European residential energy pricing report 2013

European Residential Energy Price Report

2013

Writer and main editor: Christophe Dromacque Research assistant: Anna Bogacka

with the participation of:

www.energypriceindex.com

Introducing the European Residential Energy Price Report 2013 To correct for a persistent lack of current, frequently updated and methodologically reliable information on household prices for both electricity and gas at the European level, the Austrian energy regulator Energie Control Austria and VaasaETT started compiling and publishing the Household Energy Price Index (HEPI) as well as price-ranking in the EU-151 on a monthly basis in January 2009. The methodology is designed in such a way that "HEPI prices" reflect prices paid by typical residential customers and assess overall price developments in Europe2.

Early on, it became obvious that the Index should be extended to more countries in order to meet its primary goal to improve energy price transparency for European households. We have been working hard to that end and we should be able to make a positive announcement to that regard in the coming weeks.

Within four years of existence, our index has reached a very wide audience. Illustrating its value to numerous stakeholders, about 150 organisations worldwide subscribed to receive the free monthly update, ranging from regulatory and government bodies, utilities, IT companies, research centres, consultancies, journalists and others from Europe, but also from Australia, North America and the Middle East. Our study is also meeting some of its primary goals, which are to enable and promote price transparency in an industry which may arguably lack some and enhance price comparability at the If you would like to get the European level. Finally, HEPI is increasingly being used by latest prices delivered national regulators, journalists and consumer groups to compare automatically to your email, and discuss energy prices in their respective countries or at the European level. HEPI has for instance recently been used visit our project webpage extensively by ACER and the CEER in their first annual Monitoring energypriceindex.com and Report and is used regularly by the DG Energy at the European subscribe to the free monthly Commission for their quarterly reports on energy markets.

update of the HEPI index for Europe

Last year’s annual summary report was downloaded by over 630 organisations and hence it was decided to publish a much awaited update. The European Residential Energy Price Report 2013 summarises our findings over the years, gives an overview of price developments in 2012 and gives an update on the “Savings Tracker” research project introduced in the previous edition. This year's report also looks at the issue of energy affordability for European households.

1

The former EU-15 comprised Austria, Belgium, Denmark, Finland, France, Germany, Greece, the Republic of Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom. Prices in respective capital cities are used as a proxy to assess prices at the national level.

2 The full methodology is described at the end of this report.

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We encourage you to use tables, charts and other figures from this report in your own reports and presentations providing they are unchanged and accompanied by the full reference to the VaasaETT European Residential Energy Prices Report 2013 or alternatively to VaasaETT Global Energy Think Tank. If you would like further usage rights, please contact andy.white@vaasaett.com.

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 Residential energy prices at their highest level in four years  Residential energy prices on a continuous upward trend since the beginning of 2010  Shocking differences in electricity and gas prices depending on where a customer lives in Europe  At PPP, countries with comparatively low income have highest energy prices (Portugal, Greece, Spain) and spend a larger share of disposable income on energy  Number of vulnerable or “fuel poor” households to increase in Europe  EU-15 end-user electricity and gas prices increase faster than inflation  Energy prices increase fastest in countries worst hit by economic crisis  Market forces represent only half of the end-user price for both gas and electricity, whereas national fiscal and regulatory elements are responsible for the other half through distribution tariffs, energy taxes and VAT  European customers miss out on savings opportunities  European households could have saved 15% on their energy bills by switching supplier in 2012  Savings opportunities greater in 2012 than in previous years  Typical Portuguese and Italian households paid about 12% more for electricity in 2012 than in 2011 in real terms  A typical Irish household paid close to 20% more for gas in 2012 than in 2011 in real terms  Changes in wholesale markets are a poor indicator of changes to come in electricity retail markets  Changes on the wholesale markets seem to be a good indicator of changes to come over the next quarter in the natural gas retail markets  Residential electricity prices likely to increase in 2013 as Governments try to secure more revenues, networks are modernized and RES are subsidised

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Contents About the VaasaETT Global Energy Think Tank

