15 Energy prices and costs in Europe
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5599/14
+ ADDs 1-6
COM(14) 21
| Commission Communication: Energy prices and costs in Europe
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| Legal base | —
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| Document originated | 29 January 2014
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| Deposited in Parliament | 27 January 2014
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| Department | Energy and Climate Change
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| Basis of consideration | EM of 6 February 20104
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| Previous Committee Report | None; but see footnotes
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| Discussion in Council | See para 15.9 below
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
15.1 We are reporting separately on a Commission
Communication,[71] setting
out a policy framework for climate and energy in the period from
2020 to 2030, which (among many other things) draws attention
to the impact which the significant levels of investment needed
to achieve the objectives proposed will have on energy prices
for industrial and domestic consumers at a time when there are
political concerns about recent rises in Europe prices.
The current document
15.2 Those concerns led the May 2013 European Council
to call on the Commission to provide an in-depth analysis of the
issue, and its response is set out in this Communication, which
has been published alongside the one on climate and energy in
order to inform the subsequent debate. It is accompanied by, and
summarises the contents of, two Staff Working Documents, one (SWD(14)
20) providing an analysis of trends in gas and electricity[72]
prices and costs across Europe between 2008 and 2012, and the
other (SWD(14) 19) an in-depth look at the factors which have
influenced energy economics in Europe in recent years.
15.3 The Commission begins by noting that rising
energy prices in Europe are not new, but that the difference now
is that the sector is in the midst of a major shift away from
imported fossil fuels, and needs high levels of investment; that
the energy price gap between the EU and its major economic partners
has widened; that moves to decarbonise electricity generation
have led to a strong growth in wind and solar power, which has
impacted on grids and production costs; and that, as a result
of the move within Europe's gas and electricity sectors from public
monopolies to competitive private companies, users bear the cost
of new investments in the short term, rather than taxpayers, although
these developments are expected in the long run to result in a
sustainable energy sector.
15.4 The Commission also highlights the distinction
between energy prices and costs. It notes that the first of these
is often seen as the more critical, and comprises three elements
— the wholesale and retail energy components (covering fuel
purchase and processing, and the costs of constructing and operating
power stations); network costs (covering transmission and distribution
infrastructure, as well as public service obligations and technology
support); and taxes and levies (either as part of general taxation,
such as VAT, or sector-specific levies, for example to support
climate policies). However, the Commission also points out that
energy costs determine the amounts actually paid by consumers,
and that price rises can, in part at least, be offset by reduced
consumption arising from efficiency gains.
15.5 The Commission identifies the following main
findings from the two Staff Working Documents:
· whilst there are significant variations
across Member States, average retail prices for both gas and
electricity across the EU rose between 2008 and 2012, with
electricity prices rising on average by 4% a year for domestic
consumers and 3.5% for industrial consumers, and with corresponding
increases of 3% and 1% for gas;
· on average across the EU, the two main
drivers of these price rises are network costs and taxes and
levies, with the network cost component of the retail price
for electricity having increased by 18.5% and 30% for domestic
and industrial consumers respectively, whilst the taxes and levies
components have increased by 36% and 127% respectively, although
this is before exemptions to some industry sectors are taken into
account: for most Member States, the share of taxes and levies
is less than 10% of the electricity price, but the average across
the EU as a whole is 30%;
· although lower import dependency and better
security of supply could help cushion the impact, fossil fuel
prices remain the key drivers of gas and electricity prices
in the EU, in part because of the continuing practice of
oil-indexed contracts, whilst there is empirical evidence that
unbundling and market opening have helped to reduce prices;
· although there are again significant variations
between Member States, on average across the EU the cost of renewable
energy added to retail prices has risen, but still only constitutes
6% of the household electricity price and 8% of the industrial
