(-13%output over last 5Y)1)Comparing average 02/2024 TTF price with average of 2019Sources:S&P,considering the change 2018 vs.2023 in the following sectors:chemicals/chemical products,non-mineral products,paper and paper products and basic metals;FT/Refinitiv,PwCs 27th Gl

5、obal CEO Survey;Strategy&analysisIs the storm really over yet?Uncertainty is accelerating at an unprecedented paceStrategy&Mastering the Challenges of Energy Costs in EuropeStrategy&March 2024The perception of market realities is mixed;some players believe that short-term actions are sufficientSourc

6、e:Strategy&Selected voices on rising energy cost“If manufacturers of materials needed by industry(such as steel or chemicals)were to leave the region due to high energy costs,you run the risk of losing the whole value chain of production”Executive,Steel Sector“The awareness is generally there.But mi

7、d-sized companies especially are not well prepared.Measures are primarily short-term initiatives and some long-term contracts.This alone will not be sufficient”Senior Official,Large Utility“I dont think Germany will be manufacturing basic chemicals,plastics,and ammonia in 2035.Maybe it just makes mo

8、re sense to produce them in Saudi Arabia,where energy is cheaper”Executive,Public Administration“Everybody thinks that energy prices are back to the old days in terms of pre-crisis level.That is not the case”Executive,Cement Sector“Todays reality:Ourplant in China is running not only on significantl

9、y lower costs,but also with a better CO2 footprint”Executive,Chemical Sector“The energy prices are coming at the worst time,e.g.considering overcapacities coming in from China.All of these factors are a significant restriction in international competition for us”Executive,Energy intensive player“Our

10、 storages are at very high levels,demand has been reduced significantly,and new infrastructure has been developed to support the diversification efforts”European Commissioner for Energy“Very high natural gas and power prices in Europe were extremely bad for the world economy,but now they have come b

11、ack to a more reasonable level.Theres no more fear of an energy crisis”Hedge fund manager3Mastering the Challenges of Energy Costs in EuropeStrategy&March 2024Rough winds ahead for European industrials Key challenges to remain for next decadeSources:Eurostat,S&P;comparing 2023 and 2018 chemicals/che

12、mical products,non-mineral products,paper and paper products and basic metals;1)based on 2022 figures;2)net of depreciation(real-primary/direct impact only);Strategy&analysis How to maneuverthrough the storm?over 500klost jobs since 2018131mnjobs provided3,261bnGDP contribution10.5bndecrease in net

13、operating profits2Initial expectation Energy will remain at affordable pricesand will even improve competitiveness Burden of decarbonization is split evenly across locally-produced products andimportsOutput from core industriesto remain at stable levelsMarket realitiesEnergy prices are significantly

14、 higher comparedto other markets(e.g.,China,US)Industrials lose competitiveness vs.players with less ambition to decarbonizeOutput from energy-intensive industries 11-17%lower vs.pre-CovidKeep readingMastering the Challenges of Energy Costs in EuropeStrategy&Strategy&March 2024Energy crisis in full

15、swing:Energy prices have recovered but are still at higher levels,and with higher volatilitySource:Bloomberg,Strategy&analysis 0204060800180200220Price of major fuel sources(Monthly average,01/2019-02/2024)05003003502002220232024Brent(/bbl)Coal(/t)Mid-2020 plungeRedu

16、ced global demand due to pandemic and oversupply in certain markets(e.g.,oil)Global coal price rallyConvergence of soaring coal demand(countries switching to coal-fired generation)and global supply shortages(export ban Russia,adverse weather conditions reducing supply)020224Vol

17、atility TTF(%)Market declineReplacement of Russian gas and increased level of European gas storage drove prices down from mid-2022Pre-Covid European prices determined by supply and demand,with significant imports(40%)from RussiaWar in UkraineSudden increase in gas prices and volatilityEasing prices