6

HEPI index: price developments over the past four years

8

Overview of European residential electricity prices 2012

10

Residential electricity prices

10

Recent residential electricity price evolution

11

Electricity price breakdown

12

Study of retail and wholesale electricity prices

13

Overview of European residential gas prices 2012

17

Residential gas prices

17

Recent residential gas price evolution

18

Gas price breakdown

19

Study of retail and wholesale gas prices

20

The value of switching energy supplier

21

Insights into affordability issues

25

Residential energy prices at PPS

25

Household budget for electricity

26

Retail price forecasts for 2013

29

The methodology behind the Household Energy Price Index

30

Meet the Author

32

Sources

33

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INDEX OF FIGURES FIGURE 1: EVOLUTION OF RESIDENTIAL ENERGY AND DISTRIBUTION PRICES EXCLUDING TAXES IN THE EU-15 8 FIGURE 2 : AVERAGE RESIDENTIAL ELECTRICITY PRICES INCLUDING TAXES (2012) 10 FIGURE 3: RESIDENTIAL ELECTRICITY PRICE EVOLUTION ADJUSTED FOR INFLATION (2012/2011) 11 FIGURE 4: RESIDENTIAL ELECTRICITY PRICE BREAKDOWN (AVERAGE 2012) 13 FIGURE 5: AVERAGE END-USER ELECTRICITY PRICES EXCLUDING TAXES IN EU-15 COUNTRIES VS. AVERAGE WHOLESALE PRICE ON KEY EUROPEAN POWER EXCHANGES - 2009-2012 14 FIGURE 6 : AVERAGE RESIDENTIAL GAS PRICES INCLUDING TAXES (2012) 17 FIGURE 7: RESIDENTIAL GAS PRICE EVOLUTION ADJUSTED FOR INFLATION (2012/2011) 18 FIGURE 8: RESIDENTIAL GAS PRICE BREAKDOWN (AVERAGE 2012) 19 FIGURE 9: AVERAGE END-USER GAS PRICES EXCLUDING TAXES IN 13 EUROPEAN COUNTRIES VS. DAY-AHEAD PRICES ON KEY EUROPEAN POWER EXCHANGES - 2009-2012 20 FIGURE 10: POTENTIAL ANNUAL SAVINGS FROM SWITCHING ELECTRICITY SUPPLIER (2012) 21 FIGURE 11: POTENTIAL ANNUAL SAVINGS FROM SWITCHING GAS SUPPLIER (2012) 23 FIGURE 12: AVERAGE RESIDENTIAL ELECTRICITY PRICES INCLUDING TAXES AT PPS (2012) 25 FIGURE 13: AVERAGE RESIDENTIAL GAS PRICES INCLUDING TAXES AT PPS (2012) 26 FIGURE 14: ELECTRICITY EXPENDITURES AS A SHARE OF DISPOSABLE INCOME (2012) 27 FIGURE 15: GAS EXPENDITURES AS A SHARE OF DISPOSABLE INCOME (2012) 28

TOPIC FOCUS TOPIC FOCUS: An Integrated Approach To Feedback written by C. Dromacque, P. Lewis, J. Stromback, S. Brennan, VaasaETT 16 TOPIC FOCUS: Does Price Matter For Switching? written by P. Lewis., C. Dromacque, S. Brennan, VaasaET

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About the VaasaETT Global Energy Think Tank The VaasaETT Global Energy Think-Tank is a unique and independent

collaborative

concept

based

on

the

philosophy of mutuality. Through its network of thousands of senior executives, officials, researchers and other experts who are for the most part known and trusted personally, the Think-Tank provides value-to-all by combining an interactive Community and Collaborative Projects. The Think-Tank focuses broadly on practical strategic business and market issues, as well as envisioning state of the art innovations and developments. The VaasaETT Global Energy Think-Tank brings together utilities, authorities, universities, NGOs and other players in the energy industry. More Information at www.vaasaett.com

The VaasaETT Global Energy Think-Tank offers knowledge sharing through its extensive online Knowledge Centre, unique data sharing through various projects such as the Household Energy Price Index for Europe and the Utility Customer Switching Research Project, networking integration through its intimate high level events, the VaasaETT Community and world leading round-tables and coalitions such as the Smart Energy Demand Coalition based in Brussels.

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The VaasaETT Global Energy Think-Tank also publishes an array of free reports on its own or in partnership with other organisations, such as Capgemini, and in collaborative projects, such as the renowned Respond 2010 smart metering and demand response project, incorporating the best partner organisations and experts that the world has to offer.

This knowledge sharing, best practice identification and collaboration ultimately lead to outstandingly innovative strategies, solutions, methodologies, tools and visions such as the Utility Churn Radar, which is the most advanced loyalty/disloyalty prediction tool available in the energy utilities market. It has been developed through 14 years of research and collaboration in over 35 liberalized energy markets around the globe.

“We are particularly impressed with VaasaETT’s in-depth knowledge and understanding of consumer related issues in European energy markets, the degree of professionalism VaasaETT has shown and the attention to detail they demonstrated. …We can highly recommend VaasaETT Global Energy Think-Tank.”

