The European Union's aggressive adoption of renewable energy could raise supply chain utility costs there — but any price hikes will probably not be permanent.
The EU hopes renewables will account for 20% of its energy production by 2020. In Germany, Europe's largest economy, that figure is already 25% and is expected to reach 35% in 2020 and 80% by 2050, according to EU statistics. Comparatively, only 13% of US electricity is currently produced with renewables, according to the Renewable Energy Policy Network for the 21st Century (REN21).
But Europe's ambitious initiative to convert utility capacity to renewable energy production has a price. Without taking into account the environmental impact of fossil fuel energy production and consumption, electricity from renewables costs more per kilowatt than traditional energy sources, according to the Organization for Economic Co-operation and Development (OECD). A number of factors contribute to the challenges of renewable energy adoption — in Europe as well as the rest of the world.
“Most renewable electricity technologies are not generally competitive, even if examples to the contrary are no longer rare,” the OECD wrote in a June paper. “The commercial viability of renewables remains hampered by market failures, especially the absence of a CO2 price that reflects the global constraint on emissions.”
Meanwhile, estimations of the price differences between renewable and fossil fuel-produced electricity also vary significantly, making cost comparisons difficult.
A Wall Street Journal report (subscription required), which did not disclose its source, said renewables have contributed to a price increase of up to 21% in industrial energy production during the past four years. The OECD is less sure about the magnitude of Europe's increase in utility costs caused by renewables. It qualifies its price comparison with the caveat that it is tremendously difficult to compare energy costs from different sources. Calculating present and future production capacity, fluctuations in demand, subsidies, and other dynamic factors that are in constant flux make price comparisons, (and especially forecasts) exceptionally difficult.
There is also a huge difference in the range of costs between different types of renewable electricity production. Solar power can cost more than three times more than fossil fuel energy, while electricity produced at onshore wind farms costs close to the average for traditional power sources, according to the OECD. For example, geothermal energy capacity can cost as little as five cents per kWh, while certain solar panel solutions can cost 35 cents.
But overall, the OECD's consensus is that electricity is more expensive to produce with renewables than it is with fossil fuel. Any price increase that would make electronics production more expensive than it already is in Europe would inevitably mean that electronic component producers, such as chip makers, would shift production out of the euro zone.
“Any increased cost that is incurred in manufacturing in only one region will put that region and those companies manufacturing in that region at a significant disadvantage,” Len Jelinek, an analyst at IHS, told us. “That is fundamentally why manufacturing left high-cost regions such as Europe and the US for Korea, Japan, Taiwan, and China.” EU countries account for about 7% of wafer capacity worldwide, while Taiwan accounts for 20.2%. “The majority of the wafers manufactured in Europe are legacy, and therefore manufacturing cost versus the value of the wafer is critical.”
The scenario would be bad for those whose livelihoods depend on the European supply chain, but any shift out of Europe because of high renewable energy costs would have little impact (if any) on global supply chain costs.
“You must also recognize that there are no unique products that are manufactured in Europe, so if the manufacturing were shut down or relocated, there would be no impact on any segment of the electronics industry,” Jelinek said. “Other companies or regions would pick up their manufacturing. I realize that the world is looking at renewable energy, but to handicap a specific region and try to say it's good for the long-term environment will just cause an exodus of manufacturing in the region.”
However, any spikes in electricity costs for supply chain needs in Europe will probably not be permanent. Renewable-sourced power should get cheaper over time as the technologies mature. According to the OECD and REN21, renewable prices should eventually reach parity or become competitive with fossil-based energy sources. (Given the complexity of the forecasts, the organizations did not offer a timeline for that.)
Also, cost calculations for renewable and fossil fuel electricity sources often don't take into account the benefits of reducing CO2 emissions into the atmosphere. Wupply chain electricity costs will likely suffer somewhat in the interim before renewable-sourced energy costs level off, but Europe is probably about to set an example for the rest of the world to follow.