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Document 52016SC0420

COMMISSION STAFF WORKING DOCUMENT Accompanying the document REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Energy prices and costs in Europe

SWD/2016/0420 final

Brussels, 30.11.2016

SWD(2016) 420 final

COMMISSION STAFF WORKING DOCUMENT

Accompanying the document

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS

Energy prices and costs in Europe

{COM(2016) 769 final}


Contents

Introduction    

Energy prices    

1    Electricity prices    

1.1    Wholesale electricity prices    

1.2    Retail electricity prices    

1.2.1    Household Electricity Prices    

1.2.1.1    Price evolution – Total prices    

1.2.1.2    Price drivers – Main components    

1.2.1.3    Price drivers – Sub- components    

1.2.2    Industrial Electricity Prices    

1.2.2.1    Price evolution – Total prices    

1.2.2.2    Price drivers – Main components    

1.2.2.3    Price drivers – Sub- components    

1.2.3    Small vs. Large Industrial Consumer Prices    

1.2.3.1    Price evolution – Total prices    

1.2.3.2    Price drivers – Main components    

1.2.3.3    Price drivers – Sub- components    



Figure 1 – Monthly (day-ahead) wholesale electricity prices in European regions    

Figure 2Monthly (day-ahead) wholesale electricity prices in Spain, Italy and Greece    

Figure 3 –Wholesale electricity prices–European average, maximum and minimum    

Figure 4 –Wholesale electricity prices in Europe, United States, Japan and Australia    

Figure 5 – Power generation from different energy sources in the EU    

Figure 6 –EU electricity prices vs coal, gas prices and renewables share in EU power generation.    

Figure 7 - Composition of average electricity prices over time    

Figure 8 - Evolution of the EU average household price (DC)    

Figure 9 - Household electricity prices by country in 2015 (DC)    

Figure 10 - Nominal price changes & prices relative to EU av. in 2015 for households (DC)    

Figure 11 – Household electricity prices by country (DC)    

Figure 12 - Weighted EU average household components (DC)    

Figure 13 – Minutes of electricity supply disruption in EU Member States, 2013    

Figure 14 – Customer satisfaction with electricity supply in the EU and G-20 countries    

Figure 15 - Weighted average levels of taxes and levies for median households (DC)    

Figure 16 - Share of EU average components for households (DC)    

Figure 17 - Price components by country in 2015 for households (DC)    

Figure 18 - Share of price components by country in 2015 for households (DC)    

Figure 19 – Transmission & distribution shares in network tariffs in 2015 for households (DC)    

Figure 20 - Composition of (EU weighted av.) Taxes & levies in 2015 for households (DC)    

Figure 21 – Share of sub-components in (weighted EU av.) Taxes and Levies for households (DC)    

Figure 22 - Household (DC) VAT costs in 2015 by country    

Figure 23 - Evolution of the EU weighted average RES support cost for households (DC)    

Figure 24 – EU average RES & CHP costs relative to EU average total price for households (DC)    

Figure 25 - Nominal RES and CHP support cost by country in 2015 for households (DC)    

Figure 26 – Share of RES & CHP support costs in national prices in 2015 (DC)    

Figure 27 - Nominal cost of not- earmarked taxes for households (DC) in 2015    

Figure 28 - Share of not-earmarked taxes(excl. VAT)in national prices in 2015 for households(DC)    

Figure 29 - Nominal cost of social charges for households (DC) in 2015 by country    

Figure 30 - Share of social charges in national prices in 2015 for households (DC)    

Figure 31 - Nominal security of supply support cost for households (DC) in 2015 by country    

Figure 32 - Evolution of the weighted average EU electricity price for industrial consumers (ID)    

Figure 33 – Total prices for industrial consumers (ID) by country in 2015    

Figure 34 - Nominal price changes & prices relative to EU av. price for industry (ID)    

Figure 35 - Industrial (ID) price levels by reporting period and country    

Figure 36 - Evolution of industrial (ID) EU weighted average components    

Figure 37 - EU weighted average cost of taxes and levies in 2015 for industrial consumers (ID)    

Figure 38 - Share of components in the EU average price for industrial consumers (ID)    

Figure 39 - Total prices by component and country in 2015 for industrial consumers (ID)    

Figure 40 – Shares of price components in the total price by country in 2015 for industry (ID)    

Figure 41 – Shares of transmission and distribution costs in 2015 for industry (ID)    

Figure 42 - Sub-components in Taxes and Levies in 2015 for industry (ID)    

Figure 43 – Share of sub-components in Taxes and levies in 2015 for industry (ID)    

Figure 44 - Evolution of (weighted EU av.) RES & CHP support cost for industry (ID)    

Figure 45 – Share of RES& CHP support costs in the EU price over time for industry (ID)    

Figure 46 - Nominal RES & CHP support cost in 2015 by country for industry (ID)    

Figure 47 -– Share of RES & CHP support costs in national prices for industry (ID) in 2015    

Figure 48 – Cost of not-earmarked taxes (excl. VAT) for industry (ID) in 2015    

Figure 49 - Share of not-earmarked taxes (excl. VAT) in national prices for industry (ID) in 2015    

Figure 50 - Social charges by country in 2015 for industrial consumers (ID) in 2015    

Figure 51 - Share of social costs in national prices for industry (ID) in 2015    

Figure 52 - Security of supply charges for industry (ID) in 2015    

Figure 53 - Evolution of weighted EU average prices for small and large industrial consumers    

Figure 54 - Small and large industrial prices by country in 2015    

Figure 55 - Price changes & prices relative to EU av. in 2015 for small industrial consumers (IB)    

Figure 56 - Price changes & prices relative to EU av. in 2015 for large industrial consumers (IF)    

Figure 57 - EU weighted average components for small and large industrial consumers    

Figure 58 - Weighted av. of taxes and levies for small and large industrial consumers    

Figure 59 - Share of (EU weighted av.) components for small and large industrial consumers    

Figure 60 - Price components by country in 2015 for small and large industrial consumers    

Figure 61 - Share of price components by country in 2015 for small and large industrial consumers    

Figure 62 – Shares of transmission & distribution charges in 2015 -for small and large industry    

Figure 63 - Evolution of average RES & CHP support costs    

Figure 64 – Share of RES and CHP support costs in the average EU price over time    

Figure 65 - RES & CHP support costs by country in 2015    

Figure 66 – Share of RES and CHP supports costs in 2015 by country    



Table 1. Evolution and share of price components by consumer type    

Table 2. Price dispersion by consumer type    

Table 3. Overview of taxes and levies sub- components for small industrial electricity consumers (IB)    

Table 4. Overview of taxes and levies sub- components for large industrial electricity consumers (IF)    



Introduction

Having a good understanding of the evolution and drivers of energy prices and costs is essential. In a market economy prices are signals that allow for an efficient allocation of resources. Prices have an impact on costs, influencing our consumption and investment decisions.

Energy prices and costs are important for our economic growth, our personal budget and the competitiveness of our industry. Their economic impact can also affect the achievement of our energy and climate policy objectives. The cost-effectiveness of policy measures can also be related to the impact of such measures on energy prices and costs.

The Energy Union acknowledges that, and the EU energy policy initiatives to implement it are well aligned with this idea. The security of supply gas package (February 2016) and the recent package of legislative proposals (November 2016) for the promotion of energy efficiency, renewable energy sources as well as for a new market design for the electricity market; all have been devised by the European Commission taking into account the interactions and impact on energy prices and costs.

In January 2014 the Commission published a report on energy prices and costs in response to a request from the European Council. The report was widely welcomed and the EU Ministers for energy of the EU requested a follow up. The Commission acknowledged the importance of having a good understanding of energy prices and costs for reaching a fully functioning internal energy market and included the presentation of biennial analysis on energy prices and costs as an Action of the Strategy Framework for the Energy Union 1 .

This report aims to shed more light on how energy prices evolved and which were the drivers of prices. The impact of energy prices and costs will also be looked at. The report also provides a general analysis of the energy costs' impact on the international competitiveness of EU industry by looking at the energy costs structures of EU sectors in an international perspective. It also looks more in detail to some sectors via specific case studies. The impact of energy prices on energy expenditure is also addressed in particular as regards that impact across different income levels of households in the EU.

The report relies on recent studies commissioned by the European Commission which partially address all these areas. In-house analysis from the Commission services completes the inputs on which this report is based. The quality of the analysis provided in the report is to a great extent owed to the high quality data on electricity and gas prices and on households energy expenditure collected by the Commission Services during the last months of 2015. This has allowed for an analysis which already includes 2015 data as well for an unprecedented level of detail in the subcomponents of electricity and gas prices.

The report goes deeper in the analysis of components with more detailed analysis of subcomponents. It provides analysis on the two main price subcomponents of energy networks (transmission and distribution). It also provides a rather detailed analysis of price subcomponents of taxes and levies, which allow us to identify the different impact on prices of taxes and levies used to finance certain policies (those used for supporting RES+CHP, nuclear, security of supply or social measures, etc.) as well as others taxes and levies used for other purposes (financing market or system operation, as well as fiscal needs).

For electricity, gas and oil products, each chapter begins by looking at the developments in prices in the wholesale market and its drivers. Then retail price drivers and interactions between the wholesale and the retail market are examined. The report provides the most rigorous and exhaustive exploration of the data to date, and a more solid understanding of the factors driving energy prices in the EU.

The report then turns to the energy costs for the economy, households and industry. It shows the favourable evolution of the energy import bill of the EU in the last years and the underlying factors that have been driving down the bill. The report then makes a detail analysis of the impact of energy expenditure on households, looking at what factors explain such evolutions like the prices and consumption on different energy carriers (electricity, gas, solid fuels, etc.) and most importantly how energy expenditure affects households with different income levels.

The report also provides the industry perspective and makes an overview of the competitiveness of the EU and analyse the role of energy in the EU's competitiveness. Based on the results of various studies, the report details EU energy intensive sectors, i.e. those industries where energy can be a factor for competitiveness. In some selected energy intensive industries the report provides the evolution of energy costs shares and profit margins and makes a price sensitivity analysis. It then compares with EU trading partners EU industry prices, energy costs shares and profit margins as well as other indicators such as energy intensity. A synthesis of various studies with specific case studies of sectors and market products is made in order to provide a more detailed perspective of competitiveness developments in certain energy industries.

To complete the assessment of energy prices, the role of energy subsidies in the EU is addressed in the final chapters, as well as the implications for the development of government revenues and for inflation.


Energy prices

1Electricity prices

1.1Wholesale electricity prices

Over the last decade wholesale electricity markets in Europe have undergone fundamental transition in parallel with regulatory changes at national and EU level. In almost all EU Member States organised wholesale electricity exchange markets have been established, providing for trading opportunities for day-ahead, forward and intraday contracts, giving the right price signals for producers and consumers of electric power. Besides organised power trading platforms the so-called over-the-counter (OTC) markets also have an important role, especially in settling bilateral contracts between sellers and buyers of electricity.

Most of the European wholesale electricity markets are being linked together by market coupling, enhancing the potential welfare benefits of cross-border electricity trade and contributing to better price convergence across markets. Increasing market liquidity, cross-border trade in electricity and wholesale market coupling have all substantially contributed to the integration of national markets and to the realisation of the functioning European internal electricity market, especially for day-ahead and forward power contracts. However, even full market integration cannot assure perfect wholesale price convergence over time, therefore price volatility should be addressed by the market participants, through optimising their purchase contracts and hedging risk arising from price volatility.

In this subchapter the evolution of wholesale electricity prices between 2008 and early 2016 and the main drivers behind are analysed; focussing on the day-ahead base load contracts in different European markets, as the most detailed data we have are related to the day-ahead market.

Main findings

Although integration of wholesale electricity markets in the EU has been advancing well over the last few years, this has not necessarily resulted in perfect price convergence across different regions. However, in the first quarter of 2008 the price difference between the most expensive and the cheapest European wholesale electricity market was 44 €/MWh, eight years later this difference has shrunk to 24 €/MWh.

In parallel with high fossil fuel prices, European wholesale electricity prices peaked in the third quarter of 2008; then fell back as the economic crisis broke out, and slightly recovered between 2009 and 2012.

However, since 2012 wholesale prices have been decreasing, due to lower fossil fuel prices, increasing share of renewables in the EU power generation mix and low demand as electricity consumption decoupled from an already low economic growth, leading in various markets to overcapacity in power generation.

Compared to the average of 2008, the pan-European benchmark for wholesale electricity prices were down by 55% in the first quarter of 201, reaching 33 €/MWh on average, which was the lowest in the last twelve years.

Regional wholesale electricity benchmarks followed more or less the same trend since 2008, however, regional features, such as diverse electricity mixes, market couplings and interconnector capacities might substantially influence regional prices, especially on the short run.

As both coal import prices and natural gas prices decreased significantly since 2011/2012 the competition between the two fuels are rather influenced by other factors, such as low carbon prices. The share of natural gas has been permanently dwindling in the EU power generation mix, however as a result of unfavourable coal to gas ratios, large RES penetration and low carbon prices.

Different market factors, such as fuel mixes, renewables share, cross border flows and markets couplings and supplier concentration have different impacts on the wholesale price level.

While increasing share of renewable energy sources generally has decreasing impact on wholesale electricity prices, increase in coal, gas or carbon emission prices normally increases the price level, however, by different magnitudes in different regions in the EU and depending on the fuel source that is being replaced in the power generation mix.

Market concentration (the combined share of the top three electricity suppliers) and cross-border flows only have minor impact on the wholesale electricity price level at EU average.

Countries participating in market couplings normally have better wholesale electricity price convergence with their neighbours and temporary price differences are faster eliminated. Surpassing of the 10% threshold in electricity interconnection capacity only has a minor impact on electricity price level.

The influence of each market factor might strongly very across different regions. For example, the share of renewables and carbon prices have strong impact on wholesale price evolution in North Western Europe, while in Central and Eastern Europe the main price driver is the share of coal and gas in the generation mix.

Regional wholesale price comparison

As price evolution on national markets are being more and more interlinked with neighbouring markets, it is reasonable to make a comparison across Europe through looking at regional price benchmarks. The Central Western European power region (CWE) comprises of six countries, such as Germany, France, Belgium, the Netherlands and Luxembourg; and as Austria is practically the same pricing area as Germany, this country is also part of the CWE region. Since 2010 market coupling has been implemented, linking together the markets of the CWE region. The Nordpool region comprises of the non-EU member Norway, and other EU countries, such as Sweden, Denmark, Finland, Estonia, Latvia, and Lithuania. The market coupling, existing since the 1990ies in the Nordic region, was extended in 2012-2013 on the three Baltic States.

In February 2014 the CWE region, the Nordic region and the United Kingdom were linked together in a larger North-Western Europe coupled area (NWE), and this market coupling was extended in May 2014 to the Iberian region (Spain and Portugal). Although Ireland is not yet coupled with the NWE region, market developments in the UK strongly impact the Irish power market. In early 2015 Italy was also coupled with the NWE region. In May 2015 the so-called flow based coupling was implemented in the NWE region, contributing to significant increase in cross border electricity flows.

In Central and Eastern Europe (CEE region) four countries (Czech Republic, Slovakia, Hungary and Romania) are coupled since November 2014, while Poland is price coupled with Sweden.

Greece has an own functioning wholesale trading exchange, however, the Greek market is not coupled with any of its EU neighbours. In Bulgaria the new electricity exchange is operational since January 2016, while Croatia and Cyprus still do not have an own wholesale electricity exchange market. Malta is linked with Italy though an electricity interconnector since 2015, though it does not have an own functioning electricity trading platform.

In the following part the Platt's Pan-European Power Index (PEP) is used as European benchmark in order to show how regional average day-ahead wholesale electricity prices compare to each other and how they compare to the European average.

The next two charts ( Figure 1 ) and ( Figure 2 ) show the monthly evolution of the main regional and national wholesale day-ahead base load contracts since the beginning of 2008. Due to high fossil fuel prices in mid-2008, most of the wholesale prices and the PEP benchmark index as well reached its peak in the third quarter of 2008, and shortly after a steep fall in prices followed in parallel with the outbreak of the 2008-2009 economic crisis; resulting in a dramatic decrease in electricity demand in whole Europe.

As from mid-2009 the EU economy started to recover, demand for electricity also started to increase, however, there are clear signs of decoupling of electricity demand from the economic growth in the EU. Demand for electricity in the EU-28 grew less than the GDP over the last five-six years, which points to decreasing electricity intensity of the EU economy. Since the beginning of 2012 the PEP benchmark is on a downward path, owing to decreasing electricity generation costs besides subdued demand for power. At the beginning of 2016 the PEP fell to 30 €/MWh, being an unprecedented low level in the last twelve years.

Although general trends of wholesale price developments were quite similar across the EU, there were significant differences over the last few years between regional markets. As Figure 1 shows, both Central Western and Central Eastern European regional averages followed closely the PEP benchmark. In the CWE region increasing share of renewables in Germany helped in pushing down electricity generation costs and in France the large share of nuclear in the power mix assured low-cost base load electricity generation. In the CEE region the role of coal (mainly in Poland and Czech Republic) and nuclear is important in assuring competitive base load power generation. Hydro generation has an important share in Romania and the import of hydro-based electricity, generated in the Balkans, also improves regional electricity supply, contributing to competitive price levels.

Wholesale electricity prices in the Nordic markets have been more volatile than the PEP benchmark, primarily owing to the importance of hydro in the regional generation mix. During cold and dry periods (with low hydro reservoir levels and generation), like at the beginning of 2010 and 2011, regional price spikes occurred, while during summer wet periods, like in July 2012 or July 2015 the Nordpool system price fell as low as 10 €/MWh on monthly average. Besides hydro power nuclear generation in Sweden and Finland also contributed to competitive regional base load prices. However, in the Baltic States and to lesser extent in Finland the local wholesale price has had significant premium for a long time as the lack of sufficient level of electricity interconnections hampered the flow of cheap hydro-based power to these countries. The inauguration of the LitPol and Nordbalt interconnectors in December 2015, linking Lithuania with Sweden and Poland, helped in reducing the price premium of the Baltic markets to other parts of the Nordpool coupled area, which underlines the importance of physical interconnections in the accomplishment of the EU internal electricity market.

In the United Kingdom the role of natural gas is decisive in setting the marginal electricity generation costs and thus the wholesale market prices. As until recent times the costs of generating electricity from natural gas remained high compared to other energy sources, the UK had a measurable price premium compared to continental Europe during the last three-four years (bearing in mind that in the CWE region renewables became an important wholesale electricity driver in the last few years). In order to comply with environmental standards, significant coal fired generation capacities have been retired in the country over the last three-four years, reducing the opportunity to generate power from cheap coal sources. Furthermore, due to the limited level of electricity interconnections between the UK and the CWE region, the UK could not import sufficient quantity of electricity that would have offered a competitive alternative to domestic generation.

Figure 1 – Monthly (day-ahead) wholesale electricity prices in European regions

Source: Platts and European power exchanges

As hydro generation plays a significant role in the electricity mix in the Iberian peninsula (Spain and Portugal, constituting a market with practically identical prices in both countries), volatility of wholesale prices is greater compared to the PEP benchmark. Wind and solar generation play an increasing role in the Iberian market, and in Spain nuclear has also a significant share. During winter periods hydro generation normally reaches its seasonal peak and wholesale prices are low (e.g.: In February-March of 2010, 2013 and 2014 the wholesale price fell until 20 €/MWh on average). During the dry summer season when high temperatures result in increasing demand for electricity (residential cooling needs), wholesale prices are higher than in other periods of the year. The summer period also coincides with the onset of the planned maintenance period of nuclear generation capacities, which result in switching to costlier coal and gas fired generation, especially in the periods of lower availability of intermittent generation sources (e.g.: wind and solar). Although in 2015 electricity interconnection between France and Spain has been reinforced, existing capacities are still not optimal to reduce price volatility in both markets through enabling sufficient cross-border electricity flows.

Over the last few years, as presented on Figure 2 , Italy has always had a measurable price premium to the PEP benchmark, primarily owing to the country's structural import dependency on electricity and the large share of natural gas in its domestic generation mix. As natural gas prices decreased since the beginning of 2012 and the share of renewables (solar and wind) increased in the Italian generation mix, the wholesale price premium to major European peers shrank significantly. During hot summer periods when residential cooling needs increase significantly compared to other seasons, wholesale prices may show sudden upturns.

In EU comparison Greece has rather been among the expensive markets regarding the wholesale electricity prices. As natural gas, which has been imported at relatively high purchasing costs in comparison to other European countries in the last few years, has always had significant share in the country's energy mix, high power generation costs are also reflected in the overall wholesale price level. High domestic generation costs result in structural import dependency, as competitive import electricity from the Balkans helps in putting a lid on the increase of domestic wholesale prices. In parallel with decreasing natural gas prices the premium of the Greek market to the PEP benchmark also decreased at the beginning of 2016.

Figure 2Monthly (day-ahead) wholesale electricity prices in Spain, Italy and Greece

Source: Platts and European power exchanges

Looking at the timely evolution of wholesale electricity price ranges in Europe, Figure 3  shows that over the last eight years wholesale electricity markets in Europe (EU countries with Norway and Switzerland) showed signs of convergence, as the lowest and the highest market price got closer to each other and to the PEP benchmark as well. However, in the short run significant price differentials may occur, as different local power generation mixes can result in differences in electricity generation costs, resulting in the divergence of wholesale prices across different markets, especially which would enable free flow of electricity being necessary for better price convergence.

Figure 3 –Wholesale electricity prices–European average, maximum and minimum

Source: Platts and European power exchanges

Box - Comparison of wholesale electricity prices in the EU with some of its international peers

The next chart (Figure 4) shows that wholesale electricity prices in important commercial partners of the EU, such as the United States, Japan and Australia may substantially differ in certain periods.

During most of the time in the last six-seven years electricity prices in the US were lower than in the EU (in the first half of 2016 US prices were 35% lower than the EU average), primarily owing to low generation costs in the US, predominantly based on cheap domestic natural gas production. As during the last few years electricity generation costs also decreased in the EU, the EU-US price gap shrunk. However, during cold periods in the winter and hot periods in the summer US wholesale prices might suddenly turn up in parallel with increasing heating or cooling needs.

In 2011 and 2012 wholesale electricity prices in Japan were 2.5-3 times as high as in the EU, primarily owing to the consequences of the nuclear incident at the Fukushima power plant in March 2011, as practically the whole nuclear generation capacity in the country was taken offline and had to be replaced by more expensive gas-fired generation, based on Liquefied Natural Gas (LNG) imports. As from 2014 LNG prices started to converge among different regions in the world and underwent a significant decrease, electricity generation costs in Japan went down as well. Furthermore, some of nuclear generation capacities have been restarted so far, reducing the cost pressure on wholesale electricity prices. However, in the first half of 2016 wholesale electricity prices in Japan were still almost twice as high as in the EU.

Abundant domestic coal resources in Australia and increasing share of renewables in the electricity generation mix assures for the country having one of the lowest wholesale electricity prices in the world, though temporary factors (e.g.: policy measures, availability of coal supply routes, etc.) can result in sudden price increases.

Figure 4Wholesale electricity prices in Europe, United States, Japan and Australia

Source: PJM and ERCOT markets in the US, Platts in the EU, JPEX (Japan) and AEMO (Australia)

Changes in the EU power generation mix and the main drivers of wholesale electricity prices

Figure 5 shows the evolution of the EU-28 power generation from different energy sources between 2010 and 2015 2 . As it has already been mentioned, generation and consumption of electricity in the EU decoupled from economic growth during the last few years; just as this chart shows but slightly decreasing trend (having high seasonality) of electricity generation. Between 2010 and 2015 the share of fossil fuels decreased by ten percentage points 3 (from 51% to 41%), while the share of renewables doubled (rose from 8% to 17%) in power generation in the EU. At the same time the share of both nuclear and hydro remained practically the same.

Natural gas prices were relatively high compared to import coal prices in the EU over the last few years. While in 2008-2009 the estimated value of gas-coal price ratio was 1.7 on average, in 2014-2015 it amounted to 2.7, implying that gas-fired generation became costlier and the competitive disadvantage of gas increased compared to coal. In parallel with the recent fall in gas prices, the gas-coal price ratio has slightly improved, though in the first quarter of 2016 it was still above 2.

This has resulted in a permanent crowding out of natural gas from the EU electricity generation mix. However, albeit its existing cost advantage over natural gas, coal is also being gradually squeezed out from the EU power mix as renewables have been gaining ground.

Figure 5 – Power generation from different energy sources in the EU

Source: ENTSO-E

Figure 6 puts together the main factors driving electricity generation costs and wholesale electricity prices in the EU.

Figure 6 –EU electricity prices vs coal, gas prices and renewables share in EU power generation.

Source: Platts, BAFA

Platts PEP: Pan European Power Index (in €/MWh)

Coal CIF ARA: Principal coal import price benchmark in North Western Europe (in €/Mt)

DE border imp. stands for long term contract based import natural gas price on the German border (in €/MWh)

RES includes hydro, wind, solar and biomass; RES share in the total power generation estimation is based on monthly ENTSO-E data for the EU-28 as a whole

Carbon price: EUA emission allowances in €/tonnes of CO2 equivalent

Since the beginning of 2011 coal import prices in the EU (CIF ARA contract is used as a benchmark in North Western Europe) decreased from 90 €/Mt to 40 €/Mt, primarily owing to global coal oversupply, stemming from increasing exports from Colombia and the US (in the consequence of cheap domestic gas resources following the so-called 'shale gas revolution' coal has lost ground against natural gas in the US power generation mix) and decreasing demand in major consumer regions like China or in the EU.

Natural gas prices peaked at the beginning of 2012 after recovering from the lows measured in mid-2009. Since 2012 a gradual decrease in gas prices could be observed across Europe as gradually decreasing importance of oil-indexed gas contracts enables supply and demand forces to independently form market gas prices. Since the end of 2014 the decrease in gas prices has gained momentum, as the price fall of crude oil prices filtered in the oil-priced gas contracts as well. In February 2016 the average German gas import price fell below 15 €/MWh, being about the half of the average price measured in the first quarter of 2012. Hub prices in North Western Europe were even lower in the first quarter of 2016 (around 11-13 €/MWh).

Between April 2011 and May 2013 carbon emission allowance contracts underwent a significant price fall (decreasing from 17 €/tCO2e to 3.5 €/tCO2e). Since April 2013 carbon prices slightly recovered, however, they stayed below 10 €/tCO2e during the last three years. Low emission allowance prices have hardly been able to give any effective incentives to move towards generation sources with lower carbon emission intensity.

In parallel with decreasing fossil fuel and carbon prices, resulting in decreasing marginal costs of electricity generation, the share of renewable energy sources (wind, solar, biomass, also including hydro) has been gradually increasing over the last few years. In most of the EU countries fossil fuel costs set the marginal cost of electricity generation, being decisive for the wholesale electricity price. However, increasing share of renewables in the electricity mix shifted the generation merit order curve to the right, resulting in lower equilibrium price set by supply and demand. Consequently, we can say that increasing share of renewable energy sources have significantly contributed to low wholesale electricity prices in the EU markets.

In the consequence of these all, the PEP index, being in the range of 50-60 €/MWh in 2011/2012, decreased significantly and in the first quarter of 2016 it was around 33 €/MWh, which was, as it was mentioned, the lowest in the last twelve years.

In the previous paragraphs the main drivers behind the trend of wholesale price developments were described. In the following part quantitative estimation is provided on the impact of each market factor on the wholesale price level.

The impact of different market factors on wholesale electricity prices

In the report on Prices and costs of EU energy 4 an econometric analysis has been presented in order to assess the influence of each market factor on wholesale electricity prices in the EU. Several factors, such as fossil fuel prices, the share of renewables, demand for electricity, electricity market concentration in different countries, existence of market couplings, etc. have been analysed and in the following points their impact is briefly described.

Panel data analysis shows highly significant values for shares of all energy sources in the EU except for nuclear power, and existing links between wholesale prices and market competition, integration as well as for demand for electricity and exchange rates (relative to the Euro).

These results should be interpreted by taking into account some general conditions that have been characteristic for the European wholesale electricity markets over the last few years. By looking at absolute changes in the wholesale electricity price level, providing details on the impact of renewables, oil, coal and gas share and price changes, it has been assumed that the average electricity price level in the EU was 40-50 €/MWh, the gas price level was around 10-15 €/MWh and the average coal price was around 50-70 €/Mt over the last few years, against which the price change details below in the bullet points should be measured.

The results show that if the share of renewables increases in the power generation mix, the impact on the wholesale electricity price might differ depending on the fuel source that is being replaced by renewables. As the share of renewable energy sources has been rapidly increasing over the last few years in many EU countries, the impact of one percent incremental increase can differ over time. The impact of renewables on wholesale electricity prices also shows measurable differences across different regions in the EU. When the impact of market concentration on the wholesale price level is analysed, a competitive, oligopolistic market structure is assumed against which the impact of increasing or decreasing concentration is measured on the overall electricity price level.

In detail, the results are:]

The econometric analysis shows a robust evidence that increase in renewables (solar and wind) share in the electricity generation mix by one percentage point reduces wholesale prices by 0.4€/MWh in the EU on average, however, the magnitude of the impact also depends on which generation source (mainly fossil fuels) is being replaced by renewables. The impact is stronger (amounting to 0.6-0.8 €/MWh) in North Western Europe, Baltics and Central and Eastern Europe. The econometric analysis looked at data with monthly frequency, however, the impact of renewables is suspected to be even stronger, if hourly price data had been taken into account (given the impact of renewables in different time periods of a day).

An increase in fossil fuel shares in the generation mix (gas, oil or coal) has an upward impact on the wholesale price level as econometric results show, however, depending on the region in the EU and at the expense of which fuel source this increase occurs, one percentage point increases in the fossil share results in an increase of the wholesale electricity price ranging from 0.2 to 1.3 €/MWh.

Similarly, increases in the price of the two main fuels setting marginal electricity generation costs (gas and coal) by one €/MWh and the increase in CO2 allowance (ETS) prices by one €/tCO2e,also have an upward impact on the wholesale electricity price level, ranging between 0.2 €/MWh and 0.8 €/MWh in different EU markets. Weak impact of CO2 prices on electricity prices also relates to the strong structural oversupply in the ETS market, weakening its impact on the generation mix.

Only weak relation has been identified between the increase in the market share of the top three suppliers (by one percentage point) and the wholesale price level (slightly positive relation) and between increasing cross border flows (by one percentage point) and decreasing wholesale prices (the impact was barely measurable) at EU level; in some regions these impacts might be stronger.

Countries belonging to one (or several) market coupling areas tend to have higher number of hours when local wholesale electricity prices converge with the neighbouring markets. The average price difference with the neighbours tend to decrease and temporary price differentials are eliminated faster in most cases after the coupling takes place. Uneconomic electricity flows against normal price differentials (from higher to lower price area) also significantly decreases after the coupling is implemented.

Analytical results do not show strong evidence on the impact of surpassing the 10% electricity interconnection capacity; in the case of countries being below this threshold we can find slightly higher prices than for the ones with higher interconnection than the 10% threshold.

Increasing demand for electricity (demand of households, as measured by external temperatures and demand in the business sector, as approximated by economic growth) definitely has upward impact on wholesale electricity prices, however, results are region-specific, depending on climate conditions and electricity intensity of a given country and economy. As generation fuel supply mostly depends on imports, weakening of the local currency leads to increasing wholesale electricity prices through higher generation costs.

The following major regional differences can be observed:

In the previous points general conclusions on the impact of each factor on wholesale electricity prices at European level were presented. In the next bullet points some qualitative results of these factors in different regions of Europe are summarised:

In the North-Western Europe region (Central and Western Europe, Nordpool and the UK) natural gas prices and emission allowance prices (ETS) had stronger impact on the wholesale price level than in Europe as a whole.

Temporary price differences in day-ahead wholesale prices between Germany and the neighbouring markets disappeared faster in recent years (2012-2015) than in earlier periods (before 2012). This indicates that the regional development of the internal market has had an effect in eliminating price differentials.

In the Nord Pool area as a whole change in the coal share showed a stronger impact on the wholesale electricity price level (given the significant share of coal in some countries of the region, like Denmark, Finland and Estonia 5 ) than in Europe on average.

In the Baltic States change in the share of renewables and natural gas had measurable influence on the wholesale electricity price, so had cross border electricity flows.

Cross border electricity flows also had measurable impact in Spain and France, as the interconnector capacity is still limited between the two countries and any increase in border flows might have a large marginal impact.

In the analysed Central and Eastern European countries change in the share of coal (especially high in Czech Republic) had a large impact, similarly to nuclear power in Hungary and Slovakia.

Concentration of the three largest electricity generators had particularly strong influence in countries like France, Austria, Italy, and Slovenia, and the change in the share of coal in power generation also significantly impacted wholesale prices in these countries.



1.2Retail electricity prices

The composition and drivers of retail prices are analysed based on a data collection designed and conducted by DG Energy of the European Commission. The gathered data set has distinct features:

Cost elements are allocated to harmonized main components, facilitating the targeted identification of price increase drivers on EU and national levels.

The main component "taxes & levies" is further disaggregated into 10 sub- components, facilitating the quantification of the impact of specific policies and fiscal measures.

The main component "network" is further decomposed into transmission and distribution costs.

Energy policy relevant levies and not- earmarked taxes are distinguished.

Summary

Retail prices increased at 3% annual rate for households 6 and at 2% annual rate for industry 7 . The average household price was 20.8 Eurocent/kwh while the average industrial price was 107.3 EUR/MWh in 2015. Large industrial consumers 8 paid 84.5 EUR/MWh on average.

Price increases were driven by government imposed taxes, levies and regulated network tariffs. While VAT remained the largest tax element, RES support costs experienced the fastest growth. They accounted for 12% of the average median household price and for 23% of the average median industrial price in 2015. The impact of other policy supports costs such as energy efficiency, security of supply remained limited on EU level, however certain policies proved to be price increase drivers on Member State level. Taxes & levies increased at the annual rate of 7.9% and 18% for the average household and industrial consumer respectively.

The energy component diminished both in absolute and relative terms. By 2015 it was no longer the largest of the three components in half of the EU Member States and in the weighted EU average price. The energy component decreased at the annual rate of 0.3% and 2.8% for the average household and industrial consumer respectively.

Energy policy relevant levies were out weighted by tax instruments which do not necessarily finance energy or climate related policies. Not- earmarked taxes cost the average EU household 15% more than designated policy support costs.

Progress towards a single EU energy market is mirrored by the significant increase in the convergence of national energy components. Such became 15% and 12% less dispersed since 2008 for households and industry respectively. While total industrial prices also became less dispersed, for total household prices a different trend is to be observed as such are impacted by highly divergent national taxation and policy support costs. Total household prices became 9% more spread out across the EU from 2008 to 2015.

Diminishing energy components might negatively impact investments in the power sector. The energy component is the competitive part of the bill which determines the revenues of suppliers. Decreasing energy components decrease incentives in the private sector to invest in new or refurbished generation capacity. The lack of investment in turn might negatively impact security of supply on the long term.

The increase of the average electricity price slowed down to a marginal rate for households 9 and prices decreased for industrial consumers from 2014 to 2015. This might negatively impact energy efficiency investments by both consumer types.

Figure 7 - Composition of average electricity prices over time

Source: European Commission, Member States

Table 1. Evolution and share of price components by consumer type

Consumer Type

Household (DC) 10

Industrial (ID) 11

Large industrial (IF) 12

Component

Annual growth

Share 2015

∆ share

Annual growth

Share 2015

∆ share

Annual growth

Share 2015

∆ share

Energy

-0.3%

36%

-10pp

-2.8%

49%

-21pp

-3.2%

58%

-19pp

Network

3.3%

26%

0pp

3.2%

19%

+1pp

3.1%

16%

+2pp

Taxes & Levies

7.9%

38%

+10pp

18%

32%

+20pp

16%

26%

+17pp

Total price

+3.2%

-

-

+2.3%

-

-

+0.8%

-

-

Source: European Commission, Member States

Table 2. Price dispersion by consumer type

Consumer type

Band

Year

Max/Min

Total price dispersion 2008-2015

Energy component dispersion

2008-2015

Household

DC

2008

3.2

+9%

-15%

2015

3.2

Small industrial

IB

2008

3.2

0%

-2%

2015

2.6

Med. industrial

ID

 

2008

2.9

-6%

-12%

2015

2.7

Large industrial

IF

2008

3.7

- 16%

-17%

2015

3.1

Source: European Commission, Member States

1.2.1Household Electricity Prices

The following chapter analyses electricity retail prices paid by consumers whose annual consumption falls in the range 2500 to 5000 kWh. This consumption band is defined by Eurostat terminology as DC and is the most representative consumption band in 23 out of 28 Member States of the European Union 13 .

Summary

The average household price was 20.8 Eurocent/kwh in 2015. Household electricity prices increased at an annual rate of 3.2% since 2008 and diverged by a factor of 3 across the EU in 2015.

The energy component diminished both in nominal and relative terms on EU level as well as in most reporting countries. It remained the largest of the three components only in half of the reporting countries by 2015. The moderate decrease of the energy component (annual -0.3%) was overtaken by increases in the network (annual 3.3%) and taxes and levies (annual +7.9%) components, resulting in overall higher prices.