Walter Boltz, Director General, Energie Control Austria

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HEPI index: price developments over the past four years

Figure 1 shows the evolution of residential energy and distribution prices excluding taxes between January 2009 and December 2012 in 15 European countries3. The index is calculated by weighing prices in each of the countries by the national electricity or gas consumption. As such, price changes in Germany have a bigger impact on the index than price changes in say Luxembourg. In December 2012, electricity and distribution prices excluding taxes were about 12% higher than in January 2009 whereas gas and distribution prices excluding taxes were about 8% above their January 2009 levels.

Figure 1: Evolution of residential energy and distribution prices excluding taxes in the EU-15

Source: HEPI by Energie Control Austria and VaasaETT Ltd, 2013

Residential electricity prices steadily decreased over the first half of 2009 and reached a trough at 96 index points in June 2009 as the economic crisis took its toll on demand and wholesale prices plummeted. Prices started to recover in H2 2009 together with green shoots in economic activity and a general feeling that the worst of the crisis was behind us. They have been on an upward trend since then and reached their highest level since the survey started in December 2012 at 112 index points. At the EU-15 level, the graph shows that although retail prices roughly follow the trend in wholesale prices with a delay, wholesale price 3

Please note that throughout this report, prices in respective capital cities are used as a proxy to assess prices at the national level.

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volatility is not directly passed onto final customers. As an illustration, the index value remained within a +/- 5% range in 2009 whereas European wholesale prices dropped by about 40%4.

The economic downturn which impacted energy demand and wholesale prices in 2009 is much more visible in the development of residential gas prices. The price index dropped significantly in 2009 and reached its lowest value only in December at 80 index points (six months after the lowest value in the electricity price index). Retail prices started to recover in December 2009 – January 2010 when a cold wave hit many parts of Europe. The index steadily increased ever since and is also at its highest level since our survey started at 108 index points. The gas index shows an interesting pattern in which retail prices are largely stable for three months and are then sharply revised. This stems from the fact that the majority of European household customers are still receiving by-default prices which are revised at the same time in a number of countries (typically quarterly). Electricity prices on the other hand tend to be revised at different times between countries and revisions of by-default or regulated prices are more seldom.

To summarise, Figure 1 shows that residential energy prices excluding taxes have been increasing continuously since the beginning of 2010 and are now at their highest level in 4 years. It also shows that electricity prices have been a lot less volatile than residential gas prices, and finally that changes in wholesale prices are passed on to final customers to a lesser extent for electricity than for gas.

4

Cap Gemini, European Energy Market Observatory, 12th edition, p23, November 2010.

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Overview of European residential electricity prices 2012

Residential electricity prices Figure 2 shows the end-user price of electricity in 15 European countries for the year 2012. It shows that depending on where a customer lives in Europe, the price that customer has to pay per kWh of electricity can vary by as much as 120%.

Figure 2 : Average residential electricity prices including taxes (2012)

Source: HEPI by Energie Control Austria and VaasaETT Ltd, 2013

Household customers in Denmark pay by far the highest price within the EU-15 (though 55% is made up of taxes), while Greek customers pay the least. Since our survey started, Denmark, Germany and Belgium have had the highest prices for electricity while Greece, France and Finland the cheapest. Some of the other countries however saw quite dramatic developments. The Netherlands, which was the third priciest country for electricity in 2009, saw all-in prices paid by typical customers decrease by almost 3% between 2012 and 2009. Dutch prices now stand below EU-15 average. On the other hand, and perhaps quite unexpectedly, electricity prices in Portugal and Spain which used to be below the EU-15 average saw 10 ďƒŁ2013 VaasaETT

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impressive jumps and are now among Europe's highest. Electricity prices at PPP studied later in this report reveal very different results.

Recent residential electricity price evolution European residential electricity prices increased on average 2% faster than inflation in 2012. However, they evolved in a very disparate manner depending on the country5. In fact, we can distinguish three groups of countries. A group of mostly Nordic countries in which end-user prices decreased, another group where prices kept more or less on par with inflation and a final group where price increases far exceeded inflation.

Household customers in the Nordic countries (Sweden, Finland and Denmark) saw all-in electricity prices decrease between 2011 and 2012 as a result of several converging factors. Wholesale prices on NordPool have been relatively low and steadily decreasing for most of 2012. Unlike in most other European markets, suppliers in the Nordic region source most of their electricity from the wholesale market6. Therefore, wholesale prices eventually get passed on to final customers.

