Low UK energy prices are not the whole story

UK energy prices look low compared to the rest of Europe but it's not that simple, says SSE director of retail economics Richard Westoby.

The topic of how UK energy prices compare to those of our European neighbours is one I’ve blogged about a couple of times in the past. And in January a new report by the European Commission (largely lost in the slew of other documents setting out energy and climate proposals to 2030, amongst other things) again underlined this point.

The report highlights that UK domestic gas and electricity end prices are the cheapest and fifth cheapest respectively in the EU15.

However, there is a very important distinction between prices and the bill you end up paying. The other variable which influences the size of the bill is the amount of energy consumed. Despite having much cheaper energy prices than, say, Sweden, UK households end up paying more because we are much less energy efficient.

The end unit price of gas in Sweden is more than double that of the UK, which shows just how significant a factor the energy efficiency of our housing stock can be in determining how much we pay.

These kinds of comparisons are generally useful in getting a sense for how competitively priced energy is on a country-by-country basis. From that point of view, we welcome this report and applaud the efforts of the Commission in pulling together this information. But when it comes to exactly how bills are made up in different countries, like-for-like comparisons of the individual components can be misleading.

As Eurelectric – the EU-wide electricity trade body – pointed out last week: “The breakdown of other price components remains unclear. In many countries the cost of power generation support, most notably for renewables sources, is hidden in network costs and various taxes and levies. The Communication acknowledges that this makes a meaningful comparison between network charges and end-user prices across Europe impossible, but fails to explain the differences between countries sufficiently. This may lead the reader to draw wrong conclusions.”

Put simply, while the report does its best, it doesn’t necessarily compare apples with apples. For instance, UK network costs appear to account for a smaller proportion of the bill than they do in other countries, while the wholesale element seems disproportionately high.

This is because in the UK some network and metering costs such as transmission charges and the smart meter rollout are included in the energy or wholesale component, which is not the case for much of the rest of Europe. In some of the data, such as that compiled by Eurostat, social and environmental levies are included in the energy component for the UK.

Another major discrepancy is the fact that, in many member states, policy costs – particularly social policy costs – are paid for through general taxation rather than through energy bills. In the UK this isn’t the case, meaning that the end price that UK energy consumers pay for their energy is higher than it would be if, as is the case for many of our European neighbours, these costs were recouped through direct taxation rather than energy prices.

We’ve been campaigning for the government to take policy costs off energy bills and fund them through general taxation as this is a much fairer, more progressive approach based on an ability to pay, which would mean the fuel poor are better protected.

The government has taken an important step in the right direction by committing to provide all electricity customers with a £12 rebate in the autumn, funded through taxation for the next two years and providing a small amount of relief to customers from the burden of social and environmental schemes on their bills. But we think there’s more to be done and we hope that in time all policy costs will be paid for through taxation.

Another more progressive solution on the table is the idea of recycling the revenues the government receives from carbon taxes, also paid for by consumers through their energy bills, into funding energy efficiency programmes.

This idea, put forward by the Energy Bill Revolution campaign group, would have the advantage of reducing energy consumption and therefore bills by using existing revenues already paid for by energy consumers. Countries including France and Germany have already pledged to adopt this approach.

So overall, the report highlights that despite the relatively low prices paid by customers in the UK, it is difficult to draw meaningful comparisons between the different components of the bill and more work needs to be done to improve transparency in this area, so consumers across Europe know that what they are paying for is fair.

In our view, the UK still has a lot to do to improve the efficiency of its homes, bring costs down and ensure they are paid for more fairly. We’ll continue to campaign for progress in this area, and we are encouraged to see that the Commission’s report agrees that “it is generally more efficient to protect such vulnerable consumers through social policy measures rather than through energy pricing”.