According to Forbes, more than 40% of Fortune Global 500 companies have either announced their intention to reach net-zero emissions by 2030 or have already achieved it. As companies seek to find their way through the labyrinth of alternative approaches, they need their location strategy to be aligned with their renewable energy (and/or net zero) strategy.
Virtually all companies, regardless of location, are being pushed to join the renewable energy movement to one extent or another, whether through consumer expectations, employee/stakeholder pressure, direct regulation (particularly in the European Union), indirect regulation by virtue of a threshold physical presence in a regulated market, or value chain mandates from customers who themselves are pursuing net-zero. Companies are adopting a variety of strategic solutions, including purchasing carbon offsets, reducing emissions, minimizing their transportation carbon footprint, collaborating with supply chain partners, and using renewable power sources.
In our work advising companies on location strategy and site selection, we have recently witnessed a dramatic increase in clients prioritizing how well positioned the location is to help them achieve their net-zero targets, particularly in respect to renewable energy options. Each company has its own unique targets, definitions, and priorities; thus, the site selection process must be designed to identify locations well-positioned to help the company meet its objectives.
Government renewable energy policies in Europe
The European Union (EU) has set ambitious climate objectives, with an overall goal of achieving climate neutrality by 2050 and an intermediate target of reducing net greenhouse gas emissions by at least 55% by 2030. Each of the EU’s 27 member states has committed to their own emissions reduction targets by 2030, ranging from -10% in Bulgaria to -50% in Germany, Sweden, Finland and Luxembourg.
EU Emissions Trading System
The path towards achieving these goals is governed by several programs, including the EU Emissions Trading System (EU ETS) that allows large carbon emitters (including energy intensive industries) to purchase carbon credits. As a “cap and trade” mechanism, the ETS establishes a cap on how much CO2 can be emitted every year. Companies then need to buy or trade allowances for every ton of CO2 they emit. The ETS applies to power stations, energy-intensive industries (e.g., production of steel, aluminum, cement, paper, and glass), aviation and shipping. Energy-intensive manufacturers receive a certain percentage of their allowances for free. Sectors that face global competition and are considered at risk of relocating out of the EU receive 100% of their allowances for free, whereas other sectors will see a phase out of the allowance in the coming years. Companies are fined if they emit more CO2 than they have allowances for.
The ETS is designed to encourage companies to adopt renewable energy, since buying allowances for emitting carbon based on fossil fuels is more expensive than purchasing renewable energy. Recent reforms are raising the price of CO2 allowances, which is expected to further spur demand for renewables. In 2023, the EU introduced an ambitious goal of increasing the share of renewables in energy consumption to 42.5% in 2030 (compared to 22% in 2021).
European Green Deal
To support the roll-out and adoption of renewable energy across Europe, the EU has launched a variety of programs under the “European Green Deal”. These include the REPowerEU Plan, which includes investing in renewables to make Europe less dependent on Russian energy, as well as individual strategies for different types of renewables, such as solar, hydrogen and biofuels. In addition to providing funding to the development and implementation of new technologies, these programs are also designed to reduce the bureaucratic procedures that are holding back investment in renewables.
Industrial companies in Europe also face some of the highest energy costs worldwide. The spike in energy prices in 2022 as a result of the war in Ukraine was somewhat cushioned by government support and prices have since stabilized. Despite expectations that industrial users would face a surge in energy prices at the end of 2023, as fixed contracts between energy companies and industrial clients caught up with real prices on wholesale markets, these did not materialize. Instead, energy prices continued to stabilize at the close of 2023.
Maintaining Europe as a competitive location
The combination of more stringent emissions regulations and rising energy prices has called into question Europe’s competitiveness as a location for energy-intensive manufacturing. Representatives of industries such as chemicals, steel, fertilizer, glass, automotive production and others have been sounding alarm bells about their ability to continue operating in the EU and there is a perceived threat of mass relocation to regions with more favorable energy costs.
While the cost of energy should be weighed against other operating costs, the alarm expressed by industry has spurred governments across Europe into action to mitigate the impact of high energy prices. The EU allows governments to compensate companies in specific industries for high energy costs, and several governments have put programs into place. For example, Italy introduced a tax credit to “energy-intensive” companies, which was increased at the end of 2022 from 20% to 40% of expenditures for energy purchased and used. Spain and Portugal have introduced several packages designed to subsidize the energy consumption of certain sectors. In a significant move at the end of 2023, the governments of Germany and France committed to implementing measures to lower energy costs for their industrial sectors. This decision, which includes the use of subsidies and tax breaks, is aimed at preserving competitiveness in the face of escalating global energy prices. However, this strategy has raised eyebrows among smaller EU states, who fear it may disrupt the balance of competition within the bloc and potentially compromise the integrity of the EU’s single market by creating disparities. Despite these concerns, the German and French governments remain steadfast in their commitment to support energy-intensive companies in their respective countries.
For companies that meet official definitions of “energy-intensive”, these programs should go a long way to mitigating the impact of higher energy prices and the costs of transitioning to renewables. Energy prices are likely to stay elevated for the foreseeable future in the EU, not reaching the high prices of 2022 but also not returning to pre-crisis levels. Companies planning to establish new production facilities in the EU can also consider other strategies to secure affordable renewable energy for their new facilities.
Securing renewable energy for new facility investments
Renewable energy power purchase agreements
Major utilities offer a range of PPA options to negotiate power purchase agreements (PPA), from delivering power directly from a renewable source to the customer to providing guarantees of origin. For example, German utility company RWE concluded a 10-year PPA to supply all of Japanese company Asahi’s Polish breweries with renewable wind energy from a single wind farm in northern Poland.
Develop on-site renewable energy generation
For major energy users, it may be worth investing in on-site renewable energy generation to supply their own facilities. For example, the packaging company Ardagh is installing on-site solar energy in its plants in the Netherlands, Scotland and Ireland to replace 14,500 MWh of electricity consumption from the grid. One challenge to this approach is the relative shortage (and high-cost) of industrial land in some European countries, although some companies are also adopting a “near-site” approach by locating behind-the-meter renewables generation on brownfield locations close to their facilities.
Adopt hydrogen to decarbonize existing facilities
Especially large energy users are adopting on-site hydrogen to reduce the carbon footprint of their facilities. For example, H2 Green Steel has opened Europe’s first green steel plant in Northern Sweden, which uses green hydrogen (from hydropower and wind) to replace coal in the production process.
Select a location with a greater availability of renewable energy
Countries such as Sweden, as well as non-EU countries such Iceland and Norway, already generate most of their energy from renewable sources, while others such as Portugal or Austria are catching up. The Nordic countries have successfully attracted facilities with limited supply chain requirements such as data centers as well as investments by manufacturers for whom the lower cost of renewable energy outweighs the transportation costs of operating in a more remote location.
Renewable Energy Strategies in the United States
While Europe’s renewable energy landscape centers on regulation and cost mitigation strategies, in the U.S., companies face social and business pressure to set their own carbon footprint goals and then seek out viable approaches to meet them. Our U.S.-based colleagues at Biggins Lacy Shapiro & Co. continue the conversation.
Renewable Energy Strategies in Asia
Asia’s renewable energy landscape is, in a word, diverse, with a wide range of national-level sustainability goals apparent across the various countries, and varied availability of renewable energy options, though the trend toward net zero is well-established in this region of the world. Our Asian-based colleagues at Tractus continue the conversation.
This article is part of a series in collaboration with Biggins Lacy Shapiro & Co. and Tractus. For more information on the global renewable energy landscape, check out their insights on the United States and Asia.
