Are we seeing deindustrialization or the effect of bad choices?

Introduction

Talk of deindustrialization in Europe is somewhat misleading. For decades, industrial production has grown alongside rising energy costs. The real disruption began when the war in Ukraine led to extreme volatility in natural gas prices, exacerbating an already inefficient electricity pricing system that ties electricity costs to gas prices. Instead of being the result of a natural economic shift, the current crisis is a consequence of failing to act decisively in reducing industry’s reliance on natural gas and reforming the electricity market.

Since the signing of international climate agreements like Kyoto (1997) and Paris (2015), governments and industries have repeatedly committed to lowering fossil fuel dependency. Yet, rather than really investing in electrification, renewables, and industrial transformation at the necessary scale, natural gas remained the backbone of industrial energy supply. Now, with supply disruptions and price volatility, the consequences of this delay are fully visible.

Natural gas and the electricity pricing problem

The EU’s electricity pricing model has further intensified the crisis. Under the current marginal pricing system, the most expensive power source, often natural gas, sets the electricity price for the entire market. While renewables like wind and solar have become the cheapest sources of power, their cost advantages are not directly passed on to consumers and industry. As gas prices soared in 2022, so did electricity costs, creating an unsustainable burden on both households and energy-intensive industries.

This crisis was not inevitable. Had industrial policy prioritized reducing natural gas dependency earlier, electricity costs would be less exposed to fossil fuel price swings. Instead, companies and policymakers assumed that cheap and stable natural gas would always be available, a miscalculation that is now costing Europe dearly. The EU actually recognizes this with the fit for 55 and repower EU package. 

The necessary shift: electrification and grid reinforcement

The solution is not to cling to natural gas but to accelerate the shift toward electrification. Industrial processes that currently rely on gas, such as steel production, chemical manufacturing, and ceramics must transition to electricity-powered alternatives. However, this shift requires significant grid reinforcement to handle higher electricity demand and distribute low-cost renewable power efficiently.

Strengthening grid infrastructure is crucial to making full use of renewables, which, unlike fossil fuels, have near-zero marginal costs once installed. Currently, net congestion in parts of Europe prevents industries from accessing available renewable power, forcing them to rely on expensive gas-based electricity instead. Addressing these bottlenecks should be a top priority for policymakers. And should have been so much earlier. In the short term this will hurt a little but reverting back to natural gas is not the solution. 

A sustainable industrial model for Europe

The only viable path forward is a proactive, long-term strategy that reduces industrial reliance on natural gas while maintaining competitiveness. Key steps include:

• Accelerating industrial electrification: The faster industries move away from gas, the more they will benefit from lower electricity costs tied to renewables rather than volatile fossil fuels
• Expanding and modernizing the electricity grid: Grid congestion is a major barrier to using renewable energy efficiently. Investments in transmission and storage infrastructure will be essential but indeed takes time now
• Providing targeted support for industries in transition: Some sectors face structural barriers to immediate electrification. In the short term, temporary subsidies or contracts for difference (CfDs) could help stabilize costs for industries affected by gas price volatility
• Reforming the electricity pricing model: Decoupling electricity prices from natural gas would allow consumers and industries to benefit from the lower costs of renewables, making European industry more competitive

Conclusion

Europe is not deindustrializing it is facing the consequences of delayed action on energy transition and over reliance on natural gas. The current crisis should serve as a wake-up call but not lead to going back on the real solution which is increasing the supply of renewable electricity. If Europe had followed through on past commitments to reduce natural gas reliance, the energy crisis would have been far less severe. Now, the way forward is clear: accelerating electrification, reinforcing the grid, adding storage, utilizing hydrogen and CCS where appropriate and ensuring that industrial energy policies align with the cost advantages of renewables. The true risk to European industry is not moving away from natural gas, it is failing to move fast enough.

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