18、back to normal?TTF recovered,and remain 12 above 2019 average as of February 2024Increased volatility thenew normal?Volatility TTF of last 12 months 4x the level of 2019EU Dutch TTF(/MWh)Coal price recoveryIncreased production(e.g.,from Australia)and mild temperatures have caused coal prices to decl

19、ine,but still 57%above average 2019 levelNatural gas TTF price(Monthly average,01/2019-02/2024,/MWh)Mastering the Challenges of Energy Costs in Europe6Strategy&March 2024Does the perceived collapse of commodity prices solve the problem of ongoing deindustrialization of industrials across Europe?Mast

20、ering the Challenges of Energy Costs in Europe7Root causes of deindustrialization are much deeper:Change of growth paradigm:Lower growth rates compared to other markets and shorter growth cycles with an average duration of 4 months since the end of economic slowdown in 2019Redirected investments:Ass

21、et decisions reside abroad and are not made in favor of European countries,e.g.-55 bn direct investments to Germany compared to 2019Lagging improvements:Over the last 5 years labor productivity in Europe have been stagnating(+0.9%),while patent publications dropped(up to 32%)for major technologiesRe

22、gulation driven overload:Well intended regulatory requirements are maximizing cost of bureaucracy,which is one of the top 3 reasons for delayed transformationCompeting volumes from abroad:Production volume from Asia(due to softer demand)cannibalize domestic business(e.g.+27%imports from China3)Faili

23、ng pricing mechanisms:Increased volatility put margins under continuous up-and downward pressure with variability of margins 1.2x higher in Europe compared to the US and 2x to China2Common sense based facts:European wholesale electricity prices plummeted with-42%in last 12 months1TTF spot prices hav

24、e fallen to 25/MWh-the lowest level since war in UkraineEuropean gas storage reached historically high levels of 96%Even todays lowered energy spot prices are insufficient to avoid a strategic and operational reset1)Until end of January 2024 for EU 27 excl.Malta and Cyprus;2)Based gross operating ma

25、rgins on manufacturing industry for the time period 2019 2023;3)11/2023 vs.01/2019;Sources:CEIC,Eurostat,Ember,Financial Times,German Federal Bank,OECD,S&P,WIPO IP;Strategy&analysisStrategy&Strategy&March 2024Insufficient resilience has left its mark on Europes industrial core,with the biggest impac

26、t in Germany,France,and ItalySource:S&P;Strategy&analysisSector profitability for selected countries(2023 vs.2018,gross operating profits,real)Gross operating profit has been stagnating or decreasing for most sectors across EU 27 Industrials in France and Germany,notably,experienceda strong decline

27、in profitability Profits in Eastern Europe have been more positive compared with other European countries High discrepancy over profits(even within a given sector)reveals the complexity of managing coherent(re)actions to increased energy cost and volatility Given the dynamic rally in energy costs in

28、 recent months,actions by industrial players have softened the true impact to bottom-lineObservationsImpact on profitabilityPositiveSlightly positiveNeutralSlightly negativeNegativeMastering the Challenges of Energy Costs in Europe6SectorFoodGlass,Ceramic,CementBasic MetalsChemicalsTransport Equipme

29、ntOther ManufacturingMachineryTextilesRubber+PlasticsPaper+PulpStrategy&March 2024Industrials with heavy energy consumption have experienced the biggest production cost increase,albeit differing by regionSource:Eurostat,IEA;Strategy&analysisProduction cost increase for selected countries(2023 vs.201

30、8)Strongest increase in produc-tion cost since 2018 in the Glass,Ceramic and Cement sector,followed by the Basic Metals and Chemicals sectors Cost increases in Germany,Benelux,and Eastern Europe have been above the EU 27 average for these sectors A look at profitability metrics can help evaluate how

31、 effective short-term actions have beenObservationsWhat has been the impact on your sector and company?Stay tuned for more insights into your industry?SectorFoodGlass,Ceramic,CementBasic MetalsChemicalsTransport EquipmentOther ManufacturingMachineryTextilesRubber+PlasticsPaper+PulpMastering the Chal