While VAT remained the largest cost element within the taxes and levies component, price increases were mostly driven by RES support costs (annual +22%) and not- earmarked taxes. Energy efficiency support costs grew annually by 73% but still remained to account for less than 1% of the total price in 2015.

Whilst prices for all other electricity and gas consumer types became more convergent since 2008, household electricity prices became 9% more dispersed. This is mostly due to the fact that they are strongly impacted by divergent national taxation and policy measures.

The energy component is the only part of the price which is determined by the market. The household EU average energy component became annually 2.3% less dispersed since 2008, mirroring the progress towards a single energy market.

Reporting countries impose a broad variety of taxes and policy support costs on household electricity bills, reflecting various national energy technology priorities, social structures, topographies and market structures. While designated policy support costs have often experienced notable increases, not- earmarked taxes (including VAT) still cost the average EU household 15% more in 2015.

1.2.1.1Price evolution – Total prices

The weighted average EU household price was 20.8 Eurocent/kWh in 2015. This average price increased from 16.65 Eurocent/kWh at the annual rate of 3.2% from 2008 to 2015 14 . The average inflation was 1.5% during the same period. 15  The increase of electricity retail prices has slowed down to a rate of 2% from 2014 to 2015. This might have negative impacts on energy efficiency investments by households in more efficient appliances and buildings.

Figure 8 - Evolution of the EU average household price (DC)

Source: European Commission, Member States

In 2015 the highest national price was more than three- fold of the smallest, as prices ranged from 9.42 Eurocent/kWh in Bulgaria to 30.55 Eurocent/kWh in Denmark. The highest and lowest prices in 2008 were recorded in the same countries with the same ratio.

Figure 9 - Household electricity prices by country in 2015 (DC)

Source: European Commission, Member States

Figure 10 - Nominal price changes & prices relative to EU av. in 2015 for households (DC)

Source: European Commission, Member States

Electricity prices on the island systems of Cyprus and Malta are largely dependent on international oil prices. Falling prices of the commodity are reflected in falling wholesale prices. Three Central- Eastern European countries, namely the Czech Republic, Hungary and Slovakia alongside Norway also reported decreasing nominal prices.

Figure 11 – Household electricity prices by country (DC) 16

Source: European Commission, Member States



1.2.1.2Price drivers – Main components

Total prices provide no information on the drivers of price developments. To facilitate the more focussed identification of price increase drivers, total prices are further decomposed into three main components. The components Energy, Network and Taxes & Levies disaggregate the total price along the value chain.

The Energy component typically includes cost elements such as the wholesale price of the commodity, various costs of the supply companies including their operational costs and profit margins, balancing energy as well as metering and billing charges. It also includes ETS costs, which are understood as production costs, rather than levies. The same holds for various taxes, such as property or vehicle taxes paid by supplier companies.

The Network component mainly consists of transmission and distribution tariffs. It might also include further cost elements, such as ancillary services.

The Taxes & Levies component includes a wide range of cost elements that highly vary from country to country. They reflect each country's energy technology priorities, social conditions, geographical characteristics and market structure. Levies are typically designated to specific technology, market or social bound policies, while taxes are general fiscal instruments feeding into the state budget.

Figure 12 - Weighted EU average household components (DC)

Source: European Commission, Member States

The weighted average energy component decreased at the annual rate of 0.3% and accounted for 7.49 Eurocent/kWh in 2015. From 2014 to 2015 the energy component decreased in 23 of the 30 reporting countries. By 2015 the energy component was no longer the largest of the three components in 14 out of 30 reporting countries and in the weighted EU average. The decrease in energy components can be linked to EU energy policies: increased competition resulting from market coupling, the unbundling of electricity generation from system operation, the fall in EU ETS carbon prices and the growth of power generation capacity with low operating costs (such as wind and solar power, in addition to existing nuclear and hydro power).

In 13 reporting countries the nominal level of energy costs increased from 2008 to 2015. In these countries the fall of wholesale prices has not translated into a reduction in the energy component. Such results may imply that price competition in a number of retail markets is weak, allowing suppliers to avoid passing on wholesale price reductions to retail prices.

Box - Pass through effect on electricity

Our 2014 report on energy prices and costs indicated that the fall in wholesale prices had not translated into a reduction in the energy component of retail prices, and that this result may imply that price competition in a number of retail markets was weak. The fact that cost fluctuations are reflected in final prices, is a sign that a market works properly. Such responsiveness of retail prices can however be diminished by the lack of competition and by the presence of price regulation (as it happens in some Member States) which can also be detrimental for competition by deterring new entrants. The analyses conducted in our 2016 report to test the cost reflectiveness of wholesale prices are overall aligned with these ideas.

To assess how wholesale prices impact the energy component of final prices (the pass through effect – see also box below), we should look at how quickly and how strongly energy supply prices adjust to changes in wholesale prices. The speed of the pass through could be evaluated by using a correlation analysis with lags between the retail price component and the wholesale price. A panel analysis based on fixed and random effects (which allow incorporating time series and country specific characteristics) was used to evaluate the magnitude of the pass-through.

Electricity

On the speed of the pass through, the correlation analysis reveals a heterogeneous picture across Europe in which wholesale prices seem to be passed through faster in some countries than in others [0 months in NO, SE, AT, LV while it takes 8 months in NL, IT, CZ, DE, FR]. These differences could depend on the market and tariff design of the retail markets, given that in some countries prices are still regulated, in some countries prices are fixed for a given time period (with monthly prices relying on old and new contracts) while in others they are indexed to the wholesale market price.

On the magnitude of the pass through the econometric analysis shows that wholesale prices are the main drivers and strongly affect the energy component (i.e. a price drop of 1 Eurocent would result in a decrease of the energy component by about €0.04 – 0.09 ct.).

The econometric analyses also show that there is an impact of the competitive structure and regulated prices on the pass through effect 17 :

Markets with a market share above 80% of the three largest suppliers show a higher energy supply price (mean is about €1ct per kWh higher) while under regulation the energy price component seems to be slightly lower (mean is about €0.8 ct/kWh lower). However, low retail prices often go hand in hand with a low level of customer satisfaction as their service and range of products is modest, as the ACER MMR 2015 report highlights.

In a competitive and deregulated market the impact on wholesale prices is significantly stronger (about €0.2 ct/kWh per one Eurocent change for the household consumption band DC), signalling that suppliers react to wholesale price changes. Econometric analysis shows that competitive structure of markets and price regulation significantly impacts the pass through of wholesale price. Panel data analysis reveals that the speed and magnitude of the pass through differs between the group of Member States with competitive retail markets and the group of Member States with regulated prices. For the deregulated group it can be stated that the more competitive markets are, the higher the magnitude of the pass through. 18  

There are further market characteristics, or different market behaviour or product designs, be it at the supply (e.g. number of suppliers, offers, price transparency) or demand side (switching behaviour) that certainly exert an influence on the energy component. However there are no suitable data available across all Member States to capture these factors.

Source: Ecofys study sections 3.2.2.1 & 3.2.2.2 and related Annex 2

Box - Cost reflectiveness of wholesale prices and the evolution of retail prices

Retail energy suppliers can compete on their offers on energy supply costs which depend to an important extent on wholesale energy prices. In a properly functioning market, the higher or lower wholesale prices should be translated to energy component of the (final) retail price. This however does not necessarily mean that retail prices will strictly mimic the evolution of lower energy costs given that retail prices are also impacted by the evolution of its other components (e.g. network costs and taxes & levies). E.g. in the energy market, lower wholesale should be passed through to final consumers in the form of lower cost of the energy supply component but this does not mean that final prices will necessarily decrease because network costs and taxes & levies could, for instance, have risen, compensating lower energy costs.

The network component increased at the annual rate of 3.3% and cost the average EU household 5.45 Eurocent/kWh in 2015. Network tariffs steadily increased over the whole observation period. From 2014 to 2015 they increased in 18 out of the 30 reporting countries. The network component was the largest of the three components in 7 reporting countries (BE, CZ, EE, NO, RO, SE) in 2015. In Poland energy costs were only marginally higher than network costs.

Box - Network quality and charges

A frequently used indicator for measuring the quality electricity networks is the annual number of minutes of supply disruption. Disruptions can occur at different levels of the transmission and distribution networks (e.g.: high voltage, middle voltage and low voltage networks). They can be planned (disruptions related to grid maintenance activities) or unplanned (those resulting from an unexpected event).

Error! Reference source not found. shows that there are significant differences across EU Member States in the extent of electricity supply disruptions (data from 2013). The highest number of minutes of disruptions could be observed in Central Eastern European Member States (Romania, Latvia, Estonia, Croatia, Czech Republic, Lithuania, Poland) while disruptions were less frequent in North Western European countries (e.g.: Luxembourg, Denmark, Netherlands, Germany, Austria, Belgium). The duration of planned disruptions was also higher in those Member States with a higher number of the overall outage minutes, indicating lower quality electricity supply in those countries.

Figure 13 – Minutes of electricity supply disruption in EU Member States, 2013

Source: CEER Benchmarking Report 5.2 on the Continuity of Electricity Supply, February 2015

However, it is worth noting that in most EU Member States the annual interruption time has been decreasing over time, suggesting improvements in the quality of the electricity grid. In 2005 the EU average interruption time was 373 minutes, by 2009 this figure decreased to 365 minutes and by 2013 to 309 minutes.

Results of customer satisfaction surveys can also foster the understanding of the quality of electricity supply. They can be especially useful for global comparison. The satisfaction survey on electricity supply of the World Economic Forum (Global Competitiveness Index) takes into account basically two factors: disruptions and fluctuations of power voltage. Error! Reference source not found. shows that the quality of supply in the EU on average scores well when compared to other non-EU G-20 countries. On a scale of 1 to 7, the average satisfaction rate in the EU-28 was 5.95, while in the case of non-EU G-20 countries the same figure was 4.97. The upper third of the satisfaction ranking consists entirely EU Member States (with the exception of Canada), while in the lower third there were only five EU Member States (Bulgaria, Romania, Malta, Greece and Estonia):


Figure 14 – Customer satisfaction with electricity supply in the EU and G-20 countries

Source: World Economic Forum Global Competitiveness Index, 2014-15edition - (1=worst, 7= best)

Increased expenditure for improving network quality subsequently increases network costs. However, it is important to emphasise that good network quality does not always appear associated with higher network costs. In some cases network costs are higher in those EU Member States where the supply interruption periods are longer, or the consumer satisfaction is lower. It is therefore not easy to establish a direct link between the quality of electricity supply and network costs in a given country. In international comparison, it is even more difficult to analyse network cost differentials and their impact on the quality of electricity supply across different countries. For these reasons, a more thorough data collection and methodological considerations should be carried out to establish and quantify this impact (which goes beyond the framework of the current energy prices and costs staff working document).

The report by Ecofys on prices and costs of energy in the EU provides some descriptive information on the impact of different factors on electricity and gas network costs:

There are three potential factors to calculate network costs: A lump sum for the connection of an installation, a capacity fee for the connected capacity (e.g.: kW) and a consumption fee based on the usage of the network. In most countries, households only pay a consumption fee, sometimes there is a lump sum fee for the connection. For industries, the capacity fee for the connected capacity (or peak load) is often more important.

In the case of gas, network costs for households largely depend on the fixed price component and capacity elements. In the case of the existence of the former (fixed) component, network costs are significantly higher. For industrial customers we do not see such big differences.

Network costs can be driven by several factors, such as replacements (investments) of existing equipment, substitution or new infrastructures, number of connections, by renewables energy generation shares in the case of electricity, and the existence of fixed capacity charges

The taxes & levies component of household prices grew at a faster annual rate of 7.9% and accounted for 7.92 Eurocent/kWh in 2015. Taxes and levies continuously increased over the whole observation period, at times by double digit figures. From 2014 to 2015 the increase of the component slowed down to a pace of 2% and in 11 of the 30 reporting countries it even decreased. The taxes & levies component was the largest of the three components in 7 reporting countries as well as in the weighted EU average price (DK, DE, ES, PT, AT, LV, SK) in 2015. The two Member States (DK, DE) that recorded the highest prices in 2015, reported the highest taxes and levies components across all reporting countries. It is to be noted that only these two countries are represented in the top 5 countries with the highest retail prices. Contrarily, in Italy, Ireland (rank 3 and 4 on the list of highest prices) energy costs accounted for the largest part for the bill, while in Belgium (ranks 5) network costs weighted out the two other components.

Within the taxes and levies component, two sets of cost elements can be distinguished. Levies finance energy, environmental, climate change related and social policies, while taxes contribute to financing general public expenditure as outlined in the state budget. Taxes, such as excise duty, environmental or greenhouse gas emission taxes do not necessarily finance energy related policies. It is important to note that the current study analyses only the direct impact of policies and fiscal measures on retail prices. Some reporting countries supplement the financing of policies from the state budget. This means that additionally to the explicit levy, which represents a cost element in the retail price in the structure of the current study, policies are also supported by other public resources.

Non- energy policy relevant charges (taxes) were 15% higher than energy policy relevant charges (levies) in 2015. Taxes cost the average EU household 4.2 Eurocent/kWh in 2015. The average sum of costs related to policies such as renewable energy support, energy efficiency and vulnerable consumers equalled to 3.7 Eurocent/kWh, while taxes cost the average EU household 4.2 Eurocent/kWh. Levies made up 46% of the average taxes and levies component and 17% of the average total price. Taxes accounted for 54% of the average taxes and levies component and 20% of the average total price. These shares also reflect the development of VAT, which as an ad valorem tax is levied on the sum of the underlying components.

Figure 15 - Weighted average levels of taxes and levies for median households (DC)

Source: European Commission, Member States

Energy taxation is harmonised on EU level by Directive 2003/96/EC. The directive sets minimum levels for VAT and excise duty, however most Member States apply rates higher than the binding minimum levels. VAT, at different rates, exists in all reporting countries. Beyond VAT and excise duty, Member States are generally free to apply any additional national taxes 19 . It should be noted that excise duty on some energy products, including electricity, is levied according to the volume of the product. Hence, it is determined independent of the price and its share in the final price will increase with falling prices. Excise duty on other products, such as natural gas is levied on the basis of their energy content. VAT is an ad valorem tax, determined as a percentage of the sum of all other costs, such as the energy component, network component and other taxes and levies. Hence, its share remains constant with falling prices.

Figure 16 - Share of EU average components for households (DC)

Source: European Commission, Member States

The relative share of the energy component in the total price gradually diminished over time. It decreased by 10 percentage points from 46% to 36%. The share of the Network component in the total price remained constant at 26%. The share of the taxes & levies component in the total price increased by 10 percentage points from 28% to 38%.

Figure 17 - Price components by country in 2015 for households (DC)

Source: European Commission, Member States

Figure 18 - Share of price components by country in 2015 for households (DC)

Source: European Commission, Member States

As of 2015 in 4 Member States the Taxes & Levies component accounts for at least 50% of the total price. In 4 Member States and Turkey the share of the Taxes & Levies component was 20% or below in the same year.



Developments within components

The current study introduces sub- components within the Network and Taxes & Levies components. These sub- components facilitate the more focussed analysis of developments within the two components.

Energy component

EU ETS costs are included in the energy component for all consumption bands. A 2014 study by DG ECFIN found that EU ETS costs had no significant impact on electricity prices. As the price of ETS allowances only moderately increased since, it can be stated that ETS costs further remain insignificant in terms of price increases.

The energy component is the only one of the three price components determined by market forces. Increasing competition is likely to lead to decreasing energy components. The share of the energy component decreased by 10 percentage points and accounted for 36% of the total price. The levels of the network and taxes & levies components are set by divergent national laws and regulations. Their joint share in the average median household price increased from 54% to 64%. As the part of the price which is set by market forces has been gradually decreasing, total prices are imperfect indicators for the measurement of price dispersion. The dispersion of the energy component however adequately reflects to progress towards an internal energy market. The energy component of the average median household price became 19% less dispersed since 2008. Results of econometric analysis support the finding that wholesale prices, which constitute the bulk of the energy component, became less spread out over time. The overall convergence however, conceals of shorter periods characterized by higher variance of the energy component. Increasing share of RES might be a contributing factor to the higher variance.

Network component

The Network component is broken down into two sub- components, namely Transmission and Distribution. Both transmission and distribution tariffs are regulated in all EU Member States as well as in Norway and Turkey. The allocation of cost elements (for example costs of infrastructure, losses, ancillary services and re-dispatching) to the two sub- components might differ from country to country. Therefore, cross- country comparisons are to be considered with caution. Household consumers are typically supplied with electricity by being connected to the distribution grid, therefore have to pay both transmission and distribution fees. 17 out of 30 reporting countries submitted the split between transmission and distribution costs. 20

Figure 19 – Transmission & distribution shares in network tariffs in 2015 for households (DC)

Source: European Commission, Member States

The share of distribution costs ranged from 13% in Italy to 100% in France, highlighting the lack of harmonized definitions of distribution and transmission tariffs. It is to be noted that there is no transmission system operator on Malta, therefore all costs are accounted for as distribution costs.

Taxes & Levies component

It is to be noted, that only explicitly reported cost elements could be allocated to specific policies and consequently taken into account for the analysis of sub- components. For example, RES support costs exist in several countries which could not report such costs explicitly. In other countries the revenues collected through a levy that supports a specific policy are complemented by other resources. Such additional resources are not covered by the underlying study.

Cost elements within the Taxes & Levies component were assigned to 10 sub- components. Sub- components 1-8 are considered energy policy relevant while sub- components 9-10 consist of general fiscal measures.

1. Renewable energy sources and combined heat and power (RES & CHP): contains any cost imposed to support renewable energy technologies, grid connection of renewable energy generation units and any support to combined heat and power.

2. Social: the most common cost elements in this sub- component are related to vulnerable consumers, social tariffs, island system tariff equalization, last resort supply, special tariffs, and sectorial employment policies.

3. Nuclear: includes any support to the nuclear sector, most notably nuclear decommissioning.

4. Energy Efficiency: includes any support to energy efficiency and energy saving measures.

5. Security of supply: includes any support to security of supply policies, support to indigenous electricity generation or fuel production and emergency stockpile fees.

6. Concession fees: include concession fees and other charges for the occupation of public and municipal land.

7. Regulator and Market: cost elements in this sub- component are typically imposed to finance the National Regulatory Agency (NRA) or the Market Operator.

8. Other Levies: the sub- component includes a small number of designated cost elements that could not be assigned to any of the above sub- components, most notably R&D, deficit annuities and public television fees.

9. Value Added tax (VAT): VAT is imposed on electricity and natural gas prices in every EU Member State as well as in Norway and Turkey.

10. Other taxes: this sub- component includes any manifestation of excise duties, environmental taxes as well as distribution, transmission and greenhouse gas emission taxes. If revenues from a tax are earmarked for specific policies, the tax was allocated to the policy specific sub- component.



Figure 20 - Composition of (EU weighted av.) Taxes & levies in 2015 for households (DC)

Source: European Commission, Member States

Figure 21 – Share of sub-components in (weighted EU av.) Taxes and Levies for households (DC)

Source: European Commission, Member States

VAT was the largest sub- component within the taxes and levies component. It accounted for 37% of the weighted average taxes and levies component while other not- earmarked taxes (such as, excise duties, environmental, greenhouse gas emission and distribution taxes) made up 17% of the taxes and levies component.

The largest energy policy relevant sub- component was RES & CHP accounting for 33% of the total Taxes & Levies component, followed by social cost elements (4%), concession fees (4%) and security of supply measures (1.2%). The share of energy efficiency, nuclear sector and institutional costs were each below 1%.

1.2.1.3Price drivers – Sub- components

Value Added Tax

VAT is imposed in all reporting countries on household electricity prices, whereas the EU VAT Directive 21 explicitly allows Member States to apply reduced rates to electricity. As a result, VAT rates range from 6% in the United Kingdom to 27% in Hungary. As the largest sub- component, VAT made up more than a third of the weighted average taxes & levies component.

Figure 22 - Household (DC) VAT costs in 2015 by country

Source: European Commission, Member States

Renewable energy and Combined Heat and Power

This sub- component includes any support to renewable energy and combined heat and power generation. Explicit RES & CHP support costs were reported by 23 countries in 2015 for households. 5 EU countries did not report explicit RES or CHP cost elements. They are: Finland, Malta, Netherlands Poland and Sweden. Norway and Turkey also did not report explicit RES or CHP support costs. It is important to note that consumers in these countries are paying RES support despite the fact that such costs are not explicitly levied on electricity bills. They are captured either in the energy component or are financed through general fiscal measures. The Netherlands introduced a Sustainable Energy Levy in 2013 as part of the SDE+ mechanism. This levy could not be calculated separately for the current study.



Figure 23 - Evolution of the EU weighted average RES support cost for households (DC)

Source: European Commission, Member States

The EU 28 weighted average RES & CHP support cost tripled from 2008 to 2015. While the annual compound average growth rate of RES & CHP costs was 22% over the whole period, from 2014 to 2015 the increase slowed down to 4%.

Figure 24 – EU average RES & CHP costs relative to EU average total price for households (DC)

Source: European Commission, Member States

Figure 25 - Nominal RES and CHP support cost by country in 2015 for households (DC)

Source: European Commission, Member States

In 2015 Germany recorded the highest rate of RES & CHP support accounting for 61 Eurocent/kWh. The smallest amount of the same cost, 0.45 Eurocent/kWh was recorded in Croatia. In Hungary households are exempted from the RES levy as of 31 October 2013.

Figure 26 – Share of RES & CHP support costs in national prices in 2015 (DC)

Source: European Commission, Member States

While Germany recorded the highest nominal amount of RES & CHP cost to households, the share of supporting such policies was the highest in Portugal, accounting for almost a quarter of the total price. The smallest share of 3% was reported by Ireland.

Other not earmarked taxes

The sub- component includes any manifestation of excise duty, environmental- , greenhouse gas emission- , transmission- and distribution taxes. Minimum tax levels on energy products and electricity are harmonised on the EU level and are defined by the Council Directive 2003/96/EC 22 . Normally those taxes are not earmarked to energy, climate or environment related policies. The sub- component excludes VAT.

Such taxes accounted for 6% of the weighted average EU price and 17% of the weighted average taxes & levies component. 21 reporting countries (19 EU member States, Norway and Turkey) imposed not- earmarked taxes (other than VAT) averaging at 1.29 Eurocent/kWh in 2015. Not- earmarked taxes increased at an annual rate of 2%.

Figure 27 - Nominal cost of not- earmarked taxes for households (DC) in 2015

Source: European Commission, Member States

Figure 28 - Share of not-earmarked taxes(excl. VAT)in national prices in 2015 for households(DC)

Source: European Commission, Member States

Not- earmarked taxes (other than VAT) accounted for 39% of the total price in Denmark, 18% in the Netherlands, 16% in Sweden and 14% in Finland. It is to be noted that the latter 3 countries could not report explicit RES support costs. In 13 Member States such taxes accounted for 1% or less of the total price.

Social charges

Social charges include any support to vulnerable consumers, island system tariff equalization, social funds and support to sectorial employment policies. Such charges were the second most important energy policy relevant charges across the EU in terms of nominal costs.

The impact of the weighted average social charge on the weighted average EU price was negligible (1.3%) and limited on the weighted average taxes and levies component (4%). The share of social charges in the weighted average EU taxes and levies component marginally increased by one percentage point from 3% to 4%

10 EU Member States imposed social charges during the reporting period. In Bulgaria and Portugal the reported cost element in 2015 was negative as social rebates effectively decreased the total prices in these countries. In Portugal the cost element was positive in years prior to 2015. The number of Member States imposing social levies in 2015 totalled at 9 as Hungary discontinued a social levy after 2012.

The United Kingdom's Warm Home Discount is a redistributive levy. All households pay towards this levy via their gas and electricity bills. All the money collected is recycled back as £140 annual rebates on the electricity bills of eligible low-income and vulnerable households. As such, the net effect of the policy on average dual fuel (gas and electricity) bills is £0. In the current study, only the gross cost is reflected as the rebate only applies to a subset of households.



Figure 29 - Nominal cost of social charges for households (DC) in 2015 by country

Source: European Commission, Member States

Figure 30 - Share of social charges in national prices in 2015 for households (DC)

Source: European Commission, Member States

In 2015 France reported the highest share of social charges of 5.6% in the total price while in Greece the share of such charges was 5.4%. In all other countries the share of social charges in the total price was below 2%.

Security of supply

Security of supply related levies were imposed by 10 Member States in 2015. It is to be noted that at the beginning of the observation period in 2008 only 6 Member States imposed such levies. The impact of the weighted average security of supply cost on the weighted average EU price was negligible (below half a percent). Security of supply charges accounted also for less than 1% of the average taxes & levies component.



Figure 31 - Nominal security of supply support cost for households (DC) in 2015 by country

Source: European Commission, Member States

In 2015 Slovakia reported the highest nominal level of security of supply related charges accounting for 1.21 Eurocent/kWh. In Portugal the charge manifested as a rebate and was therefore negative. The share of security of supply related charges in the total price is not significant in any of the reporting countries.

Other energy policy relevant charges

The explicit impact of other energy policy relevant costs remained limited. Cost elements imposed to support energy efficiency, nuclear sector and market operation policies account for 1% or less of the average EU price. Albeit concession fees for the occupation of public land account for 4% of the weighted average EU price, such fees are imposed only in four Member States (BE, DE, LU, PT). The relatively prominent presence of concession fees in the weighted average price is mostly due to the German concession fee of 1.89 €c/kWh. Charges for the financing of the National Regulatory Agency or a market operator are levied in 6 Member States (BE, CZ, PT, SK, SI, ES). Nuclear 23 sector related levies are imposed by four Member States (BE, IT, SK, ES). Energy efficiency measures are explicitly levied also in 4 Member States (BE, IT, SI, UK).



1.2.2 Industrial Electricity Prices

The following chapter analyses electricity retail prices paid by industrial 24 consumers whose annual consumption falls in the range 2000 to 20000 MWh. This consumption band is defined by Eurostat terminology as ID and is the most representative consumption band in the majority of EU Member States.

Summary

The average industrial 25 price was 107 EUR/MWh in 2015.Industrial electricity prices increased at an annual rate of 2.3% since 2008 and diverged by a factor of 3 across the EU in 2015. From 2014 to 2015 the average industrial price decreased for the first time since 2008.

The energy component diminished both in nominal (at the annual rate of 2.8%) and relative terms (by 21 p.p.) but still remained the largest of the three components in all but 2 reporting countries and in the weighted EU average price.

Price increases were mostly driven by RES support costs and not- earmarked taxes other than VAT. Taxes and levies tripled on average from 2008 to 2015 for the industrial consumer, however due to their initial low level, they still accounted only for a third of the EU average price. Due to the recoverability of VAT, the taxes and levies component for industrial consumers consisted mostly (91%) of designated levies rather than not- earmarked taxes as seen in the case of households.

Industrial electricity prices became 10% less spread out across the EU since 2008. The energy component is the only part of the price which is determined by the market. The weighted EU average energy component became 12% less dispersed since 2008, mirroring the progress towards a single energy market.



1.2.2.1Price evolution – Total prices

The average 26 industrial 27 price was 107 €/MWh in 2015, having experienced an annual increase of 2.3% from 91 €/MWh in 2008 28 . The average annual inflation rate accounted for 0.5% during the same period. 29 While the average price steadily increased from 2008 to 2014, it marginally decreased from 2014 to 2015.

Figure 32 - Evolution of the weighted average EU electricity price for industrial consumers (ID)

Source: European Commission, Member States

In 2015 the highest recorded price was 2.7 fold of the smallest, as prices ranged from 54 €/MWh in Sweden to 148 €/MWh in Italy. The highest and lowest prices in 2008 were recorded in Cyprus and France respectively.

Median industrial electricity prices have marginally decreased on average across the EU from 2014 to 2015. This might negatively impact energy efficiency investment in more efficient industrial processes.

Figure 33 – Total prices for industrial consumers (ID) by country in 2015

Source: European Commission, Member States

Industrial electricity prices are less dispersed across Europe than their industrial counterparts. This is largely due to the fact that household electricity prices are more impacted by highly divergent national policy and fiscal driven additions.

Figure 34 - Nominal price changes & prices relative to EU av. price for industry (ID)

Source: European Commission, Member States

Figure 35 - Industrial (ID) price levels by reporting period and country

Source: European Commission, Member States



1.2.2.2Price drivers – Main components

For a detailed description, please consult the section on the three main   components .

Figure 36 - Evolution of industrial (ID) EU weighted average components

Source: European Commission, Member States

The average energy component decreased at the annual rate of 2.8% and accounted for 52.8 €/MWh in 2015. It decreased in 21 of 28 EU member States from 2014 to 2015. By 2015 the energy component remained the largest of the three components in all but 2 reporting countries (DE, SK).

In 7 EU Member States (HR,FR,IE,LV,PL,PT,UK) the nominal level of energy costs increased from 2008 to 2015. In these countries the fall in wholesale prices has not translated into a reduction in the energy component of retail prices despite the fact that this is the part of the energy bill where energy suppliers should be able to compete. Such results may imply that price competition in a number of retail markets is weak, allowing suppliers to avoid passing on recent wholesale price reductions to retail prices.

The average network component increased at the annual rate of 3.2% and cost the average industrial consumer 20.5 €/MWh in 2015. From 2014 to 2015 the network component increased in 16 out of 28 EU Member States. The network component was the largest of the three components only in Slovakia in 2015.

The taxes & levies component grew at the annual rate of 18%. Despite the significant increase, due to the component's initial low level it accounted for a fifth of the total price in 2015. Taxes and levies continuously increased from 2008 to 2014. From 2014 to 2015 the taxes & levies component decreased in 8 Member States. Due to decreases in these bigger Member States, the weighted EU average also shows a decrease. The taxes & levies component was the largest of the three components for median industrial consumers only in Germany in 2015. It is to be noted that VAT is recoverable for industrial consumers, therefore the current study analyses prices without VAT and other recoverable taxes.

Within the taxes and levies component, two sets of cost elements can be distinguished. Levies finance energy, environmental, climate change related and social policies, while taxes contribute to financing general public expenditure as outlined in the state budget. Taxes, such as excise duty, environmental or greenhouse gas emission taxes do not necessarily finance energy related policies. It is important to note that the current study analyses only the direct impact of policies and fiscal measures on retail prices. Some reporting countries supplement the financing of policies from the state budget. This means that additionally to the explicit levy, which represents a cost element in the retail price in the structure of the current study, policies are also supported by other public resources.

Due to the recoverability of VAT, the taxes and levies component for industrial consumers consists mostly (91%) of designated levies rather than not- earmarked taxes as seen in the case of households. The average sum of cost related to policies such as renewable energy support, energy efficiency and vulnerable consumers equalled to 30.8 €/MWh. Not- earmarked taxes cost the average industrial consumer 3.1 €/MWh.

Figure 37 - EU weighted average cost of taxes and levies in 2015 for industrial consumers (ID)

Source: European Commission, Member States

For further information on energy taxation, please consult page 36. Energy taxation

Figure 38 - Share of components in the EU average price for industrial consumers (ID)  30

Source: European Commission, Member States

The relative share of the energy component in the total price gradually diminished, as it decreased by 22 percentage points from 71% to 49%. The share of the Network component in the total price remained constant at around 19%. The share of the Taxes& Levies component in the total price increased by 22 percentage points from 11% to 32%.

Figure 39 - Total prices by component and country in 2015 for industrial consumers (ID)

Source: European Commission, Member States

Figure 40 – Shares of price components in the total price by country in 2015 for industry (ID)

Source: European Commission, Member States

Developments within components

The current, second edition of the Energy Prices and Costs study introduces sub- components within the Network and Taxes & Levies components. These sub- components facilitate the more focussed analysis of developments within the two components.



Energy component

EU ETS costs are included in the energy component for all consumption bands. A 2014 study by DG ECFIN found that EU ETS costs had no significant impact on electricity prices. As the price of ETS allowances only moderately increased since, it can be stated that ETS costs further remain insignificant in terms of price increases.

Only one of the three price components, the energy component is determined by the market. Increasing competition contributes to decreasing energy components. The share of the energy component decreased by 21 percentage points and accounted for 49% of the average median industrial price in 2015. The level of the network and taxes & levies components are set by divergent national laws and regulations. Their joint share in the average median household price increased from 30% to 51%. As the part of the price which is set by market forces has been gradually decreasing, total prices are imperfect indicators for the measurement of price dispersion. The dispersion of the energy component however adequately reflects to progress towards an internal energy market. The energy component of the average median industrial price became 12% less dispersed since 2008.

Network component

The Network component is broken down into two sub- components, namely Transmission and Distribution. Both transmission and distribution tariffs are regulated in all EU Member States as well as in Norway and Turkey. The allocation of cost elements (for example costs of infrastructure, losses, ancillary services and re-dispatching) to the two sub- components might differ from country to country. Therefore, cross- country comparisons are to be considered with caution. Household consumers are typically supplied with electricity by being connected to the distribution grid, therefore have to pay both transmission and distribution fees. 18 out of 30 reporting countries submitted the split between transmission and distribution costs.

Figure 41 – Shares of transmission and distribution costs in 2015 for industry (ID) 31

Source: European Commission, Member States

The share of distribution costs ranged from 17% in Bulgaria to 97% in Lithuania, highlighting the lack of harmonized definitions of distribution and transmission tariffs. Another reason for this heterogeneity among Member States might be the fact that in certain countries industrial users are connected only to transmission grid, while in others industrial consumers are connected both to the distribution and transmission grid. It is to be noted that there is no transmission system operator on Malta, therefore all costs are accounted for as distribution costs.

Taxes & Levies component

It is to be noted, that only explicitly reported cost elements could be allocated to specific policies and consequently taken into account for the analysis. For example, RES or nuclear decommissioning costs exist in several countries which could not report such costs explicitly.

For a detailed description, please consult the section on Taxes & Levies sub- components .

Figure 42 - Sub-components in Taxes and Levies in 2015 for industry (ID)

Source: European Commission, Member States

Figure 43 – Share of sub-components in Taxes and levies in 2015 for industry (ID)

Source: European Commission, Member States

The largest energy policy relevant sub- component in 2015 was RES & CHP accounting for 72% of the total Taxes & Levies component, followed by social cost elements (4%) and security of supply (3%). The EU weighted average share of energy efficiency, nuclear sector, concession fees and market operation related costs were each below 1%. Excise duty, environmental, greenhouse gas and distribution taxes made up 9% of the taxes and levies component.

1.2.2.3Price drivers – Sub- components

Value Added Tax

VAT is reimbursable for industrial consumers in all reporting countries, therefore it is not further analysed.

RES & CHP

Explicit RES & CHP support costs were reported by 22 countries in 2015 for industrial consumers. 6 EU countries did not report explicit RES or CHP cost elements. They are: Finland, Malta, Netherlands Poland, Sweden and the United Kingdom. Norway and Turkey also did not report explicit RES or CHP support costs. It is important to note that consumers in these countries are paying RES support costs despite the fact that such are not explicitly levied on electricity bills. The Netherlands introduced a Sustainable Energy Levy in 2013 as part of the SDE+ mechanism. This levy could not be calculated separately for the course of the current study. In the United Kingdom RES support costs are part of the Climate Change Levy which could not be further disaggregated in the course of the current study.

Figure 44 - Evolution of (weighted EU av.) RES & CHP support cost for industry (ID)

Source: European Commission, Member States

While the annual growth rate of RES & CHP costs was 27% over the whole period, from 2014 to 2015 the increase slowed down to 4%.

Figure 45 – Share of RES& CHP support costs in the EU price over time for industry (ID)

Source: European Commission, Member States


Figure 46 - Nominal RES & CHP support cost in 2015 by country for industry (ID)

Source: European Commission, Member States

In 2015 Germany recorded the highest rate of RES & CHP support accounting for 61 €/MWh. The smallest amount of the same cost, 2.3 €/MWh was reported by Ireland.

Figure 47 -– Share of RES & CHP support costs in national prices for industry (ID) in 2015

Source: European Commission, Member States

Germany recorded the highest share of RES & CHP costs accounting for 47% in the total price. The smallest share of 2% was reported by Ireland.

1.2.2.3.1Other not earmarked taxes

The sub- component includes any manifestation of excise duty, environmental- , greenhouse gas emission-, transmission- and distribution taxes. Minimum taxes on energy are harmonised on the EU level and are defined in the Council Directive 2003/96/EC 32 . As a general rule those taxes are not earmarked to energy, environment or climate related policies.

Such taxes accounted for 3% of the weighted EU average price and 9% of the weighted EU average taxes & levies component. 24 reporting countries (23 EU member States and Turkey) imposed not- earmarked taxes other than VAT averaging at 3.1 €/MWh in 2015.



Figure 48 – Cost of not-earmarked taxes (excl. VAT) for industry (ID) in 2015

Source: European Commission, Member States

In 2015 Austria reported the highest nominal value of not- earmarked taxes (entirely consisting of excise duty), accounting for 15 €/MWh .

Figure 49 - Share of not-earmarked taxes (excl. VAT) in national prices for industry (ID) in 2015

Source: European Commission, Member States

Not- earmarked taxes, other than VAT accounted for 39% of the total price in Denmark. In 7 Member States such taxes accounted for 1% or less of the total price.

