DATA REPORT: How do UK energy prices measure against the rest of Europe?

As the political debate over energy prices looks set to continue into 2015, Trevor Loveday compares the UK market to its European counterparts

Copenhagen is the worst place in Europe.  The Serbian capital Belgrade is the best place by a factor of almost five. Judgements based on the price of residential electricity supplies may not be the fairest way to appraise the virtues of Europe’s great cities but they illustrate how the disparity in energy pricing might be misrepresented. It’s a significant issue given the political thrashing around between the UK government and the opposition to find perceived unfairness in household energy bills that can be eradicated by a sweep of the policy hand.

Politicians and the media have questioned:

the extent to which wholesale costs govern retail price increases;

the level of “green taxes” included in energy bills that cover subsidies for renewables and energy efficiency measures;

the profit margin taken by the suppliers; and

the component in bills that covers network costs.

Figures reported by consultancy Vaasa ETT in its Household energy price index published in October indicate the spreads in residential prices paid in different European countries which are sometimes, but not always, substantial. They show also the variations in the proportions of the component costs that go into the bill which also include examples of outlying cases large median populations.

The Vaasa ETT study compares residential energy supply prices paid in European capitals as at September this year. The headline prices paint a version of events that shows British residential power prices are about 15 per cent below the European average. Green taxes are at close to the mean across the continent while wholesale costs are, as a proportion of the consumer’s bill, among the highest. And network costs are below the average in their part of the bill.

For gas Britain’s prices are among Europe’s lowest third at 20 per cent below the average with wholesale costs in the highest 20 per cent. Green taxes and network costs are very close and at the average respectively.

And Britain charges the lowest VAT rate on energy.

 Overall this is a supportive picture for UK energy companies – not much for politicians to shoot at.

Two countries stand out on electricity price with bills that more then 50 per cent greater that the average.  For those countries – Germany and Denmark – green taxes make up a huge chunk of the bill: some 36 per cent of the price of electricity in Denmark – three times the European average – and 56 per cent with VAT. Green taxes in Germany come to 28 per cent. Adding VAT takes the tax burden to 44 per cent. 

And Vaasa ETT found that the highest gas prices are paid in Stockholm – almost double the second highest (Copenhagen) and three times the average across 22 European countries. The significance of the gas price in Sweden’s capital is put in to perspective by the fact that hardly any household in Sweden uses gas.  The second highest bills are Copenhagen’s again with a 56 per cent tax component

On applying a compensation factor to energy prices to balance out differences in currencies’ purchasing power – the purchasing power standard (PPS) – countries’ rankings shifted substantially in a few instances (Table 1, below). PPS is a device developed by the EU statistics office, Eurostat. 

Table 1

Applying the PPS shifts the Central and Eastern European countries from the lowest price grouping in electricity and gas to one of the highest priced sets for each market. Otherwise the movements on adopting PPS in gas are zero or one quartile for most countries with a few more two quartile shifts in electricity. So the impact of applying PPS was limited for most European countries although Britain moved a few places down the price ranking in electricity and fell to second lowest in gas.

Once VAT is added to the mix along with transmission and distribution costs the proportion of costs attributable to wholesale energy ceases to be the largest slice of the power bill for all but four countries: Ireland, Britain, Italy and Greece. In gas the fuel cost makes up the majority of the bill in only half the countries in the report.

Green levies in Britain account for 11 per cent of the average electricity bill and 6 per cent of its gas counterpart according to energy regulator Ofgem. Vaasa ETT arrived at very similar figures.

The Vaasa ETT figures show a correlation between higher headline electricity and gas prices and the percentage of the bill taken by green levies. The gas bills in the half of the countries with the highest charges had an average green levy component of 12.5 per cent compared to 2.5 per cent among the rest while for electricity the green tax part was 13.3 per cent for the higher bills and 8.2 per cent for the rest.  However this was offset significantly by PPS which revealed higher prices in countries where green taxes were low or absent.

The investment in renewable and other sustainable energy measures supported by the green taxes are largely backed by both political sides. But in pondering whether and which to cut there are uncertainties that need to be addressed.

Uncertain costs

Recent cost figures for generation technologies by the UKERC in its report, Presenting the future, show enormous spreads in estimated levelised costs of onshore and offshore wind as well as CCGTs – all significantly greater than for nuclear. The levelised cost is the sum of all the costs incurred during the life of a power station, including capital expenditure, operations and maintenance, fuel and decommissioning costs, divided by the lifetime output from the plant.

Table 2

In the absence of any operating generation using carbon capture and storage (CCS) all cost estimates are wholly theoretical. Probably as a consequence they are widely variable with steady increases the only consistent feature. From 2000 to 2012, the starting level for projections for CCS levelised costs increased from  £45-70 million/MW to £0.8-1.6 billion /MW according the UKERC.

Even the standard issue combined cycle gas turbine (CCGT) has soared in the unpredictability of its costs. The UKERC study shows a range of forecasts out to 2050 of about £20/MWh to £40/MWh all made before gas prices became unstable around 2005. After 2005 the picture changes radically with forecasts ranging between about £30-120/MWh between 2015 and 2020 reaching £60-165/MWh in 2040.