32、lenges of Energy Costs in Europe8Cost increaseUp to 10%10 20%20 30%30 40%+40%Strategy&March 2024Electricity costs will continue to challenge the footprint for all industrials in Europe;nearshoring insufficient to achieve global competitiveness1)Eurostat 2019 H1 vs.2023 H1 and IEA 2023,excl.taxes&lev

33、ies.Average pricing based on energy demand bracket,same weighting for all.15 of EU 27 by highest total energy supplied;2)Ember Yearly Electricity Data(2023);Ember-European Electricity Review(2022);Energy Institute Statistical Review of World Energy(2023);3)Shut-down of last nuclear power plants on 1

34、5 April 2023:Isar 2,Emsland and Neckarwestheim 2;4)Renewable Energy Supply 26 ct/kWh 21 ct/kWh 18 ct/kWh 16 ct/kWh 8 ct/kWh 30 ct/kWhNordics among the countries with the lowest pricesHungaryAustriaGreeceNetherlandsGermanyItalySlovakiaFranceBelgiumPolandDenmarkPortugalSpainSwedenFinland18.215.114.413

35、.513.011.510.710.610.67.26.95.83.53.22.344%25%77%17%43%37%10%40%39%43%14%32%21%69%84%60%42%21%68%22%55%35%25%25%25%23%36%51%8%12%9%8%37%31%46%59%63%11%30%RES4NuclearGasCoalOilPrice increase H1 19-23(ct/kWh)1Electricity price for industrial consumers(H1 2023)Electricity mix 2022,net prod.(%)2Electric

36、ityMastering the Challenges of Energy Costs in Europe8Strategy&March 2024Electricity costs will continue to challenge the footprint for SMEs in Europe;nearshoring insufficient to achieve global competitiveness1)Eurostat 2019 H1 vs.2023 H1 and IEA 2023,excl.taxes&levies,focus on small-medium enterpri

37、ses.15 of EU 27 by highest total energy supplied;2)Ember Yearly Electricity Data(2023);Ember-European Electricity Review(2022);Energy Institute Statistical Review of World Energy(2023);3)Shut-down of last nuclear power plants on 15 April 2023:Isar 2,Emsland and Neckarwestheim 2;4)Renewable Energy Su

38、pply 26 ct/kWh 21 ct/kWh 18 ct/kWh 16 ct/kWh 8 ct/kWh 30 ct/kWhRomania+Hungary experienced the highest prices in H1 2023Nordics among the countries with the lowest pricesHungaryAustriaFranceSlovakiaNetherlandsItalyBelgiumGermany3GreecePolandDenmarkPortugalSwedenFinlandSpain21.17.617.54.917.14.413.66

39、.412.54.410.85.811.43.910.53.910.44.06.16.96.93.36.44.03.36.03.15.11.63.444%25%77%17%25%63%23%59%40%39%12%36%25%25%43%14%32%43%22%10%21%69%84%60%68%30%55%35%42%21%31%51%37%9%8%46%11%37%RES4NuclearGasCoalOilPrice increase H1 19-23(ct/kWh)1Electricity price for industrial consumers(H1 2023)Electricity

40、 mix 2022,net prod.(%)2ElectricityGasMastering the Challenges of Energy Costs in Europe8Strategy&March 2024Second half of 2023 has shown increasing uncertainty for main energy sources;a new storm on the horizon?Source:Financial Times(1),Bloomberg(2),Reuters(3)France looks at windfall levy to“take ba

41、ck control”of energy prices1 Sep.2023Germany to raise carbon price to 40 in 2024,50 in 20252 Sep.2023Germany rejects subsidies for energy-intensive industries1 Sep.2023UK government to increase offshore wind subsidies by 66%1 Nov.2023UK carbon price plunge raises risk of green levies on exports to E