Figure 3: Residential electricity price evolution adjusted for inflation (2012/2011)7

Source: HEPI by Energie Control Austria and VaasaETT Ltd, Eurostat, 2013

5

Please note that price changes are expressed in local currency.

In its latest annual report NordPool (2013) reports that 77% of Nordic power consumption was bought on the power exchange compared to for instance 13% in France, 15% in Britain and 32% in Holland (CEER 2012:61).

7 FI: Finland, ES: Spain, DE: Germany, PT: Portugal, BE: Belgium, DK: Denmark, GB: Great Britain, IE: Republic of Ireland, GR: Greece, FR: France, IT: Italy, SE: Sweden, NL: The Netherlands, AT: Austria, LU: Luxembourg.

6

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While the other elements which compose the end-user price (i.e. distribution, transmission and taxes) remained fairly stable in a number of countries, they are the reason why prices increased so much faster than inflation in others. As an example, most of the price increases in Italy and The Netherlands can be explained by the fact that distribution prices went up between 2011 and 2012. Comparatively, energy taxes went up in Austria, Greece, and Germany (+21%). In Portugal and Spain last year, the VAT rate jumped from 6% to 23% and from 18% to 21% respectively as an attempt to raise more tax money in order to meet bail out requirements. Increasing prices in regulated components are often justified by the needs to modernize electricity networks and to support the introduction of renewable energy sources. Electricity is a convenient product to tax; demand is largely inelastic in the short term, most customers are normally unaware of what composes the price they pay, and it is easy to blame the energy industry for increasing prices even for the components which are out of its hands.

Electricity price breakdown The breakdown of end-user electricity prices into four main components depicted in Figure 4 (energy, distribution, energy taxes and VAT) shows major variations in Europe. On average, the energy price component (including retail margins) represents a mere 43% of the total cost; distribution 30%; energy taxes 13% and VAT 14%. Denmark is a special case since the cost of energy represents less than a fifth of the end-user price, by far the lowest of all surveyed countries, whereas energy taxes represent an astonishing 35% (three times the average) and 55% if we include VAT. In countries where the energy component represents a small proportion of the end-user price such as Denmark, France, Germany and Portugal, end-user prices are so heavily influenced by a combination of taxes, distribution costs and wholesale prices that any variation in supplier costs has a relatively small, if any noticeable, influence on the prices paid by the customer. The electricity component (in blue in the graphs) represents in effect the "switchable" part of the cost, or in other words the cost the customer can seek to decrease through switching to a cheaper supplier. The lower the energy price component, the lower the incentive for customers to look for more competitive offers. It also means that retailers can hide relatively high margins or inefficiencies without much notice.

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Figure 4: Residential electricity price breakdown (average 2012)

Source: HEPI by Energie Control Austria and VaasaETT Ltd, 2013

Over the past few years, an ever-increasing share of energy taxes and distribution costs has been passed onto final consumers. This trend is likely to continue in the near future as large investments to modernize the network and subsidies to support Renewable Energy Sources are required.

Study of retail and wholesale electricity prices Though there should in theory be an apparent relationship between end-user and wholesale electricity prices, it is worth remembering a few features of European residential electricity markets that combine to weaken this link:

8 9



Most of Europe's electricity is sourced through internal procurement or bilateral transactions. The notable exception being the four Nordic countries (Denmark, Finland, Norway and Sweden) where typically between 70 and 75%8 of the electricity used in the area is traded through NordPool;



On average, in each of the EU-15 countries just over 70%9 of residential customers still receive bydefault prices which are rarely revised more than three times a year;

Nord Pool Spot, various statistical market reports.

From 24% in Sweden to 98-99% in Luxembourg and Greece.

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

A significant number of customers who have switched away from their by-default tariff chose fixedterm contracts thereby reducing retail price volatility. The maximum legal duration of fixed contracts vary per country. The maximum permitted fixed term contract under Finnish law is two years, compared to three in Sweden. In The Netherlands, five year contracts are common; and,



Spot-price-tied contracts are not yet commonly marketed to residential customers in the countries we track for HEPI except in Sweden and Finland. Typically, customers on spot-price-tied contracts pay the average monthly spot price on the NordPool power exchange plus a mark-up. The Energy Markets Inspectorate reports that they are increasingly popular in Sweden.

As a result, it is understood that short term changes in wholesale prices are a poor indicator of changes to come in retail prices. This is illustrated by the following graph which shows the evolution of retail electricity prices in the EU-15 compared to day-ahead prices on some key European power exchanges over the past four years. Not surprisingly, a closer analysis of monthly data indicates that there is very little correlation between wholesale and retail prices. The strongest relationships (in increasing order of importance) appear to be in Finland, Belgium, Denmark and Sweden with the latter the only market where retail prices are statistically predetermined by wholesale prices.