Environmental fate

Our environment is in the hands of others.  In a report, Up in smoke, published in November think tank IPPR cited World Resources Institute league table of global emitters which places 27 per cent of the blame with China, 17 per cent with the US and 12 per cent with the EU. Another 14 per cent is roughly equally split between India, Russia and Japan while the rest are responsible for about 30 per cent.

A popular line among critics of the UK’s climate change policies is that the UK is doing more than its fair share to mitigate carbon emissions – and burdening UK consumers with more than there fair share of the cost. Meanwhile, the argument goes,  – others are carrying on regardless.  Data from IPPR (Table 2) supports that assessment to a degree but shows also that, other than Russia, the alleged recidivists have, at least recently, contributed in line with their pollution. And Germany and Italy top the munificence league.

Table 3

*Drawn from the EDGAR database created by the European Commission and the Netherlands Environmental Agency

IPPR reported that clean energy (renewables and electric cars) investment levels have increased more than five-fold from around $18 billion in the first half of 2004 to $97 billion in the first half of 2013 but there has been a downturn. Following a boom year in 2011 when nearly $275 billion, occurred financial incentives in many developed countries were withdrawn or expired and policy uncertainty grew in some clean energy markets, including the UK. But investments in countries outside the G20 increased by 52 per cent in 2012.

However, while investors may clamour the cost of keeping the environment in fact is a tab that a large and apparently growing number of UK consumers are not willing to pick up.

With only Estonia keeping the UK from the top place in the fuel poverty league, five million people unable to afford their energy bill form a powerful body of political support to be canvassed. But the people already in poverty are not the only ones with a compelling case for consideration by energy suppliers.

Figures from a government-commissioned study by consultancy London Economics indicate that energy prices place a heavier burden on UK paypackets than many of their counterparts in other industrialised countries.

Compared to average wage indices UK residential power prices were greater than the ratio in France but less than those experienced in Germany and were greater than an number of OECD countries (Table 3).

The story for gas is similar (Table 4).

Table 4

Table 5

Evidence elsewhere shows that the UK population is not robustly equipped for significant increases in energy prices.

The latest Eurostat figures (2011) on household wealth place the UK in 11^th position on the percentage of its population “at risk of poverty” out of the 27 EU countries and Iceland, Norway, Switzerland and Croatia.  Eurostat reported that 16.2 per cent of UK population fell into this category – defined as falling below 60 per cent of the national median household disposable income adjusted for numbers of children.  The highest were Bulgaria at 22.3 per cent Romania (22.2 per cent) and Spain (21.8 per cent). The lowest incidences were in Iceland (9.2 per cent) and the Czech Republic (9.8 per cent)

On looking at retired people, the UK was fourth of the 31 with 23.1 per cent at risk of poverty. And it lay in 10^th position for fully employed people at 7.8 per cent.

Table 6

Marginally speaking

Data on supplier profit margins are scant. London Economics provided “nominal supplier profits for gas and electricity that were questionable: for example the profit margin in electricity for the UK exceeded 20 percent.

However the London Economics figures did show that UK electricity profit margin was close to triple that in Germany, five times Italy’s and six times the margin in Portugal. For gas the UK profit margin was marginally ahead of those for Ireland and Portugal which were all about three time the margin in Italy.

UK power prices were outstripping inflation (Consumer Price Index) by a factor of more than two by 2008 according to IEA figures cited by London Economics. This had fallen to about 1.75 by 2010 grouping the UK close to the US and Canada. Of the OECD countries analysed Germany at about 2.3 CPI showed the highest growth rate in residential power prices. France was lowest at 0.75 times inflation.

A similar tale is told in gas with prices running at double inflation alongside France by 2010 after a 2008 peak of about 2.3 times CPI. Of the OECD group featured Switzerland was slightly higher than the UK and German gas prices had risen at three times CPI by 2010

Britain’s network costs component as a percentage of the final bill in electricity were at the average across the 23 countries studied by Vaasa ETT at 23 per cent. The gas network component in Britain was, at 26 per cent substantially below the 33 per cent average.

Summing up

On the basis of costs and comparisons with other countries there is little in the way of damning evidence against the UK energy companies pricing positions and costs. That said, power profit margin figures could signal excess margin but not so in gas.  And price increases at multiples of the inflation rate raise questions.

Wholesale costs in the UK are in the higher bracket compared to EU rivals and green levies are in keeping with the UK’s commitments to sustainability, with a premium that could be defended on the grounds of ambition to lead.  And there are substantial investment challenges before the energy sector coupled with uncertainty over cost and technology. This is an area where policy must play a part.

But the chief task for the administration is to address the financial pressure felt by consumers. Overall UK energy prices are in the lower reaches of the EU range. But the wherewithal of the UK population to bear those charges is another matter particularly should the recovery fail to pick up or worse stall.