42、U3 Aug.2023Scholzs government cuts climate fund by 45bn by 2027 in response to debt brake ruling Nov.2023Funding for energy price reductions increasingly at risk while green transition targets are missedSubsidies+&CO2Angola quits OPEC after clashes with Saudi Arabia1 Dec.2023Oil market caught by sur

43、prise as US output surges1 Dec.2023Oil slumps to lowest in five months despite OPEC+production cuts1 Dec.2023OPEC+weighs further oil production cuts as anger mounts over Gaza1 Nov.2023BP pauses oil shipments through Red Sea after rebel attacks1 Dec.2023Russia puts squeeze on oil market with diesel e

44、xport ban1 Sep.2023High geopolitical pressure in both directions on the oil price might lead to increased volatility Mineral oilEquinor and German state energy group sign 50bn long-term gas deal1 Dec.2023EU to give Member States power to block Russian gas imports1 Dec.2023Top EU energy official says

45、 US gas will be neededfor decades1 Sep.2023European gas price jumps almost 40%over supply disruption fears1 Aug.2023Ukraines gas storage helps Europe avert further energy crises1 Dec.2023EU ports help sell on over 20%of LNG imports from Russia1 Nov.2023Hidden ongoing reliance on Russian gas and crit

46、ical infrastructure could lead to supply shocksNatural gasMastering the Challenges of Energy Costs in Europe9Strategy&March 2024Many outlooks are building on a normalization,whereas the next energy crisis might risk the asset footprint in Europea.Sudden disruption on gas transport routes(e.g.,Baltic

47、 Sea Sep.2022)b.Sudden impact on gas suppliers,either through destruction or politically-motivated reduction of supply(e.g.,Russia 2022)c.Unexpected harsh winter conditions can lead to spikes in daily gas prices(e.g.,EU March 2018)d.a.OPEC+decides to drastically reduce output(e.g.,Q4 2023)b.Major oi

48、l supplier becomes involved in military conflict(e.g.,Gulf War 1990-91)c.Shipping routes get blocked either through accident(e.g.,Suez Canal March 2021)or by military or rebel forces(e.g.,Red Sea Q4 2023)d.No further shocks to supply and demand in electricity,gas,and oil Electricity prices will beco

49、me dynamic due to a higher share of renewables,and off-takers with variable load will profit Share of fossil fuels gradually declines as they are phased out Overall price for electricity will experience only a moderate decline,due to costs for flexibility(back-up power plants and grid expansion)a.On

50、e or more electricity suppliers get taken out of the grid through accident or maintenance issues(e.g.,France Nov.2022)b.Power plants with high cooling requirements,like coal or power plants,are unable to run on full load due to low river basins(e.g.,France Jul.2023)c.Extreme weather can lead to dema

51、nd surges for heating and problems in power plant operations(e.g.,Texas 2021)d.Strong interdependence(spark spread)High impact on short-and/or long-term gas pricesHigh impact on short-and/or long-term electricity pricesHigh impact on short-and/or long-term oil pricesNormalization and stabilization o

52、f energy pricesNormalizationOil price increaseGas price increaseElectricity price increaseMastering the Challenges of Energy Costs in Europe10IllustrativeStrategy&March 2024Best-in-class companies have not stopped at short-term levers,but continued on their journey to champion energy resilienceSourc

53、e:Strategy&analysisStart of energy crisis0Short-termlevers2Full adaptationto the newnormal5Companies that successfully deployed mid-term levers achieved average energy cost reductions up to 10%10%energy cost reductionCompanies that deployed a Fit-for-Growth program to ensure further resilience saw a

54、n average reduction in their respective cost rate by 20%20%cost base optimization throughFit-for-Growth2 in 5 companies did not trigger a full strategic reviewUnder-reporting of impact combines with a lack of confidence and a waitit out mentality in describing internal changes for the majority of co

55、mpaniesA lack of capabilities and skills fosters inaction 3+months average lever response time Long decision-making cycle due to lack of preparednessCompany inertia due to lack of awareness and uncertainty/decision aversion60-70%of mid-sized companies have no clear energy strategyBy the time the fir