Figure 5: Average end-user electricity prices excluding taxes in EU-15 countries vs. average wholesale price on key European power exchanges - 2009-2012

Source: HEPI by Energie Control Austria and VaasaETT Ltd, Platts, 2013

Academic research looking at the Nordic markets showed however that retail prices tend to adjust to long term (year) trends in wholesale prices. Johnsen & Olsen (2008) also found evidence that retail prices are

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adjusted sooner when wholesale prices increase than when they fall10. Ongoing recent price increases have prompted authorities in several countries to react by temporarily freezing regulated tariffs or investigate utilities' pricing policies. In Great Britain, where energy costs account for over 60% of a customer’s energy bill, energy regulator Ofgem investigated whether customer bills increase rapidly in response to supplier cost increases but respond more slowly when supplier costs decrease. The authors found evidence of an asymmetric trajectory11.

10

Johnsen, Tor Arnt & Olsen, Ole Jess (2008). The relationship between wholesale and retail electricity prices to households in the Nordic countries.

11 Ofgem, Do energy bills respond faster to rising costs than falling costs? (2011).

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Topic Focus – An Integrated Approach To Feedback Abstract from "Empower Demand 2: Energy efficiency through ICT - Best practice examples and guidance“, 2012; VaasaETT funded by ESMIG, written by C. Dromacque, P. Lewis, J. Stromback, S. Brennan, D. Kennedy. Download the full report at http://www.esmig.eu/filestor/Final_Empower%202_Demand_Report_FINAL_Distr2.pdf/view

There is a lot of debate in the field of smart meter enabled energy efficiency and demand response about which forms of feedback work best, but what this research, and the research presented as part of Empower Demand 1 has shown, is that multiple feedback channels work best. While in home displays are typically the most effective form of feedback, leaflets done well can in some cases prove to be even more effective. Furthermore, different consumers will prefer different channels, be they paper based, electronically via a computer, phone or tablet, via a home display or some other means. Nor should it be forgotten that different feedback channels have a different purpose: 

In home displays provide feedback to the entire family;



Fully ambient displays provide less feedback information, but can be excellent ways of, for instance, gently informing (through push feedback) family members of critical peak pricing or high usage periods with minimal involvement required on the part of family members; they can also be seen as aesthetically desirable elements of a feedback and control environment;



Communication to a phone provides the opportunity to deliver advice, support and warnings to customers at any time, regardless of where they are;



Energy usage statements and smart bills can aggregate larger amounts of information to provide consumers with excellent explanations for their bills when they receive them, at the time they are most keen to receive such explanations. PowerCentsDC for instance, found that 42% of users in the post-pilot survey stated that they had changed their consumption significantly because of the usage reports.



Online feedback via tablets or computers can provide a low cost alternative to in home displays for consumers wanting to know how much they are consuming and how much it is going to cost, while there is still time to do something about that cost before the next bill arrives;



Fridge magnets can be an excellent, well uses and popular quick reference guide for consumers wishing for instance to know when the next higher price period will be as part of a time of use pricing scheme. For instance in the Irish trials, 75% of the respondent participants stated that fridge magnets were useful to them in practice.

As technological developments continue to deliver new feedback channels, the choice of channels will naturally change, but the principle of multi-channel feedback will remain.

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Overview of European residential gas prices 2012 Residential gas prices Figure 6 shows the end-user price of gas in 13 European countries for the year 201212. It shows that depending on where a customer lives in Europe, the price that customer has to pay per kWh of gas can vary by as much as 100%. Danish households pay by far the most within the EU-15 where end-user prices are about 25% higher than in Italy, the second most expensive country for gas, and twice as much as in Great Britain which, despite common wisdom, has the lowest end-user gas prices in the EU-15.

Figure 6 : Average residential gas prices including taxes (2012)

Source: HEPI by Energie Control Austria and VaasaETT Ltd, 2013

The country ranking has seen some interesting developments since last year. While Denmark and Italy are traditionally the countries with the highest gas prices, Greece is now third while it was in the middle of the table last year. Great Britain, the Republic of Ireland (despite an impressive price hike) and Luxembourg remain the cheapest places for gas this year again. Gas prices at PPP studied later in this report reveal very 12

Please note that Finland and Sweden have been left out of this analysis on gas prices. Indeed, there is virtually no residential gas market in Finland and The Energy Markets Inspectorate reports just over 33,000 residential gas customers in Sweden (The Swedish electricity and natural gas markets 2011 2012: 61).

