Outsprinting the energy crisis

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European energy markets are experiencing an unprecedented shock. In the first quarter of 2022, short-term gas prices on the largest European exchange were five times higher than their 2021 average. The upward price pressures come from a confluence of long-term trends and current events, including shifts in sentiment among customers and investors, carbon pricing, the post-COVID-19 surge in global demand, and, most recently, the conflict in Ukraine.

In energy-intensive industries, these extraordinary increases are having a profound impact on production costs, which have risen by almost 50 percent in some sectors (Exhibit 1). The situation is likely to be prolonged. Futures markets are pricing European gas at twice or three times their 2021 levels for at least the next three years. Companies in these sectors face an urgent need for action. They must ensure the viability of their businesses today and find ways to maintain or extend their competitiveness for the future.

For some process industry players, rising energy prices have increased production costs by almost 50 percent.

In this environment, two groups of short-term moves could create significant value for big energy users: a new approach to energy procurement and a radical focus on energy efficiency and decarbonization. Our modeling indicates that the companies which make the boldest and fastest moves in both these areas could achieve sustainable margin improvements of up to 10 percent while simultaneously reducing their carbon footprint by 40 percent or more.

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Energy price stabilization

Big users routinely purchase energy in advance to hedge against price volatility. As companies come to the end of their current positions, extraordinary market conditions have created the opportunity to think in new ways.

Hedges for future energy supply are currently priced above the levelized cost of electricity (LCOE) for renewable-energy projects. As a result, meeting some of a plant’s energy needs via the physical ownership of renewables assets or power purchase agreements (PPA) with renewables generators can cut short- and medium-term energy costs while also improving long-term price security.

Before the current energy crisis, one company in the chemicals sector acquired a two-square-kilometer plot of land next to its plant, intending to construct a solar farm. Under a PPA that provided power at €50 per megawatt hour, the project supplied 45 percent of the plant’s overall energy, with a payback period of only one year. At today’s prices, such a project would pay for itself in weeks.

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Energy efficiency and accelerated decarbonization

The most significant mid- to long-term opportunity to mitigate high energy costs comes from plans that energy-intensive users already have in place. European companies have adopted decarbonization strategies that typically involve reducing energy consumption by around 50 percent over the next decade. Implementing a big part of those changes in two to three years not only would fully mitigate the currently expected price increases but also could create a real competitive advantage—a profitability boost of multiple percentage points (Exhibit 2).

Accelerating existing decarbonization plans could mitigate today’s energy price increases.

That’s a bold step, but the main barriers to success are organizational, not technical or financial. Since projects that would have taken several years to pay back will now do so in months or even weeks, high prices have transformed the business case for energy efficiency. The wide range of opportunities includes high-efficiency cooling systems, pressure recovery technologies, optimized configuration and control of pumps and fans, and the replacement of hydraulic or pneumatic equipment by electric actuators (Exhibit 3).

A 40 percent gain in efficiency improvements in three years or less can be made through bold moves on energy supply and demand.

One area of promise is the application of advanced heat recovery systems that convert waste heat at 60 to 70°C into 100 to 110°C hot water or steam, which can be reused in other processes. Recent studies have shown that in some applications, these technologies can reduce requirements for process steam by up to 70 percent. The availability of sophisticated digital twins that can simulate the performance of plants has made it much easier to design the best possible configuration for these systems, dramatically reducing their capital cost and delivering further operational cost savings.

To reap the benefits of such technologies in the current energy crisis, industrial players will need aggressive schedules and advanced project delivery capabilities. They must streamline capital approval processes and reallocate resources, prioritizing engineering and procurement capacity for the highest-impact energy-efficiency projects. And they will need to adopt best-in-class design and construction approaches, including highly standardized modular designs, off-site construction wherever possible, and the parallelization of on-site work. Some industrial companies already use these approaches and others to compress project timescales by up to 40 percent.

The energy price shock is the latest test for the resilience of Europe’s industrial companies. For the best of them, today’s crisis could be the catalyst for action that protects their short-term profitability while helping them pull ahead in the race to a net-zero world.

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