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Energy prices are rising across the globe, but have most significantly affected Europe due to the closure of Russian pipelines
The global energy crisis is hitting Europe harder than average and could trigger massive shifts in the European economic structure, even leading to deindustrialization. While Europe is losing competitiveness on the world market, the impact of higher energy prices varies enormously between the EU member states and industrial sectors. On the world market, Europe is thus losing its attractiveness as a production location.
However, the increased energy prices are affecting the EU member states to different degrees due to their individual energy policies: While production costs in France and southern countries such as Spain are rising comparatively moderately, countries such as Poland are coming under extreme pressure. The reason for this is the higher share of nuclear power and renewables in the energy mix of countries like France or Spain compared to the heavy dependence on Russian oil and gas in countries like Poland. In the long term, such differences could lead to structural shifts within the European industrial landscape. This current situation could also bear the chance for companies to boost its ESG agenda and enable better positioning in the long-term including access to sustainable financing, tax benefits, sustainable markets, and positive publicity.
Industrial natural gas price by country
EUR cents/KWh
Gas price avg. 2016-2018
Est. gas price avg. Jan-Aug ’22
Impact of rising energy prices in 2022 differs across sectors, depending on relative increases in energy cost and intermediate product prices
The increase in energy prices will reduce profit margin across all sectors at the EU level, and the extent of impact depends on the sector and country. Europe faces an overall decline in profitability of ~20% due to rising energy prices. Any decline in profitability is a risk because the sector may become less attractive for investors given the risk profile. European industries that focus on specialty or high-quality products are not affected in the same way due to higher profit margins and to cost structures based on R&D and process technology.
“In the future, many companies may decide to reorganize their production within Europe or to move out of Europe altogether. Companies should now analyze what impact leaps in energy prices will have on their own business model and on profitability. At the same time, there is currently an opportunity for companies to address the energy crisis as well as climate change and drive decarbonization by increasing energy efficiency and expanding renewable energies.”
Strategy& energy crisis approach
Due to the huge energy price increases, EU-based companies need to create or amend their energy strategy. Companies need to ask themselves how they should approach their energy strategy based on its industry and company positioning. The strategy should include both energy and non-energy related levers. Strategy& has built a static model that uses six key assumptions to assess the impact of rising energy prices on various sectors in Europe.
Connecting energy cost reduction to a company’s ESG agenda can enable better positioning in the long term including access to sustainable financing, tax benefits, sustainable markets, and positive publicity.
Kelsey Pace, Bas Verhagen, Yağız Deniz, Brian Oliver Ramos, and Sjors van der Velden also contributed to this report.
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