electricity price;
· the EU Emissions Trading System
(ETS) has not provided a strong price signal for consumption and
investment behaviour, in part because economic conditions in Europe
have dampened overall demand, although the increased role of renewables
in the electricity mix may also have contributed to the low carbon
price;
· in contrast to the energy element of retail
prices, there has been a convergence and a fall in wholesale
electricity prices, with the prices of some major European
wholesale electricity benchmarks having decreased by 35% to 45%,
implying that price competition in some retail markets may be
weak;
· against a backdrop of declining gas consumption,
due in part to improvements in the energy efficiency of household
heating, the average share of energy costs as a proportion
of total household consumption increased from 5.5% to 6%;
· despite falling industrial consumption,
increases in electricity prices caused cost increases of
about 4% for industry overall, whereas, in the case of gas, costs
declined by 6.8% (and consumption by 5.3%);
· the gas price differential with major
international competitors is increasing, particularly in the
case of the US, with average EU retail industrial gas prices being
around three to four times more expensive: this widening difference
has mainly been driven by factors such as the shale gas boom in
the US, the impact of oil-indexation on gas price dynamics in
the EU, and sharply increased gas demand in Japan in the aftermath
of the Fukushima incident;
· EU electricity prices have also increased
relative to major international competitors, with medium
sized industrial consumers in the EU having paid more than twice
the price for electricity compared with companies based in the
US and Russia, and about 20% more than those based in China;
· whilst EU energy prices have increased,
the EU manufacturing sector as a whole has relatively low
real unit energy costs, partly because restructuring
to lower energy intensity and higher value added production has
helped to offset the price rises;
· the widening gap in energy prices and
costs between EU and other regions is forecast to contribute to
a reduction in the EU's share in global export markets for
energy intensive goods;
· the US energy position relative
to the rest of the world has been changed by shale gas, with gas
prices having fallen significantly: and, although there is so
far no evidence that this has led to a shift in industries between
the EU and the US, the impacts may not yet have fully fed through,
and concerns therefore remain.
15.6 The analysis concludes that high energy prices
for EU industry, particularly relative to the US, are an important
concern, and that EU energy and carbon policies need to be cost-efficient.
In particular, it identifies that action to reduce energy costs
is required in the following areas:
· completion of the internal energy market
in 2014 and further development of energy infrastructure, in order
to increase competition and generate efficiencies which will exert
downward pressure on electricity and gas prices;
· action to improve price competition
in the retail markets on which the Commission intends to launch
a Communication before the summer of 2014;
· action to strengthen the EU's international
influence by maintaining current policies of diversifying
energy supplies and supply routes, negotiating with major energy
partners with one European voice, and increasing indigenous renewable
energy production and energy efficiency to reduce import dependency;
· ensuring a cost effective approach
to the EU 2030 Climate and Energy Framework, and ensuring
that climate and energy policies financed by taxes and levies
are applied cost effectively and follow best practice;
· undertaking further work to investigate
varying Member State network practices and drawing out best practice,
with a view to minimising the impact of network costs on
energy prices;
· helping vulnerable energy consumers
to improve their energy efficiency, respond to price signals and
adopt other novel energy technologies to lower their energy costs;
· continuing efforts to ensure a level
playing field for industrial energy prices, tackling international
partners under the auspices of the World Trade Organisation (as
well as bilaterally) on their energy subsidies and export restrictions
on energy goods;
· helping European industry to improve
its international competitiveness, including where necessary
fiscal transfers, and exemptions or reductions in taxes or levies
provided these are compatible with state aid rules and internal
energy market rules.
The Government's view
15.7 In his Explanatory Memorandum of 6 February
2014, the Minister of State at the Department for Energy and Climate
Change (Michael Fallon) says that, although the documents do not
contain any specific proposals, and thus have no immediate policy
implications, the Government welcomes them as providing important
analyses which should inform political discussions on climate
and energy policy at the EU level over the course of 2014, on
which it will continue to engage with the Commission as thinking
develops.