56、st levers are implemented,companies have often lost focus and fail to conduct a strategic reviewMid-sized industrials,especially,do not have a comprehensive energy strategyThe absence of clear progression markers,due to a lack of monitoringand clear guidelines,results in a low level of energy resili

57、encePoor monitoring conditions:IT infrastructure issues+coordination across departments affects the ability to react to market shiftsOnly 2 in 10 companies championed energy resilienceImmediate responselevers1Mid-term levers3Long-term levers4012345Footprint optimization incl.country shiftsAdapted he

58、dging and diversification of energy sourcesInitial product price increases+quick-fix efficiency measuresMastering the Challenges of Energy Costs in Europe14Market observationsA company journeyStrategy&March 2024Fortifying and streamlining the supply chainfor continuity by challenging the sourcing,pr

59、oduction,and distribution strategyAssessing criticality of structures,processes,and workflows to navigate through market volatility effectivelyNurturing and re-inventing skills,technology,and resources that provide a competitive advantage or future differentiationAssessing exposure,reflecting on pas

60、t actions and creating an environment for substantial energy resilienceEstablishing a clear view on how and where value is created today vs.in the future by improving quality of earningsrigidflexiblebreadthdepthinnovativetraditionalhorizontalverticalreactiveproactiveRecalibration requirementDesign o

61、ptions for decision-makersCore capabilitiesWhat is our right to win?Go-to-market What is our way to play?Supply chainHow do we organize?Operating modelHow do we operate?Energy resilienceHow do we survive?The new normal requires a full strategic recalibration;energy resilience as a first step to safe

62、guard the competitive spikeSurviving the stormSucceeding in the new normalStrategic dimensionsWhat would a competitive solution look like for your business?We support you in performing the right recalibrationMastering the Challenges of Energy Costs in Europe11Strategy&March 2024Championing energy re

63、silience and sharpening the competitive spikeThe way forward:Future-proofing industrial players across EuropeAssessmentReflectionExecutionStrategyProven approach Start with the overall sector picture Perform benchmarking vs.leading peers Consider direct and indirect influences Start with most releva

64、nt production sites Build a robust governance as a basis Question legacy investments relevance Ensure alignment w/sustainability goals Consider human&financial resources Dont wait for the next price shock See resilience as long-term commitment Go beyond the obvious Keep focus and make it understanda

65、ble Evaluate effectiveness of past actions Do not claim success for external factors Allow and encourage contrarian opinions Avoid downplaying past challengesLessons learned from best-in-class1.How vulnerable is your sector to future energy prices?2.What has been the impact on your sectors cost base

66、?3.How have energy prices impacted your profitability?4.To what extent is your production footprint impacted?1.What is your current approach to energy management?2.Which existing initiatives need to be considered?3.What are the external expectations that you need to fulfil?4.What are the resources t

67、hat you are willing to dedicate?1.How should your company respond in the short-term?2.What should your firm tackle in the mid-to long-term?3.Do your sustainability-related initiatives fit into this plan?4.How can you communicate this plan to the market?1.How well did your existing risk mgmt.strategy

68、 perform?2.How long did it take until you switched to crisis mode?3.Which previous actions worked exceptionally well/badly?4.How effective was your stakeholder mgmt.in the crisis?Critical clarificationsMastering the Challenges of Energy Costs in Europe13Strategy&March 2024We support you in selecting

69、 the right levers for substantial change;dont wait until it is too late,and go beyond the obviousWe will support you in reaching the right conclusions,selecting+implementing the appropriate levers+(Uncoordinated)launch of efficiency initiativesReconsider shift of load and/or productionShort-term lev

70、ersMid-term leversLong-term leversImmediate response leversMost initiatives are focused on the obvious reactive measures,and only when it is too late100%pass-through of costStress-test pricing approachLeverage power purchase agreementsInvest in on-site generationBlind trust in claw-back clausesImple