Social charges

Social charges 33 include any support to vulnerable consumers, island system tariff equalization, sectorial employment policies and social funds. Such charges were the second most important energy policy relevant charges across the EU in terms of nominal cost. The impact of the weighted average social charge on the weighted average EU price was negligible (1.3%) and was limited on the weighted average taxes and levies component (4%). The share of social charges in the weighted average EU taxes and levies component has decreased by 5 percentage points from 9% to 4%.

10 EU Member States applied social charges during the whole reporting period however the Warm Homes Discount in the United Kingdom could not be separately reported in the course of the current study. In Bulgaria the reported cost element manifested in 2015 as a rebate and was therefore negative. In Portugal, while for households the cost element was a negative rebate, for industrial consumers it was positive in 2015. In Hungary a social levy related to restructuring employment in the coal industry is imposed on industrial prices while households are exempted.

Figure 50 - Social charges by country in 2015 for industrial consumers (ID) in 2015

Source: European Commission, Member States

Figure 51 - Share of social costs in national prices for industry (ID) in 2015

Source: European Commission, Member States

Security of Supply

Security of supply related levies were imposed by 12 Member States in 2015. It is to be noted that at the beginning of the observation period only 9 Member States imposed such levies.

The impact of the weighted EU average security of supply charge was below 1% both on the weighted EU average price and the weighted EU average taxes and levies component.

Figure 52 - Security of supply charges for industry (ID) in 2015

Source: European Commission, Member States

In 2015 Slovakia reported the highest nominal level of security of supply related charges accounting for 12 €/MWh. In Portugal the charge manifested as a rebate and was negative for households. For industrial consumers the cost element was positive.

Other energy policy relevant charges

The explicit impact of other energy policy relevant charges remained limited. Cost elements imposed to support energy efficiency, nuclear sector, concession fees and market operation, each accounted for 1% or less of the average EU price. Charges for the financing of the National Regulatory Agency or a market operator are levied in 6 Member States (BE, CZ, PT, SK, SI, ES). Nuclear sector related levies are imposed by four Member States (BE, IT, SK, ES). Energy efficiency measures are explicitly levied in 4 Member States (BE, IT, SI, UK) whereas in the United Kingdom ECO and CERT costs could not be separately reported in the course of the current study.



1.2.3Small vs. Large Industrial Consumer Prices

The following chapter compares the evolution and composition of electricity prices paid by small and large industrial consumers. The annual consumption of small industrial consumers falls in the range of 20 MWh to 500 MWh. This consumption band is defined by Eurostat as IB. The consumption of large industrial consumers falls in the range 70 000 MWh to 150 000 MWh. This consumption band is defined by Eurostat as IF.

Prices for small industrial consumers were reported by 27 EU member States, Norway and Turkey. Lithuania reported an average industrial price across all bands, which was analysed as the medium industrial price (ID). Prices for large industrial consumers were reported by 26 EU Member States. In Luxembourg large industrial prices are confidential due to the small number consumers in the consumption band.

1.2.3.1Price evolution – Total prices

The average small industrial price was 146 EUR/MWh in 2015 while large industrial consumers paid 84 EUR/MWh on average. The average price for small industrial consumers increased at the annual rate of 3.1% while the average price for large industrial consumers increased at a slower pace of 0.8%. The average annual inflation rate accounted for 0.5% during the same period. 34

Figure 53 - Evolution of weighted EU average prices for small and large industrial consumers

Source: European Commission, Member States

In 2015 prices for small industrial consumers ranged from 70 EUR/MWh in Norway and 72 EUR/MWh in Sweden to 188 EUR/MWh in Italy. Also Sweden recorded the lowest price of 41 EUR/MWh for large industrial consumers, while the highest price of 131 EUR/MWh was paid by large consumers in the United Kingdom. The highest large industrial price was more than three- fold of the smallest, while this ratio was 2.6 for small industrial prices. The variation coefficient for large industrial prices equalled to 0.27. The same figure for small industrial consumers was 0.26, indicating slightly more concentrated prices across the EU.

Figure 54 - Small and large industrial prices by country in 2015

Source: European Commission, Member States

Figure 55 - Price changes & prices relative to EU av. in 2015 for small industrial consumers (IB)

Source: European Commission, Member States

The evolution of small industrial prices in nominal terms is highly divergent across the EU, ranging from 48% increase in Estonia to 26% decrease in Hungary. Nominal prices for small industrial consumers decreased from 2008 to 2015 in 11 reporting countries.



Figure 56 - Price changes & prices relative to EU av. in 2015 for large industrial consumers (IF)

Source: European Commission, Member States

Nominal prices decreased in 14 reporting countries from 2008 to 2015 (whereas Austria, Greece and Turkey could not report prices for 2008). National prices in most Member States were below the EU average, which was impacted by higher prices in countries accounting for larger consumption volumes.

1.2.3.2Price drivers – Main components

For a detailed description, please consult the section on the three main components .

Figure 57 - EU weighted average components for small and large industrial consumers

Source: European Commission, Member States

The EU average energy component decreased at the rate of -1.75% for small industrial consumers, while the energy component of large industrial prices experienced an even faster decrease of 3.2%. The energy component on average accounted for 66 EUR/MWH (small industrial) and 41 EUR/MWh (large industrial) in 2015. For small industrial consumers the energy component remained the largest of the three components in all but 4 reporting countries. In The Netherlands Taxes & Levies cost marginally more than the energy component, while in Estonia and the Czech Republic it was out weighted by network costs. In Slovakia both network costs and taxes and levies exceeded the energy component. For large industrial consumers the energy component remained the largest of the three components in all but two reporting countries. In Germany and Slovakia taxes and levies exceeded the energy component.

The decrease in energy costs can be linked to EU energy policies: increased competition resulting from market coupling, the unbundling of electricity generation from system operation, the fall in EU ETS carbon prices8 and the growth of power generation capacity with low operating costs (such as wind and solar power, in addition to existing nuclear and hydro power).

In a quarter of the reporting countries, the nominal level of energy costs increased from 2008 to 2015 for small industrial consumers. In these countries the fall in wholesale prices has not translated into a reduction in the energy component of retail prices despite the fact that this is the part of the energy bill where energy suppliers should be able to compete. Such results may imply that price competition in a number of retail markets is weak, allowing suppliers to avoid passing on wholesale price reductions to retail prices.

The average network component increased at the annual rate of 3% both for small and large industrial consumers. The network component on average accounted for 38 EUR/MWH (small industrial) and 13 EUR/MWh (large industrial) in 2015. The almost three- fold difference is due to the fact that large industrial consumers are often connected only to the transmission grid while small industrial consumers are connected both to the transmission and distribution grids and therefore have to pay network tariffs for both.

The taxes & levies component grew at the annual rate of 18% for small and at 16% for large industrial consumers, accounting for 41 and 22 EUR/MWh respectively. The average taxes and levies component for large industrial consumers was half of what small industrial consumers pay. This highlights the fact that large industrial consumers are often exempted or pay reduced tax rates and policy support costs. From 2014 to 2015 the increase of taxes and levies slowed down for both consumer types. Taxes and levies for small industrial consumers decreased in all but 5 reporting countries (DE, EL, IT, SE, TR) from 2014 to 2015. Taxes and levies for large industrial consumers decreased in 5 countries (BE, IT, PT, SE, TR).

In 2015 the average sum of costs related to energy policies equalled to 35 €/MWh and 20 €/MWh for small and large industrial consumers respectively. Taxes cost the average EU household considerably less, namely 6 €/MWh and 1.7 €/MWh .

Figure 58 - Weighted av. of taxes and levies for small and large industrial consumers

Source: European Commission, Member States

Figure 59 - Share of (EU weighted av.) components for small and large industrial consumers

Source: European Commission, Member States

The relative share of the energy component in the total price gradually diminished. It decreased by 18 percentage points from 63% to 45% for small industrial consumers. The relative share of the energy component in the total price for large industrial consumers experienced a similar decrease of 19 percentage points.

The share of the network component in the total price remained constant at 26% for small industrial consumers and experienced only moderate increase for large industrial consumers, growing by 3 p.p.to account for 16% of the total price in 2015.

The share of taxes and levies in the total price increased by 15 p.p. for both consumer types and accounted for 28% and 26% for small and large industrial consumers respectively. Albeit the absolute level of the taxes and levies component is much higher for small industrial consumers, the relative share of the component is almost equal for the two consumer types.

Figure 60 - Price components by country in 2015 for small and large industrial consumers

Source: European Commission, Member States

Figure 61 - Share of price components by country in 2015 for small and large industrial consumers

Source: European Commission, Member States

Developments within components

It is to be noted, that only explicitly reported cost elements could be allocated to specific policies and consequently taken into account for the analysis. For example, RES or nuclear decommissioning costs exist in several countries which could not report such costs explicitly.

For a detailed description, please consult the section on the three main components .

Energy component

EU ETS costs are included in the energy component for all consumption bands. A 2014 study by DG ECFIN found that EU ETS costs had no significant impact on electricity prices. As the price of ETS allowances only moderately increased since, it can be stated that ETS costs further remain insignificant in terms of price increases.

Only one of the three price components, the energy component is determined by the market. Increasing competition contributes to decreasing energy components. The share of the energy component decreased by 19 percentage points and accounted for 58% of the average large industrial price in 2015. The levels of the network and taxes & levies components are set by divergent national laws and regulations. Their joint share in the average large industrial price increased from 23% to 42%. As the part of the price which is set by market forces has been gradually decreasing, total prices are imperfect indicators for the measurement of price dispersion. The dispersion of the energy component however adequately reflects to progress towards an internal energy market. The energy component of the average large industrial price became 17% less dispersed since 2008.

Network component

The Network component is broken down into two sub- components, namely transmission and distribution. Both transmission and distribution tariffs are regulated in all EU Member States as well as in Norway and Turkey. The allocation of cost elements (for example costs of infrastructure, losses, ancillary services and re-dispatching) to the two sub- components might differ from country to country. Therefore, cross- country comparisons are to be considered with caution. Household consumers are typically supplied with electricity by being connected to the distribution grid, therefore have to pay both transmission and distribution fees.

17 out of 30 reporting countries submitted the split between transmission and distribution costs for the consumption band IB and 17 countries for the consumption band IF.

Figure 62 – Shares of transmission & distribution charges in 2015 35 -for small and large industry

Source: European Commission, Member States

Data within the network component remains un- comparable due to different methods of calculations across Member States. It is however visible, that large industrial consumers are often connected only to the transmission grid. Therefore, the share of distribution costs is much lower for the band IF in several reporting countries.

Taxes and Levies component

For a detailed description, please consult the section on Taxes and levies sub- components .

1.2.3.3Price drivers – Sub- components

It is to be noted, that only explicitly reported cost elements could be allocated to specific policies and consequently taken into account for the analysis.

RES support costs for small and large industrial consumers

Explicit RES & CHP support costs were reported by 22 36 countries for small industrial consumers and by 21 countries for large industrial consumers. 37 It is visible from the below figures that in no reporting country are large industrial consumers completely exempted from paying RES and CHP support costs.

The EU weighted average cost of RES support increased from 4.9 EUR/MWh in 2008 to 27.1 EUR/MWh in 2015 for small industrial consumers and from 3.6 EUR/MWh to 15.9 EUR/MWh in 2015 for large industrial consumers. Support costs for the two consumer groups were initially similar however over time they became more differentiated as supports costs grew annually by 28% for small and by 24% for large industrial consumers.

Figure 63 - Evolution of average RES & CHP support costs

Source: European Commission, Member States

The share of average RES and CHP support costs in the total average price grew for both consumer groups by 15 percentage points from 4% to 19%.

Figure 64 – Share of RES and CHP support costs in the average EU price over time

Source: European Commission, Member States



Figure 65 - RES & CHP support costs by country in 2015

Source: European Commission, Member States

It is visible that in certain countries small industrial consumers pay significantly more than large industrial consumers. The difference in relative terms is the biggest in Belgium (15- fold), Greece (9- fold) and Spain (6- fold). In absolute terms Italy (23 EUR/MWh difference), Spain (21 EUR/MWh), Germany (20 EUR/MWh) and Greece (20 EUR/MWh) recorded the biggest differences

Figure 66 – Share of RES and CHP supports costs in 2015 by country

Source: European Commission, Member States

The share of RES & CHP support costs in respective national prices ranged from 36% in Germany to 3% in Ireland for small industrial consumers and from 41% in Germany to 1% in Ireland for large industrial consumers. Albeit RES & CHP support costs for small industrial consumers are higher or equal to the support costs paid by large industrial consumers in all reporting countries, the share of such support costs in the total national price was higher in 13 reporting countries for large industrial consumers.



Table 3. Overview of taxes and levies sub- components for small industrial electricity consumers (IB)

Sub- Component

Number of Countries

List of Countries

RES & CHP

21

AT, BE, BG, HR, CY, CZ, DK, EE, FR, DE, EL, HU, IE, IT, LV, LU, PT, RO, SK, SI, ES

Nuclear

4

 BE, IT, SK, ES

Social

9

BE. BG, CY, FR, EL, HU, IT, PT, ES

Security of supply

9

BE, BG, DK, FI, DE, IE, PT, SK. ES

Concession fees

3

BE ,DE, PT

Regulation

6

BE, CZ, PT, SK, SI, ES

Energy efficiency

3

BE, IT, SI

Other Levies

7

BE, BG, DK, IT, ES, UK, TR

Other Taxes

25

AT, BG, HR, CY, CZ, DK, EE, FI, FR, EL, HU, IE, IT, LU, NL, PL, PT, RO, SK, SI, ES, SE, UK, NO, TR

Table 4. Overview of taxes and levies sub- components for large industrial electricity consumers (IF)

Sub- Component

Number of Countries

List of Countries

RES & CHP

20

AT, BE, BG, HR, CY, CZ, DK, EE, FR, DE, EL, HU, IE, IT, LV, PT, RO, SK, SI, ES

Nuclear

4

BE, IT, SK, ES

Social

9

BE. BG, CY, FR, EL, HU, IT, PT, ES

Security of supply

9

BE, BG, DK, FI, DE, IE, PT, SK. ES

Concession fees

3

BE ,DE, PT

Regulation

6

BE, CZ, PT, SK, SI, ES

Energy efficiency

3

BE, IT, SI

Other Levies

7

BE, BG, DK, IT, ES, UK, TR

Other Taxes

25

AT, BG, CY, CZ, DK, EE, FI, FR, EL, HU, IE, IT, NL, PL, PT, RO, SK, SI, ES, SE, UK, NO, TR

 

(1)

Action 8. Greater transparency on energy costs and prices as well as on the level of public support

(2)

Comparable generation data for all of the EU Member States (with the exception of Malta) is only available as of January 2010 in the database of the European Network of Transmission System Operators for Electricity (ENTSO-E)

(3)

Due to methodological differences these numbers might slightly differ from the annual energy balance data from Eurostat

(4)

Report by Ecofys 2016

(5)

In Estonia oil shale is accounted among solid fuels, we took it under coal

(6)

Refers to Eurostat consumption band DC covering annual consumption of 2500 to 5000 Kwh.

(7)

Refers to Eurostat consumption band ID covering annual consumption of 2000 to 20000 MWh.

(8)

Refers to Eurostat consumption band IF covering annual consumption of 70000 to 150000 MWh.

(9)

Latest data of the evolution of electricity prices for households in EU capitals (April 2016, source: VaasaETT Ltd) shows significant monthly drops in prices in various capitals which could be reflecting the recent decreases in the wholesale prices.

(10)

Refers to Eurostat consumption band DC covering annual consumption of 2500 to 5000 kWh.

(11)

Refers to Eurostat consumption band ID covering annual consumption of 2000 to 20000 MWh.

(12)

Refers to Eurostat consumption band IF covering annual consumption of 70000 to 150000 MWh.

(13)

The aggregated consumption of these countries accounts for approximately three quarters of the total EU consumption. The average household consumption lies above the range of the band DC in Norway and slightly below in Turkey.

(14)

Compound Annual Growth Rate

(15)

Harmonized Consumer Price Index (HCPI), Eurostat: prc_hicp_aind

(16)

2010-2015 value for Greece.

(17)

For a literature review supporting the methodology used for the econometric analysis, please consult Error! Reference source not found.

(18)

R-squared values of estimated regressions are in the range of usual panel data results

(19)

Provided that these do not hinder cross border trade between Member States by enhancing formalities.

(20)

The graph displays 2014 shares for the United Kingdom.

(21)

Council Directive (2006/112/EC) of 28 November 2006 on the common system of value added tax (OJ L 34711.12.2006, p. 1).

(22)

Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity

(23)

It is to be noted that Sweden applies a Nuclear Capacity tax. This tax is not allocated to the nuclear sub- component of the taxes & levies main component, as the sub- component contains only costs elements that support the nuclear sector.

(24)

According to Directive 2008/92/EC of the European Parliament and of the Council : Industrial end-user may include other non-residential user.

(25)

Refers to Eurostat consumption band ID covering annual consumption of 2000 to 20000 MWh.

(26)

All average prices refer to weighted EU 28 average prices

(27)

 Refers to Eurostat consumption band ID covering annual consumption of 2000 to 20000 MWh.

(28)

Compound Annual Growth Rate

(29)

Producer Price Index, Eurostat sts_inpp_a

(30)

EU 28 weighted average

(31)

The graph displays 2014 shares for Estonia and the United Kingdom.

(32)

Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity

(33)

In Greece such charges include supply of electricity to consumers on non-interconnected islands for the same prices as for customers on the interconnected system; supply of electricity to customers eligible for the discounted Social Residential Tariff by decisions of the Minister of Environment and Energy (such as persons of low income, families with three or more children, long-term unemployed people, people with special needs as well as people on life support), supply of electricity to multi-member families at special tariffs; supply of electricity to non-profit social welfare organizations and institutions at special tariffs and costs of last resort and the universal service provider

(34)

Producer Price Index, Eurostat sts_inpp_a

(35)

There is no transmission system operator on Malta, therefore all costs are accounted for as distribution costs.

(36)

6 EU countries did not report explicit RES or CHP cost elements. They are: Finland, Malta, Netherlands Poland, Sweden and the United Kingdom. Norway and Turkey also did not report explicit RES or CHP support costs. It is important to note that consumers in these countries are paying RES support costs despite the fact that such costs are not explicitly levied on electricity bills. RES and CHP support costs are captured either in the energy component or are financed through general fiscal measures. The Netherlands introduced a Sustainable Energy Levy in 2013 as part of the SDE+ mechanism. This levy could not be calculated separately for the current study. In the United Kingdom RES support costs are part of the Climate Change Levy which could not be further disaggregated. As the Climate Change Levy could not be decomposed into designated RES, energy efficiency, social etc. elements, as it was de- composed in the case of households it was entirely assigned to the sub- component "Other taxes". For this reason, on the sub- component level, industrial and household data are not comparable for EU averages and for the United Kingdom. Comparison is feasible across different industrial bands.

(37)

Luxembourgish data for large industrial consumers is confidential 

Top

Brussels, 30.11.2016

SWD(2016) 420 final

COMMISSION STAFF WORKING DOCUMENT

Accompanying the document

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS

Energy prices and costs in Europe

{COM(2016) 769 final}


Contents

2    Gas prices    

2.1    Wholesale gas prices    

2.1.1 Price development    

2.1.2 Regional differences    

2.1.3Drivers of wholesale gas prices    

2.2    Retail gas prices    

2.2.1 Household Natural Gas Prices    

2.1.1.1 Price evolution – Total prices    

2.2.1.2 Price drivers – Main components    

2.2.2 Industrial Natural Gas Prices    

2.2.2.1 Price evolution – Total prices    

2.2.2.2 Price drivers – Main components    

2.2.3 Large Industrial Natural Gas Prices    

2.2.3.1 Price evolution – Total prices    

2.2.3.2 Price drivers – Main components    



Figure 67 - Comparison of gas, oil and coal prices in Europe    

Figure 68 - Gas hub prices in Europe    

Figure 69 - Comparison of gas hub prices in Northern and Southern France    

Figure 70 - Comparison of the UK gas hub (NBP) price with a theoretical oil-indexed price    

Figure 71 - Gas imports by pricing mechanisms    

Figure 72 - Estimated border prices of gas imports from Russia    

Figure 73 - Estimated border prices of gas imports from Norway    

Figure 74 - Estimated border prices of (pipeline) gas imports from North Africa    

Figure 75 – Natural gas components for different consumer types    

Figure 76 - Evolution of the weighted EU average natural gas price for households (D2)    

Figure 77 - Household (D2) natural gas prices by country in 2015    

Figure 78 - Price increases and national prices relative to EU average in 2015 for households (D2)    

Figure 79 -Household (D2) natural gas prices by country and observation period    

Figure 80 - Weighted EU average price components for households (D2)    

Figure 81 - Share of price components in the weighted EU average price for households (D2)    

Figure 82 - Household (D2) natural gas price components by country in 2015    

Figure 83 - Share of price components in the household natural gas (D2) price in 2015    

Figure 84 – Shares of transmission and distribution costs for households (D2) in 2015 by country    

Figure 85 - Evolution of the average EU natural gas price for industrial consumers (I3)    

Figure 86 - Natural gas prices for industrial (I3) consumers in 2015 by country    

Figure 87 - Gas price increases for industry (I3) and national prices relative to EU price in 2015    

Figure 88 - Gas price for industry (I3) by observation period and country    

Figure 89 - Gas price components (EU weighted av.) by observation period for industry (I3)    

Figure 90 – Shares of gas price components for industry (I3)    

Figure 91 - Price components for industrial (I3) gas consumers in 2015 by country    

Figure 92 - Price components for industrial (I3) natural gas consumers in 2015    

Figure 93 – Shares of transmission & distribution charges in 2015 for industrial gas (I3) consumers    

Figure 94 - Overview of sub- components on natural gas bills for median industrial consumers    

Figure 95 - Weighted EU average natural gas price for large industrial consumers (I5)    

Figure 96 - Natural gas prices for industry in 2015 - large (I5) vs median (I3) consumers    

Figure 97 - Difference of median and large industrial price as % of large industrial price    

Figure 98 - Price changes and national price relative to (weighted av.) EU price in 2015 for large industrial consumers (I5)    

Figure 99 - Natural gas prices for large industrial consumers (I5) by country    

Figure 100 - EU average price components for large industrial natural gas consumers (I5)    

Figure 101 - Share of price components in the EU average price for large industrial gas consumers(I5)    

Figure 102 - Price components by country in 2015 for large industrial gas consumers (I5)    

Figure 103 - Share of price components in 2015 by country for large industrial gas consumers (I5)    

Figure 104 - Transmission & distribution shares in 2015 for large industrial consumers(I5)    



Table 5. Evolution of price components by type of consumer    

Table 6. Price dispersion by type of consumer    

Table 7. Overview of taxes and levies sub- components for household natural gas consumers    

Table 8. Overview of sub- components on natural gas prices for large industrial consumers    



2    Gas prices

2.1Wholesale gas prices

In this chapter, the evolution of wholesale gas prices between 2008 and mid-2016 and the main price drivers are analysed.

Main findings

European wholesale gas prices plummeted in the wake of the 2008-2009 financial crises but recovered by 2011-2013, helped by the economic recovery and the Fukushima accident which increased global LNG demand. Since 2014, prices are on a declining trajectory as low oil prices and increasing global LNG supplies, coupled with weak demand are putting pressure on European gas prices.

While there seems to be a long-term correlation between gas, oil and coal prices, in shorter periods price trends can diverge.

Regional price differences persist in Europe, mainly driven by the level of competition although falling oil prices contributed to a convergence of prices in 2015-2016. In general, markets with higher levels of competition show a lower price level than markets with only one supply source.

Northwest Europe is characterised by developed and liquid wholesale gas markets which are supplied by a diverse range of supply sources, resulting in relatively low prices compared to other regions. Prices in more peripheral markets (Austria, Southern France, Italy) are generally higher, mainly because of infrastructure bottlenecks and lower liquidity.

In a large part of the EU, gas hubs are non-existent or are at an initial stage of development. In such cases, the analysis of estimated border prices allows us to see whether import prices in a given Member State are based on hub prices or are oil-indexed (or, possibly, a combination of the two).

Oil-indexed prices have a diminishing role in the European market but continue to be the dominant pricing mechanism in certain regions, in particular in Southeast Europe and the Baltics. On the other hand, hub prices gained significant ground in Central Europe: wholesale prices in this region are more and more aligned with Northwest European hub prices, rather than with oil-indexed prices.

Econometric analysis confirmed that the influence of crude oil price on wholesale gas prices is divergent across different regions: the impact is moderate in Northwest Europe while oil prices remained an important price driver in the Mediterranean, the Baltics and Southeast Europe. In case of Central Europe, crude oil prices had a markedly weaker impact in 2013-2015 than in 2009-2012. Other factors like the weather (heating degree days) and the US Henry Hub price were also found to have an impact on wholesale gas prices.

2.1.1 Price development

There have been significant fluctuations in European wholesale gas prices since 2008.

European gas prices peaked in mid-2008, with the spot (day-ahead) price at the NBP, the UK gas hub, reaching 30 €/MWh in September. Practically all commodities (including oil and coal) reached record levels in 2008, driven by the growing demand of the Asian emerging economies.

In the wake of the 2008-2009 financial crisis, the NBP price plummeted below 10 €/MWh in the third quarter of 2009. This was followed by years of increase, with the price gradually recovering to pre-crisis levels: in 2013, the annual average price exceeded 27 €/MWh. In addition to the economic recovery, the price rise was supported by the Fukushima accident in 2011: in the wake of the accident, Japan closed its nuclear power stations and replaced them with gas-fired power plants. The resulting increase in Japanese LNG imports raised Asian LNG prices and the decreasing availability of LNG cargoes also put pressure on European markets.

Since 2014, the price is again on a declining trajectory: in August 2016, the average price was just above 12 €/MWh, the lowest level since the end of 2009. Lowering oil prices and increasing global LNG supplies, coupled with weak demand are putting pressure on European gas prices in recent years.

As it can be seen on the below graph, over the long term, one can observe a clear correlation between the prices of the main fossil fuels, oil, gas and coal. The correlation between oil and gas prices is to a significant extent explained by the prevalence of the so-called oil-indexation used in many gas contracts (see below). In shorter periods, such a correlation does not necessarily exist, especially in the most recent years. For example, in the second part of 2014, when oil prices started their recent fall, NBP was moving in the opposite direction.

Figure 1 - Comparison of gas, oil and coal prices in Europe

Source: Platts



2.1.2 Regional differences

While NBP is often considered as the main gas price benchmark in Europe, it is not representative for the whole EU. In fact, there can be significant price differences between different Member States, depending on – inter alia – the type of contracts used (spot or long-term), the way of pricing (hub-based or oil-indexed) and, crucially, the level of competition. In general, markets with higher levels of competition show a lower price level than markets with only one supply source.

The three factors mentioned above are closely interlinked: long-term contracts are the most prevalent in Member States with limited supply sources (i.e. no or limited competition) and often apply oil-indexed prices.

In 2008, hub prices existed in the UK, the Netherlands, Belgium, Germany, the Netherlands and Italy. Subsequently, Austria and France also established gas hubs.

Northwest Europe is characterised by developed and liquid wholesale gas markets which are supplied by a diverse range of supply sources (indigenous gas in the Netherlands and the UK, supplies from storage facilities, pipeline imports from Norway and Russia and LNG imports from around the world). These well-connected and integrated markets show a significant convergence of prices, with price differences between the main hubs (NBP in the UK, TTF in the Netherlands, Zeebrugge in Belgium, Gaspool and NCG in Germany, PEG Nord in France) rarely increasing above 1 €/MWh. In terms of liquidity, the Dutch and the UK hub have a dominant role in the region.

More peripheral markets like Austria, Southern France and Italy also have established hubs but prices are generally higher than in Northwest Europe, mainly because of infrastructure bottlenecks and lower liquidity. Nevertheless, the price premia of these markets show a decreasing trend. More recently, Denmark, Finland and Poland have also established national hubs and corresponding marker prices (but are not depicted in the below graph).

Figure 2 - Gas hub prices in Europe

Source: Platts

The considerable impact of infrastructure constraints is well represented by the price difference between Northern and Southern France. Northern France has access to the diverse supply sources available in Northwest Europe while Southern France is largely relying on the LNG terminals on its Mediterranean coast. Constraints on the North-South link within France mean that prices can be quite divergent. For example, the premium of PEG Sud over PEG Nord averaged 4 Euro/MWh in January-October 2014; in December 2013 the difference exceeded 10 €/MWh. However, the price difference has almost disappeared during the 2014/2015 winter as a result of falling LNG prices and the high volume of incoming LNG to the southern terminals at Fos. In addition to the increasing LNG flows, high storage levels and relatively weak demand also helped to reduce congestion of the North-South link.

Figure 3 - Comparison of gas hub prices in Northern and Southern France

Source: Platts

In other parts of Europe we cannot really speak of gas hubs, accordingly there are no public hub prices. The exact price formulas of long-term contracts are not known either. As a proxy for wholesale prices, for these countries we are using the estimated border prices, i.e. the average price of imports. These countries generally rely on a low number of suppliers, often a single one. The import price is often based on the price of oil products (usually gas oil and/or fuel oil), applying a 6-9 month time lag.

Platt’s North West Europe Gas Contract Indicator (GCI), reported since May 2009 and depicted in the below graph, is a theoretical index showing what a gas price linked 100% to oil would be. Of course not all contracts use the same price formula but this indicator gives a good idea about the development of oil-indeed prices. Such "oil-indexed" prices show less volatility than hub prices but their absolute level is considerably higher. Falling oil prices contributed to a convergence of hub-based and oil-indexed prices in 2015-2016: the premium of oil-indexed prices has significantly decreased and practically disappeared in the summer of 2016.

Figure 4 - Comparison of the UK gas hub (NBP) price with a theoretical oil-indexed price

Source: Platts

Oil-indexed prices have an important but diminishing role in the European market: according to a report of the International Gas Union 1 , oil-indexation accounted for 39% of gas imports in 2014, down from 78% in 2009. 

There are important regional differences within Europe. In Northwest Europe, the share of oil-indexed-contracts from imports was only 13% in 2014. This represents a very significant decrease from 2009 when it was still 62%. Considering the increasing role of bub pricing in this region, hub prices well represent wholesale prices in these countries.

The role of oil-indexation also decreased significantly in Central Europe (from 90% of imports in 2009 to 38% in 2014), reflecting increased imports of spot gas, but remain dominant in other parts of Europe, in particular the Mediterranean and the Baltics/Scandinavia where gas-indexed components haven’t been introduced to the major share of long term contracts yet.



Figure 5 - Gas imports by pricing mechanisms

Source: IGU, Nexant

Northwest Europe: Belgium, Denmark, France, Germany, Ireland, Netherlands, UK

Central Europe: Austria, Czech Republic, Hungary, Poland, Slovakia, Switzerland

Scandinavia & Baltics: Estonia, Finland, Latvia, Lithuania, Norway, Sweden

Mediterranean: Greece, Italy, Portugal, Spain, Turkey

Southeast Europe: Bosnia, Bulgaria, Croatia, FYROM, Romania, Serbia, Slovenia

As mentioned above, in case of Member States with no established gas hubs, we use estimated border prices as a proxy. Border prices are estimated based on customs data (value and quantity of gas imports) which is available in Eurostat trade statistics (COMEXT database). This data is publicly available on Eurostat's website but for confidentiality reasons certain Member States are missing, in particular Austria, Germany and Poland. In case of Germany, we can use the average border price reported by the Federal Office for Economic Affairs and Export Control (BAFA). BAFA does not report the import price by supplier; the reported price is the weighted average of all gas imports.

When comparing the curve of the estimated border price with those of the NBP and the GCI, one can infer whether import prices in the given Member State are based on hub prices or are oil-indexed (or, possibly, a combination of the two).

Looking at estimated border prices of gas imports from Russia, by 2012 these seem to follow the GCI, i.e. the oil-indexed price indicator, suggesting that the pricing formula used in the contracts was based on oil product prices. On the other hand, there have been significant variations in the absolute values of the prices, suggesting that the exact price formulas were different.

From 2013, however, estimated border prices seem to follow different trajectories; this is most visible in mid-2014 when the NBP fell to 16 €/MWh while GCI remained above 30 €/MWh. Prices in the Baltic States and Southeast Europe continued to follow the trend of GCI but in Central Europe (Czech Republic, Hungary, Slovakia) and Italy they moved closer to the NBP price, indicating that these contract now has a significant hub pricing element and are no longer (purely) indexed on oil products. This finding confirms the result of the IGU analysis mentioned above, according to which hub prices gained significant ground in Central Europe but have only a minimal role in the Baltics and Southeast Europe. The average German border price (reflecting all imported gas, not only Russian) also seems to follow the trend of the NBP from 2013.

Apparently, in the years of high oil prices and decreasing European demand, several buyers of Russian gas managed to renegotiate their contracts with Gazprom, resulting in lower prices. This happened in countries having access to alternative supply sources and/or routes, proving the importance of competition as a price driver.

Figure 6 - Estimated border prices of gas imports from Russia

Source: Platts, BAFA, Eurostat COMEXT

When it comes to Norwegian imports, estimated border prices show that the switch from oil-indexation to hub-based pricing happened earlier. In case of Belgium and the UK, already in 2008 the border price seems to follow the NBP curve. In case of Spain, the switch happened later, around 2010 while in case of Italy only in 2014, reflected by a prominent fall of the estimated border price between March to May (by 15 €/MWh).



Figure 7 - Estimated border prices of gas imports from Norway

Source: Platts, BAFA, Eurostat COMEXT

Finally, in case of pipeline imports from North Africa, the estimated border prices provide no real evidence of a shift to hub-based pricing. Prices seem to follow the trend of the GCI indicator, suggesting a continuation of oil-indexation, although in recent years the absolute level of the prices has been considerably lower than the GCI, especially in 2014.

Figure 8 - Estimated border prices of (pipeline) gas imports from North Africa

Source: Platts, Eurostat COMEXT



2.1.3Drivers of wholesale gas prices

In the report on Prices and costs of EU energy 2 , an econometric analysis has been presented in order to assess the influence of different factors (including heating degree days, crude oil prices, the US Henry Hub price, domestic gas production and the availability of gas storage capacity) on wholesale gas prices in different regions of the EU.

Gas is often used for space heating and, as a result, gas demand often shows a high degree of seasonality which can have an impact on prices, in particular if temperatures deviate from the normal seasonal pattern (e.g. unusually mild winters vs. cold spells). The econometric analysis indeed found that heating degree days have a significant positive impact on prices, with the strongest impact seen in the UK. However, during the past (2015/2016) winter, hub prices in Northwest Europe have hardly shown any seasonality; in fact, prices showed a continuous decreasing trend since early 2015. Heating degree days were also found to have an impact on LNG prices.

In addition, hub prices are also influenced by the oil-indexed prices of long-term contracts. Econometric analysis indeed found that crude oil prices influence Northwest European hub prices although this impact is moderate and declining with time. (Hub prices in Northwest Europe had been strongly coupled to the oil-indexed prices of long-term contracts before 2009; afterwards, they started to deviate from the oil-indexed prices.) The impact is stronger if a lag is applied; this is consistent with the fact that oil-indexed prices are based on the oil product prices of 6-9 months ago. In case of decreasing oil prices for example, as seen in the last 2 years, falling oil-indexed prices put downward pressure on hub prices.

In case of Central Europe, crude oil prices had a markedly stronger impact on the border prices in the first part of the study period (2009-2012); in 2013-2015, as the pricing shifted away from oil indexation, this impact significantly decreased. In turn, the impact of Northwest European hub prices has significantly increased. In 2013-2015, there has been a very strong correlation between NBP and the border prices in Central Europe. The increasing share of hub-based pricing clearly had a negative impact on prices in the region,

In the Baltics and Southeast Europe, oil-indexed prices continue to have a dominant role. This was confirmed by the econometric analysis which found only a small decrease in the impact of crude oil prices in 2013-2015 compared to 2009-2012. In this region, crude oil price remained an important price driver while the role of the NBP price proved to be minimal.

In the Mediterranean, in particular Spain, LNG imports play an important role. In this region, LNG prices show a modest correlation with oil prices, suggesting that most contracts still use some oil-indexation. (In turn, LNG prices in Northwest Europe closely follow the local hub prices)

It was found that the evolution of the US wholesale price (Henry Hub) also has an impact on European hub prices and in fact this impact proved to be stronger than that of the crude oil price.

The hypothesis that a higher share of domestically produced gas would result in lower prices was refuted in case of Northwest Europe: it was found that this factor has no significant impact on the hub prices. On the other hand, in the Baltics and Southeast Europe (where Romania is an important gas producer) the share of domestic production proved to be a driver, having a significant negative impact on border prices.

According to the analysis, the availability of gas storage capacity has no significant impact on prices.

2.2Retail gas prices

The composition and drivers of natural gas retail prices are analysed based on a data collection designed and conducted by DG Energy of the European Commission. The gathered data set has distinct features:

Cost elements are allocated to harmonized main components, facilitating the targeted identification of price increase drivers on EU and national levels.

The component "taxes & levies" is further disaggregated into 10 sub- components, facilitating the quantification of the impact of specific policies and fiscal measures.

The component "network" is further decomposed into transmission and distribution costs.