15.8 He also makes the following detailed points:
· the Government is committed to tackling
rising energy prices through delivering more efficient and competitive
energy markets, and helping to improve the energy efficiency of
consumers;
· it continues to be a strong supporter
of the EU internal energy market, and agrees that it is important
to complete this in 2014, in order to place downward pressure
on gas and electricity prices, by improving competition, increasing
the efficiency of power and gas flows and use of generation capacity,
and providing stable price signals to drive cost-efficient investment
in energy infrastructure;
· it notes the Commission's intention to
bring forward an action plan on retail markets by summer 2014,
commenting that Great Britain is in the process of implementing
national actions following the completion of a regulatory review
of the retail energy market, which focused on the key factors
deterring consumer engagement and switching;
· it agrees with the Commission that new
technology can help encourage consumers to respond to price signals,
better control their energy use and save money on their energy
bills, and says that the intention is to replace 53 million meters
with smart electricity and gas meters in all domestic properties,
and smart or advanced meters in smaller non-domestic sites in
Great Britain by the end of 2020 (which is expected to result
in savings of £26 a year by 2020, rising to around £43
a year by 2030, for the average dual fuel domestic consumer, and
of about £200 for non-domestic customers by 2020);
· it notes the conclusions relating to engagement
with international partners, diversification of energy supplies
and supply routes, and the reference to negotiating with major
energy partners with one European voice, and it supports the principle
of greater coherence in the EU's external energy relations, valuing
the role of the Commission in co-ordinating Member State positions
on energy issues, so long as the existing balance of EU-Member
State competence is respected;
· it highlights the importance, in the context
of increasing energy dependence in the EU, of making the best
use of indigenous energy resources, not least by avoiding unnecessary
regulation;
· it agrees on the need for a cost-effective
EU 2030 Climate and Energy Framework, its response to the Commission
Green Paper[73] having
set out the UK's view on the need for the EU to adopt a unilateral
EU-wide greenhouse gas emissions reduction target of 40% for 2030
(and one of up to 50% in the context of a global agreement on
climate change), to deliver structural reform of the ETS; to avoid
mandatory renewable energy or energy efficiency targets, and to
continue to improve energy efficiency;
· it agrees that climate and energy policies
financed by taxes and levies need to be cost-effective, and welcomed
the recent non-binding Commission guidance[74]
on public intervention in the electricity market;.
· it notes the conclusion relating to network
practices and will continue to engage with the Commission as its
thinking develops in this area, stressing the need for the Commission
to adopt a clear set of objectives, so that any subsequent measures
have tangible benefits;
· it is committed to ensuring that manufacturing
is able to remain competitive during the shift to a low carbon
economy and to minimise the risk of carbon leakage, and it believes
that the competitiveness of energy intensive industries should
be an integral part of the 2030 climate and energy package, where
it supports a single greenhouse gas target and opposes specific
and potentially costly sub-targets for renewables or energy efficiency.
15.9 The Minister concludes by noting that these
documents do not contain either legislative or non-legislative
proposals, but that the Energy Council is due to have a policy
debate in March on energy prices, which is expected to draw on
the information and conclusions set out in these documents. He
adds that the Commission has indicated its intention to produce
an action plan on retail energy markets by summer 2014, and that
the Energy Council in June is expected to agree conclusions on
energy prices.
Conclusion
15.10 This document provides an essentially factual
analysis of trends in energy costs and prices within Europe, and
of some of the factors which have influenced these, and, as such,
it does not appear to give rise to any issues requiring further
consideration. Having said that, the question of energy prices
is currently a matter of some general political controversy, as
well as having a read-across to the recent Commission Communication
on climate and energy policy to 2030, and, for that reason, we
think it right in clearing the document, to draw it to the attention
of the House.
71 (35754) 5644/14: see chapter 2 of this Report. Back
72
Oil and coal prices are not covered in any detail as they are
determined globally. Back
73
(34814) 8096/13: see HC 83-i (2013-14) chapter 5 (8 May 2013)
and HC 83-viii (2013-14), chapter 2 (3 July 2013). Back
74
(35531) 15776/13: see HC 83-xxviii (2013-14), chapter 9 (22 January
2014). Back
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