Why European Energy Business Is in Decline

As demand stagnates, utility companies in Europe continue to face declining revenues. And while some subsectors are seeing a decline or stagnation, others are seeing massive growth. We look at the current state of Europe's energy sector and how the sector appears in the mid- to long-term. (For more, see: The Industry Handbook: The Utilities Industry.)

Current State of the European Energy Sector

Energy business revenues are directly linked to the demand for consumable energy. Final energy consumption (FEC) is defined as the total energy that reaches the end-users for consumption. End-users include individuals, households, agriculture and industry. FEC does not include energy used by the sector itself, say towards generation, delivery and transformation of energy. Therefore, FEC forms an ideal measure of realistic energy consumption from the point of view of the end-user.

The data reported by Eurostat classifies energy consumption across solid fossil fuels (like coal), oil and petroleum, gas (natural and derived), electricity, derived heat and renewables. Eurostat offers the following details of energy consumption in Europe over the 23-year period from 1990 to 2013:

• FEC remained flat between 1990 and 2013. After peaking in 2006, the 2013 FEC levels declined to those of 23 years before.
• The worst hit subsector was solid fossil fuels, which saw a decline of 61.7%, while derived heat was down by 11.6%.
• Though oil and petrol FEC hit a record low, at a combined 38.5%, these still constitute the largest share of the energy pie.
• Energy sources continue to be dominated by fossil fuels (including solid, liquid and gas) with a 66.3% share, electricity had a 21.6% share, and others like derived heat, renewables and non-renewable wastes constituted the rest.
• Solid fossil fuels (like coal) saw a major decline of 61.7%, which was compensated by a significant increase in renewables (+115.4%) and electricity (+28.5%).

Reasons for the Decline

It is evident from the above-mentioned historical data that energy consumption from traditional sources has remained flat. The total FEC increase from 1990 to 2013 was only 2.3%. Bear in mind that decline or stagnation in end-user consumption directly impacts business revenues. Here are the primary reasons for this decline in Europe:

• Poor economic growth in Europe, much of which is attributed to the impacts of global financial crisis ongoing since 2007-08, the European sovereign debt crisis and the recent euro currency crisis. (For more, see: The 2007-08 Financial Crisis In Review.)
• Amid stagnant demand, traditional utility companies are losing out due to the availability of alternate energy sources like renewable energy.
• Lack of foresight by utility companies into emerging trends and changing market scenarios has led to a failure to diversify their business. In addition to existing traditional utility sources, a timely foray into renewables could have been a savior for utility companies using traditional energy sources. Unfortunately, the majority of European businesses failed to diversify, leading to a decline in market share.
• The European Union has lost its leadership in renewables. For example, none of the world’s top ten solar companies is European.
• Europe has completely missed out on the fracking boom, which has allowed countries like the United States to move toward greater energy security. The Guardian reports, “Electricity prices to European companies are about 40% higher than those in the US, and gas prices in Europe are three to four times higher, following the vast expansion of shale gas production there.” Fracking acted as a savior for U.S. fossil fuel businesses. However, despite having an advantage in terms of large shale gas reserves, Europe failed to cash in on the fracking boom due to environmental concerns and mass opposition. (For more, see: Countries With The Highest Fracking Potential and Fracking Companies: Practices, Profit Opportunities & Outlook.)
• Traditional utility companies may not see any respite in near-term. Developments and innovations are leading to improved efficiencies in renewable energy sources. Additionally, increased opposition from environmental organizations and the general public against fossil fuel usage will lead to a further decline in fossil fuel usage. The best option for traditional utility companies is to start diversifying into renewables. (For more, see: Clean Or Green Technology Investing.)
• Other developments have and will continue to spell doom from traditional utility companies. Many Eastern European nations, like Bulgaria and Lithuania, have improved their infrastructure, resulting in a decline in energy consumption. And proposed legislation would mandate buildings be more energy efficient, which could further reduce energy demand. Improvements in utilities transportation and distribution have also resulted reduced energy needs. Moreover, Eurostat notes the 2020 targets of reduced European Union energy consumption:

The Bottom Line

Amid declining end-user consumption, the energy business in Europe is expected to remain stagnant. The situation may worsen further due to other factors such as financial turmoil, currency challenges, efficiency improvements and a continued migration to renewables. Utility companies, especially ones dependent on traditional sources like fossil fuels, are expected to feel the heat. Diversification into renewables is critical for long-term sustainability for these European energy businesses.

(Further suggested reading: Top 10 Energy Stocks for 2015 and Top 10 Alternative Energy Stocks for 2015.)