71、ment business continuity managementImplement dynamic hedging strategiesEvaluate strategic location decisionIgnore and absorb lossesAdjust sourcing strategyImplement energy mgmt.systemBuild scalable business cases for green initiativesReduce energy consumptionRestructure the portfolio for long-term v

72、alue creationImprove price escalation clausesDrive electrification of assetsImplement circularity in the value chainOptimize energy mix(e.g.,consider hydrogen)Drive decarbonization-related supply chain transformation+Unique levers for your sector and companyComplexity Next shock is sure to come comp

73、anies should start to prepare now There is no one size fits all solution,and many paths to energy resilience Moving away from immediate response levers will be key to reducing the negative impact of elevated prices and volatility to bottom-line Mid-to long-term levers,especially,will pay off quickly

74、 once energy prices increase again1234Mastering the Challenges of Energy Costs in Europe15CommentEnergy resilience levers:From reactive to proactive resilience championStrategy&March 2024Mastering the Challenges of Energy Costs in Europe15To protect the bottom-line,decision-makers in energy-intensiv

75、e industries need to Recalibrate your business strategy by re-inventing your status quo:Core capabilities(“What is our right to win?”)Go-to-market approach(“What is our way to play?”)Supply chain management(“How do we organize?”)Operating model(“How do we operate?”)recalibrate strategyEstablish a cl

76、ear picture on exposure and the concrete implications of the energy crisis on your own(sub-)industry and companyUnderstand own positioning against direct peers and leading market playersPerform scenario-and stress-testing of how prices and volatility could affect your business financials understand

77、their positioningPerform a strategic review of previous actions,by evaluating resources deployed and their financial effectivenessEvaluate the readiness of your business continuity management to protect critical processesConduct a maturity analysis of current and budgeted initiatives that will be pa

78、rt of your resilience strategy reflect on previous actionsDrive implementation of resilience levers to move your company towards a proactive mindset Select the most relevant levers for your industry/business Perform business case estimation to derive lever prioritization Outline implementation roadm

79、aps incl.ownership,timeline and milestones.drive resilience leversSurviving the stormSucceeding in the new normalStrategy&Mastering the Challenges of Energy Costs in EuropeMarch 202416Strategy&March 202417 In the short-term,coordinated support mechanisms outside of“generalistic price caps”are requir

80、ed to enable financing of CAPEX-intensive transformation efforts(e.g.,tax credits,subsidies)These mechanisms,however,can help at most only temporarily.It will be essential to outline long-term strategies that can promote competitive energy prices(e.g.,expanding RES and the grid,flexible generation a

81、ssets)Maximize domestic energy supply in the short-term(e.g.,gas exploration in NL,nuclear power plants)Leverage purchasing power in negotiations with gas suppliers Expand pipeline infrastructure throughout Europe Establish an European fund for high-priority infrastructure investments beyond current

82、 programsDecision-makers in governments and public institutions will need to support Europes industrial core and Find regulatory solutions that support energy-intensive industries.Current initiatives(e.g.,CBAM)are overly complex,unclear,and raise trade/import restrictions instead of structurally imp

83、roving the attractiveness of the EU as a location Streamline laws that hinder expansion of renewable energy sources (e.g.,permit and approval processes)Reduce bureaucracy that prolongs required investments in infrastructure and technologyStrategy&Mastering the Challenges of Energy Costs in EuropeMar

84、ch 202417 enhance laws+streamline regulation provide stability for investments act as one united frontStrategy&March 2024Your Strategy&contactsChristian BrandManagerCMichael MeyerSr.AssociateM Dr.Eva PoglitschDirectorEChristian von TschirschkyPartnerC Michael WeissPartnerMDr.Johannes SchneiderPartne

85、rJ Mastering the Challenges of Energy Costs in Europe18Thank 2024 PwC.All rights reserved.PwC refers to the PwC network and/or one or more of its member firms,each of which is a separate legal entity.Please see for further details.Disclaimer:This content is general information purposes only,and should not be used as a substitute for consultation with professional advisors.