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different results.

Recent residential gas price evolution Although they increased everywhere but in Denmark, European residential gas prices evolved in a very disparate manner between 2011 and 201213. On average, residential gas prices increased by 7% in real terms (i.e. adjusted for inflation in each country) in the EU-15, compared with between 15% and 22% in Ireland, Portugal and Greece.

Figure 7: Residential gas price evolution adjusted for inflation (2012/2011)

Source: HEPI by Energie Control Austria and VaasaETT Ltd, Eurostat, 2013

Retail gas prices follow wholesale markets much more closely than retail electricity prices follow wholesale markets. European wholesale prices were higher in 2012 than in 2011 due in part to domestic events (a cold snap in early 2012), in part to international events (disrupted flows from Russia) and also to the fact that gas contracts are indexed on the price of oil14. Higher wholesale prices were thus passed on to customers. For instance, the gas component of the bill increased in real terms by 18% in Italy, 13% in The Netherlands and 7% in Belgium. Moreover, gas in the same manner as electricity is a convenient product to tax, demand is largely inelastic in the short term, most customers are normally unaware of what composes the price they pay and it is easy to blame the energy industry for increasing prices even for the components 13 14

Please note that price changes are expressed in local currency.

Cap Gemini, European Energy Market Observatory, 13th edition, p66, November 2012.

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which are out of its hands. For example, an energy tax was introduced in Greece at the very end of 2011 and it has nearly doubled in Belgium between 2011 and 2012. In Portugal and Spain last year, VAT rate jumped from 6% to 23% and from 18% to 21% respectively as an attempt to raise more tax money in order to meet bail out requirements.

Gas price breakdown As for electricity, the breakdown of end-user gas prices into four main components (energy, distribution, energy taxes and VAT) differs a lot within Europe. On average, the energy price component (including retail margins) represents 53% of the total cost; distribution 24%; energy taxes 9% and VAT 14%. Denmark is again a special case since the cost of energy represents just 36% of the end-user price, by far the lowest of all surveyed countries, whereas energy taxes represent 30% (over three times the average) and exactly half if we include VAT. In countries where the energy component represents a small proportion of the end-user price, end-user prices are so heavily influenced by a combination of taxes, distribution costs and wholesale prices that any variation in supplier costs has a relatively small, if any noticeable, influence on the prices paid by the customer.

Figure 8: Residential gas price breakdown (average 2012)

Source: HEPI by Energie Control Austria and VaasaETT Ltd, 2013

The energy component (shown in blue in the graphs) represents in effect the "switchable" part of the cost, 19 ďƒŁ2013 VaasaETT

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or in other words the cost the customer can seek to decrease through switching to a cheaper supplier. The lower the energy price component, the lower the incentive for customers to look for more competitive offers. It also means that retailers can hide relatively high margins or inefficiencies without much notice.

Study of retail and wholesale gas prices As a storable commodity with clear cost-origins, retail gas prices tend to follow wholesale markets relatively closely, albeit with a time lag of a few months. This may be due to the fact that the majority of European household customers still receive by-default tariffs which are typically revised quarterly. In addition, by-default tariff formulas usually include a spot price component.

Figure 9: Average end-user gas prices excluding taxes in 13 European countries vs. day-ahead prices on key European power exchanges - 2009-2012

Source: HEPI by Energie Control Austria and VaasaETT Ltd, Platts, 2013

Figure 9 shows the evolution of retail gas prices in the EU-1515 compared to day-ahead prices on some key European power exchanges for the years 2009-2012. The graph illustrates that, unlike for electricity, changes in the wholesale markets seem to be a good indicator of changes to come over the next quarter in the retail markets.

15

Please note that Finland and Sweden have been left out of this analysis on gas prices (see footnote 12).

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The value of switching energy supplier

The full opening of most European energy markets to competition makes it possible for residential customers to actively seek better deals and switch to cheaper suppliers. In practice, however, a study for SANCO16 found that less than a third of EU-27 consumers compared offers from different suppliers (ECME Consortium 2010:64) and approximately two thirds of consumers are not well aware of alternative tariffs (ECME Consortium 2010:151). Different reasons include: perceived complexity of switching, perceived or real complexity of comparing offers, lack of interest or lack of awareness of alternative offers, and even the ability to switch. However, our study finds that sizeable savings can be achieved by household consumers on their energy bills.

