European Commission reveals: EU governments push up energy prices dramatically

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Copyright: ShalomTesciuba

Copyright: ShalomTesciuba

Retail energy prices are rising dramatically across Europe even as wholesale prices and consumption are coming down. Taxes and levies – set by national governments – are the main culprit, says the European Commission. Energy Post offers a sneak preview of an analysis of energy prices and costs expected from the European Commission on 22nd January.

The European Commission has nearly finalised its policy paper on energy prices and costs, plus an analysis of their drivers and implications. Below, Energy Post gives a “top 10” selection of insights from the analysis, based on the latest draft. The paper is due to be formally approved by all 28 Commissioners on 22 January. It will be issued alongside a new industrial policy for Europe (see our article “Climate policy bumps into competitiveness in Europe”), 2030 climate and energy proposals and non-binding guidelines for shale gas development.

  1. Electricity retail prices are rising despite wholesale prices coming down. Wholesale electricity prices declined by 35-45% from 2008-12, even as retail prices rose by 17.5% for industry and 20% for households. Wholesale prices have converged – thanks to EU energy policies – even as retail prices continue to diverge. The Commission plants to launch “an action plan on retail markets” by the summer.
  1. Gas prices for industry have increased by less than inflation. They grew by less than 1% a year from 2008-12; for households, they grew by 3% a year. In comparison, retail electricity prices rose by 3.5% a year for industry and 4% a year for households.
  1. Taxes and levies are primarily responsible for driving up European electricity prices. Since 2008, this is the component of the retail price that has seen the greatest increase: 36.5% for households and 127% for industry (not counting exemptions). This has not helped competitiveness: EU electricity and gas taxation is higher than elsewhere in the world.
  1. Electricity and gas prices could be a lot more competitive. Over half of EU households still face some kind of electricity price regulation. This curbs the scope for competition and the potential for the drop in wholesale prices to be reflected in retail prices. Vulnerable consumers should ideally be protected through social or industrial policy. Over half of the gas used in Europe is still indexed to oil.
  1. Energy costs for households and industry have increased even as consumption has decreased. Energy efficiency improvements have been insufficient to keep up with rising prices. Households’ share of budget for energy grew by 15% from 2008-12 although electricity consumption dropped by 1% and gas consumption by 15% from 2008-11. Industry consumed 4% less electricity but paid 4% more in for it in total.
  1. Retail prices are diverging, not converging across Europe. The gap between the highest and lowest prices paid for electricity and gas by consumers across member states has grown over time, especially for households. Consumers in the most expensive member states pay 2.5-4 times as much as those in the cheapest.
  1. European averages hide tremendous variation. National increases in household electricity prices range from -34% to +55% and although the average EU gas price rose by less than 1% a year for 2008-12, some industries reported rises of 27-40% from 2010-12.
  1. Network costs are the hardest to understand. Gas is particularly difficult. Even for electricity, there is great variation among member states driven by national differences on network tariffs and the physical infrastructure in place.
  1. The energy price gap between the EU and other major partners is growing. EU industry gas prices are 3-4 times more than in the US, India and Russia, and 12% more than in China. EU industrial electricity prices are more than double those in the US and Russia, and 20% more than in China (although 20% less than in Japan). The Commission posits that European electricity supply is more reliable than elsewhere, however.
  1. EU energy-intensive goods still dominate global export markets. This is true despite the widening disparities in energy prices since 2008. But the International Energy Agency (IEA) predicts that this share will go down, with energy prices as one driving factor; others include recession in Europe and global shifts in demand.

Underpinning this European Commission paper on energy prices and costs is a much more detailed analysis of this issue prepared by the Commission’s Economic and Financial Affairs department. Energy Post will therefore follow up next week with a more in-depth analysis of what make energy prices tick in Europe and how they compare to the rest of the world.

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