Energy policy relevant levies and not- earmarked taxes are distinguished.

Summary

Natural gas retail prices for households increased at the annual rate of 1.7%. Prices for median industrial consumers marginally decreased while prices for large industrial consumers decreased at the annual rate of 0.5%.

Natural gas prices, unlike their electricity counterparts, remain largely determined by international commodity prices as the energy component of natural gas bills ranges up to 84%. Falling wholesale prices counterweighted and in the case of large industrial consumers even reversed the impact of increasing taxes and levies. The impact of energy policy relevant charges remained limited as such charges accounted for less than 10% of the weighted EU average price in 2015.

Highly varying national taxes and levies have only a moderate impact on natural gas prices, therefore they are more convergent across Europe than their electricity counterparts. Prices became on average 25% less dispersed for all consumer types from 2008 to 2015, mirroring the progress towards a single EU energy market. Impacts of the internal market are also underlined by 36% and 58% less dispersed energy components for households and median industrial consumers respectively.

Natural gas retail prices decreased for all consumer types from 2014 to 2015 3 . Such price evolution might hamper energy efficiency investments by households in more efficient equipment and by industry in more efficient production processes.

Slightly increasing or even decreasing retail prices reflect natural gas market conditions which have considerably changed over the past few years. The fall in oil prices, which started in 2014 significantly impacted the mostly oil indexed gas prices. The decrease in gas prices in turn changed the favourable investment climate leading to lower gas production on the medium term. Such supply reduction combined with increasing demand would normally lead to increasing prices on the short term. Demand for natural gas is however hampered by slow economic growth in Europe and tough competition by US coal. The slow recovery of EU economies comes with stagnating electricity demand. Demand levels, which in 2015 have not reached pre- crisis levels, are not sufficient to create supply shortages which in turn could increase price levels. Gas fired power generation more than halved from 468 TWh in 2008 to 201 TWh in 2014 despite decreasing commodity prices.

The shale gas boom in the United States has not directly impacted European gas prices by increasing supply. However, it indirectly contributed to decreasing prices. On the domestic US markets coal was crowded out by shale gas. Relatively low transport costs of excess coal from the United States, made the commodity a feasible option in Europe. Coal imports from the United States to the EU have increased 12 fold from 2300 kilotons in 2008 to 31500 kilotons in 2014 4 . The increased use of US coal for power generation in Europe lowered the demand for natural gas and thus contributed to sustained lower prices.

For large industrial consumers the weighted EU average of both the energy and network components decreased. This is a unique development across all analysed electricity and natural gas bands. The largest part of the bill - energy supply costs - decreased at the annual rate of 0.8% while network tariffs decreased by 1.9% annually. Taxes and levies increased at the annual rate of 4.4%.

For median industrial consumers decreasing energy costs (annual -1.9%) were counterweighted by increasing network tariffs (annual 6.2%) and growing taxes and levies (annual 11%). The combined impact of a moderate decrease in the largest component and faster increases in the smaller components led to almost net zero change in total prices from 2008 to 2015.

For households all three components increased over the observation period. The energy component accounted for the largest part of the household gas bill (53%). Its moderate annual increase of 0.3%, combined with respective annual increases of 2.5% and 4.2% of network tariffs and of taxes and levies led to a total annual price increase of 1.7%.

The composition of total prices remained almost constant for all households and large industrial consumers. The share of energy costs in the total price became slightly less prominent while the shares of the two other components slightly increased.

Figure 9 – Natural gas components for different consumer types

Source: European Commission, Member States

The following table summarizes the evolution of the three components as well as the evolution of their relative shares.

Table 1. Evolution of price components by type of consumer

Consumer Type

Household

Median industrial

Large industrial

Component

Annual growth

Share 2015

∆ share

Annual growth

Share 2015

∆ share

Annual growth

Share 2015

∆ share

Energy

0.3%

53%

-5pp

-1.9%

73%

-9pp

-0.8%

84%

-1pp

Network

2.5%

23%

+1pp

3.6%

17%

+4pp

-1.9%

8%

-1pp

Taxes & Levies

4.2%

24%

+4pp

8.3%

10%

+5pp

4.4%

8%

+2pp

Total price

1.7%

-

-

-0.3%

-

-

- 0.5%

-

-

Source: European Commission, Member States

Natural gas retail prices are less spread out across Europe than their electricity counterparts. This is largely due to the fact that they are less impacted by highly divergent national policies and fiscal measures. Various energy policy related levies, fees and charges imposed on natural gas bills are limited both in their value and variety. The following table displays natural gas price dispersion for various consumer types at the beginning and at the end of the observation period. Prices for all consumer types became more convergent over time.

Table 2. Price dispersion by type of consumer

Type of Consumer

Band

Year

Max/Min

∆ Total price dispersion

2008-2015

∆ Energy component dispersion

200-2015

Household

D2

2008

3.54

-14%

-36%

 

 

2015

3.11

Median industrial

I3

2008

1.8

-39%

-58%

 

 

2015

0.63

Large industrial

I5

2008

2.24

-26%

-30%

 

 

2015

1.99

Source: European Commission, Member States

2.2.1 Household Natural Gas Prices

The following chapter analyses natural gas retail prices paid by household consumers whose annual consumption falls in the range of 20 to 200 GJ. This consumption band is defined by Eurostat terminology as D2. It is the most representative consumption band in all but one reporting country. Disaggregated natural gas prices for this consumption band were reported by 23 EU member States and Turkey. Natural gas is not used on Cyprus and Malta and its household share in total primary energy supply is below 1% in Finland. Therefore, these three countries do not report prices. 5 Disaggregated prices could not be reported by Ireland, Latvia and Norway in the course of the current study. 6

Summary

Natural gas prices for households grew at the annual rate of 1.7% from 2008 to 2015. While nominal price levels are largely determined by the energy component, price increases were driven by growth in taxes, levies and network tariffs.

With over 50% share in the weighted EU average price, the energy component remained the most dominant component. It was the largest of the three components in 20 reporting countries in 2015. In two of the three remaining, countries taxes and levies was the largest component (DK, SE) while Portugal was the only country reporting the highest share of network tariffs. These three countries, where the energy component was out weighted by another component, recorded the highest prices in 2015.

Progress towards a single energy market is mirrored by the increased convergence of household natural gas prices as such became 14% less dispersed from 2008 to 2015.This trend is underlined by the evolution of national energy components which became 37% less dispersed.



2.1.1.1 Price evolution – Total prices

The average 7 household natural gas price was 6.60 Eurocent/kWh in 2015. This average price increased at the annual rate of 1.7% from 5.86 €c/kWh in 2008. This growth closely resembles overall average inflation 8 of 1.5% during the same period. The average price decreased by almost 6% in the period 2008 - 2010 reflecting decreasing demand trends, partly due to the ongoing financial and economic crisis. From 2011 to 2014 prices increased at a faster pace of almost 15%. From 2014 to 2015 the average EU price, in line with the evolution of international commodity prices, decreased by 4%.

Figure 10 - Evolution of the weighted EU average natural gas price for households (D2)

Source: European Commission, Member States

The highest reported price was almost four- fold of the lowest in 2015 as household prices ranged from 3.11 Eurocent/kWh in Romania to 11.31 Eurocent/kWh in Sweden.

Figure 11 - Household (D2) natural gas prices by country in 2015

Source: European Commission, Member States

Significant differences in international price convergence are observed for different energy products. Electricity household prices are considerably more spread out than their natural gas counterparts. This is mostly due to the fact that household electricity prices are more impacted by various taxes and levies that highly differ from country to country.

The following graph displays nominal price increases and decreases from 2008 to 2015 and national prices in 2015 relative to the 2015 average EU price 9 .

Figure 12 - Price increases and national prices relative to EU average in 2015 for households (D2)

Source: European Commission, Member States

Figure 13 -Household (D2) natural gas prices by country and observation period

Source: European Commission, Member States



2.2.1.2 Price drivers – Main components

For a detailed description please consult the section on the main components.

Figure 14 - Weighted EU average price components for households (D2)

Source: European Commission, Member States

The average energy component increased marginally by at the annual rate of 0.3% from 2008 to 2015 and accounted for 3.54 Eurocent/kWh in 2015. The evolution of the energy component closely resembles the evolution of the total price. It was the largest of the three components in all but three (DK, SE, PT) reporting countries. These three countries recorded the highest prices in 2015. In Denmark and Sweden taxes and levies and in Portugal network costs out weighted the energy component.

Box - Pass through effect on gas

The main results of the analysis on the drivers of the energy component of gas retail prices are well aligned with theoretical expectations. Wholesale gas prices are the main driver of the retail prices’ energy component and have a strong impact on the energy price component, particularly in the countries with more liberalised markets (one Euro of wholesale gas prices affects the retail prices’ energy and supply component by about €0.4 in general and by €0.7 in the energy component of households prices in NL, UK, BE) Countries with regulated retail markets show a lower impact of wholesale prices (about €0.2) and markets with higher level of competition (CR3 equal or below 80%) show a slightly stronger impact of wholesale prices on the energy supply component. Finally, countries with liberalised markets seem to have lower prices, but limited data availability allows no further analysis.

There are regional differences in prices, which could be explained by different market characteristics (e.g. retailer concentration, number of suppliers, number of households switching, etc.) but analysis on that could not been carried out because sufficient time series data for market characteristics were not identified.

Overall, wholesale prices affect retail prices, but how strongly and quickly wholesale prices are passed through to retail prices (supply component) also depend on retail market structures, of which no appropriate data have been available yet to fully explain price developments.

Source: Ecofys study sections 3.2.2.1 & 3.2.2.2 and related Annex 2

The average network component increased at the annual rate of 2.5% and cost the average EU household 1.49 Eurocent/kWh in 2015. The taxes & levies component increased at the annual rate of 4.2% from 2008 to 2015 and accounted for 1.56 Eurocent/kWh in 2015. The increase in taxes and levies is the most relevant contributor to overall natural gas price increases for households.

Figure 15 - Share of price components in the weighted EU average price for households (D2)

Source: European Commission, Member States

The share of the energy component in the total price decreased by 5 percentage points from 59% to 54%. The share of the Network component marginally increased from 21% to 22%.

The share of the Taxes& Levies component in the total price increased by 4 percentage points from 20% to 24%.

Figure 16 - Household (D2) natural gas price components by country in 2015

Source: European Commission, Member States

Figure 17 - Share of price components in the household natural gas (D2) price in 2015

Source: European Commission, Member States

Energy component

Only one of the three price components, the energy component is determined by the market. Increasing competition contributes to decreasing energy components. The share of the energy component decreased by 5 percentage points and accounted for 53% of the average household price in 2015. The level of the network and taxes & levies components are set by divergent national laws and regulations. Their joint share in the average household price increased from 37% to 42%. As the part of the price which is set by market forces has been gradually decreasing, total prices are imperfect indicators for the measurement of price dispersion. The dispersion of the energy component however adequately reflects the progress towards an internal energy market. The energy component of the average median industrial price became 37% less dispersed since 2008.

Network component

The Network component is broken down into two sub- components, namely transmission and distribution. Both transmission and distribution tariffs are regulated in all EU Member States as well as in Norway and Turkey. The allocation of cost elements (for example costs of infrastructure, losses, ancillary services) to the two sub- components might differ from country to country. Therefore, cross- country comparisons are to be undertaken with caution.

13 reporting countries provided the split between transmission and distribution tariffs 10 .

Figure 18 – Shares of transmission and distribution costs for households (D2) in 2015 by country

Source: European Commission, Member States

Taxes & Levies component

It is to be noted, that only explicitly reported cost elements could be allocated to specific policies and consequently taken into account for the analysis. For example, RES or nuclear decommissioning costs exist in several countries which could not report such costs explicitly.

VAT is paid by household consumers in all reporting countries. Natural gas VAT rates ranged from 5% in the United Kingdom to 27% in Hungary in 2016. 11 The share of taxes and levies in the EU average price is less than a quarter. Not- earmarked taxes (VAT, excise tax and other taxes) accounted for 93% of the total taxes and levies component. Energy policy relevant levies were rather insignificant and accounted for only 7% of the total taxes & levies component. 12

During the whole reporting period, 12 countries have not imposed any energy policy relevant levies, fees or charges on household natural gas prices. 11 countries imposed levies in at least one year (not necessarily in all years). While 24 EU Member States impose explicit renewable energy support levies 13 on household electricity consumption, only two (Italy and Slovenia) do so on natural gas bills.



Table 3. Overview of taxes and levies sub- components for household natural gas consumers

Sub- Component

Number of Countries

List of Countries

RES & CHP

2

IT, SI

Nuclear

0

 

Social

3

BE, FR, UK

Security of Supply

2

GR, HU

Concession fees

3

AT, BE ,DE, PT

Market operation

2

BE, CZ

Energy Efficiency

3

BE, SI, UK

Concession fees for the occupation of public land, imposed by 4 Member States represented the most commonly applied levy on natural gas bills.



2.2.2 Industrial Natural Gas Prices

The following chapter analyses natural gas retail prices paid by industrial consumers whose annual consumption falls in the range of 10 000 to 100 000 GJ. This consumption band is defined by Eurostat terminology as I3 and is the most representative consumption band in the majority of the reporting countries. Disaggregated natural gas prices were reported by 24 EU member States and Turkey. Natural gas is not used on Cyprus and Malta, therefore these countries do not report such prices. 14 Disaggregated prices could not be reported by Ireland, Latvia and Norway in the course of the current study. 15

Summary

Nominal natural gas prices for median industrial consumers remained stable from 2008 to 2015 when the average price accounted for 36.5 EUR/MWh.

The energy component, with its almost three- quarter share in the total price, remained the most dominant component. Its moderate decrease counterweighted higher increases in the two smaller components. The impact of taxes and levies on the total price remained limited, therefore the evolution of the total price is mostly correlated to the evolution of the energy component. Natural gas prices are determined by international commodity prices rather, than divergent national taxes and levies, therefore they are more convergent across Europe than their electricity counterparts.

VAT is recoverable for most industrial 16 consumers in all reporting countries. Therefore the current study analyses industrial prices excluding VAT and other recoverable taxes.

Progress towards a single energy market is mirrored by the increased convergence of industrial natural gas prices as such became 39% less dispersed from 2008 to 2015.This trend is underlined by the evolution of national energy components which became 58% less spread out.



2.2.2.1 Price evolution – Total prices

The average 17 median industrial natural gas consumer paid 36.5 €/MWh in 2015. The average price has decreased at the annual rate of 0.3% from 2008 to 2010. The annual average inflation rate accounted for 0.5% during the same period. 18

Figure 19 - Evolution of the average EU natural gas price for industrial consumers (I3)

Source: European Commission, Member States

The highest observed price was less than two fold of the lowest observed price in the EU. Prices for median industrial consumers ranged from 28.72 €/MWh in Lithuania and 26.40 €/MWh in Turkey to 45.72 €/MWh in Finland in 2015.

Figure 20 - Natural gas prices for industrial (I3) consumers in 2015 by country

Source: European Commission, Member States

The following graph displays nominal price increases or decreases from 2008 to 2015 and national prices in 2015 relative to the 2015 average EU price 19 .



Figure 21 - Gas price increases for industry (I3) and national prices relative to EU price in 2015

Source: European Commission, Member States

Figure 22 - Gas price for industry (I3) by observation period and country

Source: European Commission, Member States



2.2.2.2 Price drivers – Main components

For a detailed description, please consult the section on the main components.

Figure 23 - Gas price components (EU weighted av.) by observation period for industry (I3)

Source: European Commission, Member States

The average energy component decreased at the annual rate of 0.5% since 2008 and accounted for 26.5 €/MWh in 2015. For median industrial consumers the energy component was the largest of the three components in all reporting countries. The average network component increased at the annual rate of 3% and cost the average median industrial consumer 6.1 €/MWh in 2015.

The taxes & levies component experienced a faster increase of annual 11% but still remained the smallest component accounting only for 3.8 €/MWh in 2015.

Figure 24 – Shares of gas price components for industry (I3)

Source: European Commission, Member States

The share of the energy component in the total price decreased by 9 percentage points but it remained to make up two thirds of the total price in 2015.

The share of the network component slightly increased from 12% to 16%.

The share of the taxes& levies component in the total price increased by 5 percentage points from 5% to 10%.

Figure 25 - Price components for industrial (I3) gas consumers in 2015 by country

Source: European Commission, Member States

Figure 26 - Price components for industrial (I3) natural gas consumers in 2015

Source: European Commission, Member States

Developments within components for industrial gas consumers

The current edition of the Energy Prices and Costs study introduces sub- components within the network and taxes & levies components.



Energy component

Only one of the three price components, the energy component is determined by the market. Increasing competition contributes to decreasing energy components. The share of the energy component decreased by 8 percentage points and accounted for 73% of the average median industrial price in 2015. The levels of the network and taxes & levies components are set by divergent national laws and regulations. Their joint share in the average median household price increased from 19% to 27%. As the part of the price which is set by market forces has been gradually decreasing, total prices are imperfect indicators for the measurement of price dispersion. The dispersion of the energy component however adequately reflects the progress towards an internal energy market. The energy component of the average median industrial price became 58% less dispersed since 2008.

Network component

The Network component is broken down into two sub- components, namely transmission and distribution. Both transmission and distribution tariffs are regulated in all EU Member States as well as in Norway and Turkey. The allocation of cost elements (for example costs of infrastructure, losses, ancillary services) to the two sub- components might differ from country to country. Therefore, cross- country comparisons are to be undertaken with caution.

14 reporting countries provided the split between transmission and distribution tariffs 20 .

Figure 27 – Shares of transmission & distribution charges in 2015 for industrial gas (I3) consumers 21

Source: European Commission, Member States



Taxes & Levies component

It is to be noted, that only explicitly reported cost elements could be allocated to specific policies and consequently taken into account for the analysis. For example, RES support costs exist in several countries which could not report such costs explicitly.

VAT is recoverable for most industrial consumers in all reporting countries, therefore the current study analyses prices excluding VAT and other recoverable taxes.

Non- recoverable, not- earmarked taxes (for instance excise tax) accounted for 75% of the total average taxes and levies component. 22

In Lithuania and Romania median industrial natural gas consumers do not pay any taxes or levies.

In the period 2008-2015 altogether 14 reporting countries have not imposed any energy policy relevant levies, fees or charges on median industrial natural gas prices. 10 countries imposed levies in at least one year (not necessarily in all years). While 25 EU Member States impose explicit renewable energy support levies 23 on industrial electricity consumption, only Italy does so, on natural gas bills.

Figure 28 - Overview of sub- components on natural gas bills for median industrial consumers

Sub- Component

Number of Countries

List of Countries

RES & CHP

1

IT

Nuclear

0

 

Social

3

BE, FR, IT

Security of Supply

3

FI, GR, HU

Concession fees

3

AT, BE ,PT

Market operation

2

BE, CZ

Energy Efficiency

1

SI

Source: European Commission, Member States

Concession fees for the occupation of public land, imposed by 3 Member States represented the most commonly applied levy on natural gas bills. Also 3 countries applied levies related to security of supply and social policies.

2.2.3 Large Industrial Natural Gas Prices

The following chapter analyses natural gas retail prices paid by industrial consumers whose annual consumption falls in the range of 1 million to 4 million GJ. This consumption band is defined by Eurostat terminology as I5. The chapter does not only reflect on developments of large industrial prices but analyses them in comparison to median industrial prices. Disaggregated natural gas prices were reported by 20 EU Member States. Natural gas is not used on Cyprus and Malta, therefore these countries do not report such prices. 24 In Croatia, Greece, Ireland, Luxembourg, Latvia and Slovenia there is either no consumer in this consumption band or data is confidential.

Summary

The average natural gas price of 26.6 EUR/MWh for large industrial consumers in 2015 was below that of 2008. The energy component with its share of 84% in the total price remained by far the largest component and thus the most prominent driver of the price evolution. The impact of taxes and levies on the total price is limited, as such made up only 8% of the bill.

Industrial gas prices are determined by international commodity prices rather than highly divergent national taxes and levies, therefore prices for large industrial consumers show relatively small variation across Europe. The composition of large industrial prices remained remarkably stable over time.

Progress towards a single energy market is mirrored by the increased convergence of large industrial natural gas prices as such became 26% less dispersed since 2008. This trend is underlined by the evolution of national energy components which became 30% less spread out across the EU.

2.2.3.1 Price evolution – Total prices

The average natural gas price for large industrial consumers was 26.6 EUR/MWh in 2015. This average price decreased since 2008 at the annual rate of half a percent. The average annual inflation rate accounted for the same figure, 0.5% during the period. 25

Figure 29 - Weighted EU average natural gas price for large industrial consumers (I5)

Source: European Commission, Member States

Prices for large industrial consumers ranged from 22.91 €/MWh in Belgium to 41.40 €/MWh in Finland 26 in 2015.

Figure 30 - Natural gas prices for industry in 2015 - large (I5) vs median (I3) consumers

Source: European Commission, Member States

In some countries large industrial consumers pay considerably less than median 27 industrial consumers, in other countries price differences are smaller. This highlights the fact that despite efforts towards the creation of a single EU energy market, retail price conditions remain persistently different across Member States. Such differences are in sharp contrast with developments on wholesale markets where major benchmarks are broadly aligned.

Figure 31 - Difference of median and large industrial price as % of large industrial price

Source: European Commission, Member States

In absolute terms the Netherlands recorded the biggest difference of 12 EUR/MW between the median and the large industrial price, followed by France, the United Kingdom and Germany (differences above 10 EUR/MWh). In relative terms France and the United Kingdom reported the highest price differences of 47% while in Estonia the difference was only 9%.

Figure 32 - Price changes and national price relative to (weighted av.) EU price in 2015 for large industrial consumers (I5)  28

Source: European Commission, Member States

Figure 33 - Natural gas prices for large industrial consumers (I5) by country 

Source: European Commission, Member States

2.2.3.2 Price drivers – Main components

For a detailed description, please consult the section on the main components.

Figure 34 - EU average price components for large industrial natural gas consumers (I5)

Source: European Commission, Member States

The average Energy component decreased at the annual rate of 0.8% since 2008 and accounted for 22.37 €/MWh in 2015.

The average Network component decreased at the annual rate of 1.9% and accounted for 2.21 €/MWh in 2015.

The Taxes & Levies component increased at the annual rate of 4.4% and accounted for 2.08 €/MWh in 2015.

Figure 35 - Share of price components in the EU average price for large industrial gas consumers(I5)

Source: European Commission, Member States

The share of the Energy component in the total price decreased by 1 percentage point and accounted for 84% of the total price in 2015. The energy component remained the largest of the three components in all reporting countries.

The share of the Network component remained constant at 8%.

The share of the Taxes& Levies component in the total price increased by 3 percentage points from 5% to 8%.

Figure 36 - Price components by country in 2015 for large industrial gas consumers (I5)  29

Source: European Commission, Member States

Figure 37 - Share of price components in 2015 by country for large industrial gas consumers (I5)

Source: European Commission, Member States



Developments within components for large industrial consumers

It is to be noted, that only explicitly reported cost elements could be allocated to specific policies and consequently taken into account for the analysis. For example, RES or nuclear decommissioning costs exist in several countries which could not report such costs explicitly.

Energy component

Only one of the three price components, the energy component is determined by the market. Increasing competition contributes to decreasing energy components. The share of the energy component decreased by 1 percentage points and accounted for 84% of the average large industrial price in 2015. The level of the network and taxes & levies components are set by divergent national laws and regulations. Their joint share in the average large industrial price increased from 5% to 6%. As the part of the price which is set by market forces has been moderately decreasing, total prices are imperfect indicators for the measurement of price dispersion. The dispersion of the energy component however adequately reflects the progress towards an internal energy market. The energy component of the average industrial price became 17% less dispersed since 2008.

Network component

The Network component is broken down into two sub- components, namely Transmission and Distribution. Both transmission and distribution tariffs are regulated in all EU Member States as well as in Norway and Turkey. The allocation of cost elements (for example costs of infrastructure, losses, ancillary services) to the two sub- components might differ from country to country. Therefore, cross- country comparisons are to be undertaken with caution.

12 reporting countries provided the split between transmission and distribution tariffs 30 .

Figure 38 - Transmission & distribution shares in 2015 for large industrial consumers (I5) 31

Source: European Commission, Member States

Transmission shares ranged from 6% in the Czech Republic to 100% in Bulgaria, Finland and Italy, highlighting the lack of harmonization of the definitions for transmission and distribution.

Taxes & Levies component

VAT is recoverable for industrial consumers, therefore the current study analyses prices excluding VAT and other recoverable taxes.

The share of taxes and levies in the EU average price is 8%. The impact of energy policy relevant levies is the least significant for this type of consumer. In Lithuania and Romania industrial natural gas consumers do not pay any taxes or levies.

Table 4. Overview of sub- components on natural gas prices for large industrial consumers

Sub- Component

Number of Countries

List of Countries

RES & CHP

1

IT

Nuclear

0

 

Social

3

BE, FR, IT

Security of Supply

2

FI, HU

Concession fees

3

AT, BE ,PT

Market operation

2

BE, CZ

Energy Efficiency

0

 

Concession fees for the occupation of public land, imposed by 3 Member States represented the most commonly applied levy on natural gas bills.

(1)

Wholesale Gas Price Survey - 2015 Edition

(2)

Report on Prices and costs of EU done by Ecofys for the European Commission

(3)

Latest data of the evolution of gas prices for households in EU capitals (April 2016, source: VaasaETT Ltd) shows significant monthly drops in prices in various capitals which could be reflecting the recent decreases in the wholesale prices.

(4)

Excludes coking coal, Eurostat nrg_122a.

(5)

Finland reported industrial natural gas prices.

(6)

Total prices for Ireland and Latvia are available in the Eurostat data base.

(7)

All average prices refer to weighted EU 25 average prices.

(8)

Harmonized Consumer Price Index (HCPI), Eurostat prc_hicp_aind

(9)

2010-2015 value for Austria

(10)

2014 data for Spain and the United Kingdom

(11)

Source: DG TAXUD: Excise Duty Tables, Part II- Energy products and Electricity at: http://ec.europa.eu/taxation_customs/taxation/excise_duties/energy_products/rates/index_en.htm

(12)

includes tax data from Greece and Ireland

(13)

RES support costs occur in all 28 Member States regardless if they are levied explicitly or not

(14)

Finland reported industrial natural gas prices and Ireland reported VAT and excise tax for all bands.

(15)

Total prices of Ireland and Latvia are available in the Eurostat data base.

(16)

According to Directive 2008/92/EC of the European Parliament and of the Council : Industrial end-user may include other non-residential user.

(17)

All average prices refer to weighted EU average prices.

(18)

Producer Price Index, Eurostat sts_inpp_a

(19)

2010-2015 value for Austria

(20)

2014 data for Portugal, Spain and the United Kingdom

(21)

Data from 17 Member States were available. The graph displays 2014 shares for Estonia and the United Kingdom. There is no transmission grid on Malta, therefore all costs are attributed to the distribution system.

(22)

includes tax data from Greece and Ireland

(23)

RES support costs occur in all 28 Member States regardless if they are levied explicitly or not

(24)

Finland reported industrial natural gas prices and Ireland reported VAT and excise tax for all bands.

(25)

Producer Price Index, Eurostat sts_inpp_a

(26)

It is to be noted that according to total prices formed as the aggregation of price elements reported for the ad- hoc data collection, Finland has the highest industrial natural gas price of 0.0457 €/MWh followed by the Swedish price of 0.0448 €/MWh.

(27)

Eurostat consumption band I3

(28)

2010-2015 value for Austria

(29)

It is to be noted that according to Eurostat (nrg_pc_203) data Sweden has higher industrial prices than Finland.

(30)

2014 data for Spain, Portugal and the United Kingdom.

(31)

Data from 17 Member States were available. The graph displays 2014 shares for Estonia and the United Kingdom. There is no transmission grid on Malta, therefore all costs are attributed to the distribution system.

Top

Brussels, 30.11.2016

SWD(2016) 420 final

COMMISSION STAFF WORKING DOCUMENT

Accompanying the document

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS

Energy prices and costs in Europe

{COM(2016) 769 final}


Contents

3    Oil product prices    

3.1    Crude oil prices    

3.2    Wholesale prices of oil products    

3.2.1    Impact of oil prices    

3.3    Retail prices of oil products    

3.3.1    Gasoline    

3.3.2    Diesel    

3.3.3    Heating oil    

Energy costs    

4    The EU energy bill    

4.1    Drivers    

4.2    Import bill calculation    

4.3    Putting the import bill in context    



Figure 105 - The Brent crude oil price from 2008    

Figure 106 - Crude oil (Brent) vs wholesale gasoline, diesel and heating oil prices (2008-2015)    

Figure 107 - Crack spreads of gasoline, diesel and heating oil in 2008-2015    

Figure 108 - Average retail price of oil products in the EU    

Figure 109 - Average excise duty rates for oil products in the EU    

Figure 110 - Average retail price of oil products in the EU, without taxes    

Figure 111 - Crude oil price as a percentage of average retail prices without taxes and the difference between average retail prices without taxes and the crude oil price    

Figure 112 - Average retail price of gasoline by Member State    

Figure 113 - Average retail price of gasoline by Member State, 2008=100    

Figure 114 - Average retail price of gasoline by Member State, without taxes    

Figure 115 - Average exercise duty rate of gasoline by Member State    

Figure 116 - Average retail price of gasoline in the EU by price component    

Figure 117 - Average retail price of gasoline in 2015 by Member State and price component    

Figure 118 - Average retail price of diesel by Member State    

Figure 119 - Average retail price of diesel by Member State, 2008=100    

Figure 120 - Average retail price of diesel by Member State, without taxes    

Figure 121 - Average excise duty rate of diesel by Member State    

Figure 122 - Average retail price of diesel in the EU by price component    

Figure 123 - Average retail price of diesel in 2015 by Member State and price component    

Figure 124 - Average retail price of heating oil by Member State    

Figure 125 - Average retail price of heating oil by Member State, 2008=100    

Figure 126 - Average retail price of heating oil by Member State, without taxes    

Figure 127 - Average excise duty rate of heating oil by Member State    

Figure 128 - Average retail price of heating oil in the EU by price component    

Figure 129 - Average retail price of heating oil in 2015 by Member State and price component    

Figure 130 - EU import dependency by fuel    

Figure 131 - EU net imports of energy in 2014 (mtoe)    

Figure 132 - Production, consumption and net imports of crude oil and NGL    

Figure 133 - Production, consumption and net imports of natural gas    

Figure 134 - Production, consumption and net imports of hard coal    

Figure 135 - Comparison of European oil, gas and coal prices    

Figure 136 - The USD/EUR exchange rate since 2013    

Figure 137 - Spot LNG prices in Europe    

Figure 138 - Estimated border prices of gas imports from Russia    

Figure 139 - Estimated border prices of gas imports from Norway    

Figure 140 - Estimated border prices of gas imports from Algeria    

Figure 141 - Estimated border prices of gas imports from Libya    

Figure 142 - CIF ARA spot coal price    

Figure 143 - The Brent spot oil price since 2013    

Figure 144 - The Brent price and the average EU import price    

Figure 145 - The estimated EU import bill    



Table 9. Estimated average gas import prices by supplier (€/MWh)    

Table 10. EU crude oil import bill in 2013-2015    

Table 11. EU gas import bill in 2013-2015    

Table 12. EU hard coal import bill in 2013-2015    

Table 13. Estimated import bill by fuel and supplier in 2015 (billion €)    

Table 14. The energy import bill as percentage of GDP and total imports    



3Oil product prices

Main findings

After three and a half years of relative stability, crude oil prices started to fall in mid-2014, driven by robust supply growth and relatively weak demand. At the beginning of 2016, Brent dropped to 26 USD/bbl, the lowest level since 2003. Since then, prices recovered and since June 2016 Brent has been trading in the 40-50 USD/bbl range.

Expectations of the global oil market reaching a balance have been pushed back to 2017, although the agreement of OPEC countries reached in September 2016 to cut output may hasten rebalancing. In any case, high stock levels suggest that prices will remain subdued throughout 2016 and 2017. In the longer run, a shortfall in investment is likely to lead to tighter markets and higher prices.

The crude oil price is the main driver for the development of the wholesale prices of oil products although other factors, like the supply-demand situation in the specific oil product market, refinery maintenance or seasonality can also influence the prices.

In addition to the crude oil price, the retail price of oil products is also influenced by the costs of refining and distribution, variations in exchange rates (crude oil is traded in US dollar but the finished products are sold at the pump in euros or other national currencies) and tax rates. In fact, the share of crude oil in the final price can be as low as 25% and, therefore, variations in the price of crude oil have a limited impact on the price at the pump.

In 2014-2015, the high share of taxes, the weakening of the euro and – in part of the Member States – the increasing excise duty rates moderated the pass-through of falling oil prices to the retail prices of oil products in Europe. In 2015, the tax component of the average gasoline and diesel price was 63% and 57%, respectively.

3.1Crude oil prices

Crude oil prices reached unprecedented levels in 2008, exceeding 140 USD/bbl at the height of the "commodity super cycle" which was driven by the rising demand from emerging markets, particularly China. The price increase was interrupted by the financial crisis, with a sharp downturn in the second half of 2008. However, as demand recovered, prices began to rise again and crossed the 100 USD/bbl level again in early 2011. This was followed by three and a half years of remarkable price stability, with Brent rarely leaving the 100-120 USD/bbl range.

Crude oil prices have been on a declining trajectory since mid-2014, driven by weak demand and robust supply growth. In the first half of 2015, prices bounced back as the falling number of active rigs in the US and the news about oil companies cutting upstream spending have raised expectations that supply growth could soon ease. However, as the global market remained oversupplied, prices continued to decrease. From a 115 USD/bbl peak in June 2014, Brent dropped to 26 USD/bbl on 20 January 2016, its lowest level since 2003. This means the price decreased by 77% in 19 months. By June, prices recovered to around 50 USD/bbl and, since, then, have been trading in the 40-50 USD/bbl range.

Figure 105 - The Brent crude oil price from 2008

Source: Platts

Weak demand growth

Global oil demand growth has significantly weakened in 2014, mainly because of lower than expected global economic growth and mild winter temperatures. In addition to these cyclical and one-off factors, we can also see deeper underlying changes in oil demand: energy efficiency measures such as CO2 standards for cars are increasingly implemented throughout the world and are starting to have an effect on global demand. 1 The high oil prices of the past decade have also supported a switch to other sources of energy and structural changes in the economic activities.

China remains the main contributor of global demand growth but its demand growth has noticeably slowed down as the country is entering a less oil-intensive stage of development. Concerns over China's growth prospects – in the wake of the stock market turmoil, followed by the devaluation of the yuan in August 2015 – also contributed to the falling oil prices.

Global demand growth gained momentum and reached a five-year high in 2015 (+1.8 mb/d according to the IEA), helped by economic growth and the lower prices. 30% of the growth was coming from OECD countries and, unusually, even Europe registered a demand growth.

Although the macroeconomic backdrop is expected to improve in 2016 (the IMF, in its January 2016 World Economic Outlook, cited global economic growth rising to 3.4% in 2016 and 3.6% in 2017, from 3.1% in 2015), the IEA forecasts global oil demand growth to slow down to 1.2 mb/d. Almost all of this growth will come from the non-OECD countries. The support provided by low oil prices to demand in 2015 seems to fade away. In fact, several countries wisely used this opportunity to cut or reduce subsidies which curbs their demand outlook.

Robust non-OPEC supply growth

According to the IEA, non-OPEC output grew by a robust 2.5 mb/d in 2014, well above the increase of global demand. The better part of this growth, 1.9 mb/d, came from OECD countries, driven by increasing unconventional oil production in North America. In the last few years, US light tight oil and Canadian oil sands created an important new source of supply. (Production of light tight oil picked up well before 2014, but this additional supply was largely offset by supply disruptions and outages, mainly in Libya and Iran.)

Low oil prices undeniably have an impact on supply: they have prompted the oil industry to slash investment spending and delay or cancel projects. However, it takes time for today’s investment decisions to translate into lowered physical supply. In fact, in spite of the falling prices and the investment cuts, non-OPEC supply continued to grow in 2015, although the increase eased to 1.5 mb/d in 2015 which is still a significant growth compared with historical trends.

Even US light tight oil production proved to be rather resilient to low prices. Light tight oil basically requires continuous investments to sustain production, more than conventional oil. Accordingly, analysts expected that low prices would trigger faster supply side reductions. Although drilling activity decreased significantly, this was at least partly offset by improving efficiency and cost reductions. For most of the time, prices remained high enough to support drilling in core areas of major light tight oil plays.

In 2016, lower prices and spending cuts are finally expected to bring non-OPEC supply growth to a halt: according to the IEA, non-OPEC supply is set to decrease by 0.9 mb/d in 2016.

OPEC output policy

In spite of the falling prices, OPEC countries chose not to cut production in an attempt to maintain market share and to squeeze out high-cost producers. This was a fundamental change from OPEC's traditional policy of adjusting supply to balance markets and stabilise prices. In an effort to retain market share, OPEC continues to produce at near-record levels.

Furthermore, the lifting of the Iranian sanctions in January 2016 allowed Iran to increase its oil exports, adding to an already high OPEC output and further delaying the market rebalancing.