Figure 10 shows the average annual savings in â‚Ź (left axis) and in percent of the standard by-default electricity bill (right axis) achievable by typical households who switched away from their local by-default contract to the cheapest offer available in 2012.

Figure 10: Potential annual savings from switching electricity supplier (2012)

Source: Accredited price comparison websites, Suppliers' website, analysis VaasaETT Ltd.

16

ECME Consortium (2010). The functioning of retail electricity markets for consumers in the European Union. Prepared for the DG Health and Consumers. Available on line at <http://ec.europa.eu/consumers/consumer_research/market_studies/docs/retail_electricity_full_study_en.pdf>.

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Potential savings are measured as the price difference between standard by-default and cheapest (including temporary discounts) available contract in each European country. The simulations were repeated each month of 2012 and the price difference was averaged out over 12 months.

The results show that household customers in the EU-15 could have saved on average 14% or 116€ on their electricity bill if they had left their standard contract and switched to the cheapest available option. As is often the case when it comes to European electricity markets, the graph shows major differences. The 24% of Swedes who are still on their by-default contract could have saved about €400, which is equivalent to 36% of their current annual bills, by switching to the cheapest available contract in 2012. Two main reasons explain this abnormally high figure. Although Swedish electricity prices are not among Europe's highest, consumption is relatively high and by-default prices are kept much higher than competitive ones with the idea of encouraging customers to switch to market contracts. German, Belgian, Dutch and Italian households also had the possibility to realise sizeable savings of over 15% on their annual electricity bills.

Italy is an interesting case. Although electricity prices and consumption levels are relatively low, a typical household would have been able to save about 16% on its annual bill. On the other hand, Spanish, Portuguese and French customers may have felt they had little financial incentive to actively seek for better deals since the amount they could have saved seem hardly impelling (below €40 a year). In Denmark, the fact that the electricity component accounted for only 18% of the total electricity price (see Figure 4) is reflected by the fact that household customers could have saved at best 8% on their annual bill by switching to the cheapest supplier despite paying Europe’s highest prices by far.

Figure 11 shows the average annual savings in € (left axis) and in percent of the standard by-default gas bill (right axis) achievable by typical households who switched away from their local by-default contract to the cheapest offer available in 2012. Overall, savings were higher for natural gas than for electricity. German customers who had not switched away from their standard gas contract could have saved the most, both in Euros and in percent of their annual bill (37%), had they switched to the cheapest option available. British and Belgian households could have both saved over 20% of their annual bill. In the same way as electricity, even though British customers enjoyed EU-15’s cheapest gas prices, they were still able to enjoy significantly lower prices by switching from their by-default contract to the cheapest option. On the contrary, Portuguese and Spanish customers might have seen little incentive to actively look for contract terms with greater financial savings because highest potential savings were 4% of their annual gas bill in 2012.

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Figure 11: Potential annual savings from switching gas supplier (2012)

Source: Accredited price comparison websites, Suppliers' website, analysis VaasaETT Ltd.

It is interesting to note that markets with the lowest overall saving potential (France, Spain and Portugal) share the common attribute of having regulated or by-default prices set low by the government. In these markets, competitors seem unable to significantly discount this price, which in turn makes it less appealing for residential customers to seek better deals. Although savings potential is only one of many factors that influence customer switching, the low financial savings potential is reflected in the low level of customer switching in these countries17.

Finally, we can mention the fact that the price difference between by-default and cheapest contracts (which can also be seen as an indicator of market competitiveness) was much higher in 2012 than in 2011 in most countries. New entrants were often the cheapest energy suppliers in 2012, perhaps an indication that they were able to take advantage of lower wholesale prices to offer highly competitive prices.

17

VaasaETT (2012). Utility Customer Switching Research Project. The latest edition is available on line at <http://www.vaasaett.com/2012/06/world-energy-retail-market-rankings-2012-launched>

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Topic Focus – Does Price Matter For Switching?

Abstract from “World Energy Retail Market Rankings Report 2012“, 2012; VaasaETT written by P. Lewis., C. Dromacque, S. Brennan. Download the full report at http://www.vaasaett.com/2012/06/world-energy-retail-market-rankings-2012launched/

Surprisingly, recent research from the Utility Customer Switching Research Project has found that absolute price levels are not a significant determinant of customer switching. The research has found that the complexity of the relationship between prices and switching is such that the way in which prices change, and the environment of the change, are far more significant. A detailed explanation of the price-switching relationship is provided in the full version of this report.

