Is it wise for the government to help companies get through the energy transition?

Topical issues in the field of economy, (responsible) investment, pension and income: every week, one of APG's experts provides a clear answer to this week's question. This time expert portfolio manager Energy Transition, Martijn Olthof, about the question whether or not it is wise for the Dutch government to help companies get through the energy transition. “The industrial policy has made a comeback.”

Tata Steel is the biggest emitter of CO2 of all the companies in the Netherlands. The steel plant in IJmuiden can ‘go green’ but that requires money. And the company is looking at the government in The Hague for financial aid. They could help the former Koninklijke Hoogovens with several billions of state support to make the transition to steel production based on natural gas for now and hydrogen in the future. The production currently still takes place using heavily polluting coal. But is it actually up to the government to help companies get through the energy transition?

Carrot and stick
Without government policy, there will be no energy transition whatsoever, Olthof says. “After all, fossil fuels are extremely efficient and also relatively easy to transport. It is therefore up to the government to take control and to make the transition possible. That is already happening, but not enough yet.” The government could apply the carrot-and-stick method, according to the expert in energy transition. “The stick in this case represents, for example, making fossil fuels more expensive  and banning coal-fired plants in the long term. The carrot stands for, among other things, grants that make sustainable energy cheaper. The Hague will have to deploy all the tools necessary to make the energy transition happen and that sometimes goes along with grants. In fact, this applies not only to Tata Steel because many grants and tax benefits were introduced in the past to help several industries become more sustainable.”

However, Tata Steel is a special case. “If the government increases the price of CO2 emissions, the steel the company produces will become more expensive, meaning buyers will turn to China and India for instance to obtain cheaper steel which increases the risk of Tata Steel going bankrupt. That would be a massive destruction of capital as the plant is already here and the Netherlands continues to need steel. Besides that, it would also cost billions to remediate the site following a possible closure of Tata Steel in order to prepare the site for other uses. It therefore seems like a good idea to me to look into ways to keep this company for the Netherlands. As it involves tax money, The Hague would impose requirements and conditions to the state support to make sure the money is well spent.”

Hydrogen economy
Fact is also that the Dutch government is eager to create a hydrogen economy, Olthof continues. “The EU promised grants for large electrolysis projects to produce green hydrogen, but those projects have not yet commenced due to a lack of long-term buyers. Until now, the policy to stimulate the demand for green hydrogen was mainly focused on ‘greening’ the existing ‘grey’ hydrogen (made from natural gas, ed.) used in the petrochemical industry for example. The steel industry has little alternatives for hydrogen when it comes to becoming more sustainable, and a major steel plant such as Tata Steel would therefore be an ideal candidate to purchase high amounts of hydrogen in the future.”

Olthof understands the concerns about the pollution by Tata Steel of, among others, the local residents. “It seems a legitimate question why such a polluting company as Tata Steel receives grants from the government. At the same time, such grants can contribute to a decrease in the pollution while steel can still be produced. That is not only beneficial to the employees of Tata Steel, but also to the entire ecosystem of companies depending on the steel plant. It also prevents the Netherlands from becoming dependent of foreign steel producers that in many cases emit even more CO2 than Tata Steel. Companies that are active in the Netherlands are often innovative and capable of coming up with efficient solutions, such as making the production of steel more sustainable.”   

Industrial policy
The industrial policy has truly made a comeback, Olthof concludes. “If the government does nothing, there is a risk that all important industries move abroad. That is why the government has to make choices: what does it want to do and what not? Government intervention is necessary to carry out the energy transition. This involves the previously mentioned carrot and stick, but also the creation of infrastructure and the issuance of authorizations. We all know that the Netherlands has a problem with nitrogen. That makes it more difficult for a company such as TenneT to install power lines because that leads to the emission of nitrogen. But those power lines are required for the transition. Electric driving is also encouraged, but the electricity network is not yet suitably equipped to make that happen. It is my opinion that the government could look into these issues in a smarter way and apply the rules for nitrogen more flexibly to projects with an immediate positive impact on the energy transition.”