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European Electricity Prices Rising

April 23rd, 2014 by Fereidoon Sioshansi, EEnergy Informer

“European consumers’ electricity and gas prices have risen and are still rising,” is a good summary of a recent report, Energy Costs & Prices in Europe, released by the European Commission in Brussels. Moreover, whilst almost all Member States have seen a consistent rise in consumer prices of electricity and gas, the differences between national prices remain large: consumers in the highest priced Member States are paying 2.5 to 4 times as much as those in the lowest priced Member States.

The gap between the highest and lowest prices paid for electricity and gas by consumers across Member States has widened over time, especially in the case of household gas prices. So while the intention was for the prices to converge and for markets to become more efficient and harmonized, differences at national level persist and/or are diverging.

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The recent EC report identifies the components of costs and pinpoints why they have risen and will continue to do so – more or less regardless of what bureaucrats at the Commission or member state capitals say or do.

The main culprit in a number of high cost European countries has been the rising taxes and levies that support rapid growth of renewables. The energy component of electricity costs, certainly the wholesale cost of generation, has in fact been declining as renewables and self-generation erodes the livelihood of thermal plants.

Wholesale electricity prices, the EC points out, have declined roughly 35-45% between 2008-12 on major European trading hubs and remain depressed. Nobody can blame the large incumbent utilities for the rising retail tariffs – who have been complaining bitterly about their unenviable plight. As illustrated in graph on top of page 11, during this period, electricity network costs rose 18.5% for households, 30% for industrial consumers while taxes and levies rose a whopping 36% and 127%, respectively – the latter excludes industries that have been spared due to exemptions.

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Not surprisingly, European consumers, always frugal by US standards, have been embracing energy efficiency measure by better insulating their homes, buying more efficient appliances and so on.

A stunning testimony to just how European households are becoming even more efficient is the graph below left that shows energy consumption, both gas and electric, for household heating for the period 2000-11.

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Rising household tariffs, as every politician knows, is painful. But so is the plight of energy-intensive industry, who sustains many households. Moreover, households may complain but are unlikely to move due to rising tariffs. Industrial customers complain and have the option to relocate if going gets tough.

Which explain why European energy-intensive industries receive exemptions and other forms of support, a highly contentious issue for EC who frown on special subsidies and favors. A number of import-exposed industries have been complaining, with some justification that they can no longer compete with their American or Asian rivals.

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In Germany, which has been in the news lately due to its rapidly rising renewable levies and its abrupt decision to phase out its remaining nuclear reactors by 2022, many customers have decided to generate more of what they consume. According to Michael Salcher, head of KPMG’s energy practice in Germany, customers who self-generate can cut their electricity bills by as much as 50% by avoiding the surcharges and levies that go on top of already high retail tariffs.

According to a recent article in the Wall Street Journal (3 March 2014), an estimated 16% of German companies generated their own power by mid-2013, up from 10% a year earlier. The German Chamber of Commerce says a further 23% of companies surveyed indicated that they were considering doing the same. This is not good news for utilities that lose them as customers.

In the case of Germany, the rapid rise of distributed generation (DG) reduces revenues leading to even higher prices for the remaining customers, a death spiral scenario. No wonder the two biggest incumbents E.ON and RWE have been complaining.

The same challenges face the big 7 European utilities, to varying degrees. In late Feb 2014, GDF Suez SA wrote down €14.9 billion ($20.4 billion) in assets blaming the flood of renewables, which have zero marginal costs and are increasingly making life difficult for thermal generators. Its CEO, Gerard Mestrallet, said, “We consider that the deterioration of gas storage and thermal energy production in Europe is deep and long lasting.” GDF has already mothballed roughly 10 GW of capacity with another 5 GW under review.

Speaking on behalf of the 10 largest European utilities in 2013, known as the Magritte Group (see Dec 2013 issue), Mestrallet has repeatedly stated that renewable subsidies are making traditional centralized utility generation business a losing proposition.

As companies like GDF Suez begin to shed assets and lay off workers, the message is reverberating across EU. In January 2014, RWE said it would write down $4.5 billion in thermal generation assets, following similar moves by its bigger rival, E.ON who has also been trimming down in the past 2 years.

F.P. Shioshansi

This post is extracted from EEnergy Informer, April 2014 issue.

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One Response to “European Electricity Prices Rising”

  1. MI Wenkai Says:

    With rising electricity prices, it’s important to figure out the reasons. As the electricity price can be divided into three elements: energy-related element, network element and taxes and levies, we can analyze the increases separately.
    Firstly, whether for the retail household price or the retail industry price, it’s been stabilized during the last years: in the EU28 countries, for the household this element has risen less than 10% and the industry has a negative number. In a healthy open market, the energy and supply cost can reflect well the generation cost, as represented by an efficiently functioning wholesale market. Moreover, there should be some pricing signals, providing a strong link between wholesale market and retail market. But many of EU markets have partially transformed into open market in recent years. But the consumers are not sensitive to pricing and don’t switch across offers of supplier or switch suppliers. In the past 12 months, only 4% of consumers have switched products or services with their existing provider and 7% switched supplier. A European Commission’s 2010 in-depth market study estimate that 62% of consumers could switch to a cheaper tariff, representing a potential average annual saving of EUR 13 billion EU-wide. Reasons could be obscure information, complicated procedure or behavior inertia.
    Secondly, network element can be divided to infrastructure cost, system services, network loss and other charge. Renewable energies bring changes not only in the level of energy and supply, in the transmission tariff, the support to wind power or solar energy would lead to a big part of other charge. In Denmark, this is the case where other charge is twice of other costs.
    In the tax-related terms, VAT in most EU countries varies between 15% and 25%. But once again, renewable energies result in huge increase in taxes and levies. In 5 Member States, Germany is in the first place due to its renewable strategies these years, support for renewable electricity generation in 2012 accounts for more than 10% of household electricity price, excluding VAT. Concerning the industry, this number can be even close to 30%. Heavy taxes may put consumers in the energy intensive sectors in a disfavor position facing the competition from the import goods. In order to improve their competitiveness, tax exemptions are given by many governments. For example, in German certain energy intensive sectors pay a rate on electricity consumption below the rates for businesses.
    In a word, electricity market is being in a transmission period. From a regulated market to a liberalized one, from a carbonized market to a mix one. Maybe we will suffer for years those problems but we have been always trying to make our power system more efficient in the short-term and improve its environmental performance in the long run.

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