Vive la difference in energy prices?

The cost of energy varies wildly between EU member states

EU policymakers and regulators have been working on the completion of the European energy market for decades, with significant benefits on the horizon for security of supply, energy prices and the expansion of low-carbon energy.

There has been progress in the development of common network codes, the integration of wholesale markets and building an interconnected European grid. Interconnection capacity exceeded 8 per cent of installed European capacity last year, not far off the 10 per cent interconnection target Europe has set itself for 2020. The new 15 per cent target for 2030 seems within reach.

A modest amount of interconnection already enables a large amount of trading: only net flows have to be physically transmitted.

So it is surprising that energy prices in individual countries are increasingly and markedly different. The price of electricity in the central and western European region, including Germany and France, was the same for 65 per cent of the time in 2011, but this plummeted to less than 20 per cent of the time in 2013, the most recent year for which there is available data. The price of electricity was the same only between 5 and 10 per cent of the time in the same period between the UK, Ireland and France.

The first reason is the differing energy mixes. Energy policy is becoming more national, and the EU’s 2030 framework will further accelerate this trend. Fossil fuel prices are volatile and have a markedly different impact on prices in the various national markets. For example, Germany has significantly higher coal capacity than the Netherlands.

The second reason is the lack of physical interconnection. For example, interconnection is lacking between France and Italy (where the highest savings could be made), between France and Spain (where agreement between TSOs was recently reached after years of negotiations) and around the North Sea.

The third reason is the asymmetric impact of price convergence. Whenever prices converge, generators in low-price zones receive higher prices and thus benefit, whereas generators in high price zones lose out.

With this in mind, will the European energy market ever be complete? As the energy sector goes through a radical transformation, individual countries forge ahead at different speeds. In the mid to long term, energy policies should start to look more similar again centred on renewables. As soon as energy policies re-converge, wholesale markets will follow.

Martin Schoenberg, head of policy, Climate Change Capital