In this article, Javier Rodríguez CEO of ACOGEN, draws the industrial sector´s current landscape of in a very detailed and descriptive way. He bets on an industry with good energy and reminds all the agents involved in the growth experienced by the sector in the last five years that keeping this evolution on track will not depend solely on the measures applied by the new Government of Spain, although they will be decisive. Rodríguez also reviews the strong impact of energy factors on the industries’ income statement and concludes by underlining the decisive role that cogeneration can play in overcoming all the challenges facing the industrial sector. That is why he invites the new central executive to join forces with the industrial sector.
In the last five years, the manufacturing industry, which manufactures and exports food, steel, cars, chemicals, paper, tiles and endless products that account for more than 15% of the country’s GDP and 2.5 million direct jobs, has led the national growth as an indisputable pillar of economic recovery. Maintaining this pace will depend on how we handle the new turbulence that we can foreshadow and in this the new Government´s decisions will be key to boost the energy of the industry.
The industry has weathered the crisis
The industrial catastrophe we have been enduring in Spain since 2008, has led to the loss of almost 30% of production and 800,000 jobs in two years. After hitting rock bottom in 2013, the Spanish industry has not stopped growing. Survival was based on a reduction in labor costs and increased exports, but when competing in foreign markets, margins are like shaving an egg. With much effort the industries succeeded in weathering the situation and accelerating their recovery thanks to the exports growth in a general context in favor of structural economic reforms in the country, low interest rates, zero inflation, downward oil and energy prices, favorable exchange rates, global trade and elimination of barriers. A tailwind that benefited the efforts of companies and workers.
2017 was a memorable year for the Spanish industry with an overall growth of 3%, record of exports and contribution to the trade balance
In 2017 we reached the peak of the recovery, a memorable year for the Spanish industry with global growth of 3% -some manufacturing activities in ratios of 5-8% -, record of exports and contribution to the trade balance and production capacities used to more than 80% in many sectors. At last we were in the right direction and society unanimously recognized the important role of industry in the welfare of Spain. We all agree on the enormous advantage of having a more industrial country.
In this climate of optimism, industries began to consider the necessary increase in salaries, greater digitization and return to investments that, except in sectors such as refining, automobile and paper, had been scarce. Investment is key because future industrial competitiveness is at stake. Industrial investment must be captured for current industries and for new capacities; it is the elixir of the industry life.
However, beyond the energy sector, the business results in the manufacturing sectors are nothing to shout about. The export efforts and the good evolution have not been reflected in double-digit EBIDTA’s and the taxes cut the final results of the industrial companies.
In just a few months, factors greatly impacting the good progress of the industry have arisen: rise in oil and energy costs, rise in CO2, “trumpetting” in international trade, foreseeable inflation, rise in interest rates and some political uncertainty. We hope that the new government strengthens investor confidence and achieves regulatory effectiveness because, wherever we look, the horizon shows uncertainties and great challenges.
The increases in gas and electricity prices, two key energy vectors of industrial competitiveness, do not stem only from the rise in oil prices, there are also regulatory and national and European conjuncture factors. The manufacturing industry consumes more than 1/3 of the country’s electricity and 2/3 of the natural gas, an annual bill of about 9 billion euros to which the CO2 costs are to be added. The use of energy is concentrated in electro-intensive industries (metallurgical, chemical, steel, industrial gases, cement…) and heat-intensive industries (food, paper, chemical, refining, tile, textile…) largely cogenerating; in total they account for some 800 industries on which a turnover worth 45 billion euros depend.
The situation for the industry has been aggravated by the disastrous results of interruptibility auctions
Electricity prices are reaching historic records and the future does not bode well. Pool levels of plus € 60 / MWh and the uncertainty of strategic business movements essential in energy – with dances of appointments and due diligences – drive the attractiveness of results that are passed on to consumers. As if that were not enough, the situation for the industry has been aggravated by the disastrous results of the interruptability auctions, resulting from the lack of foresight and certainty to face sound energy policies by industry. This has been the responsibility of the Ministry of Energy and its ever deadly game of passing-the-parcel. One thing is the predicament and another to deliver results.
Gas prices have started an upward path linked to their correlation to Brent in the purchase formulas and all the signs are that we could exceed, in just a few months, levels of € 25 / MWh. The nascent development of organized and futures markets will neither be able to reduce the increase nor the great differential with our European competitors, aggravated by the regulated extra costs.
CO2 price has evolved from € 5 to € 15 / Ton in one year – and will continue to rise to € 25-30 / Ton – and the 86 million tons of direct industrial impact will involve new costs and efforts for industries, in addition to indirect emissions. The reform of energy taxation – which came in times of emergency to provide sustainability and did not evolve anymore – must be a priority for the Government along with the reforms of the tolls and other systems.
Cogeneration is a perfect tool in the Spanish industry to weather the variability of the energy markets
Cogeneration is a perfect tool in the Spanish industry to weather the variability of the energy markets -Europe along with the commission of experts for the transition agrees on this- but it urgently requires a regulation that allows the plants to continue operating at the end of their regulated useful life while simultaneously encouraging new investments. Almost 300 industries with cogeneration plants foresee that moment; key companies for the country that are in a complete and unearned uncertainty about their future and, even more serious, if they cease their activity, their contributions to energy systems and competitiveness will be lost. We, the cogenerators, trust that the new Government will give priority to this situation of the cogeneration and enacts soon the regulation that allows the industries to realize and relaunch their activity in the certainty of a new framework.
The industrial energy bill that rises more than 2 billion euros
Thus, adding the increases in electricity, gas and CO2 costs, the industry faces an increase in its annual energy costs in excess of 2 billion euros. If in addition the orders pipelines begin to weaken, the questions are clear: will the exports withstand? Can the cost increases be transferred? Will we be able to maintain exports, the national market and margins?
Oil climbs up all over the world, but Spain is an energy island with insufficiently developed markets that make it necessary and urgent to efficiently restructure the regulated costs and taxation and act clearly and fast to anticipate the changes that are to come from Europe. All this is undermining the national energy competitiveness and the arrival of a cyclical change can have much more impact.
For an industry with good energy
The new Government should boost reforms and solutions to bolster the energy and environmental competitiveness for an industry with good energy. The confidence needed to continue to improve the welfare of the country must be provided to the industry. The new Executive must talk to the industry, join forces with it and, without delay, take measures that contribute competitiveness in energy costs. It must draw the necessary regulations to achieve competitiveness and confidence quickly and well. The industry needs good energy because that will mean more exports and more quality employment. We hope it is a priority in their agenda. Good energy for the industry!
Javier Rodríguez, CEO Acogen, Spanish Association of Cogeneration
‘For an industry with good energy, priority for the new Government’