On 16 February 2016, three OPEC members – Saudi Arabia, Qatar and Venezuela – plus Russia said they are ready to freeze crude production at January 2016 levels, if other oil producers join this initiative. However, in their meeting on 17 April, producers failed to reach an agreement.

In late September 2016, OPEC ministers tentatively agreed in Algiers to limit their production to between 32.5 and 33 mb/d 2 , in order to accelerate the drawdown of the stock overhang and bring the rebalancing forward. The organization’s next formal meeting on 30 November is scheduled to decide on each country’s allocation and the date for the ceiling to take effect. In the meantime, OPEC will consult key non-OPEC producers about the possibility of reducing their production.

Outlook

Continued stock builds indicate that the global market remains oversupplied. According to the IEA, the "call on OPEC" (the level of OPEC crude oil production needed to balance global demand and supply) will remain below the current level of OPEC production in 2017. 3 This implies that – if OPEC won't change output – the global oil market will not find balance in 2017. The implementation of the OPEC agreement of September 2016 to cut output can potentially bring the rebalancing forward. In any case, the high level of stocks accumulated over the last two years will limit the potential for a significant price rise in the short term. Accordingly, oil prices are expected to remain subdued throughout 2016 and 2017. On the other hand, geopolitical risks remain high and possible supply disruptions can tighten the global oil market.

Sustained low prices are not likely to trigger the necessary supply side investments; upstream investments in the oil sector have indeed dropped sharply. In the longer run, a shortfall in investment will probably lead to tighter markets and higher prices, although the extent and pace at which oil prices will bounce back to higher levels remains to be seen.

On the demand side, efficiency policies and the climate change agreement reached at COP21 are likely to restrain demand for oil, translating in less likely prospects for a high oil price environment in the future.

3.2Wholesale prices of oil products

Crude oil is the main feedstock to produce oil products and, not surprisingly, oil product prices closely follow the development of the crude oil price. This is clearly visible if we compare the Brent oil price with the representative wholesale prices of the main oil products in Western Europe.

Figure 106 - Crude oil (Brent) vs wholesale gasoline, diesel and heating oil prices (2008-2015)

Source: Platts, ECB

The following oil product prices were used: Gasoline Prem Unleaded 10ppmS FOB AR Barge (gasoline), ULSD 10ppmS FOB ARA Barge (diesel) and Gasoil 0.1%S FOB ARA Barge (heating oil)

Crude oil prices are reported in USD/bbl while product prices in USD/ton. The following conversion rates were used to convert product prices: gasoline 8.5 bbl/ton, diesel and heating oil 7.5 bbl/ton.

Nevertheless, there is no clear one-to-one relationship between crude oil prices and oil product prices. Looking at the crack spreads, i.e. the differential between the price of oil products and crude oil, one can see that these are rather volatile and often follow different paths for different products.

Figure 107 - Crack spreads of gasoline, diesel and heating oil in 2008-2015

Source: Platts, ECB

Crack spreads are calculated as the difference between the Brent crude oil price and the price of the following products: Gasoline Prem Unleaded 10ppmS FOB AR Barge (gasoline), ULSD 10ppmS FOB ARA Barge (diesel) and Gasoil 0.1%S FOB ARA Barge (heating oil)

The supply-demand conditions of the different products are divergent (both from crude oil and from each other) which will affect their crack spreads. For example, the 2008 oil price rise was very much driven by industrial growth in China, leading to a big increase in the demand of middle distillates which is reflected in the high crack spreads of these products. There are also seasonal differences in demand, for example, gasoline demand is higher in the summer, typically resulting in a relatively high crack spread during that period while in times of low demand crack spreads can even turn negative (implying the gasoline is cheaper than crude oil). Oil product supply can also fluctuate, for example as a result of refinery maintenance; this will also affect crack spreads.

On the above figure one can see that European crack spreads have been relatively high in 2015 (averaging 13 €/bbl for both gasoline and diesel) which – in addition to exchange rate developments and high taxes (elaborated in the next subchapter) – limited the pass-through of falling oil prices to retail prices.

3.2.1Impact of oil prices

Falling oil prices also influence the price of other energy sources, in particular gas. Falling oil prices directly affect the oil-indexed contracts (the role of which is gradually decreasing in Europe) and also put pressure on hub prices. In the last few years, European gas prices have indeed decreased substantially.

In principle, lower gas prices could make gas more competitive to coal and reverse the trend observed in recent years that coal fired generation was cheaper than gas fired. However, coal prices are also on the decline because of the global oversupply so the relative competitiveness of gas has not improved substantially. In fact, since late 2014, the development of European spot prices of coal and gas show a remarkable similarity, suggesting that the relative competitiveness of the two fuels has stabilized. In the second half of 2016, however, coal prices started to increase, thereby improving the relative competitiveness of gas.

3.3Retail prices of oil products

In addition to electricity and gas, oil products constitute an important part of the energy costs of both households and industry. Oil products have a dominant role in transport where they have limited alternatives, particularly in road freight, maritime and air transport. In case of space heating, the share of oil products is on a declining trend but in certain Member States they still have an important role in this sector.

The retail price of oil products depends on several factors.

Variations in the price of crude oil will obviously have an impact on retail prices but crude oil costs constitute just a part, often a relatively small part, of the final price paid by the consumer. Crude oil is traded in US dollar but the finished products are sold at the pump in euros or other national currencies. Therefore, variations in exchange rates will also influence the crude oil component.

Crude oil has to be refined to produce fuels which can be used in transportation, heating or other uses. After refining, the finished products have to be distributed and sold, typically at petrol stations. Refining and distribution costs are relatively stable and are not proportional to the crude oil price.

A significant part of the price goes to taxes: excise duties, other indirect taxes and VAT. These taxes make an important contribution to the tax revenue of Member States (see Chapter 8). In case of motor fuels (gasoline and diesel), taxes typically cover more than half of the final price.

Excise duties are generally a fixed amount per quantity (usually litre or kg), i.e. not influenced by the price of crude oil. VAT, on the other hand, is set as a percentage of the price of the product (including the excise duty) and therefore changes in the crude oil price will have an impact on the absolute value of the VAT component.

Rates of both the excise duty and VAT vary by product and by Member State, resulting in significant price differences across Europe. Nevertheless, Member States have no complete freedom when setting the tax rates. The Energy Tax Directive (2003/96/EC) sets minimum excise duty rates for gasoline, gasoil, kerosene, LPG and heavy fuel oil. New Member States were often granted a transition period to reach the minimum level; today, all Member States comply with minimum level.

In case of VAT, the VAT Directive (2006/112/EC) requires that the standard VAT rate must be at least 15%; currently the standard VAT rates applied by Member States range from 17% (in Luxembourg) to 27% (in Hungary). In case of oil products, Member States typically apply the standard VAT rate. 4

As the share of crude oil in the final price can be as low as 25%, variations in the price of crude oil will have a limited impact on the price at the pump. In fact, the high share of fixed taxes in the price acts as a buffer: fluctuations in the retail price of oil products (particularly motor fuels) are significantly lower than the fluctuation of the crude oil price. Variations in the exchange rate have a similar effect: the oil price and the value of the US dollar usually move in the opposite direction: a strengthening dollar typically coincides with decreasing oil prices and vice versa. This means that changes in the oil price, whether upwards or downwards, are mitigated by the exchange rate and the volatility of the oil price expressed in euros is smaller than the volatility of the price expressed in dollar.

During the recent drop of crude oil prices, the above factors moderated the pass-through to oil product prices in the EU: while crude oil prices fell by 77% between mid-2014 and early 2016, in the same period 5 the average EU consumer price of gasoline and diesel decreased by 24% and 28%, respectively. In case of heating oil, where the tax component is smaller, the decrease was 45%.

Methodology

The analysis in this section is based on the data of the weekly Oil Bulletin. Pursuant to the Council Decision on Crude Oil Supply Costs and the Consumer Prices of Petroleum Products (1999/280/EC), Member States have to report to the Commission the retail prices of the main petroleum products on a weekly basis. Member States also have to report any changes in the tax rates (VAT, excise duty, other indirect taxes) applicable to these products, allowing us to break down the final price to three main components: the net price, excise duty 6 and VAT. The reported data are published on the website of DG Energy. 7

The analysis covers the three main petroleum products sold in the retail sector: gasoline (Euro-super 95), diesel (automotive gas oil) and heating oil (heating gas oil). The time horizon is 2008-2015. All Member States are covered but data for Croatia is available only from 2013. In case of heating oil, Slovakia does not report prices since October 2011 while Greece has not reported from May 2015 to mid-October 2015.

Prices reported in currencies other than the euro were converted into euro, using the ECB exchange rate of the day for which the price applies.

For each year and each Member State an average price was calculated as an arithmetic average of the weekly prices and an EU average price was calculated as the weighted average of these. In the absence of 2015 consumption figures, for 2015 we used the 2014 consumption data as the weight.

Development of oil products prices

While the absolute level of the prices of the three oil products are different, their development over the last 8 years is very similar and basically reflects the evolution of the crude oil price in the same period. The price of all three products decreased significantly in 2009 when oil prices plummeted in the wake of the financial crisis. This was followed by years of gradual increase, with prices peaking in 2012. Since then, average product prices have been on the decline, with the price fall accelerating in 2015.

Figure 108 - Average retail price of oil products in the EU

Source: Oil Bulletin, DG Energy

The difference in the absolute price of the three products can be mostly attributed to the diverging tax rates. In practically all Member States, the excise duty rate of gasoline is higher than that of diesel. The Energy Tax Directive also sets a higher minimum rate for gasoline (0.359 €/litre) compared to diesel (0.33 €/litre). The UK is the only Member State where the two motor fuels are taxed at the same level.

In case of heating oil, a few Member States (Bulgaria, Hungary, the Netherlands and Romania) apply the same excise duty rates than for diesel. In most Member States, however, heating oil is taxed at a lower level. The minimum rate established by the Energy Tax Directive (0.021 €/litre) is much lower than those for motor fuels. Ireland, Luxembourg, Portugal and the UK also apply a reduced VAT rate for heating oil.

Although excise duty rates are set in absolute values, i.e. as a fixed amount per quantity of the product, several Member States increased the tax rates over the period, resulting in a gradually increasing (weighted) average tax rate. According to the Energy Tax Directive, the minimum excise duty rate for diesel increased from 0.302 €/litre to 0.33 €/litre on 1 January 2010, requiring some Member States to adjust their rates.

Figure 109 - Average excise duty rates for oil products in the EU

Source: Oil Bulletin, DG Energy

If the net price of the three different products is compared, the difference is significantly lower. In fact, during the whole period the net price of diesel is slightly higher than that of gasoline. 8 The below figure also depicts the evolution of the Brent crude oil price (recalculated into €/litre), showing that crude oil is clearly the main component of the net price.

Figure 110 - Average retail price of oil products in the EU, without taxes

Source: Oil Bulletin, DG Energy, Platts

Over the period, crude oil price represented on average about 70% of the net price but in 2015, as crude oil prices dropped significantly, this share decreased to about 60%. The difference between the net price of the products and the crude oil price, which is supposed to cover transport, refining and distribution costs and any profits, have been volatile in 2008-2011 but relatively stable in 2012-2015, except a bigger increase in case of gasoline in 2015.

Figure 111 - Crude oil price as a percentage of average retail prices without taxes and the difference between average retail prices without taxes and the crude oil price

Source: Oil Bulletin, DG Energy, Platts

In the following subsections the average retail price of the individual fuels will be also compared to the corresponding wholesale prices of the products.



3.3.1Gasoline

In most Member States, the evolution of gasoline prices clearly followed the trend of the crude oil price but there have been considerable differences in the absolute level, mainly explained by the diverging excise duty and VAT rates. Average prices moved in a relatively wide range, with the difference between the highest and lowest price being about 0.5 €/litre. This range has slightly narrowed over the period, from 0.52 €/litre in 2008 to 0.46 €/litre in 2015, indicating some degree of price convergence.

Figure 112 - Average retail price of gasoline by Member State

Source: Oil Bulletin, DG Energy

Greece showcased the biggest relative increase in gasoline prices: while in 2008-2009 Greek prices were well below the EU average, since 2011 they are among the highest, mainly as a result of the sharp increase of the excise duty rate. In 2015, EU average gasoline prices were 5% higher than in 2008; in case of Greece, the increase was 31%. At the other end of the spectrum, prices in Poland decreased by 11%, mainly because of the depreciation of the national currency (measured in Polish zloty, the average price increased).

Figure 113 - Average retail price of gasoline by Member State, 2008=100

Source: Oil Bulletin, DG Energy

Looking at net prices, the dispersion is smaller, the difference between the highest and the lowest price is usually 0.10-0.15 €/litre. The net price depends on a number of factors, including the source of supply (local refinery or import), industry structure and competition. In 2015, the highest net price was reported by Malta while the lowest by the UK. (Yet, because of the high excise duty, the UK has one of the highest gasoline prices in the EU.) Comparing the average net price with a representative wholesale price (Platts Gasoline Prem Unleaded 10ppmS FOB AR Barge), the difference is relatively stable, amounting to 0.13 €/litre in each of the last four years.

Figure 114 - Average retail price of gasoline by Member State, without taxes

Source: Oil Bulletin, DG Energy, Platts

The wholesale price is Gasoline Prem Unleaded 10ppmS FOB AR Barge reported by Platts

Excise duty is an important component of the retail gasoline price; in 2015, in half of the Member State it exceeded the net price. Over the years, we see a gradual increase of the average excise duty rate. While in 2008 this was 56 eurocent/litre, by 2015 it increased to 64 eurocent/litre (an increase of 14% in 7 years). The average VAT rate also increased during this period, from 19.3% in 2005 to 21.0% in 2015. In most Member States, excise duty rates increased between 2008 and 2015, with the biggest increases in Greece (89%), Malta (60%), Cyprus (58%) and Slovenia (58%). Germany and Luxembourg are notable exceptions: in these countries, the excise duty rate for gasoline has not changed since 2003 and 2007, respectively. In three Member States, the Czech Republic, Hungary and Poland the excise duty rate measured in euro was lower in 2015 than in 2008, mainly because of exchange rate developments (in national currencies, the excise duty rates increased). The UK and the Netherlands apply the highest excise duty for gasoline; Bulgaria has the lowest rate, just above the minimum level.

Figure 115 - Average exercise duty rate of gasoline by Member State

Source: Oil Bulletin, DG Energy

In the last few years, in line with the decreasing oil prices, the average retail price of gasoline decreased. However, because of the fixed (or, in case of several member States, increasing) excise duty rates, the share of the tax component gradually increased, from 55% in 2012 to 63% in 2015. In absolute terms, the tax component decreased, but only marginally, from 0.90 €/litre in 2012 to 0.88 €/litre in 2015.

Figure 116 - Average retail price of gasoline in the EU by price component

Source: Oil Bulletin, DG Energy

The below graph show the composition of the average gasoline price by Member State in 2015.

Figure 117 - Average retail price of gasoline in 2015 by Member State and price component

Source: Oil Bulletin, DG Energy

3.3.2Diesel

Similarly to gasoline, the evolution of diesel prices clearly followed the trend of the crude oil price, with considerable differences in the absolute level, mainly explained by the diverging excise duty and VAT rates. Average prices moved in a relatively wide range and, contrary to gasoline, this range has widened over the years: it was 0.40 €/litre in 2008 but grow to 0.56 €/litre in 2015. If the three most expensive countries are disregarded, the range is considerably narrower. In 2015, the UK was by far the most expensive, 0.18 €/litre above the second most expensive country, Italy.

Figure 118 - Average retail price of diesel by Member State

Source: Oil Bulletin, DG Energy

Cyprus experienced the biggest relative increase in diesel prices: in 2008 it had the lowest price in the EU but after significant increases in the excise duty rate the price reached the EU average by 2013. In 2015, EU average diesel prices were 4% lower than in 2008; in case of Cyprus, the price increased by 12%. In Slovakia, in turn, the price fell by 15% between 2008 and 2015, helped by a reduction of the excise duty rate introduced in 2010.

Figure 119 - Average retail price of diesel by Member State, 2008=100

Source: Oil Bulletin, DG Energy

In case of net prices, the difference between the highest and the lowest price has been 0.10-0.12 €/litre but increased to 0.16 €/litre in 2015. Similarly to gasoline, Malta had the highest net price of diesel in 2015; the lowest net price was reported in France. Comparing the EU average net price with a representative wholesale price (Platts ULSD 10ppmS FOB ARA Barge), the difference has increased from 0.11 €/litre in 2010 to 0.15 €/litre in 2015.

Figure 120 - Average retail price of diesel by Member State, without taxes

Source: Oil Bulletin, DG Energy, Platts

The wholesale price is ULSD 10ppmS FOB ARA Barge reported by Platts

The average excise duty rate of diesel increased from 0.41 €/litre in 2008 to 0.49 €/litre in 2015 (an increase of 20% in 7 years). Although this increase is faster than in case of gasoline, the difference between average excise duty rate of gasoline and diesel remained stable at 0.15 €/litre throughout 2008-2015. The average VAT rate of diesel also increased during this period, from 19.1% to 20.9%. With two exceptions, excise duty rates increased in all Member States between 2008 and 2015, with the biggest increases in Cyprus (80%), Malta (71%), Romania (66%) and Slovenia (58%). In Germany, the excise duty rate for diesel has not changed since 2003 (similarly to the excise duty of gasoline). Slovakia is the only country where the excise duty was lower in 2015 than in 2008, as a result of a cut in the rate in 2010. The excise duty rate applied by the UK and Italy is significantly higher than in the rest of the countries. In contrast, several Member States (Bulgaria, Greece, Latvia, Lithuania and Luxembourg) impose a rate at or just above the minimum level.

Figure 121 - Average excise duty rate of diesel by Member State

Source: Oil Bulletin, DG Energy

Since 2012, the average retail price of diesel decreased, with the share of the tax component increasing from 48% in 2012 to 57% in 2015. In absolute terms, the tax component decreased marginally, from 0.72 €/litre in 2012 to 0.71 €/litre in 2015.

Figure 122 - Average retail price of diesel in the EU by price component

Source: Oil Bulletin, DG Energy

The below graph show the composition of the average diesel price by Member State in 2015.

Figure 123 - Average retail price of diesel in 2015 by Member State and price component

Source: Oil Bulletin, DG Energy

3.3.3Heating oil

The big differences in the excise duty rates result in a wide dispersion of heating oil prices across the EU. The difference between the highest and lowest price increased from 0.60 €/litre in 2008 to 0.79 €/litre in 2014 but decreased to 0.69 €/litre in 2015. In the most expensive Member State, Denmark, the price in 2015 was 126% higher than in the cheapest Member State, Luxembourg. Many of the most expensive countries have a rather low level of heating oil consumption. Germany is by far the biggest consumer of heating oil in the EU and its price is below the EU average.

Figure 124 - Average retail price of heating oil by Member State

Source: Oil Bulletin, DG Energy

Malta experienced the biggest relative increase in heating oil prices: in 2008 its price was around the EU average but today it is considerably higher. In 2015, EU average heating oil prices were 20% lower than in 2008; in case of Malta, the price increased by 21%. Belgium experienced the biggest price drop between 2008 and 2015, 25%.

Figure 125 - Average retail price of heating oil by Member State, 2008=100

Source: Oil Bulletin, DG Energy

Also in case of net prices, the difference between the highest and the lowest price is rather high (0.21-0.43 €/litre), significantly higher than for motor fuels. Denmark had the highest net price of heating oil in 2015; the lowest net price was reported in the Netherlands. Comparing the EU average net price with a representative wholesale price (Platts Gasoil 0.1%S FOB ARA Barge), the difference has been stable in the 0.10-0.11 €/litre range. Curiously, the Dutch price is lower than the wholesale price while the Romanian price is more or less equal to it.

Figure 126 - Average retail price of heating oil by Member State, without taxes

Source: Oil Bulletin, DG Energy, Platts

The wholesale price is Gasoil 0.1%S FOB ARA Barge reported by Platts

The average excise duty rate of heating oil increased from 0.08 €/litre in 2008 to 0.10 €/litre in 2015 (an increase of 13% in 7 years). Although most Member States apply a higher rate, the main consumer of heating oil, Germany, has an excise duty of only 0.06 €/litre. The average VAT rate of heating oil also increased during this period, from 19.3% to 20.2%. Several Member States increased the excise duty rate between 2008 and 2015, but in a couple of countries (Austria, Germany, Italy, Lithuania, Luxembourg, Spain) it remained unchanged. Bulgaria significantly increased the excise duty rate in 2011 but returned to the previous, lower rate the following year. The Netherlands has the highest excise duty rate (0.49 €/litre in 2015) while Luxembourg's tax rate is only 0.01 €/litre. The rates applied by Belgium and Luxembourg are lower than the minimum level set by the Energy Tax Directive (0.021 €/litre); Lithuania uses the minimum level.

Figure 127 - Average excise duty rate of heating oil by Member State

Source: Oil Bulletin, DG Energy

The average retail price of heating oil significantly decreased since 2012, with the tax component increasing from 26% in 2012 to 31% in 2015. In absolute terms, the tax component decreased from 0.26 €/litre in 2012 to 0.21 €/litre in 2015.

Figure 128 - Average retail price of heating oil in the EU by price component

Source: Oil Bulletin, DG Energy

The below graph show the composition of the average heating oil price by Member State in 2015.

Figure 129 - Average retail price of heating oil in 2015 by Member State and price component

Source: Oil Bulletin, DG Energy



Energy costs

4The EU energy bill

Main findings

High import dependency means that the EU faces an important energy import bill.

In 2013, the EU's estimated import bill reached EUR 400 billion. Since then, falling energy prices allowed the import bill to fall significantly, although the weakening of the euro has partly offset this effect.

In 2015, the estimated import bill amounted to EUR 261 billion, 35% less than in 2013. In 2 years, the import bill decreased by EUR 142 billion, about 1% of EU GDP, thereby giving a significant boost to the economy.

Crude oil is by far the main component of the import bill, making up 68% of the total in 2015. The share of gas and hard coal was 28% and 4%, respectively.

Russia is the main supplier of all three fossil fuels: crude oil, natural gas and hard coal. In 2015, 34% of the import bill went to Russia. Russia was followed by Norway (19%) and Nigeria (7%).

Introduction

The EU is a net importer of energy: in 2014, the import dependency 9 stood at 53.5%, i.e. the EU needed to import just over half of the energy it consumed. Import dependency is particularly high in case of fossil fuels: in 2014, it was 88% for crude oil, 67% for natural gas and 46% for solid fuels (from which 68% for hard coal).

EU energy import dependency seems to have stabilised in recent years: since 2005, it has been fluctuating between 52% and 55%. While the import dependency of fossil fuels continues an increasing trend, their share within the energy mix is gradually decreasing. The share of renewables, on the other hand, is steadily growing and these are typically produced within the EU.

Figure 130 - EU import dependency by fuel

Source: Eurostat

The high import dependency poses significant challenges in terms of energy security and the diversification of suppliers and supply routes but, in addition, it also means that the EU is facing an important energy import bill.

In this chapter we outline the main drivers of the import bill and estimate its size in the last couple of years.

Scope

In this analysis, we focus on the import bill of the EU as a whole, therefore only extra-EU imports are considered. (When the import bill of an individual Member State is looked at, it is of course reasonable to take all imports into account, including those coming from other Member States.)

The analysis covers the main fossil fuels: crude oil, natural gas and solid fuels. These fuels cover nearly three-quarters of the EU's gross inland energy consumption and the overwhelming majority (96% in 2014) of net energy imports. Crude oil alone makes up more than half of the EU's net energy imports.

Figure 131 - EU net imports of energy in 2014 (mtoe)

Source: Eurostat

In addition to crude oil, the EU is also an importer of petroleum products. However, considering the practical difficulties of finding reliable volume and price data for a multitude of products with different specifications and the fact that the EU is also exporting petroleum products and exports and imports are of a similar magnitude (the EU typically exports motor gasoline and imports middle distillates), petroleum products were not included in the calculation of the import bill.

Lignite/brown coal is typically not traded internationally and the imports arriving to the EU are negligible. Therefore, the analysis of solid fuels was restricted to hard coal.

In terms of time horizon, we provide import bill estimates for the period 2013-2015.

4.1Drivers

The import bill basically depends on the volume and the average price of imports. Like most commodities, energy sources are typically traded in US dollars and therefore the development of the USD/EUR exchange rate will also influence the import bill (if expressed in euros).

Volumes

Import volumes will depend mainly on the level of consumption. In addition, the development of indigenous production (falling production results in increasing import dependency even if consumption is unchanged) and, to a smaller extent, stock changes can also affect import volumes. In principle, exports can also influence import volumes (higher exports has to be offset by higher imports) but extra-EU exports of crude oil, natural gas and coal are negligible.

In this section, we give short overview of the long-term trends of EU imports, based on Eurostat annual statistics (available until 2014).

EU imports of fossil fuels showed a marked increasing trend during the 1990s and for most of the 2000s. Since then, the tendencies of the different fuels are diverging.

EU consumption of crude oil peaked in 1998 and since 2005 it has been in a structural decline: between 2005 and 2014 it decreased by 19%. Energy efficiency improvements in the transport sector have contributed to this decline, as well as the gradual replacement of oil in other sectors (e.g. power generation, heating) with alternative fuels. Indigenous oil production has been also in decline, already since 1999, as the fields in the main producing region, the North Sea, are depleting. In the last 7-8 years, the fall in consumption exceeded the fall in production and, as a result, imports have been also decreasing. In 2014, net imports of crude oil were at the same level as in 2002.

Figure 132 - Production, consumption and net imports of crude oil and NGL

Source: Eurostat

Gas consumption peaked later, in 2010. Since then, gas lost ground, especially in the electricity sector where it had to face increasing competition from renewables and coal. As gas is also used in space heating, its consumption is also driven by the weather: the strong decline in 2014 is can be largely explained by the relatively mild winter at the beginning of that year. Gas production plateaued in 1996-2004 and has been in decline since that, driven by depleting reserves. However, because of the strong decrease of consumption in the last few years, net imports decreased since 2010.

Figure 133 - Production, consumption and net imports of natural gas

Source: Eurostat

In case of hard coal, consumption was falling in the 1990 but stabilised in the 2000s. As indigenous production showed a relentless decline, imports were growing. After a steep drop in 2008-2009, consumption and net imports started to rise again. This was helped by increasing US coal exports as cheap shale gas squeezed out the fuel from the US power sector. Cheap imported coal, coupled with the low carbon prices, made the fuel competitive in the European power sector compared to other fuels, in particular gas. In 2013-2014, the trend reversed and coal consumption and imports started to fall again.

Figure 134 - Production, consumption and net imports of hard coal

Source: Eurostat

Prices

Oil is traded in the global market, hence its price is driven by global demand and supply conditions. Other factors including exchange trade developments and geopolitical risks can influence the price as well. As oil is easy to transport and transport costs are relatively low, price differences across the different regions of the world are limited. Crude oil comes in different qualities (grades), the price of which is typically pegged to a benchmark, e.g. Brent, West Texas Intermediate or Dubai, taking the characteristics (density, sulphur content, etc.) into account. Brent is the main benchmark used in Europe.

Gas is more difficult and expensive to transport and, as a result, markets are more regional in nature than in the case of oil and there are no globally used and accepted price benchmarks. That said, the progressive development of LNG markets means that regional markets are better and better connected and in recent years, particularly from 2015, one can see an increasing convergence of regional prices. Nevertheless, even within Europe there can be significant price differences between different markets, depending on – inter alia – the type of contracts (spot or long-term), the way of pricing (hub-based or oil-indexed) and, crucially, the level of competition. In general, markets with higher levels of competition show a lower price level than markets with only one supply source.

Like oil, coal is also traded in the global market. Price differences are basically explained by the (relatively low) transportation costs. China has a dominant role in the market: it is the biggest producer, the biggest consumer and the biggest importer of coal in the world although both consumption and imports decreased recently.

In the short run, changes in the import volumes are usually moderate but prices can be rather volatile. For example, the price of oil fell by more than 70% between mid-2014 and early 2016, whereas the price of gas and coal has also decreased significantly in recent years.

Figure 135 - Comparison of European oil, gas and coal prices

Source: Platts; GCI is the North West Europe Gas Contract Indicator, a theoretical index showing what a gas price linked 100% to oil would be



Exchange rates

Most energy is traded in US dollars. Accordingly, the fluctuations of the USD/EUR exchange rate can directly affect the prices and the import bill when these are measured in euros.

Historically, there has been a consistently negative correlation between oil prices and the US dollar, although recently, with the decline of US oil imports, the relationship has weakened. In other words, it can be observed that the price of oil and the value of the US dollar generally move in an opposite direction: a strengthening dollar typically coincides with decreasing oil prices and vice versa. 10 This means that changes in the oil price, whether upwards or downwards, are mitigated by the exchange rate and the volatility of the oil price expressed in euros is smaller than the volatility of the price expressed in dollar. In view of the correlation between oil, gas and coal prices, to a certain extent this is true for coal and gas prices, too.

The euro has considerably weakened compared to the US dollar in the second half of 2014: the exchange rate went down from nearly 1.40 USD/EUR in early May 2014 to 1.06 in March 2015, a depreciation of 24% in 10 months. The depreciation of the euro occurred against the background of increasingly diverging monetary policy stances and a continuously declining outlook for growth and inflation in the euro area. Since early 2015, the exchange rate has been fluctuating between 1.06 and 1.16.

In spite of the weakening of the euro in the second half of 2014, the 2014 average exchange rate was practically the same as in 2013, 1.33, but in 2015 it decreased to 1.11.

Figure 136 - The USD/EUR exchange rate since 2013

Source: ECB

The red dotted lines represent the annual average in 2013, 2014 and 2015

Methodology

In case of oil, we are in comfortable position as Member States report on a monthly basis the volume and the average CIF price 11 of imported oil under Regulation (EC) No 2964/95 of 20 December 1995 introducing registration for crude oil imports and deliveries in the Community. 12 Every year, the collected and aggregated information is published on the website of DG Energy. 13

For gas, the import volumes used are from the Transparency Platform of the European Network of Transmission System Operators for Gas (ENTSO-G) which is based on the gas flows reported by gas transmission system operators. Gas imports arrive to the EU from Russia, Norway, Algeria and Libya through several pipelines while, in 2015, LNG was arriving from 7 supplying countries to 20 terminals in 10 Member States. 14 Volumes were calculated by adding the gas flows at the relevant entry points to the EU gas network.

Gas import prices can vary across Member States depending on the supplier, the supply route, the type of contracts (spot or long-term), the way of pricing (hub-based or oil-indexed) and the level of competition. Based on available sources, including customs data, national agencies (e.g. BAFA in Germany) and commercial data providers, for each supplier (Russia, Norway, Algeria, Libya and LNG) and for each year an estimated average €/MWh price was established.

Table 9. Estimated average gas import prices by supplier (€/MWh)

Year

Russia

Norway

Algeria

Libya

LNG

2013

30.0

25.0

30.0

31.0

28.5

2014

25.5

20.0

27.5

29.5

25.5

2015

22.0

19.5

23.5

23.5

20.5

In case of LNG, the estimation is based on the price reported by ThomsonReuters (covering Belgium, France, Spain and the UK). While in 2012-2013 prices in the Mediterranean have been markedly higher than those in Northwest Europe, in 2015 this premium has largely disappeared.

Figure 137 - Spot LNG prices in Europe

Source: ThomsonReuters

In case of pipeline imports the estimation is mostly based on customs data 15 and the border prices reported by the German Federal Office for Economic Affairs and Export Control (BAFA) 16 .

Figure 138 - Estimated border prices of gas imports from Russia

Source: Eurostat COMEXT, BAFA; the German border price reported by BAFA relates to all imports, not only Russian

Figure 139 - Estimated border prices of gas imports from Norway

Source: Eurostat COMEXT, BAFA; the German border price reported by BAFA relates to all imports, not only Norwegian

Figure 140 - Estimated border prices of gas imports from Algeria

Source: Eurostat COMEXT

Figure 141 - Estimated border prices of gas imports from Libya

Source: Eurostat COMEXT

In case of coal, volumes are the imports of hard coal 17 , reported in Eurostat annual (2013 and 2014) and monthly (2015) statistics. For price, the CIF ARA spot price reported by Platts was used; this is deemed to be representative for most of the hard coal imports arriving to the EU.

Figure 142 - CIF ARA spot coal price

Source: Platts

For the conversion from US dollars to euros, we use the annual average of the daily official exchange rates published by the European Central Bank 18 : 1.3281 in 2013, 1.3285 in 2014 and 1.1095 in 2015.

4.2Import bill calculation

The price of all three fuels decreased significantly in 2014-2015, resulting in a decreasing import bill.

Oil

Table 10. EU crude oil import bill in 2013-2015

2013

2014

2015*

Volume (million bbl/day)

9.83

10.01

10.48

Average Brent price (USD/bbl)

108.66

98.95

52.39

Average CIF import price (USD/bbl)

108.83

98.65

51.72

EUR/USD exchange rate

1.3281

1.3285

1.1095

Import bill (bn USD)

390.6

360.4

197.8

Import bill (bn EUR)

294.1

271.3

178.3

Source: DG Energy, based on Member State reports under Regulation (EC) No 2964/95, Platts, ECB

*for confidentiality reason, the 2015 figures do not include the Czech Republic (in 2014, imports by the Czech Republic made up around 1.5% of total EU imports, implying an estimated import bill of 2.5-3 billion euros in 2015)

While crude oil imports show a decreasing trend since 2008, imports bounced back in 2014 and especially in 2015, driven by a combination of factors. After years of gradual decline, the consumption of oil products increased in 2015, helped by low oil prices, the economic recovery and weather impacts (relatively cold 2014-2015 winter after a mild winter in the previous year). Better refinery margins also allowed refiners to increase throughput, leading to higher crude oil imports (and an increasing net export of products). Furthermore, low oil prices provided an incentive for operators to raise stock levels which also contributed to the increase of crude oil imports.

As a result of the oversupply in the global market, oil prices decreased by more than 70% between mid-2014 and the beginning of 2016. In January 2016, the price of Brent dropped below 30 USD/bbl for the first time since 2004. In spite of the price drop, the average Brent price was almost 100 USD/bbl in 2014 (only 10 USD/bbl below the 2013 average) but it decreased to about 52 USD/bbl in 2015. Section 3.1 contains detailed information on the causes of the oil price drop.

While the annual average Brent price decreased by 52% between 2013 and 2015, when measured in euro, the decrease was "only" 42%.

Figure 143 - The Brent spot oil price since 2013

Source: Platts

The dotted lines represent the annual average in 2013, 2014 and 2015

Brent is a very good proxy for the average EU oil import price, the difference between the two is usually less than 1 USD/bbl. The average EU import price is usually slightly lower, reflecting the fact that a large part of imports is made up by heavy and/or sour crudes which are typically cheaper than the light and sweet crudes like Brent.

Figure 144 - The Brent price and the average EU import price

Source: Platts (Brent), DG Energy (average EU import price)

In spite of the growing import volumes, the EU oil import bill significantly decreased in 2014 and 2015 as a result of the oil price fall. While in 2013 the oil import bill was close to USD 400 billion, in 2015 it dropped below USD 200 billion, a decrease of 49% within two years. The depreciation of the euro in the same period mitigated this trend: measured in euro, the import bill decreased from EUR 294 billion in 2013 to EUR 178 billion euros in 2015, a decrease of 39%.

Gas

Table 11. EU gas import bill in 2013-2015

2013

2014

2015

Volume (TWh)

3 390

3 115

3 449

Estimated average import price (€/MWh )

28.1

23.6

21.0

Import bill (bn EUR)

95.4

73.5

72.5

Source: ENTSO-G, DG Energy estimations

Gas import volumes have been rather volatile in the last few years, mainly driven by the weather. In 2014, higher-than-average winter temperatures reduced gas consumption but in 2015, a colder winter, coupled with the significant decrease of Dutch production, meant that imports bounced back.

During this period, gas prices have shown a decreasing trend as falling oil prices and steady LNG supplies put downward pressure on import prices. The price of an important, but diminishing part of supply contracts is linked to the price of oil products (typically gasoil and/or fuel oil) and therefore falling oil prices directly affect such "oil-indexed" gas prices, albeit with a 6-9 month lag. In 2014-2015, growing supply and limited demand growth led to a sharp fall of global LNG prices, thereby also contributing to the decreasing import price in the EU.

In spite of the fluctuation of the import volumes, the estimated import bill decreased in both 2014 and 2015 as a result of the falling prices. Between 2013 and 2015, the estimated gas import bill decreased by 24%, from EUR 95.4 billion to EUR 71.6 billion.

Coal

Table 12. EU hard coal import bill in 2013-2015

2013

2014

2015

Volume (million tons)

227.8

225.8

194.3

CIF ARA spot price (USD/ton)

81.57

75.20

56.84

EUR/USD exchange rate

1.3281

1.3285

1.1095

CIF ARA spot price (EUR/ton)

61.41

56.63

51.25

Import bill (bn USD)

18.6

17.0

11.0

Import bill (bn EUR)

14.0

12.8

10.0

Source: Eurostat, Platts, ECB

Hard coal imports increased in 2013 but decreased in 2014 and 2015. During the period, prices gradually decreased, driven by the oversupply in the global market.

Similarly to oil and gas, the import bill is also decreasing although the absolute values are significantly lower. Between 2013 and 2015, the estimated coal import bill decreased by 29%, from EUR 14.0 billion to EUR 10.0 billion.

Total

In 2013, the total import bill was about EUR 400 billion, more than EUR 1 billion per day. Falling prices allowed the EU to decrease its estimated import bill to EUR 358 billion in 2014 (-11%) and to EUR 261 billion in 2015 (-27%). The cumulative decrease between 2013 and 2015 was 35%. The decrease of the import bill is more than EUR 140 billion, equivalent to about 1% of EU GDP.

Figure 145 - The estimated EU import bill

Source: DG Energy calculation

These estimates were verified by looking at the value of imports reported in international trade statistics. While the value of imports of individual Member States is often confidential, Eurostat is able to calculate import values for the EU as a whole. The product coverage of Eurostat's import bill calculation is wider, it also includes NGLs, lignite, peat and coke but compared to the main products (oil, gas and coal), the quantity and the value of these are negligible. According to Eurostat's calculations, the EU energy import bill was EUR 406.1 billion in 2013, EUR 357.8 billion in 2014 and EUR 262.2 billion in 2015. 19 Our estimates are well in line with these figures.

Looking at the import bill by supplying country, Russia is clearly the main energy supplier of the EU; in fact, it is the top supplier of all three fuels. In 2015, about 34% of the import bill went to Russia. Russia was followed by Norway (19%) and Nigeria (7%).

Table 13. Estimated import bill by fuel and supplier in 2015 (billion €)

Supplier

Oil

Gaseous gas

LNG

Coal

Total

Russia

55.6

30.5

3.0

89.1

Norway

24.0

24.9

0.6

49.5

Nigeria

17.6

1.2

18.8

Algeria

9.1

5.8

1.8

16.7

Saudi Arabia

16.1

16.1

Kazakhstan

12.9

0.1

13.0

Iraq

12.8

12.8

Azerbaijan

10.2

10.2

Angola

8.2

8.2

Libya

5.6

1.8

7.4

Qatar

0.0

5.2

5.2

Other

6.2

0.7

6.9

13.8

Total

178.3

63.0

9.5

10.0

260.8

Source: DG Energy calculation

4.3Putting the import bill in context

The per capita import bill decreased from around 800 euros in 2013 to around 500 euros in 2015.

When expressed as a percentage of EU GDP (at current prices), the share of the estimated import bill decreased from 3.0% in 2013 to 1.8% in 2015. This saving gave a significant boost to GDP growth in 2015: lower energy prices meant more disposable income for households, lower energy costs for businesses and increasing activity of oil intensive sectors (e.g. transport, refining and chemicals).

Energy products constitute a significant part of total EU imports; it is the second most important product group after machinery and transport equipment. When compared to total extra-EU imports, the share of the energy imports was about 24% in 2013 but it decreased to 15% in 2015.

Table 14. The energy import bill as percentage of GDP and total imports

2013

2014

2015

Energy import bill as %age of GDP

3.0%

2.6%

1.8%

Energy import bill as %age of total imports

23.9%

21.1%

15.1%

Source: DG Energy calculation

The estimated import bill in 2013 (EUR 403 billion) was more or less equivalent to the GDP of Belgium or Poland. The estimated import bill in 2015 (EUR 261 billion) was more or less equivalent to the GDP of Denmark.

The decrease of the import bill between 2013 and 2015 (EUR 142 billion) is more or less equivalent to the combined 2015 GDP of the six smallest economies of the EU: Slovenia, Lithuania, Latvia, Estonia, Cyprus and Malta.

(1)

According to the IEA's 2015 World Energy Outlook, the coverage of mandatory energy efficiency regulation expanded to 27% of global energy consumption in 2014.

(2)

According to the IEA, OPEC output was 33.83 mb/d in October 2016.

(3)

Oil Market Report, 10 November 2016

(4)

Under certain conditions, Member States can set a lower VAT rate for specific products and services; for example, a few Member States apply a reduced rate for heating oil

(5)

Between 30 June 2014 and 15 February 2016

(6)

In this section, other indirect taxes are reported in the excise duty component

(7)

  https://ec.europa.eu/energy/en/statistics/weekly-oil-bulletin

(8)

Different net prices between oil products reflect the specific characteristics and particular dynamics of the each oil product market

(9)

Import dependency is calculated as net imports divided by gross inland consumption

(10)

One explanation is that a stronger dollar makes oil and other commodities priced in dollars more expensive for buyers using other currencies, which can dampen demand and thereby contribute to decreasing prices.

(11)

The CIF price includes the FOB price (the price actually invoiced at the port of loading), the cost of transport, insurance and certain charges linked to crude oil transfer operations.

(12)

  http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:31995R2964

(13)

  https://ec.europa.eu/energy/en/statistics/eu-crude-oil-imports

(14)

Including Poland (the Świnoujście terminal received its first cargo in December) but without small-scale, off-grid terminals

(15)

Eurostat COMEXT database

(16)

  http://www.bafa.de/bafa/de/energie/erdgas/ausgewaehlte_statistiken/egasmon_xls.xls

(17)

This includes anthracite, coking coal, other bituminous coal and sub-bituminous coal

(18)

  http://www.ecb.europa.eu/stats/exchange/eurofxref/html/index.en.html

(19)

  http://ec.europa.eu/eurostat/statistics-explained/index.php/EU_imports_of_energy_products_%E2%80%94_recent_developments

Top

Brussels, 30.11.2016

SWD(2016) 420 final

COMMISSION STAFF WORKING DOCUMENT

Accompanying the document

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS

Energy prices and costs in Europe

{COM(2016) 769 final}


Contents

5    Household energy expenditure    

5.1 Energy products in household budgets    

5.1.1    Energy expenditure in households with low income    

5.1.2    Energy expenditure in households with middle income    

5.1.3    Energy expenditures in household consumption and disposable income    

5.1.4    Change in energy expenditures in the Member States (2004-2014)    

5.2 Share of energy in the household expenditure by income and region    

5.3 Decomposition of changes in the energy expenditure – (prices, consumption and income effects)    

5.3.1 Impact of cost components and energy policy measures    

5.4 Reaction of households on increasing energy costs    

5.4.1 Household energy use for different purposes    

5.5 Energy related expenditures in the transport sector    



Figure 146 - Shares of consumer goods groups in household expenditure in Member States, 2014    

Figure 147 Households energy expenditures in Member States across income quintiles, 2014    

Figure 148 - Energy products share in the total households consumption by income quintile (2014)    

Figure 149 – Households in the lowest quintile - EU average energy expenditure (€) and share of total household expenditure over time    

Figure 150 - Households with the lowest income - Energy expenditures (€) and share of energy in total consumption, by EU Member State (2014)    

Figure 151 – Households with lowest income – Map with Energy expenditures and the share of energy in total consumption in EU Member States in 2014    

Figure 152 - Households with the lowest income - Energy expenditures and the share of energy in total consumption in EU Member States (actually paid PPS EUR, 2014)    

Figure 153- Households in the middle income quintile - EU average energy related expenditure in euros and in the percentage of total expenditure.    

Figure 154 - Households with middle income - Energy expenditures and the share of energy in total consumption in EU Member States (actually paid EUR, 2014)    

Figure 155 - Households with middle income – Map with Energy expenditures and the share of energy in total consumption in EU Member States in 2014.    

Figure 156 - Households with middle income - Energy expenditures and the share of energy in total consumption in EU Member States (PPS EUR, 2014)    

Figure 157 - Households in the lowest income - Share of energy expenditures in the total consumption and disposable income of, 2014    

Figure 158 - Households with the middle income - Share of energy expenditures in the total consumption and disposable income in 2014    

Figure 159 – Households with lowest income (1st quintile) vs Households with middle income (3rd quintile) - Share of energy in household expenditure over the last decade    

Figure 160 - Households with lowest income (1st quintile) vs Households with middle income (3rd quintile) - Expenditure on energy in € over the last decade    

Figure 161 - Germany, France, Belgium, Netherlands and Luxembourg - Share of energy in final household consumption expenditure per income quintiles    

Figure 162 – South European countries (Spain, Portugal, Italy, Greece, Malta and Cyprus) - Share of energy in final household consumption expenditure in different income quintiles    

Figure 163 - Poland, Czech Republic, Slovakia and Hungary - Share of energy in final household consumption expenditure in different income quintiles    

Figure 164 - United Kingdom and Ireland - Share of energy in final household consumption expenditure in different income quintiles    

Figure 165 - Nordic and Baltic countries: Sweden, Finland, Denmark, Estonia, Latvia, Lithuania - Share of energy in final household consumption expenditure in different income quintiles    

Figure 166 - South East Europe: Croatia, Slovenia, Romania and Bulgaria - Share of energy in final household consumption expenditure in different income quintiles    

Figure 167 – Decomposition of household expenditures on electricity– changes between 2008 and 2013    

Figure 168 - Decomposition of household expenditures on natural gas– changes between 2008 and 2013    

Figure 169 – Decomposition of changes in the share of expenditures on electricity in household income, 2008-2013    

Figure 170 - Decomposition of changes in the share of expenditures on natural gas in household income, 2008-2013    

Figure 171 – Impact of energy supply cost, network charges and energy policy elements on household expenditure on electricity (in Euro per household, 2015)    

Figure 172 - Factors behind changes in energy consumption in some EU Member States (2004-2013)    

Figure 173 – Household electricity consumption – Shares of uses in some EU Member States, 2013    

Figure 174 - Household gas consumption – Share of uses in some EU Member States, 2013    

Figure 175 - Percentage of households below 60% of the median national income being unable to keep their home adequately warm    

Figure 176 – Estimated household expenditures on energy products in transport of income quintiles, 2014    

Figure 177 – Share of energy expenditure on transport in household expenditure by income quintiles, 2014    



5Household energy expenditure

Energy costs in this report are basically defined as the amount of energy consumed, expressed in energy units (e.g. per kWh), multiplied by the actually paid energy unit price (e.g.: €cent/kWh). In this chapter of the report we are going to focus on the household energy expenditure excluding transport (expenditure in motor fuels) and the impact of such energy costs on the budget of the households, otherwise saying we look at the affordability aspect of energy costs 1 in the case of households.

Energy consumption and energy costs in households depend on several factors. Energy prices fundamentally impact energy expenditures and may also give incentives to the households in order to find solutions to reduce their energy bills, for example by improving energy efficiency via refurbishment of the building they live in or by purchasing more energy efficient household appliances. Improving energy efficiency has also beneficial repercussion on household energy expenditures. However, decreasing energy consumption over time does not necessarily mean improving energy efficiency; the decrease in energy use in the households often indicates financial constraints and inability to pay for sufficient energy consumption, enabling comfortable living conditions.

Energy consumption, especially heating and cooling related consumption can largely depend on the climate conditions of a given country that varies across the EU Member States. Of course, the aforementioned energy efficiency factor, regarding the building stock, the fuel type and the household appliances used for heating and cooking, can largely mitigate the impact of the climate and can largely influence household energy expenditures.

The income of households also appears to be an important factor in determining how much burden it does imply on households to pay their energy bills, or otherwise saying, how affordable it is for the households to sufficiently consume energy products to ensure comfortable living conditions.

In this chapter an analysis is provided on how household energy expenditures evolved over the last decade (between 2004 and 2014) and how different Member States energy related household expenditures compare to each other and to the EU average. There are twenty-eight Member states in the EU, facing different retail energy prices, climate conditions, energy intensity of their homes and different income levels.

As a novelty of the current report, the analysis on energy expenditure has been enhanced with differentiation between households in different income quintiles (low income, middle income, etc.) in most of the EU Member States. Energy related expenditures are compared to both the disposable income and the total consumption expenditure of households in order to provide information on how different income levels may influence energy affordability.

There are five different energy products taken into account for analysing energy related expenditure of households 2 : electricity, gas, liquid fuels (mainly heating oil), solid fuels and heat energy (primarily meaning district heating). The primary data source for the analysis is an ad-hoc data collection 3 from the National Statistical Institutes of the Member States, based on standard questionnaires and classification used by Eurostat for the Household Budget Survey (HBS).

HBS data have also been complemented by the preliminary results of a new data collection on the final household energy consumption data, showing the use of energy by purposes (e.g.: lighting, heating, cooking, etc.) and by the aforementioned five energy products. Further data on households' energy consumption and efficiency have been taken from the ODYSSEE-MURE database 4 . On case study basis data on energy consumption is also included from the report 5 done by the external contractor, providing input for the current chapter.

Besides presenting the evolution of household expenditures on energy, it is also important to provide information on how the underlying factors, for example, energy prices, household income and the quantity of energy consumed change over time; an estimation method developed by the contractor provides information in each Member State for different energy products.

The impact of energy policy measures (e.g.: renewable surcharges, energy efficiency subsidies, other policy measures, etc.) on the expenditure of households has also been analysed in details, given that energy expenditure of households has been increasingly impacted by these policy measures over the last few years in many EU member States.

A short analysis has been provided on estimated energy related transport expenditures (mainly fuels and lubricants for personal transport vehicles). Finally, as an Annex to this chapter, there is a chart for each Member States, showing the share of energy products (excluding transport fuels) in total household expenditures in the five different income quintiles for the most recent period with available data and for periods of five and ten years earlier.

Main findings

In 2014 households spent almost 6% of their total expenditure on energy products in the EU on average, ranging from 3% in Malta to 14.5% in Slovakia. The share of energy expenditure within housing costs was generally higher in Member States with lower overall purchasing power. Housing costs is an important part of the total household expenditure in almost all Member States, besides services and food products.

Although households with higher income tend to spend more on energy products, if we look at the share of energy in total household expenditures in different income quintiles we see an inversely proportional relation between the share of energy expenditure and income level; implying that households with low income spend proportionally more on energy products than the average. This gives a good reason to focus our attention on low and middle income households while analysing expenditures on energy from affordability aspect.

The importance of energy products measurably increased in the total consumption expenditure of households in the EU: on average, the share of energy rose from 5.7% to 8.6% in the total household expenditure in the lowest income quintile between 2004 and 2014, resulting in a nearly 3 percentage point increase within a decade.

In 2014 the share of energy in total household expenditure in the lowest income quintile (8.6%) was significantly higher 6 than the share of energy for the entirety of households on EU average (5.8%). In 2004 this difference was smaller (5.7% for households with low income vs. 4.1% for households as a whole).

Most of this increase was due to electricity and gas. On EU average, in 2014 households in the lowest income quintile spent 160€ more on electricity and 140€ more on natural gas than in 2004. The overall EU average expenditure on energy products per household rose from 625€ to 960€ during the same period, implying a 24% increase in real terms after correcting by the inflation 7 .

In 2014 there was an almost eightfold difference across the EU Member States in average annual household expenditure on energy products in the lowest income quintile: while in Romania households with low income spent 294€ on energy, in Denmark energy related spending s amounted to 2,320€. In Sweden and Finland households spent less than 4% of their total expenditure on energy, while in Slovakia this share was more than 21%.

After purchasing power correction, eliminating the differences in household incomes across the EU, the difference in energy expenditures was still more than threefold in 2014 in the lowest income quintile. Households spent the largest part of their energy bills on electricity, followed by natural gas. In some Member States district heating 8 or heating oil 9 (liquid fuels) had of particular importance.

Households with middle income have not been as strongly impacted by the increase in energy costs as households with low income. On EU average the total energy costs went up between 2004 and 2014 from 885€ to 1,295€, implying an 18% increase after correcting by the inflation. Expressed as percentage of total consumption expenditure, the share of energy rose from 4.3% to 6.2% in the same period.

Increasing electricity costs added 150€ to the energy bill of households with middle income while in the case of gas the additional expenditure was 190€, implying that energy costs other than electricity and gas practically remained the same in this period.

Comparing energy expenditures to disposable income besides the total consumption expenditure reveals important differences both across Member States and different income quintiles. In the lowest income quintile the share of energy expenditures in disposable income went up from 7.8% to 12% between 2004 and 2014, while in the same time the share of energy in households with middle disposable income went up from 4.3% to 6.2%.

The share of energy expenditure in the disposable income shows a higher dispersion both across income quintiles and Member States than the share of energy within the total household expenditure. It seems that in the lowest income quintile disposable income is underestimated by household budget statistics, as some elements, such as social transfers, debt, etc. are not included in disposable income. In the case of households with middle and higher income these elements have less important role.

It seems that in some Member States households reacted on increasing energy prices and costs by reducing their energy consumption. In many cases reduction in energy consumption was the result of improving residential energy efficiency. On the other hand, in some countries purchasing power constraints might rather be suspected behind dramatic decreases in energy consumption.

Contrarily to household energy use in basic housing activities, (e.g.: heating, cooking, lighting, etc.) energy expenditures related to transport activities (e.g.: purchase of fuels for personal vehicles) are proportionally higher in the case of households with high income than for households with lower purchasing power. Consequently, energy expenditures related to transport activities are normally not taken into account for energy affordability considerations.

5.1 Energy products in household budgets

In order to assess the importance of energy products in household expenditures in different EU Member States, it is useful to look at how the share of energy compares to expenditures related to the consumption of other goods and services, such as food, services, housing, transport (which includes expenditure in transport fuels), etc.

Figure 146 shows the decomposition of consumption expenditure of households in 2014in the EU Member States, ranking them in descending order according to the share of energy in their total expenditures.

Looking at energy expenditures in each country, households in Slovakia spent proportionally the most on energy products (14.5% of their total expenditures), while households in Malta spent only 3% of their total budget. On EU average, households spent almost 6% of their total expenditure on energy products in 2014.

The share of energy related expenditures were higher in Member States with lower GDP per capita (mainly Central and Eastern European countries), while housing related expenditures 10 were generally higher and energy expenditures were lower than the EU average in Member States having higher GDP per capita. Services, and food and non-alcoholic beverages had the two biggest shares in household's expenditures in almost all Member States in 2014 (food products had higher shares in countries with lower purchasing power per capita, while in the case of services it was the other way around). Transport related energy expenditures (mainly motor fuels) were also significant in most of the Member States; ranging between 6% measured in Romania and 17% in France, if expressed as the share of total consumption expenditure.

Figure 146 - Shares of consumer goods groups in household expenditure in Member States, 2014

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations.

After looking the overall picture on consumption of goods and services in the household sector, from this point the analysis will concentrate on household expenditures on energy products. Given that all of the twenty-eight EU Member States have submitted detailed data on the final household consumption expenditures in the five different income quintiles for the last ten years, we have detailed data on how much households spent on energy and on other products as well. Each income quintile represents 20% of the population regarding the income of households; hereinafter the lowest income quintile is called Quintile 1, while the highest is Quintile 5. Households in different quintiles, representing different purchasing power, normally spend different shares of their financial resources on energy products, as Figure 147 shows. As it is presented on this chart, there were significant differences across EU Member States in spending on energy products in 2014 in all income quintiles (showing five-to-eight-fold differences between Bulgaria and Romania on the low end of the scale and Luxembourg, Denmark on the high end). Spending on energy products tends to increase with income, implying that households in higher income quintiles spend more on energy products.



Figure 147 Households energy expenditures in Member States across income quintiles, 2014

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations

Note: Expenditure data on the chart must be read in cumulative way; e.g.: expenditure in the third quintile is the sum of the first three bars from the bottom in each country. Total stands for the average of all households.

However, if we look at the share of energy products within the total household expenditure, also showing significant differences in all income quintiles across EU Member States, we can see that the share of total expenditure on energy products is inversely proportional with income, implying that poorer and middle-income households spend proportionally more on energy products than households with high income, as Figure 148 shows.

This fact has important social implications, as sudden increase in energy costs may impact more intensively households having low income. Subsequently, in the remaining part of this chapter the analysis on energy expenditures will mainly focus on households with low and middle income.

Figure 148 - Energy products share in the total households consumption by income quintile (2014)

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations

Note: Total stands for the average of all households.

5.1.1Energy expenditure in households with low income

As Figure 149 shows, the importance of energy products (their share in the total household consumption expenditure) increased measurably in the case of households being in the lowest income quintile between 2004 and 2014: the share of energy went up from 5.7% to 8.6% in the EU 11 over this ten year period. This increase was predominantly due to the rising share of electricity and natural gas, while the other three components remained more or less stable. If consumption expenditures are expressed as the share of disposable income 12 , the share of energy rose from 7.8% to 12% between 2004 and 2014.

Over the ten year period represented on Figure 148 the average EU household expenditure on energy products rose from 625€ to 960€, representing a bigger increase than the overall inflation in the EU-28 (23.6%, as measured by the Harmonised Index of Consumer Prices – HICP) in the same period.

While in 2004 13 household expenditure on electricity was 300€ in the lowest income quintile on EU average, in 2014 it reached 460€. The same data for expenditure on natural gas: 200€ in 2004 and 340€ in 2014. Expenditures related to the other three energy products presented on the charts altogether did not show significant changes over this ten year period.

Figure 149Households in the lowest quintile - EU average energy expenditure (€) and share of total household expenditure over time

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations

Besides analysing the evolution of energy related expenditures over time, it is also important to provide a cross-country analysis, revealing the differences in the structure of energy related expenditures across EU Member States. Figure 150 shows the average amount spent on electricity, gas, liquid fuels, solid fuels and heat energy in each EU Member State in 2014 in the lowest income quintile of households. Diamonds in the chart show the share of energy in the total household consumption expenditure in each country (on the right hand scale).

Figure 150 - Households with the lowest income - Energy expenditures (€) and share of energy in total consumption, by EU Member State (2014)

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations. No quintile data for Croatia.

On EU average, households being in the lowest income quintile spent 960 € on energy products in 2014, however, this average masks significant differences across Member States: While in Romania the average energy expenditure was below 300€, in Denmark it exceeded 2,300€, providing for a more than eightfold difference in energy related spending across the EU.

However, while in Romania this amount of 300€ represented 15% of the total household expenditure in 2014 in the lowest income quintile, the amount paid in Denmark (2,320€) represented only 5.6%. Energy expenditures expressed in euros were normally lower than the EU average in the Central and Eastern European countries 14 (with the exception of Slovakia, the Czech Republic, and Slovenia), as well as in Finland, Sweden, Greece and Spain, while in the other Member States households spent more on energy than the EU average.

Looking at the share of energy expenditures in the total consumption expenditure, households in the Central Eastern European countries, the UK and Denmark spent proportionally more on energy than the EU average in 2014 (8.6%), while German households spent nearly the same share of household's expenditure on energy as the EU average. In the EU households spent the lowest share of their consumption expenditure on energy in Malta, Finland and Sweden (below 4%), while in Slovakia this share was the highest (almost 22%).

In the overall majority of the EU Member States electricity had the highest share in energy expenditures in 2014, followed by natural gas. In the Netherlands however, the most important energy product in household expenditure was natural gas. In this country there is a specific item (reimbursement of energy taxes, amounting to 386€ in recent years), having a decreasing impact on the overall energy bills for all households.

Liquid fuels (mainly heating oil) has significant share in some countries (Luxembourg, Belgium, Slovenia and Greece). In Bulgaria, Estonia, Hungary, Latvia, Poland, and Romania solid fuels (mainly coal and wood) also has a measurable share. In these countries the share of solid fuels has been significantly higher in households with low income than in households with middle and higher income, which may point to the lack of infrastructure to connect some of these households to the electricity and gas grids or to the cost advantages of solid fuels to other alternatives (e.g.: heating oil).

Heat energy is especially important in Denmark, where significant investments in the heating sector have made heat as primary source within energy-related expenditures of households, outnumbering even electricity. Heat energy (mainly in the form of district heating in practice) also has an important share in the Baltic States 15 , Slovakia, Germany, Czech Republic, Austria and Finland.

The next map shows the numbers of Figure 150 on energy expenditure and share of energy in total consumption expenditure in 2014, for households with the lowest income.

Figure 151 – Households with lowest income – Map with Energy expenditures and the share of energy in total consumption in EU Member States in 2014

As Figure 152 shows, purchasing power parity correction significantly changes the country ranking order of expenditures on energy, providing for a better picture on how household incomes in different countries impact the share of energy within the total household expenditure. The dispersion of average energy expenditure across the EU was lower than before purchasing power correction (in 2014 households in the Czech Republic spent three and a half times more on energy than in Sweden calculated on purchasing power parity, as opposed to the aforementioned eightfold difference between Denmark and Romania before purchasing power parity correction).

Figure 152 - Households with the lowest income - Energy expenditures and the share of energy in total consumption in EU Member States (actually paid PPS EUR, 2014)

 Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations. No quintile data for Croatia.



5.1.2Energy expenditure in households with middle income

After analysing energy expenditures of households having the lowest income, the next step is to take a look at households with middle income, which practically means the third income quintile (40% of the total population has lower income and 40% of the total population has higher income than households in the middle income quintile).

As Figure 153 shows, the evolution of both household energy expenditure and its share in total consumption expenditure on EU average basically followed the same pattern in the case of households with middle income as it was presented before for households with low income.

However, the rise in energy expenditure was less steep: between 2004 and 2014 the average household expenditure rose from 885€ to 1,295€, or, expressed as a share of total expenditure, from 4.3% to 6.2%. This can be interpreted as increasing energy costs had weaker impact on households with middle income than on households with low income. Expressed in real terms (after correcting by inflation) energy costs went up by 18% for households with middle income during this ten year period.

Increasing electricity costs added 150€ to the energy bill of households with middle income while in the case of gas this additional amount was 190€, implying that energy costs other than electricity and gas slightly decreased in this period.

Figure 153- Households in the middle income quintile - EU average energy related expenditure in euros and in the percentage of total expenditure.

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations

A significant, fivefold difference in energy expenditures exists across the EU Member States in the case of households with middle income. As Figure 154 shows, in 2014 the EU average household energy expenditure was 1,295€, representing 6.2% of the total consumption expenditure. In Bulgaria the annual expenditure amounted to 530€ (13.2% of the total consumption expenditure) while in Denmark it was 3,360€ (though this amounted only to 7.9% of the total consumption expenditure). Households in Malta, Sweden and Cyprus spent less than 4% of their total expenditure on energy, while in Hungary and Slovakia this share was around 15%.

Similarly to the households with lowest income, middle-income households also spent the biggest part of their energy bills on electricity in most of the EU Member States. Households with middle income however, spent more on natural gas in Italy and the UK, on liquid fuels in Slovenia and Greece and on heat energy in Denmark than households with low income in these countries in 2014.

Figure 154 - Households with middle income - Energy expenditures and the share of energy in total consumption in EU Member States (actually paid EUR, 2014)

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations. In the lack of quintile data, number for Croatia represents the national average of households as a whole

The same numbers in map format (see next figure)

Figure 155 - Households with middle income – Map with Energy expenditures and the share of energy in total consumption in EU Member States in 2014.

Purchasing power correction, as it is shown on   Figure 156 reduces the difference in household energy expenditures across the EU to a factor of 3.

Figure 156 - Households with middle income - Energy expenditures and the share of energy in total consumption in EU Member States (PPS EUR, 2014)

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations. In the lack of quintile data, number for Croatia represents the national average of households as a whole.

5.1.3Energy expenditures in household consumption and disposable income

If household energy expenditure is also compared to disposable income besides the total consumption expenditure, important differences can be discovered in some Member States regarding how incomes and expenditures relate to each other and how does this difference might impact energy affordability.

As Figure 157 shows, in the case of households in the lowest income quintile the share of energy expenditure in the disposable income is higher in most of the Member States than its share in total consumption expenditure. While the share of energy in total expenditure was 8.6% on EU average in 2014, comparing to the disposable income it was higher, 12%. In Spain, Greece, Estonia and Slovenia the difference between the two shares was more than 5 percentage points in recent years, revealing that in these countries the disposable income might be underestimated in the Household Budget Statistics 16 and there are some factors that might confirm the divergence with total household expenditure, namely:

The lowest income group might also include households with negative income (e.g. self-employed people) in some Member States.

The lowest income group might also consist of households whose consumption is mainly financed by wealth components (savings), for example pensioners.

Consumption can be financed by loans (not included in disposable income)

Consumption can be also financed by income from undeclared work.

Finally, in some countries, the share of the so-called owner occupied dwellings (share of households being owner of apartments and flats they live in) is substantial and the underlying imputed rental (a non-monetary item estimating the amount of rent that would be paid if the given household were not the owner of the residence) can be a significant item in the total household expenditure. Consequently, the share of energy is underestimated in the total monetary consumption expenditure, implying that from affordability aspect the energy share within the disposable income might be closer to the reality.

The difference between disposable income and total expenditure also reveals the role of social transfers in the lowest income quintile, implying that any reduction in social transfers (for example in order to help to restore the balance of national budgets) might have significantly impact the energy affordability of households with low income.

In the case of households with middle income (third quintile) the difference between the share of energy expenditures in the total consumption expenditure and in the disposable income seems to be less important, as Figure 158 shows. In contrast to low income households, the share of energy is lower in the disposable income, showing that middle income households can still manage saving a part of their incomes and need less social transfers to cover their indispensable consumption expenditures, such as energy.

Figure 157 - Households in the lowest income - Share of energy expenditures in the total consumption and disposable income of, 2014

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations. No quintile data for Croatia.

Figure 158 - Households with the middle income - Share of energy expenditures in the total consumption and disposable income in 2014

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations. In the lack of quintile data, number for Croatia represents the national average of households as a whole.

5.1.4Change in energy expenditures in the Member States (2004-2014)

The next chart ( Figure 159 ) shows how the share of energy in the final household consumption expenditure changed between 2004 and 2014 17 . The red bars represent the share of energy in the first income quintile (households with the lowest income – 1st, on the left), while the green bars represents households with middle income (third quintile – 3rd, on the right) in each Member State. In most of the Member States the relative share of energy in the final household expenditure grew measurably; significant decreases in both observed quintiles could only be observed in Slovakia 18 , where the share of energy in household expenditure still represented the highest across the EU in 2014.

In most of the presented countries the share of energy in the total expenditure grew faster in the first income quintile than in the third quintile, implying that increasing energy costs impacted poorer households more significantly than those with middle income.

Figure 159Households with lowest income (1st quintile) vs Households with middle income (3rd quintile) - Share of energy in household expenditure over the last decade

 

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations

On Figure 160 changes in energy expenditures can be followed, measured in euros between 2004 and 2014. Expenditures for households being in the lowest income quintile increased by the most in the United Kingdom, Slovenia, Portugal and Denmark, by more than 500€ in each case. On the other hand, energy expenditures for the poorest households increased by less than 100€ in Slovakia, Hungary and Luxembourg between 2004 and 2014 19 . As it was mentioned before, the share of energy in the total household expenditure increased faster for households in the lowest income quintile than for households with middle income. Looking at the absolute expenditures, this was the other way around, nevertheless, bigger increases in energy expenditures in households with middle income was overcompensated by increasing purchasing power and total consumption expenditure, leading to proportionally lower increase in energy expenditures than in the case of the poorest households.

Figure 160 - Households with lowest income (1st quintile) vs Households with middle income (3rd quintile) - Expenditure on energy in € over the last decade

 

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations

5.2 Share of energy in the household expenditure by income and region

The following charts show the share of energy in final household consumption expenditure in the five different income quintiles in most of the EU Member States. In order to be able to present all available information, a regional approach has been followed, also enabling comparisons for the Member States with their neighbouring peers 20 .

As the next chart ( Figure 161 ) shows 21 , these six North Western European countries spent slightly less than the EU average on energy products in the most recent years. In the lowest income quintile households spent 5-8% of their total expenditure on energy, while in the highest income quintile this share varied between 3% and 5%. In these countries households have high household expenditures in EU comparison and this must be a principal reason why the share of energy is less than the EU average.

Figure 161 - Germany, France, Belgium, Netherlands and Luxembourg - Share of energy in final household consumption expenditure per income quintiles

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations

In the South European countries presented on Figure 162 the share of energy within total household expenditures was also lower than the EU average during the last few years, though the dispersion in shares of energy within the total expenditure in different countries was quite significant 22 . Given the favourable climate conditions, heating needs are lower in these countries compared to other regions of Europe; this might also contribute to lower than EU average shares on energy within the total household expenditure.

Figure 162 – South European countries (Spain, Portugal, Italy, Greece, Malta and Cyprus) - Share of energy in final household consumption expenditure in different income quintiles

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations

Although retail energy prices in the four Central and Eastern European countries presented on the next chart ( Figure 163 ) were comparable or were even below the EU average in 2014, the share of energy in total household expenditures were higher than the EU average, ranging from 12% to 21% in the lowest income quintile, while in the highest income quintile it varied between 10% and 13%. Higher-than-EU average share of energy in the total household expenditure reflects the relatively low purchasing power and total consumption expenditure in these countries and might hint on the potential of improvements in energy efficiency of residential buildings.

Figure 163 - Poland, Czech Republic, Slovakia and Hungary - Share of energy in final household consumption expenditure in different income quintiles

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations

In the United Kingdom the share of energy in total household expenditures in the lowest income quintile was above 10% in 2014, while in Ireland this share was 8%. In the highest income quintile the share of energy in total expenditures was around 4% in both countries. It must be noted that energy products (especially electricity) are relatively expensive in these two countries in EU comparison; this might contribute to significant shares of energy within total household expenditures, especially in the case of households with low income.

Figure 164 - United Kingdom and Ireland - Share of energy in final household consumption expenditure in different income quintiles

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations

In Sweden and Finland, though climate conditions imply significant heating needs in EU comparison, the share of energy in total household expenditures are among the lowest in the EU, reflecting high purchasing power and consumption expenditures of households in the two countries and high energy efficiency standards of residential buildings. Low retail electricity prices in EU comparison also contribute to low energy expenditures in these two countries as electricity makes up the bulk of energy expenditures.

In contrast, the share of energy expenditures in the three Baltic States, where purchasing power is low in EU comparison, is significantly higher than in Sweden and Finland, in spite of the similar climate conditions and low retail electricity and gas prices in EU comparison.

In Denmark, primarily owing to high domestic energy prices, the importance of energy in total household expenditures is higher than in Sweden and Finland.

Figure 165 - Nordic and Baltic countries: Sweden, Finland, Denmark, Estonia, Latvia, Lithuania - Share of energy in final household consumption expenditure in different income quintiles

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations

In Bulgaria, Croatia, Romania, and Slovenia the share of energy expenditures was higher than the EU average during the last few years, primarily owing to low purchasing power and consumption expenditure of households and low energy efficiency of residential buildings, in spite of having low retail energy prices in these four countries in EU comparison. In the case of Croatia we only have data on the share of energy in the total expenditure of households as a whole, without having information on different income quintiles.

Figure 166 - South East Europe: Croatia, Slovenia, Romania and Bulgaria - Share of energy in final household consumption expenditure in different income quintiles

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations

The charts presented above reflect different climate conditions, energy prices, incomes and purchasing power and different energy efficiency of residential buildings across the EU Member States. As climate conditions are given and energy prices are in many cases depend on external factors in most of the EU Member States (though the implementation of the internal energy market should lead to more competition and better infrastructure, having beneficial impacts on energy prices), the key factors for enhancing energy affordability are to improve energy efficiency of buildings and household appliances and to increase the income and purchasing power of households on the longer run.

5.3 Decomposition of changes in the energy expenditure – (prices, consumption and income effects)

It is possible to analyse in each country the impact of changes in energy prices, the amount of energy consumed and household incomes for a given period in order to identify the main driving factors behind the evolution of household expenditures on energy products. In the aforementioned report on Energy prices and costs in the EU method is applied that enables a pure decomposition of both the change in energy expenditures expressed in euros and the change in energy expenditures as a share of household income. The estimation has been provided for the 2008-2013 period for the household sector as a whole (without details on income quintiles) for electricity, gas, heating oil, coal and wood products. As in most EU Member States the bulk of household energy expenditures are related to electricity and gas, in the following the results on these two energy products are analysed in details 23 .

Figure 167 shows the decomposition of the changes in expenditures for electricity between 2008 and 2013 for the EU Member States. For example, an increase in the price of electricity (holding electricity consumption constant) increases the electricity expenditure share as reflected by a positive bar in Figure 167 .

Figure 167Decomposition of household expenditures on electricity– changes between 2008 and 2013

Source: Ecofys report on energy prices and costs in the EU, 2016

The net effect on total energy expenditures is the sum of both bars. For example, if a positive price effect exceeds a negative quantity effect, total expenditures increase. The key insights from the decomposition are:

Price effect: for almost all countries the electricity price increased between 2008 and 2013, thus leading to an increase in the electricity expenditures, but the magnitude of the price effects differs across countries, and was particularly strong (in absolute terms) in Cyprus, Germany, Spain, Finland, France, Greece and Sweden. Only minor price effects could be observed for Belgium, Bulgaria or Poland, for example.

Demand effect: the direction of effect is more heterogeneous than for the price effect; for most countries this effect is somewhat smaller in magnitude than the price effect; in most countries the demand effect is negative, i.e. electricity consumption has decreased after 2008. The largest decreases, in absolute terms, are observed in Cyprus, Ireland and Croatia.

The net effect in most countries is positive, i.e. total expenditures increased over time. The numbers can be interpreted as real average changes in the household expenditures on electricity. Exceptions, in which expenditures decreased, in absolute terms, substantially are Cyprus, where the negative demand effect was stronger than the positive price effect, and Hungary, where price and quantity effects were negative.

Figure 168 shows the decomposition of the changes in expenditures for natural gas for 2013 compared to 2008 for those EU Member States where data were available. The key insights are:

Price effect: in all countries with the exception of Germany and Hungary, the gas price increased between 2008 and 2013, thus leading to an increase in the expenditures for gas consumption, but the magnitude of the price effects differs across countries, and was strongest (in absolute values) in the United Kingdom, Italy, and the Netherlands, reflecting the relatively large share of natural gas in total household energy consumption in these countries. Relatively small price effects could be observed for Belgium, Bulgaria, Slovenia, or Denmark.

Demand effect: the direction of the demand effect is more heterogeneous than for the price effect; a few countries – including Austria, Belgium, or Poland - exhibit small positive effects, i.e. increases in gas consumption; but most countries saw gas consumption decline, with the strongest negative effects occurring in Lithuania, Hungary, and the United Kingdom.

Since the positive price effect tends to dominate in countries where the quantity effect was negative, expenditures for gas increased in most countries. In Lithuania, the negative quantity effect dominated the positive price effect, leading to lower gas expenditures. Conversely, in Germany, the negative price effect dominated the positive demand effect, thus leading to lower gas expenditures in 2013 compared to the base year.

Figure 168 - Decomposition of household expenditures on natural gas– changes between 2008 and 2013

Source: Ecofys report on energy prices and costs in the EU, 2016

As the share of energy expenditure in the income of households can be considered as an indicator for energy affordability, analysing the effects of changes in the individual factors on this share provides insights into what is actually driving observed changes in the share of energy expenditures within the income. For example, energy prices and energy consumption may have increased over time, but if income has increased even more, the income share of energy expenditures will have declined, suggesting an increase in affordability.

The bars in Figure 169 show the relative impact for each of the factors (price, consumption, income) on electricity expenditure share. For example, an increase in income lowers the electricity expenditure share, leading to a negative bar in Figure 169 (∆S(Income)<0). The net effect is depicted by the change in total (∆S(Total)). The value of this bar corresponds to the real change in the expenditure share.

Price effect: for most countries, electricity price increased, thus leading to an increase in the electricity income share, but the magnitude of effects differs across countries. In most countries, the increase in electricity price is the dominating effect (but not for Bulgaria or in the Czech Republic), leading to an increase in the income share of electricity expenditures;

Demand effect: the direction of effect is more heterogeneous than for the price effect; for most countries the output effect is smaller in magnitude than the price effect or the income effects;

Income effect: for most countries, an increase in income led to a decrease in the electricity income expenditure share (but not the United Kingdom for example, which experiences a decline in real GDP over that time frame); for several countries, in particular new Member States like Bulgaria, the Czech Republic and Slovakia, the income effect is dominating the other effects, thus leading to a substantial decrease in the electricity income share.

Figure 169Decomposition of changes in the share of expenditures on electricity in household income, 2008-2013

Source: Ecofys report on energy prices and costs in the EU, 2016

After doing the same for decomposing of natural gas expenditure income share, we observe the following:

Price effect: for most countries, the natural gas price increased from 2008 to 2013. This leads to an increase in the income share of gas expenditures, but the magnitude of effects differs substantially across countries and is particularly high for the Czech Republic, for Slovakia and for United Kingdom. The increase in the gas price is the dominating effect in many countries, including Austria, Italy, Croatia and Lithuania, leading to an increase in the income share of gas expenditures;

Demand effect: similar to the electricity price the direction of the output effect for gas is more heterogeneous than for the price effect; for most countries the output effect is smaller in magnitude than the price effect or the income effects;

Income effect: for most countries (but not United Kingdom and Ireland), an increase in income led to a decrease in the income share of gas expenditures; for a few countries, in particular the Czech Republic and Slovakia, the income effect is dominating the other effects, thus leading to a substantial decrease in the gas expenditure share of income.

Figure 170 - Decomposition of changes in the share of expenditures on natural gas in household income, 2008-2013

Source: Ecofys report on energy prices and costs in the EU, 2016

5.3.1 Impact of cost components and energy policy measures

As it has already been demonstrated in the retail price chapter of this report, energy prices might often be driven by non-market elements, such as network charges and taxes and levies, being not closely related to the evolution of the energy and supply component of the retail price. As we saw in the previous part, retail energy price is an important factor in the evolution of energy expenditures for households. As in most Member States expenditures on electricity has the highest importance among energy products and most of energy policy measures are related to electricity, in the following we are going to demonstrate how expenditures on different final retail price components impact the final electricity bill households pay.

Figure 171Impact of energy supply cost, network charges and energy policy elements on household expenditure on electricity (in Euro per household, 2015)

Source: Ecofys report on energy prices and costs in the EU, 2016

In most of the Member States energy supply costs make a significant part of the final household electricity bill, as Figure 171 shows. Looking at expenditure terms in euros, the electricity supply costs were the highest in Cyprus, Ireland, Malta and Sweden in 2013. Expenditures on the network charge component were the highest in Czech Republic, Belgium and Sweden. It is apparent that among taxes and levies VAT is the most prominent element of the household expenditures; its absolute amount was the highest in Sweden in 2013. Excise taxes were particularly high in Sweden and Denmark. Renewable support schemes had significant impact on household's electricity expenditures in Germany and Italy, however, in Spain, Austria, Belgium, Denmark and the Czech Republic they also had a measurable impact on energy bills. Other policy support elements (energy efficiency support, market and system operation, CHP support, nuclear support and social tariffs) had apparently less impact in 2013 on energy bills in the EU Member States.

5.4 Reaction of households on increasing energy costs

In many Member States energy prices paid by households, as it has already been mentioned, have undergone a significant increase over the last ten years, and this resulted in decrease in household energy consumption 24 . However, decreasing energy consumption can only be interpreted favourably if most of the decrease is related to improvement in energy efficiency in the household sector. If the buildings and household appliances consume less energy, it might favourably impact energy affordability. However, in many cases households do not have other choice than reducing their energy consumption, and this does not result from improving energy efficiency.

As Figure 172 shows, energy consumption in the residential sector as a whole decreased between 2004 and 2013 in many EU Member States, and in many cases this was largely due to improvements in energy efficiency. However, in some countries (e.g.: Greece, Spain) the role of energy efficiency improvements was limited, and households had to change their consumption habits, which in many cases practically meant a financial constraint relating to energy expenditures.

Figure 172 - Factors behind changes in energy consumption in some EU Member States (2004-2013)

Source: ODYSSEE database

Note: The analysis does not cover consumption on transport fuels

5.4.1 Household energy use for different purposes

Besides looking at how much electricity, gas and other energy products households consume in a given period, and how consumption and monetary expenditures on energy products change over a given period of time in households with different income levels, it is also meaningful to analyse the purposes of energy consumption in the residential sector.

Eurostat, the Statistical Office of the European Union has started to publish the first results of a new data survey on final energy consumption of households. The objective of the new data collection is to provide information on what kind of consumption purposes household use different energy products and carriers for. There were nine EU Member States who voluntarily submitted their 2013 data 25 to Eurostat, and from this dataset some conclusions can be drawn on a case study basis.

Figure 173 shows the distribution of household electricity consumption in percentages in the nine Member States where data are already available. In most of the countries the biggest share of electricity consumption is related to lighting and electric appliances, while water heating (e.g.: in Bulgaria and Slovenia) and cooking (e.g.: in Portugal) also have important shares. Space heating also has a significant share in France and the UK.

Figure 173 – Household electricity consumption – Shares of uses in some EU Member States, 2013

Source: Eurostat voluntary data collection on final energy consumption in households from National Statistical Institutes



As Figure 174 shows, with the exception of Portugal, where gas is principally used for water heating and cooking purposes, natural gas is mostly used for space heating in the Member States with available data. Besides Portugal cooking has an important share in Latvia and Romania, while water heating has more or less equal share within the total gas consumption in the remaining countries.

Figure 174 - Household gas consumption – Share of uses in some EU Member States, 2013

Source: Eurostat voluntary data collection on final energy consumption in households from National Statistical Institutes

From affordability perspective space and water heating and lighting purposes are of particular importance, as increasing electricity and gas expenditures fundamentally influence the satisfaction of these basic needs and the quality of living of households. Other energy sources, such as district heating might play important role in some Member States, basically in space and water heating purposes.

As keeping homes adequately warm is essential for proper living conditions, it is meaningful to see in each Member State the share of households that cannot afford to cover this elementary need. EU Member States show a great diversity regarding the share of those low income households (being below 60% of the median of the national income) that cannot afford to keep their homes adequately warm, as Figure 175 shows. In 2014 the share of such households was 23% on EU average, ranging from 2% in Luxembourg and 66% in Bulgaria.

However, over the last ten years there were significant changes in many Member States in the share of such households. There were six Member States (Belgium, Bulgaria, Latvia, Lithuania, Poland and Portugal), where the share of low income households being unable to keep their homes adequately warm fell by more than ten percentage points between 2005 and 2014. On the other hand, in Greece, Italy and Malta the ratio of such households increased by more than ten percentage points, and in Slovenia and the United Kingdom the increase amounted to nine percentage points over the same period.

Figure 175 - Percentage of households below 60% of the median national income being unable to keep their home adequately warm

Source: Eurostat database 'Survey on Income and Living Conditions' (SILC)

5.5 Energy related expenditures in the transport sector

Households spend on energy products in order to satisfy their heating, cooking, lighting and other basic needs, being closely related to their living conditions. However, households also spend a significant amount of their total expenditures on transport goods and services, including buying fuels and lubricants for their personal transport vehicles. It is thus also meaningful to provide a cross country comparison on how much households in different income quintiles spend on this purpose.

The next chart ( Figure 176 ) shows the estimated expenditures on fuels and lubricants for personal transport equipment 26 in each Member State in 2014 or in the most recent year with available data. In this year the average energy related transport expenditure was 1,020€ per household in the EU on average, ranging between 104€ in Romania and 3,770€ in Luxembourg 27 . It seems that there is a positive correlation between the income level and energy related transport expenditures; households with high income tend to spend more on transport fuels than households with lower income.

Figure 176 – Estimated household expenditures on energy products in transport of income quintiles, 2014

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations

Note: Expenditure data on the chart must be read in cumulative way; e.g.: expenditure in the third quintile is the sum of the first three bars from the bottom in each country. Total stands for the average of all households.

Looking at the share of energy related transport goods in total household expenditure ( Figure 177 ), it is reasonable to say that in almost all Member States households in higher income quintiles spend proportionally more on transport fuels than households in lower income quintiles. This is a substantial difference compared to what we've seen in the case of energy products used for domestic energy services (e.g.: heating, cooking, lighting, etc.), where richer households normally spend proportionally less to energy products compared to their total expenditure than households with lower purchasing power.



Figure 177 – Share of energy expenditure on transport in household expenditure by income quintiles, 2014

Source: Directorate General for Energy and Eurostat common data collection from National Statistical Institutes and own computations

Note: Total stands for the average of all households.

(1)

In this chapter energy costs are defined as domestic energy services such as heating, cooling, lighting, water heating, cooking and electrical appliances. Unless otherwise stated, energy costs exclude energy consumption in transport, however, in a subchapter estimation is also made on transport related household energy expenditures.

(2)

Following the logic of the Classification of Individual Consumption According to Purpose - COICOP nomenclature, used in household budget statistics (HBS)

(3)

Directorate General for Energy and Eurostat have implemented together this data collection and validation, at the beginning of 2016

(4)

  http://www.odyssee-mure.eu/  

(5)

Energy prices and costs in the EU, 2016. (report prepared by Ecofys for the European Commission)

(6)

Energy expenditure shares for households in the lowest income quintile might be underestimated if we take into account that many of these households does not have sufficient financial means to heat their homes to an adequately warm level

(7)

The overall EU inflation rate (measured by the Harmonised Index of Consumer Prices – HICP) was 23.6% between 2004 and 2014

(8)

For example: Denmark, Slovakia, Estonia, Latvia and Lithuania

(9)

For example: Belgium, Luxembourg, Slovenia, Greece, Ireland

(10)

It is important to recall that HBS data are not fully harmonised at EU level, implying that numbers are not always fully comparable across countries, even if the same nomenclature (COICOP) used for the data collection. For example, the distinction between housing and energy products is not the same across different countries, making sometimes the comparison on related expenditures difficult.

(11)

It is important to note that there are missing countries in each year from the EU sample, as Household Budget Survey data collection are not harmonised across Member States and hence the EU average represents an average of the actually available data. Therefore changes in the EU average from one year to another might also represent changes in composition of countries.

(12)

It must be noted that there is a risk that Household Budget Statistics underestimates disposable income of households, especially in the lowest income quintile. See more on the caveats of HBS in subchapter ' Comparing energy expenditures to total household consumption vs. disposable income'

(13)

Comparing average expenditures over consecutive years might be biased by the composition effect mentioned in the previous footnote at the computation of the EU average

(14)

Poland, Czech Republic, Slovakia, Hungary, Slovenia, Croatia, Romania, Bulgaria, Estonia, Latvia, Lithuania

(15)

Estonia, Latvia and Lithuania

(16)

Household Budget Statistics primarily concentrate on the structure of household expenditures and statistics on disposable income is not the key focus of the data collection, it is only an auxiliary indicator in HBS.

(17)

Due to unavailability of data in few Member States in 2014, the year used for comparison might change across countries (e.g.: 2012, 2013, etc.), however, in most cases the timespan used for depicting the evolution of the share of energy is ten years.

(18)

In Slovakia, due to the improving purchasing power, total household consumption expenditure grew much faster than expenditure on energy products, resulting in a decreasing share of energy within total consumption expenditure between 2004 and2014

(19)

Looking at the increase in expenditures between two time periods (see the previous footnote as well) it has to be borne in mind that changes expressed in euros might be significantly impacted by changes in currency conversion rates for countries outside the-eurozone.

(20)

In Annex I a comparison of the timely evolution of share of energy in total consumption in each the five quintiles can be found for each EU Member States

(21)

In this chapter figures always show the most recent available data for each country. As the reporting periods for Household Budget Surveys are not harmonised across the EU countries, data might stem from different years.

(22)

It is worth noting here that the curves for different countries represent substantially different time periods, pending on the last available data, which makes cross country comparisons less reliable.

(23)

For the other mentioned fuels see the results in the Ecofys report: Energy prices and costs in the EU, 2016.

(24)

As in previous sections the analysis excludes transport fuels

(25)

Commission Regulation (EU) No 431/2014, as regards the implementation of annual statistics on energy consumption in households, serves as a legal basis for the data provision

(26)

COICOP heading "07.22 Fuels and lubricants for personal transport equipment". For the estimation of energy related expenditures in transport, we use the ratio of the weight of this heading and that of Transport (COICOP 07) as a whole in the HICP index, which is multiplied by the actual expenditures for transport purposes. It must be noted that this estimation might be biased by different share of transport expenditures on passenger cars, fuels and lubricants and other transport services in the different income quintiles. For example, this method might overstate the importance of fuel expenditures in households with high income, as they probably spend a larger proportion of their transport related expenditures on purchase of vehicles (and thus a lower share on fuels) than households with average or low income.

(27)

The energy related transport expenditure data for Luxembourg might be overestimated, as compared to the population of the country there are many commuters living in neighbouring countries, who purchase transport fuels in Luxembourg, given its favourable price in the region.

Top

Brussels, 30.11.2016

SWD(2016) 420 final

COMMISSION STAFF WORKING DOCUMENT

Accompanying the document

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS

Energy prices and costs in Europe

{COM(2016) 769 final}


Contents

6    Industry energy costs    

6.1    Competitiveness and the energy costs of industry    

6.3.2. Energy's impact on competitiveness    

6.2    Energy costs in energy intensive sectors    

6.2.1 Energy costs analysis    

6.2.2 Exploring energy intensities and energy costs sensitiveness to prices    

6.3.3 International comparisons    

6.3.3.1 Energy costs in the EU vs the US and Japan    

6.3.3.2 Electricity prices    

6.3.3.3 Gas prices    

6.3.3.4 Exploring energy intensities differences with trading partners    

6.4 Case Studies    

6.4.1 Cross-Sectorial comparisons    

6.4.2 Overview of results of specific case studies    



Figure 178Competitiveness of the EU according to IMD competitiveness indicator    

Figure 179 – Competitiveness of the EU according to IMD competitiveness indicator    

Figure 180 - Results for selected favourable factors of competitiveness    

Figure 181 - Results for selected less favourable factors of competitiveness    

Figure 182 – Productivity in the EU and G20    

Figure 183- Competitiveness of the EU by Productivity and Efficiency    

Figure 184 – Industrial productivity in the EU and G20    

Figure 185– Electricity costs for industrial clients in the EU and G20    

Figure 186 – Purchase of energy products as a share of total production value in Manufacturing    

Figure 187 - Electricity retail prices in 2015 for companies not eligible for any compensation (Consumption band IB)    

Figure 188 - Electricity retail prices for industrial consumers eligible for all reduced tariffs and compensations in 2015 (Consumption band IF)    

Figure 189 - Maximum differences in total taxes and levies on electricity prices for industrial consumers    

Figure 190 - Natural gas retail prices in 2015 for companies that are not eligible for any compensation (Consumption band I3)    

Figure 191 - Natural gas retail prices for industrial consumers eligible for all reduced tariffs and compensations (Consumption band I5)    

Figure 192 - Maximum differences in total taxes and levies on natural gas prices for industrial consumers    

Figure 193 – Energy costs shares of selected Energy Intensive sectors    

Figure 194 - Absolute and relative changes in main production cost components for the paper and pulp and iron and steel sectors, 2008-2013 and 2011-2013,    

Figure 195 - Gross operating surplus as % of total production costs, average across sectors, at EU28 and Member State level, 2008-2013.    

Figure 196 - EU average gross operating surplus as % of production costs, aggregate of MS for which total production cost and gross operating surplus data available for all years.    

Figure 197 - Energy efficiency index in EU industry, figure 18 from IEE (2015) Energy efficiency trends and policies in industry    

Figure 198 - Energy intensity of selected EU Energy intensive sectors 2008-2013 [kWh energy consumed per Euro of GVA]    

Figure 199 - Total energy consumption per sector 2008-2013 [TWh] aggregate of countries with available data for all years    

Figure 200 - Average energy consumption shares per sector – based on available data points, split by energy carrier, 2008-2013 averages, excluding other energy carriers.    

Figure 201 - Average energy cost shares per sector – based on available data points, split by energy carrier, 2008-2013 averages    

Figure 202 - Energy cost structure for the paper and pulp sector    

Figure 203 - Energy cost structure for the manufacture of cement, lime and plaster)    

Figure 204 - Estimated EU average impact of changes in price of energy carriers 2008-2013 on total production cost of sector    

Figure 205 - Comparison of [%] average energy cost shares per sector, 2008-2013 averages for available years and sectors    

Figure 206 - Energy cost shares as a % of cost for selected sectors    

Figure 207 - Average electricity prices paid by industrial consumers in EU major trading partners    

Figure 208 - Industrial electricity prices in national currencies 2008-2013, indexed to year 2008=100    

Figure 209 - Exchange rate movements indexed to Euro exchange rate in 2008=100.    

Figure 210 - Average natural gas prices paid by industrial consumers in EU major trading partners.    

Figure 211 - Industrial natural gas prices in national currencies 2008-2013, indexed to year 2008=100.    

Figure 212 - Energy intensity [kWh energy consumption per Euro of GVA generated] per sector    

Figure 213 - Energy intensity [kWh energy consumption per Euro of GVA generated] per sector    

Figure 214 - Energy intensity trends in Chinese industry 2008-2011    

Figure 215 - Trends in the energy intensity of the iron and steel sector, kWh energy consumption per Euro of GVA.    

Figure 216 - Gross operating surplus as % of total production costs, average across all sectors for the EU28, United States and Japan, 2008-2013    

Figure 217 - Average industrial gross operating surplus [as % of total production cost] for the EU28, United States and Japan, 2008-2013    

Figure 218 - Electricity consumption & price variations by sector (116 facilities) weighted average, 2008 – 2015    

Figure 219 - Natural gas consumption and price variations by sector (108 plants), weighted average, 2008 – 2015    

Figure 220 - Electricity consumption and price variations by plant consumption    

Figure 221 - Natural gas consumption and price variations by consumption level (108 facilities)    

Figure 222 – Electricity and gas prices for Steel and Aluminium by levels of aggregation    

Figure 223 - Structure of electricity prices in the surveyed plants in Italy, UK, Germany, Romania and Czech Republic in absolute terms (€/MWh)    

Figure 224 - Structure of electricity prices in the surveyed plants in Spain, France, the Netherlands and Portugal in absolute terms (€/MWh)    

Figure 225 - Structure of gas prices in the surveyed plants in Italy, UK, Germany, Romania, Portugal and Hungary in absolute terms (€/MWh)    

Figure 226 - Structure of gas prices in the surveyed plants in France, Spain, Czech Republic, Belgium and the Netherlands in absolute terms (€/MWh)    



Table 15. Coverage of the sectors (15 NACE 3 and 5 NACE-4)    

Table 16. Energy intensity, share of GDP and trade intensity of NACE4 sectors    

Table 17. Countries and sectors covered    

Table 18. Energy costs share of total production costs- Aggregated results at sector level    

Table 19. Coverage of sectors for which energy consumption data per carrier was obtained    

Table 20. Coverage of sectors and product markets by various studies    

Table 21. Assumed consumption and resulting consumption bands per sector for electricity and natural gas    

Table 22. EU production cost weighted average industrial electricity prices (including exemptions) per sector 2008-2013 [EUR/MWh]    

Table 23. EU production cost weighted average industrial natural gas prices (including exemptions) per sector 2008-2013 [EUR/MWh]    



6Industry energy costs

This chapter looks at the effects of energy prices on the structure and the competitive position of the European economy, both at a broad macro-economic level and at sectors of selected energy intensive industries.

Main findings:

Compared with other factors of production, energy plays a relatively modest role in the formation of the gross value added in the economy. On EU level, its share is estimated at roughly 2% of the total production value for all businesses. For manufacturing that energy share stood slightly above 2% in 2013. The share of energy purchases to production value is even smaller for the services sector.

Yet, energy is at the very fabric of almost all products and services used in everyday life. In addition, several important manufacturing sectors also rely on energy as the biggest or the most critical factor of production.

Based on recent global metrics it appears that the economic performance and the overall competitiveness of the EU MS has remained stable compared to that of our main trading partners, despite the turbulent events that marked 2008 – 2015.

The full macroeconomic effects of the wide variations of the global energy commodity prices in recent years are yet to unravel. It seems that up to 2013 the impact on the overall competitiveness of the EU economy was limited as the real unit energy costs of large industrial subsectors remained stable.

With regards to the energy intensive sectors,

Firms are confronted with different electricity and gas prices depending on their energy supply strategies, consumption level and patterns, connection type to grids as well as price and tax exemptions and reductions. This makes that price differences between firms may vary widely (estimated up to 50% in the same sector in the same country).

Looking at general analysis of sectors at high level of aggregation (at NACE 3 level) and the analysis of the case studies (NACE 4 level), some observations can be made on the role of energy costs and competitiveness in the Energy intensive sectors studied:

Between 2008-2013:

EU electricity prices for industry, with a wide range of variation across the EU Member States, are in line with global competitors, higher than prices in the US but lower than most of Asian prices. The evolution of the exchange rate can play a very significant role. This was the case of China, with prices increase mainly driven by the appreciation of the Yuan.

EU gas prices for industry are higher than most of the competitors examined, only lower than Asian gas prices.

In the 14 energy intensive sectors studied in the Ecofys report (NACE 3 level):

Energy costs shares in the EU decreased in most of the Energy Intensive Industry sectors studied (11 sectors out of 14) while total absolute decreased in all. At the end of the period under study, between 2011 and 2013, energy costs shares increased in half of the sectors studied (7 sectors out of 14). Despite the higher prices in the EU compared to the US, energy cost shares were lower in the EU than in the US. Conversely, energy cost shares in the EU were higher than in Japan despite the higher prices in Japan. Energy cost shares are falling in both EU and US, but they are in general falling more rapidly in the US and by 2013 approaching similar levels for many sectors. Profit margins (Gross operating surplus as percentage of production costs) are smaller in EU than in Japan and the US.

For the few EU Member States for which data was available, energy intensity in the most intensive sectors (pulp and paper, basic chemicals, cement, lime and plaster and iron and steel) has increased driven primarily by downward pressure on Gross Value Added, which could be associated with decreasing profits and / or increasing production costs..

Energy efficiency for most EU sectors has improved historically helping to reduce the impact of energy price rises. Between 2008-2014, energy efficiency improvements could have stalled in some energy intensive sectors probably due to lack of capital for investment.

Case studies from energy intensive sectors (five sectors studied in CEPS et altri) show that:

Electricity prices: operators in (sub-) sectors with relatively lower energy consumption pay a much higher price than operators in (sub-) sectors with higher consumption levels. The same correlation could not be observed in natural gas prices most likely due to the lower weight of non-energy components (network costs, taxes and levies) in final prices, which reduces the impact of tax and price exemptions/reductions.

For electricity in 6 out of 9 countries, the price in 2015 is higher than in 2008. For natural gas, prices were lower in 7 out of 11 countries. Although with some differences 1 these results are overall in line with the trends observed in retail prices chapters of this report (1.2.2 & 2.2.2). As described in previous chapters the overall trend is also largely due to decreases in the energy price component and increases in network costs and taxes and levies.

Other points to be highlighted from case studies (five energy intensive sectors studied in the Ecofys report at NACE level 4: Iron and Steel, Non -ferrous metals, paper, hollow glass and basic chemicals) are that: 

The main (net) imports come from China and Russia. For steel, South Africa but also Iran, Ukraine, South Korea and Turkey are very relevant. For paper, India and, for aluminium and glass, Turkey is a growing import origin. The USA is the major destination of net exports. The EU lost market share particularly to China in certain sectors, including steel, paper and aluminium. Production in the glass sector has remained relatively stable.

Despite relatively higher energy prices in the EU than in some G20 competitors, particularly the US, Europe is a net exporter of many products, for example finished steel.

Some of the sectors under study are suffering from overcapacities and associated market consolidation and this can trigger increased competition from emerging economies

Commodity products typically face strong international competitive pressure. However, competitiveness depends not only on energy prices, personnel and raw material costs but on many other factors such as proximity to the upstream and downstream markets, economic growth (global and regional) and institutional environment, including the conditions for research and development.



6.1Competitiveness and the energy costs of industry

Defining competitiveness

The economic decision to invest and the willingness to do business in a given location are influenced by many factors that go beyond prices, costs and factor productivity. The country risk, the political stability, the regulatory environment and the investment climate (among others) are weighing heavily on such decisions and impacting directly the competitive position of each area of the world.

Several renowned international institutes and organisations have developed methodologies combining hard statistical data and surveys of experts' opinions to measure the factors that influence the competitiveness of a given economy.

The Global Competitiveness Indicator of the World Economic Forum (WEF)  2 and the World Competitiveness Scoreboard of the International Institute for Management Development (IMD) 3 are using similar bottom-up approaches to estimate economic performance. A wide range of parameters influencing the competitiveness of a given economy are first collected and quantified, to be later regrouped in main themes which will then feed into the global indices.

Energy costs and competitiveness

WEF defines the competitiveness on a national level "the set of institutions, policies, and factors that determine the level of productivity of an economy, which in turn sets the level of prosperity that the country can earn".

Drivers of competitiveness in the general economy

The following (Figures & Figure 179 ) illustrate the evolution of several indictors measuring the competitiveness of the European Union Member States against our main trading partners, defined as the non-EU members of the group of G20 of major world economies.

A similar message is emerging from the competitiveness indicators of the World Economic Forum (WEF) and: the economic performance of the EU has followed a pathway which is broadly comparable to that of the non-EU G20 major economies.

Based on the most recent data from WEF and IMD, the EU competitiveness vis-a-vis non-EU G20 members is actually slightly improving since 2014. This finding holds when economic performance is measured by actual score or by the ranking position of the countries that are being analysed.

Figure 178Competitiveness of the EU according to IMD competitiveness indicator



Figure 179Competitiveness of the EU according to IMD competitiveness indicator

The next Figures ( Figure 180 & Figure 181 ) report on factors for competitiveness where the EU Member States and the non-EU G20 countries show relatively big differences in terms of performance – be it as a ranking or as a score. Those factors could also explain possible divergences of the level of macroeconomic competitiveness of the two groups of countries.

The WEF and IMD indices produce similar results indicating that the EU group seems to enjoy a clear competitive advantage over the non-EU G20 group in the following areas: international trade; infrastructure – including electricity supply; health and primary education and ICT use. On the other hand, the relatively small size of EU economies (taken separately), the employment and flexibility of the labour market and fiscal policies seem to be pushing down the economic performance of the EU group compared to the group of non-EU G20 countries.



Figure 180 - Results for selected favourable factors of competitiveness

Figure 181 - Results for selected less favourable factors of competitiveness



The recent improvement of EU economic performance is also confirmed by the European Commission report on Single Market Integration and Competitiveness 4 .

Figure 182 – Productivity in the EU and G20

Notes:

1. Overall productivity is defined as the ratio of GDP over employment; employment data are estimates and are provisional for the most recent period;

2. Data for Cyprus, Malta and Saudi Arabia is not available

In terms of overall productivity, the majority of EU Member States are competing with the high-income members of the non-EU G20, as shown in the Figure above ( Figure 182 ).

Over the recent years, the dispersion of productivity and efficiency rates across G20 economies has increased, with high income countries enjoying stronger growth rates than the low-income and less diversified economies of the non-EU G20. Whereas the group of EU countries perform better over the group on non-EU G20 (see Figure 183 and Footnote 109) the 2015 Single Market Integration and Competitiveness report mentioned above (see footnote 105) points out that through the years many EU Member States have accumulated important productivity gaps with the United States and other high income G20 countries and that reforms enhancing the labour and total factor productivity of EU companies should be introduced at both national and EU level. The EU and national reforms are further discussed in separate reports of the European Commission 5



Figure 183- Competitiveness of the EU by Productivity and Efficiency

The productivity spread across high- and low- income countries is less relevant when the monetary value used is switched to Purchasing Power Parities 6 instead of US Dollars and if the focus shifts to the manufacturing sectors only, as shown below in Figure 184 .

Figure 184 – Industrial productivity in the EU and G20

Notes:

1. Industrial productivity is defined as the ratio of related GDP (PPP) per person employed in industry; employment data are estimates and are provisional for the most recent period

2. Data for Cyprus, Malta, Argentina and Saudi Arabia is not available

6.3.2. Energy's impact on competitiveness

Looking at the most recent prices for electricity for industrial users, the non-EU G20 countries appears again as a heterogeneous group. The G20 countries are rather split with regards to their endowment of energy resources as well as other factors that influence electricity prices. See Figure 185 .

Figure 185– Electricity costs for industrial clients in the EU and G20

Notes:

1. Prices refer to the simple average of the domestic monthly reference with tax for electricity for industry;

2. US prices are net of taxes;

3. Data for Cyprus, Malta, Argentina, Australia, China, South Africa and Saudi Arabia is not available

Assessing the importance of energy as a production factor on the global macroeconomic level, and comparing the performance of EU countries against our main trading partners is not straightforward, with serious data availability and methodological issues.

In terms of the absolute value of energy costs, a recent report 7 from the European Commission estimates that the EU manufacturing sector has enjoyed some of the lowest Real Unit Energy Costs 8 together with Japan and similarly to the US. The improvements of the EU industry in terms of energy intensity have helped to offset the increase in real energy prices. Despite the already low starting point the EU manufacturers have steadily improved their energy intensity. Reasons for the improvements on energy intensity could be due to improvements of energy efficiency, the increasing specialisation in the EU manufacturing on less energy intensive industries and the trend of Value Added of the production between the period covered by the above mentioned study (1995-2011). Real unit energy costs across the European industrial clusters have remained broadly stable during the period 2010-2014.

The relative share of energy in total factor production costs can be proxied by the share of energy products in total production value, as reported by the Structural Business Statistics (SBS) tables in Eurostat. This approach has several important limitations, listed in Textbox below, but remains the only viable one in terms of harmonised and publically available data.

The next Figure 186 represents factor production cost across the EU Member States and for the Manufacturing sector. During the 2008 – 2013 period and where data is available, the energy share stood slightly above 2% of total production value in EU 28. Member States with relatively smaller size would typically present a higher than average share; probably pointing to the fact that these economies have a relatively less diversified portfolio of Manufacturing industries.

Figure 186 – Purchase of energy products as a share of total production value in Manufacturing

Source: Eurostat SBS

Notes:

1. Data for Malta, Poland, Slovenia (prior to 2012) and Ireland (after 2012) is not available;

The energy use of Refining is not accounted in the above Figure 186 (see also Textbox below for more explanations). Its share of the refining sector in total production value of manufacturing stood in the range of 7% - 9% for the EU from 2012 to 2014. The relative share of refining is quite dispersed among the 11 Member States declare the production value of refining as non-confidential, ranging from above 30% in Greece to around 20% in Belgium to less than 1% in Luxembourg, Slovenia and Latvia.



Box – Limitations of SBS statistics to analyse the energy share in total production costs

There is no one-on-one mapping between the economic indicators of SBS and the profit and loss account of real companies;

Capital expenditure (CAPEX) is difficult to collect in SBS, forcing the estimation of the energy component to rely solely on operating expenditure (OPEX); as a result the provided estimation is not assessing the long term investment and cannot determine the relative share of investment in improved energy performance tools over the total stock of investment;

The purchases of energy product data is available only for NACE Rev. 2 sections B (Mining and quarrying), C (Manufacturing), D (Electricity, gas, steam and air conditioning supply) and E (Water supply, sewerage, waste management and remediation activities). It is not available for important industrial energy intensive sections such as Section F (Construction) and H (Transportation and storage) and, more importantly, it is not available for all services sectors. According to the 2015 Commission report (footnote 120), the relative share of the services sector in the 2014 Total Value Added in the EU 28 stood at almost 75%, as opposed to 15% for Manufacturing.

Based on the definition of the Commission Regulation (EC) No 250/2009, the structural business statistics (SBS) code "20 11 0 Purchases of energy products" includes only energy products which are purchased to be used as a fuel. Energy products purchased as a raw material or for resale without transformation are excluded. As such, the energy products purchased by companies belonging to NACE Rev.4 Group 19.2 (Manufacture of petroleum products) are not included.

The annual data for 2009 and 2010 is incomplete for the majority of EU Member States and thus not reported



6.2Energy costs in energy intensive sectors

This chapter mainly relies on the presentation of the main findings of three studies. Two studies were commissioned by the Commission to external consultants: The study 'Prices and costs of EU energy' by Ecofys BV and the study 'Composition and drivers of energy prices and costs: case studies in selected energy intensive industries' by CEPS 9 . The third study 'Production costs from energy intensive industries in the EU and third countries' was conducted by the JRC 10 .

The Ecofys study looks at selected Energy Intensive Industries (14 sectors at NACE 3 level) and 5 case studies of less aggregated sectors (NACE-4 level) following a top down approach in which statistical information is used to understand the role of energy prices and costs in the competitiveness of these sectors. The studies by JRC and CEPS also cover case studies but follow a bottom up approach. In the study by CEPS calculated averages are based on direct collection of price and costs data at plant level via a questionnaire which allows to analyse samples of varying representativeness. The JRC study uses the latter approach for the aluminium sector. For the other sectors analysed in the JRC study, information provided by commercial data providers (that contained information for a representative sample of facilities) is used. The bottom up and top down approaches are complementary and provide a broader vision of the energy prices and energy costs paid by European industries.

In this Chapter we will first briefly discuss the conditions which make energy costs become a factor for competitiveness. We will also look at the various factors that affect the final prices paid by companies. On the basis of the analyses of the some selected energy intensive industries at relatively high level of aggregation (NACE 3 level) we will provide an overview of the evolution of energy costs in these sectors as well as of other indicators of competitiveness (like profit margins or energy intensity). International comparisons will then be made to see effects on energy competitiveness. Finally we include the main results from the various case studies at more disaggregated level which allows seeing in more detail the role of energy prices and costs in their competitiveness.

Factors of competitiveness

Firms compete offering products differentiated in terms of both price and quality. Prices are thus an essential element to compete which becomes increasingly important when the products in the market are more homogenous 11 .

Prices are the result of production costs (labour costs, energy costs, capital costs) and profit margins. Differences in production costs and profit margins may stem from various competitive advantages from natural resources, geography, human capital, organisational structures, etc. In this document we will mainly look at the evolution of energy costs in some selected EU energy intensive sectors. We also look at how these energy costs have affected production costs and thereby influenced the competitiveness of such sectors

Energy costs as determinant of industrial competitiveness

On average energy costs represent a rather small share of the total production cost of manufacturing firms and therefore have a rather limited influence on the general competitiveness. As we have seen in section 6.3.2. at EU level it would be difficult to say that energy costs cause a problem of competitiveness at the economy-wide level..

However, energy costs vary considerable across sectors reflecting different conditions and circumstances. For some of them energy is a factor for competitiveness. This may happen when i) energy costs have a very significant share in the cost structure ii) energy costs per unit of production value are higher than international competitors and iii) there is international trade exposure.

This is why we focus our analysis in this document on Energy Intensive Industries (where energy costs represent a significant share of total production costs) and in particular in those sectors with internationally traded products. Naturally, as indicated above, the overall competitiveness of firms in such industries will also depend on other production factors (e.g. labour costs, use of raw materials, etc.) which can influence profit margins.

Energy costs

Energy costs of a firm depend on the energy prices paid by the firm and its energy consumption.

Energy consumption can be improved by higher energy efficiency in the production process.

Energy prices usually attract attention as they are very volatile and can rapidly escalate increasing energy costs in a significant way. A general energy price escalation would allegedly affect all firms most of which are energy price takers. However, what counts for determining the competitive position of firms (which is a relative position with regard to other firms) would be the energy prices they actually pay. The price paid may vary a lot depending upon numerous factors. These factors include energy supply strategies (e.g. use of CHP, self-production using cheaper energy sources, common purchasing strategies, long term contracts of energy supply, etc.), the amount of energy consumed (different tariffs of consumption bands), connection to the transmission or distribution grids and the firm consumption patterns derived from the specific industrial process (e.g. during the day tariffs are usually cheaper when energy demand is low, like during the night hours).

The actual amount paid for energy also depends on price and tax exemptions and reductions 12 which can be granted by specific regulations that vary across member states (e.g. lower network tariffs for firms exceeding certain level of energy intensity, firms of sectors exposed to international competition, reduced taxes or levies for firms applying energy efficiency measures, etc.)

Summing up, depending on many characteristics, each industrial firm in Europe is confronted with a different price of energy. The price difference between companies of the same sector for the same energy carrier in the same country can exceed 50% 13 . See below Figure 187 & Figure 188 as well as Figure 190 & Figure 191 .

These price differences may have also evolved over time depending on issues such as the magnitude of taxes and levies or due to the introduction of changes in the regulation for price reductions and exemptions in each country (see Figure 188 and Figure 191 )

Range in ELECTRICITY prices due reduced tariffs and exemptions

Figure 187 - Electricity retail prices in 2015 for companies not eligible for any compensation (Consumption band IB)

Source: Ecofys study

Figure 188 - Electricity retail prices for industrial consumers eligible for all reduced tariffs and compensations in 2015 (Consumption band IF)

Source: Ecofys study, EC data collection

Figure 189 - Maximum differences in total taxes and levies on electricity prices for industrial consumers

Source: Ecofys, Frauhofer ISI, CASE



Range in GAS prices due to reduced tariffs and exemptions

                                               

Figure 190 - Natural gas retail prices in 2015 for companies that are not eligible for any compensation (Consumption band I3)

Source: Ecofys study

Figure 191 - Natural gas retail prices for industrial consumers eligible for all reduced tariffs and compensations (Consumption band I5)

.

Source: Ecofys study, EC data collection

Figure 192 - Maximum differences in total taxes and levies on natural gas prices for industrial consumers

Source: Ecofys, Fraunhofer ISI, CASE

6.2.1 Energy costs analysis

Analysis of energy costs in selected Energy Intensive sectors

In the following sections we draw on the results of the sectorial analysis based on a study commissioned by the European Commission to Ecofys which analyses energy costs and other indicators across fifteen NACE 3 sectors. Methodological details can be found in the Ecofys study. The main data source was Eurostat SBS. Energy cost shares are calculated by dividing the purchases of energy by total production costs, where total production costs are equal to total purchases of goods and services (including energy) 14  plus personnel costs.

Selection of sectors

The selection of sectors took account of energy intensity, added value and trade exposure of sectors. It therefore gives us a good overview of the industry sectors where energy may have a bigger impact on competitiveness.

Table 15. Coverage of the sectors (15 NACE 3 and 5 NACE-4)

Code

Description

Case study

C106

Manufacture of grain mill products, starches and starch products

C132

Weaving of textiles

C161

Sawmilling and planing of wood

C171

Manufacture of pulp, paper and paperboard

C1712 - Manufacture of paper and paperboard

C192

Manufacture of refined petroleum products

C201

Manufacture of basic chemicals, fertilisers and nitrogen compounds, plastics and synthetic rubber in primary forms

C2013 - Manufacture of other inorganic basic chemicals, focus chlorine

C206

Manufacture of man-made fibres

C231

Manufacture of glass and glass products

C2313 – Hollow glass, focus container glass

C232

Manufacture of refractory products

C233

Manufacture of clay building materials

C234

Manufacture of other porcelain and ceramic products

C235

Manufacture of cement, lime and plaster

C237

Cutting, shaping and finishing of stone

C241

Manufacture of basic iron and steel and of ferro-alloys

C2410 - Manufacture of basic iron and steel and of ferro-alloys, focus crude steel

C244

Manufacture of basic precious and other non-ferrous metals

C2442 - Aluminium production, focus primary aluminium

Source: Ecofys study

Table 16. Energy intensity, share of GDP and trade intensity of NACE4 sectors

NACE4 category

Energy Intensity

Share of GDP

Trade intensity

C1712 - Manufacture of paper and paperboard

11.19%

0.09%

23.10%

C2013 - Manufacture of other inorganic basic chemicals

9.70%

0.05%

40.62%

C2313 - Manufacture of hollow glass

13.34%

0.04%

20.46%

C2410 - Manufacture of basic iron and steel and of ferro-alloys 15

7.83%

0.16%

25%

C2442 - Aluminium production 16

7.19%

0.05%

34.64%

Source: Ecofys study, calculations based on Eurostat data

Note: The criteria used to select five NACE-4 sectors were energy intensity above 7%, trade intensity of more than 10% and a share of GDP greater than 0.02%



Evolution of energy costs in Energy Intensive sectors

Table 17. Countries and sectors covered

C106: Grain products

C132: Textiles

C161: Sawmills

C171: Pulp and paper

C192: Refineries

C201: Basic chemicals

C206: Man-made fibres

C231: Glass

C232: Refractory products

C233: Building materials

C234: Porcelain, ceramics

C235: Cement, lime, plaster

C237: Stone

C241: Iron and steel

C244: Non-ferrous metals

Austria

1

1

1

1

0

1

1

1

1

1

1

1

1

1

1

Belgium

1

1

1

1

0

1

0

1

0

1

0

0

0

1

1

Bulgaria

1

1

1

1

0

1

0

1

0

1

1

1

0

0

1

Croatia

1

0

1

0

0

0

0

1

0

1

0

1

1

0

0

Cyprus

1

0

0

1

0

0

1

1

0

1

0

0

1

1

0

Czech Republic

1

1

0

1

0

1

0

1

1

1

1

1

1

1

1

Denmark

0

0

1

1

0

1

0

1

0

1

1

0

1

0

1

Estonia

0

0

1

0

1

1

0

1

0

0

1

0

1

1

0

Finland

1

0

1

1

0

0

0

1

0

1

0

0

1

0

0

France

1

1

1

1

0

1

1

1

1

1

1

1

1

1

0

Germany

1

1

1

1

0

1

1

1

1

1

1

1

1

1

1

Greece

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

Hungary

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

Ireland

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Italy

1

1

1

1

0

1

1

1

1

1

1

1

1

1

1

Latvia

0

0

1

0

0

1

0

1

0

0

1

0

1

0

0

Lithuania

1

1

1

1

0

1

0

1

0

1

1

0

1

0

0

Luxembourg

0

1

0

0

1

0

0

0

0

1

0

0

1

0

0

Malta

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Netherlands

1

0

1

0

0

0

1

1

0

0

0

0

1

0

1

Poland

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Portugal

1

1

1

1

0

1

1

1

1

1

1

1

1

1

1

Romania

1

1

1

1

0

1

0

1

1

1

1

1

1

1

1

Slovakia

0

1

1

1

0

1

1

1

1

1

1

1

1

0

1

Slovenia

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Spain

1

1

1

1

0

1

1

1

1

1

1

1

1

1

1

Sweden

1

1

1

1

0

1

0

1

1

0

1

1

0

1

1

UK

1

1

1

1

0

1

1

1

1

1

1

1

1

1

1

Total data points included

19

17

21

19

4

19

12

23

13

20

18

15

21

15

16

Coverage of EU28 sector GVA of included data points [%]

93

92

93

93

14

85

83

94

90

91

91

73

90

77

85

Note: The sectors and countries for which a full time series 2008-2013 was available for the energy cost as a share of total production cost calculation are indicated with "1"(i.e. all data available) A "0" indicates that at least one year of one data point missing, therefore not included in the EU aggregate calculation



Table 18. Energy costs share of total production costs- Aggregated results at sector level

Sector

Average energy cost share: 2008-2013

Data points

Minimum value

Maximum value

Change 2008-2013 [%]

Change 2011-2013

[%]

C106 - Manufacture of grain mill products, starches and starch products

3.7%

19

1.3%

17.9%

-10.5%

-0.2%

C132 - Weaving of textiles

3.5%

17

0.5%

12.1%

-38.5%

-10.6%

C161 - Sawmilling and planing of wood

3.6%

21

0.6%

10.5%

2.1%

-11.4%

C171 - Manufacture of pulp, paper and paperboard

11.3%

19

2.8%

42.0%

-16.2%

-9.8%

C201 - Manufacture of basic chemicals, fertilisers and nitrogen compounds, plastics and synthetic rubber in primary forms

6.7%

19

0.0%

6.7%

-1.8%

-1.3%

C206 - Manufacture of man-made fibres

8.4%

12

0.0%

20.4%

-1.9%

18.9%

C231 - Manufacture of glass and glass products

9.2%

23

1.9%

24.2%

2.3%

14.0%

C232 - Manufacture of refractory products

6.1%

13

1.1%

33.1%

-0.9%

11.8%

C233 - Manufacture of clay building materials

13.0%

20

3.2%

42.4%

-18.3%

11.7%

C234 - Manufacture of other porcelain and ceramic products

5.3%

18

0.9%

17.4%

-1.8%

4.3%

C235 - Manufacture of cement, lime and plaster

19.6%

15

12.7%

35.6%

-8.7%

-8.3%

C237 - Cutting, shaping and finishing of stone

4.0%

21

0.6%

24.8%

7.9%

21.6%

C241 - Manufacture of basic iron and steel and of ferro-alloys

8.5%

15

2.1%

26.8%

-2.9%

10.0%

C244 - Manufacture of basic precious and other non-ferrous metals

4.2%

16

0.7%

29.8%

-7.7%

-3.4%

Source: Ecofys study

Note: Energy costs and production costs are aggregated per sector only for Member States where all data inputs are present across all years for the relevant sector so that a consistent basis of comparison is applied to all years. For France the personnel costs were estimated in 2009.

This somewhat limits the total number of data points and can lead to differences in results compared to analysis of a single year, where other Member States may be included. The refinery sector has been excluded as the energy cost data does not accurately reflect (significantly underestimates) the actual cost to the sector.

The exclusion of the manufacture of refined petroleum products sector

The refinery sector was selected as one of the focus sectors but is excluded from many of the following figures and analysis. This is because the Eurostat SBS dataset is the basis for the energy costs analyses made by the Ecofys study. The fact is that energy products, i.e. crude oil, are purchased and consumed by the refinery sector, but as a feedstock rather than for energy generation. However the SBS energy purchases does not include crude oil thereby excluding the largest part of energy costs for the refinery sector. This results in a calculated EU average energy cost share for the refinery sector of 3% of total costs. Clearly this does not accurately reflect the actual energy costs of the sector which will be much higher. The European Competitiveness Report (2014) estimated energy costs at 62% of production value (gross output) for the Coke, refined petroleum and nuclear fuel sector in 2011. Analysis by Solomon Associates (2016) suggests that the average energy costs per barrel of oil for EU28 has increased slightly between 2008-2012 but decreased again by 2014. In the same period, US energy costs have decreased to below those in EU28 along with Russia and Middle East. Korea/Singapore and India have higher average energy costs than the EU in 2014. In terms of net cash margin, the US and Korea/Singapore have higher average margins than the EU28 while the other competitors are close to or below the EU28.

Energy costs for most of the selected sectors are ~3-10% of total production costs, only for the manufacture of pulp and paper, clay building materials and cement, lime and plaster do energy costs appear to be more than 10% of production costs 17 .

The results of the analysis showed that between 2008-2013 energy costs shares in almost every sector under study (except sawmills, glass, stone cutting) and total absolute energy costs have fallen in all the studied sectors.

Between 2011-2013, there is a change in the trend in some sectors. Energy cost shares increased in half of the sectors studied (man-made fibres, glass, refractory products, clay building materials, stonecutting and iron and steel with increases between 4-22%) and in three of these cases (sawmills, glass and stonecutting) this happened due to energy costs decreasing less than other production costs.

Between 2008-2013 total production costs decreased across almost all sectors, by 0-30% and increased in only two sectors (grain and pulp and paper, by 8% and 1% respectively).

Figure 193 – Energy costs shares of selected Energy Intensive sectors

Source: Ecofys study, Eurostat SBS.

On average between 2008-2013 total energy costs have changed more favourably, i.e. increased by less, decreased by more, than other production costs in absolute terms, and therefore have reduced their share in total costs. Energy costs typically scale very closely with production volumes, yet other costs, i.e. personnel, rent, rates, services, may not be so flexible. In times of declining production, energy costs could fall quickly while other costs must still be paid or are difficult to reduce. The evolution of the costs from non-energy purchases of goods and services depends on many factors and can also affect energy costs shares in total production costs. E.g. The non-energy purchases of goods and services cost can be driven up by price spikes in some commodities (e.g. commodity boom over the period 2008-2011) or dragged down by falling production volumes. See examples below where the non-energy purchases have opposite behaviour.

Figure 194 - Absolute and relative changes in main production cost components for the paper and pulp and iron and steel sectors, 2008-2013 and 2011-2013, 

Source: Ecofys study

Note: EU aggregates based on data points in Table 17  

Source: Ecofys study

Note: EU aggregates based on data points in Table 17

With regard to Member States, the analysis of the sectors shows that: i) the energy cost shares within a sector vary considerably, from Member States where the energy cost share is only a small percentage of the total production cost, to Member States where the energy cost share is many times the average, and more than 40% of total production costs in some years. ii) A cluster of countries (BG, HR, CY, EL, HU, LT, LV, PT, RO, SK) typically have higher than average energy cost shares within total production costs, which is consistent with average wages being lower in these countries and therefore personnel costs contributing a lower share of total costs than elsewhere.

Box -Gross operating surplus (profit margins) in Selected Energy Intensive Industries

Profit margins together with production costs do determine the final prices. The evolution of profits can therefore also play an important role in the competitiveness of firms.

On the basis of SBS statistics (Ecofys study) the level and evolution of Gross operating surplus 18 (GOS, which broadly correspond to profits) of the selected Energy Intensive Industries are presented in this box. GOS is expressed as a % of total production costs. This analysis will also be useful when we make international comparisons of GOS in the next section.

With regard to Member States, the result of the analysis of the sectors over the period 2008-2013 shows that at EU level the average gross operating surplus is generally in the range of 8-10% per annum and declined across all but four Member States (BG, DK, IT, SI) particularly since 2011. This could be that average margins are under significant pressure in the EU. However, in some Member States in some years (CY, EE, LV, LU, PL) the average gross operating surplus exceeds 20-30%.

Figure 195 - Gross operating surplus as % of total production costs, average across sectors, at EU28 and Member State level, 2008-2013.

Source: Ecofys study

From a sector perspective (see main report and Annex 4 of Ecofys study for all results regarding sectors) it can be highlighted that average gross operating surplus increased in more than half of the available Member States in the sawmill, paper and pulp sectors and were significantly lower than average in non-ferrous metals and especially in the iron and steel sector.

Figure 196 - EU average gross operating surplus as % of production costs, aggregate of MS for which total production cost and gross operating surplus data available for all years.

Source: Ecofys study



6.2.2 Exploring energy intensities and energy costs sensitiveness to prices

The efficiency of energy use has a crucial bearing on the energy costs of a sector.

Energy efficiency trends in industry (NACE 2 Level) seem to have evolved positively. Figure 197 . In many sectors energy efficiency has improved over 2000-2013, especially in the chemical sector. As from 2008, energy efficiency improvements in the cement and iron and steel sectors seem to have come to a halt. The rate of energy efficiency improvement is driven by a number of factors including state of energy efficiency at the beginning of the reference period, technical possibilities for improvement, capacity utilisation rates and availability of capital to invest. Obviously; the financial situation since 2008 could have had implications for investments generally; including in energy efficiency. In addition our analysis on the evolution of retail prices in the previous chapters shows that electricity and gas price increases for industry were slowing down during the last years and even declining in the last year under study (2014-2015). Wholesale prices have also declined sharply in recent times (See Chapters 1 and 2). This fall in energy prices could also be reducing incentives for investment in energy efficiency in industry inter alia in more energy efficient industrial processes.

Figure 197 - Energy efficiency index in EU industry, figure 18 from IEE (2015) Energy efficiency trends and policies in industry

Data on the energy consumption and physical units of production of sectors at a high level of disaggregation is however rather limited and energy efficiency is difficult to estimate.

In this section we look at the energy intensity of selected (NACE-3) Energy Intensive sectors in the EU. Energy intensity of a sector measures the energy required to generate a unit of value added (VA). This indicator contains valuable economic information and indirectly contains information of the energy efficiency of the sector.



Interpretation of energy intensity

Energy intensity has to be clearly distinguished from energy efficiency. It measures the energy required to generate a unit of value added (VA). Intensities across sectors cannot be compared to provide insight into the energy efficiency of a sector. Energy use can be dictated simply by the required processes. For example the energy intensity of the iron and steel sector could be high, but the sector can be (relatively) highly efficient for the energy required to manufacture these products. Indeed, it can be argued that sectors with relatively high energy intensities are more highly incentivised to pursue energy efficiency measures to reduce costs.

A further complexity of the energy intensity measure is the role of value added. Value added is the sum of returns to labour and capital, which is effectively the sum of personnel costs and gross operating surplus, the latter being a proxy for profit. Obviously many different factors such as salary costs, other personnel costs, pricing strategies, health of domestic markets, etc., can have an important bearing on the amount of value added generated. Therefore energy consumption is not the only important variable in this ratio. To more closely understand trends in efficiency in a sector a production volume at a sufficient level of disaggregation rather than value based measure would be preferred e.g. kWh/tonne of cement. Given that these data are not available across the range of sectors and for the Member States analysed, we use energy intensities to track trends over time in a particular sector. We also compare the same sectors across countries, although in neither case can we disaggregate the effect of different or changing product mix from energy efficiency.

The results of the analyses presented in this section are based on a small share of the value added of sectors [Value Added covered by sectors ranges from 6% to 24%] and a rather limited coverage of EU Member States. ( Table 19 )- This is due to limitation on energy consumption data at sector level, with energy consumption breakdown per fuel. The breakdown per fuel is necessary to be able to perform price sensitivity analysis. Gross Value Added was sourced from the Eurostat SBS statistics (value added at factor cost).

Table 19. Coverage of sectors for which energy consumption data per carrier was obtained

Code

Description

Countries

Coverage of GVA

C106

Manufacture of grain mill products, starches and starch products

DE

7%

C132

Weaving of textiles

DE

6%

C161

Sawmilling and planing of wood

DE

7%

C171

Manufacture of pulp, paper and paperboard

DE, SE, FI

25%

C192

Manufacture of refined petroleum products

 

#N/A

C201

Manufacture of basic chemicals, fertilisers and nitrogen compounds, plastics and synthetic rubber in primary forms

DE

17%

C206

Manufacture of man-made fibres

DE

22%

C231

Manufacture of glass and glass products

DE, FR

20%

C232

Manufacture of refractory products

DE

14%

C233

Manufacture of clay building materials

DE

8%

C234

Manufacture of other porcelain and ceramic products

DE

17%

C235

Manufacture of cement, lime and plaster

DE, UK, FR

15%

C237

Cutting, shaping and finishing of stone 19

DE, ES

16%

C241

Manufacture of basic iron and steel and of ferro-alloys

DE, AT, IT, FR

14%

C244

Manufacture of basic precious and other non-ferrous metals

DE, UK, FR

24%

The results on energy intensity cover 13 sectors (See  Table 19 ) and show a mixed picture The sectors that appear as the most energy intensive are Pulp and paper; Cement, lime and plaster; Iron and steel 20 (>20 kWh per Euro of GVA) followed by Basic chemicals (a bit less than 15 KWh per Euro of GVA).

Between 2008 and 2013 energy intensity increased mainly in the most energy intensive sectors in a general context of declining consumptions 21 and added value:

Energy intensity increased in 6 of the 13 sectors: Pulp and paper; Cement, lime and plaster; Iron and steel; Basic chemicals (i.e. the four most energy intensive sectors) plus sawmills and man-made fibres.

Gross Value Added was constant or decreasing in 10 of the 13 sectors. This is consistent with falling margins (and therefore GVA) in recent years which could be due to an increase in intensity of global competition. GVA only increased in grain products (+15%), basic chemicals (+5%) and clay building materials (+23%).

Energy consumption declined in 9 of the 13 sectors ( Figure 199  based on limited data points as per Table 19 ). The four sectors with increasing energy consumption were grain products (+9%), sawmills (+118%), basic chemicals (+20%) and man-made fibres (+28%). Of these four, only the grain products sector saw an energy intensity decrease due to a higher increase in GVA than in consumption. 

Figure 198 - Energy intensity of selected EU Energy intensive sectors 2008-2013 [kWh energy consumed per Euro of GVA]

Source: Ecofys study

Note: Data based on limited number of EU Member States (see Table 19 for coverage)

Figure 199 - Total energy consumption per sector 2008-2013 [TWh] aggregate of countries with available data for all years

Source: Ecofys study

Note: Data based on limited number of EU Member States (see Table 19 for coverage



Energy carriers and price sensitivity

In this subsection we first present the results of the analysis of the importance of some energy carriers in consumption of sectors over the period 2008-2013. Then the results of the sensitivity analysis of total energy costs to price changes in energy carriers are presented.

As for the energy intensity the analyses presented in this section are based on a small share of the value added of sectors [Value Added covered by sectors ranges from 6% to 24%] and a rather limited coverage of EU Member States.- See Table 19 .

In addition to that the analysis of energy costs only covers electricity, gas, coal, and oil products and excludes other carriers like biomass or heat for which prices were not available. This is most relevant for the sawmills (84% of energy consumption), pulp and paper (43%), basic chemicals (35%) and cement, lime and plaster sectors (38%). In all other sectors other energy consumption was less than 5% of the total.

Data on consumption of energy carriers per sector comes from National statistics and the Odyssey-Mure dataset. Prices for gas and electricity are typical prices for firms in the sectors derived as indicated in box (#).Price data for oil (petroleum products) was sourced from Eurostat: prices for Heating Oil without taxes. Price data from coal is based on the monthly prices reported in the Platts CIF ARA 6,000 NAR. 22  

The results of the analysis are presented as averages of available data points and give a rough indication of the importance of fuels per sector. This shows that overall electricity has the biggest influence on total energy costs followed by gas while oil (petroleum products) and especially coal have a relatively small influence even if consumption is high. This seems to indicate that energy costs in the sectors studied could be driven by price element of the energy carrier (electricity is usually expensive and coal cheap) rather than the consumption. See Figure 200 and Figure 201

Figure 200 - Average energy consumption shares per sector – based on available data points, split by energy carrier, 2008-2013 averages, excluding other energy carriers.

 

Figure 201 - Average energy cost shares per sector – based on available data points, split by energy carrier, 2008-2013 averages

The average figures per sector presented above have to be taken with precaution not only due to the limited available data but also because averages do not show national specificities. Two examples below illustrate this.

C171 – manufacture of paper, pulp and paperboard ( Figure 202 )– In the sector in Germany there is significant consumption and costs due to natural gas. Natural gas is not used in either Sweden or Finland. Natural gas prices in Germany are therefore important for this sector, while electricity prices are crucial in Sweden and Finland, with the costs of other energy carriers (heat, biomass) also of particular importance in Sweden.

Figure 202 - Energy cost structure for the paper and pulp sector

Source: Ecofys study

 

C235 – Manufacture of cement, lime and plaster ( Figure 203 )– a divergence in energy costs can be observed between each of the three Member States, Germany and UK both incurring around 60% of their energy costs from electricity, despite its share in consumption being relatively low (10-15%) in each. Part of this is explained by other (non quantified) energy consumption increasing the relative importance of each energy carrier including electricity. It also exemplifies the role of relatively high electricity prices and especially the role of relatively low coal prices. The cost share for electricity in France is much lower as electricity prices for the sector are around 30-40% lower than in Germany and the UK.

Figure 203 - Energy cost structure for the manufacture of cement, lime and plaster)

Source: Ecofys study

Sensitivity of energy costs to price changes

In this section we present an analysis of how the changes in prices of different energy carriers could affect the energy costs as a share of total productions costs in different sectors. The results of this sensitivity analysis have to be taken with even more precaution that the previous results. In addition to the limitations in the data coverage and information of relevant energy carriers for some sectors, additional assumptions are needed to undertake the analysis which limits even further any generalisation of the results. Namely:

The energy carrier split is based on only a limited number of data points.

The energy carrier split is assumed to remain constant over time, no fuel switching.

The other production costs are also assumed to remain constant over time.

The assumptions on energy price changes for 2008-2013 were based on the changes on the EU averages of electricity and gas prices per sector, calculated on the basis of the estimated prices after applying exemptions of Member State for a typical firm in a sector with an estimated typical electricity and gas consumption (between 2008-2013 calculated electricity prices increased from 5-25% and gas prices varied from -3.5% to 16%, depending on the sector) 23 .-. Oil (petroleum products) prices were calculated to have increased by 9% in all sectors, and coal, on the basis of the Platts CIF ARA prices were calculated to have decreased by 38% across all sectors.(details on approach on Ecofys study section 5.6.2)

The analysis shows - by sector, over the period 2018-2013 - the impact of the change in the price of energy carriers on the share of energy in total production costs ( Figure 204 ).

This shows that: the net effect on total production costs of energy price changes is relatively small (increase between 0.2 and 1.2% per sector) and that sectors which use coal may have benefitted from price changes, or at least offset the impact of increasing prices of other energy carriers.



Figure 204 - Estimated EU average impact of changes in price of energy carriers 2008-2013 on total production cost of sector

Source: Ecofys study

Note: Analysis based on energy cost shares calculated in section 6.2 *=sectors where other energy carriers, whose costs were unquantifiable play a significant role and for which greater uncertainty in the results exists.

6.3.3 International comparisons

6.3.3.1 Energy costs in the EU vs the US and Japan

Although the analysis of industrial competitiveness involves many more factors than only energy, here we concentrate on the differences in energy costs between countries. It is difficult to draw general conclusions as there is a lack of comparable data at a sufficient level of detail for competitor countries. The energy prices used for international comparison do not account for individual industries exemptions or reductions. On consumption and energy costs shares, data is only available at a relatively high level of sector aggregation.

Some general observations on energy prices and costs trends can nevertheless be provided. The case studies on specific sectors and products (Annex 4 and 5 of Ecofys Study) do not allow considerations at company level.

EU energy cost shares in the sectors analysed have to be compared against trading partners to understand their impact on competitiveness.

The results of comparison with data available for US and Japan 24 indicate that (

Figure 205 ) EU energy cost shares were on average higher than the Japanese across all the analysed sectors (in some cases EU cost shares were more than double Japanese levels) and lower than the US in 6 out of 9 sectors (significantly lower in textiles, pulp and paper, glass and porcelain and ceramics although higher in basic chemicals, iron and steel and non-ferrous metals)

Figure 205 - Comparison of [%] average energy cost shares per sector, 2008-2013 averages for available years and sectors

Source: Ecofys study

Note: Available data is for all years for the EU, 2008-2010 for Japan, 2008-2011 and 2013 for the US.

Between 2008-2013 energy cost shares have fallen in both the EU and US, but faster in the US in most of the sectors analysed (8 of the 11 sectors in which comparisons could be made). The following examples illustrate this trend.

Figure 206 - Energy cost shares as a % of cost for selected sectors

   

Source: Ecofys study

In the following sections we examine the key price and efficiency (intensity) drivers of these trends.

Industrial energy prices

The price paid for energy is a key driver of energy costs. In this section we look at data on electricity and gas prices (excluding VAT and recoverable taxes and levies) for industrial consumers in the EU and EU trading partners 25 . By comparing the prices paid internationally we can provide insight into the relative role of energy prices in energy costs.

Data are however scarce, particularly for gas and the price data used come from different sources and cannot always be easily compared (for G20 countries, excluding the EU Member States, IEA and private sources (CEIC) databases were used; EIA was also a source for US; Details in Annex 4 and Ecofys report )



6.3.3.2 Electricity prices

Figure 207 - Average electricity prices paid by industrial consumers in EU major trading partners

Source: Brazilian Ministry of Mining and Energy, Chinese Price Monitoring Center, NDRC, Indonesian State Electricity Company, Russian Federal State Statistics Service, and for Turkey, Korea, Japan, US and Mexico EIA data have been used. WB and ECB.

Within the EU, prices paid for electricity can vary significantly across Member States. In some sectors and countries electricity prices will be considerably higher than the average, in others considerably lower and comparable with the lowest prices paid internationally..

The analysis of this data shows that average EU industrial electricity prices 26 are around the average paid internationally (around €110/MWh), higher than those paid in Russia, Indonesia, the US and Mexico, slightly lower than those paid in Turkey, China, Brazil and clearly lower than those paid Japan

Over 2008-2015 the EU average was relatively stable while prices were increasing in many trading partners. Japan and China prices have markedly increased (34% and 66%, respectively, making Chinese prices now higher than the EU average prices). US (+32%) and Indonesia (+41%) prices have also significantly increased but remain well below the EU average.. In other countries prices did not change much (between €10-20/MWh).

Indeed, the appreciation of the US$ and the Chinese Yuan with respect to the Euro have significantly amplified price increase trends in China and the United States. Conversely, the depreciation of the Russian rouble, the Turkish lira and the Brazilian real has mitigated or even reverted the domestic price increases in national currencies (e.g. prices in Russia increased by 30% in the national currency terms but decreased by 10% in Euro terms). See Figure 208 , which describes the evolution of prices in national currencies, in conjunction with Figure 209 , which describes the evolution of exchange rates.

Figure 208 - Industrial electricity prices in national currencies 2008-2013, indexed to year 2008=100

Source: Ecofys study calculations on the basis of data from Brazilian National Petroleum Agency, Chinese Price Monitoring Center, NDRC, Russian Federal State Statistics Service, American Energy Information Administration, and IEA for Turkey and Canada

Note: In the case of Japan and Russia prices are indexed to 2009=100 as no 2008 values are available



Role of exchange rates in international price comparisons

Comparing international prices requires conversion to a common currency, this introduces an exchange rate effect when analysed over time, in addition to any changes in price in the original currency. Exchange rates can move for a variety of reasons unrelated to the energy sector. Therefore, it is also important to consider these movements and the impact they have on the energy prices presented here.

Energy prices are analysed and converted to euros using exchange rates from the European Central Bank. The following figure provides an illustration of the currency movements with respect to the Euro over the period 2008-2015, indexed to the exchange rate in 2008=100. This shows that over the period 2008-2015 the Russian rouble depreciated significantly against the Euro, as did the Turkish Lira and the Brazilian Real. The Indonesian Rupiah, Mexican Peso, Japanese Yen and Canadian Dollar remained relatively stable to the euro, a fluctuation of around +/-10% either compared to 2008. The Korean Won, US dollar and Chinese Yuan appreciated by 20-40% against the Euro between 2008-2015.

These trends can mask or accentuate the actual trends in national energy prices, for example an increase in Russian, Turkish or Brazilian energy prices would not necessarily be reflected in euros, due to the exchange rate movements, and vice-versa.

Figure 209 - Exchange rate movements indexed to Euro exchange rate in 2008=100.

It is important to note also that these types of currency movement can also have an effect within the EU for the countries outside the Eurozone.



6.3.3.3 Gas prices

Figure 210 - Average natural gas prices paid by industrial consumers in EU major trading partners.

Source: IEA, Brazilian National Petroleum Agency, Chinese Price Monitoring Center, NDRC, Russian Federal State Statistics Service, American Energy Information Administration, and for Turkey and Canada EIA. WB and ECB.

As for electricity, EU prices for natural gas can vary significantly across Member States and sectors within Member States.

The analysis of gas prices show that average EU industrial natural gas prices are relatively high compared to those paid internationally (€37/MWh), higher than prices paid in Russia, the United States, Canada, Brazil and Turkey and lower than prices paid in Korea and China.

Over 2008-2015 gas prices fluctuated importantly (declining from 2008-2010; increasing in 2010-2012, and (mostly) decreasing since 2012). The EU average has however not changed significantly. Prices in China (+109%) and Korea (+79%) have considerably increased, becoming much higher than the EU average. Prices in the US (-46%) and Canada (-53%) declined mainly due to the US shale gas boom.

The appreciation of the Chinese Yuan and the Korean Won with respect to the Euro has accentuated the price increases in Euro terms of China and Korea gas prices. The depreciation of the Brazilian real and Russian rouble mitigated the gas prices increases in Euro terms (prices increased in Russia by more than 65%, but only 27% in Euro terms. For Brazil, a 35% increase became a 16% increase in EUR terms). The depreciation of the Turkish lira is hiding completely the increase in gas prices in Turkey (by more than 40% in lira terms that become a decrease of 7% in EUR terms). Finally the appreciation of the US dollar is mitigating the strong decrease in gas prices in the US (where gas prices fell by more than 70% but only by 45% in EUR terms). See Figure 209 which describes the evolution of exchange rates in conjunction with Figure 211 ; which describes the evolution of prices in national currencies

Figure 211 - Industrial natural gas prices in national currencies 2008-2013, indexed to year 2008=100.

Source: Ecofys study calculations on the basis of data from Brazilian National Petroleum Agency, Chinese Price Monitoring Center, NDRC, Russian Federal State Statistics Service, American Energy Information Administration, and IEA for Turkey and Canada

Note: In the case of Russia prices are indexed to 2009=100 as no 2008 values are available.

6.3.3.4 Exploring energy intensities differences with trading partners

The analysis of energy intensities of EU selected sectors was based on a rather restricted data set over the period 2008-2013. Data on energy intensity for the United States and Japan is available but only for some years and some sectors. Limitations when interpreting these findings are thus important also due to potential differences in sector definitions, the heterogeneity of products and differences in statistical methods.

In addition the role of exchange rates is important. As highlighted in the 2014 European Competitiveness report this is particularly relevant for China where exchange rates are understood to be significantly undervalued in the reference period. This impacts by lowering the value added expressed in Euros and makes the energy intensity in China look higher, although as noted in the 2014 ECR that value added is generally lower in China. This makes that rather likely that the energy intensity of China expressed in the national currency is lower than presented in   Figure 212

China is by far the most energy intensive of all of four economies over this period. While this is likely to be partly driven by relative energy inefficiency, it is also subject to the data limitation of an undervalued exchange rate noted above, statistical errors and relatively low value added.

Figure 212 - Energy intensity [kWh energy consumption per Euro of GVA generated] per sector

Source: Ecofys study, Eurostat

Note: The Figure presents average values for 2008-2013, for EU and Japan typically all years (2008-2013), for US only for 2010, for China 2008-2011

Comparing the EU and the US Figure 213 shows that the EU is more energy intensive than the US in four out of five sectors.

This is not in line with the findings of the Commission 2014 Energy Competitiveness Report (2014 ECR), which showed that the EU had the lowest energy intensity compared to the US, China and Japan in 2009 (EU has the lowest energy intensity followed by Japan, then the US, then China). According to the 2014 ECR Energy intensity decreased in all economies between 1995-2009. However the results of these studies are hardly comparable. The differences on the results from the Ecofys study and 2014 ECR may stem from the different methodologies used as well as the periods covered (1995-2009 in 2014 ECR vs 2008-2013 in the Ecofys study) and the level of sectoral aggregation (NACE 3 level sectors in the Ecofys study vs NACE 2 in the 2014 ECR) 27 .

Also comparing the EU and Japan, the outcomes vary by sector and need to be interpreted carefully because of potential differences in sector definitions. For pulp and paper, basic chemicals and non-ferrous metals the EU is more energy intensive 28 . For porcelain and ceramics and iron and steel the EU is less energy intensive than Japan.

Figure 213 - Energy intensity [kWh energy consumption per Euro of GVA generated] per sector

Source: Ecofys study, Eurostat

Note: The Figure presents average values for 2008-2013, for EU and Japan typically all years (2008-2013), for US only for 2010

Looking at sector trends over time energy intensity in China rapidly declined in almost every sector 2008-2011( F igure 214 ) - yet it remains far above the energy intensities of the EU, US and Japan. If an undervalued exchange rate and relatively low value added were able to be factored in then we would expect China to be much more comparable, although still more intense, than the other countries.

Figure 214 - Energy intensity trends in Chinese industry 2008-2011

   Source: Ecofys study

Energy intensity in the iron and steel sector for EU and Japan has increased over the period 2008-2013 ( Figure   215 ), driven by declining GVA, which is declining faster than energy consumption. No time series data is available for the US.

Figure 215 - Trends in the energy intensity of the iron and steel sector, kWh energy consumption per Euro of GVA.

   Source: Ecofys study