Less surprisingly, savings are a more significant determinant, albeit in a conditional way. Sweden, for instance has the greatest potential savings, far higher than Ireland, which has far higher levels of switching. Even Finland, with a similar market to Sweden, offers far lower savings opportunities than in Sweden, but a similar level of switching.

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Insights into affordability issues Residential energy prices at PPS This chapter looks at the end-user price of electricity in 15 European countries for the year 2012 when adjusted for purchasing power18. At PPS, the picture changes quite dramatically. The combination of stagnant or decreasing levels of income, significant increases in electricity and gas prices and lower than average income to start with is having visible effects in countries worst affected by the economic crisis.

Regarding electricity (Figure 12), Portugal becomes the most expensive country while Greece goes from having the lowest price to having a price on par with EU-15 average. On the other end of the graph, Luxembourg becomes by far the cheapest country with electricity prices less than half that in Finland, the second cheapest country when adjusted for purchasing power.

Figure 12: Average residential electricity prices including taxes at PPS (2012)

Source: HEPI by Energie Control Austria and VaasaETT Ltd, Eurostat, 2013

18

The “Purchasing Power Standard” (PPS), is an artificial currency unit which allows for price comparisons of goods or services across Europe. http://epp.Eurostat.ec.Europa.eu/statistics_explained/index.php/Glossary:Purchasing_power_standard_(PPS)

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As shown by Figure 13, Portugal and Greece have the most expensive gas prices when adjusted for purchasing power. Luxembourg again has by far the cheapest gas prices, which are less than half that of Ireland and Great Britain (the second and third cheapest countries for gas, respectively).

Figure 13: Average residential gas prices including taxes at PPS (2012)

Source: HEPI by Energie Control Austria and VaasaETT Ltd, Eurostat, 2013

The picture that emerges is that the countries with comparatively low income also have the highest energy prices (Portugal, Greece, and Spain).

Household budget for electricity To complete this analysis, we calculated the proportion of EU-15 households' disposable income that goes towards paying electricity and gas bills19. The findings from the previous section are reflected in the fact that the same countries where households have generally lower income and higher energy prices at PPS usually have a higher share of disposable income going towards electricity and gas expenditures, despite often lower consumption levels.

19

Assuming typical consumption levels.

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Figure 14: Electricity expenditures as a share of disposable income (2012)

Source: HEPI by Energie Control Austria and VaasaETT Ltd, Eurostat, 2013

It would be logical to assume that in countries with higher electricity prices consumers spend a larger share of their income on paying energy bills. However, the results of our analysis show that it is not necessarily true. Figure 14 depicts the percentage of household disposable incomes that goes towards paying electricity bills. In Portugal, electricity prices in nominal terms are only slightly above the European average, however, in real terms they are the highest in Europe. As a result, Portuguese consumers spend the highest share of disposable income on electricity in the EU-15. On the contrary, in Luxembourg the electricity prices in nominal terms are slightly below the European average but by far the lowest in Europe in real terms.

Therefore, the share of disposable income paid by Luxembourg residents is the smallest. Another interesting example is Germany. While the electricity prices in nominal terms are high and seem to be lower in real terms, the electricity bill as a share of disposable income is below the European average.

Figure 15 represents gas expenditures as a share of disposable income. The most remarkable examples are Greece and Luxembourg. In Greece, nominal prices are low but the Greeks spend the highest share of their income on gas bills in the EU-15. On the contrary, nominal electricity prices are high in Luxembourg while consumers there spend the lowest share of disposable income on their gas bill.

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Figure 15: Gas expenditures as a share of disposable income (2012)

Source: HEPI by Energie Control Austria and VaasaETT Ltd, Eurostat, 2013

These findings have important ramifications. Historically, energy budgets have represented a small share of household budgets but the combination of economic hardship and increasing energy prices will certainly vastly increase the number of vulnerable or “fuel poor” households in countries such as Greece, Portugal and others, especially as governments in these countries have to impose draconian austerity measures and cut social spending in order to meet creditors’ demands.

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Retail price forecasts for 2013

Film producer Samuel Goldwyn is one of several people believed to have said, "Never make forecasts, especially about the future.” Nonetheless I will take a risk in this section and hope to have not been completely wrong when I revisit it next year.

Firstly, it seems to me that two of the dynamics which pushed retail energy prices up last year remain largely in place:



With financial markets forcing many cash strapped European countries to tidy up their finances, it is probably only a matter of time before more governments announce a round of tax and VAT increases on energy.



The modernisation of the electricity network and the integration of more renewables will require massive investments20 which are likely to lead to higher distribution tariffs and / or taxes. Analyses conducted in early 2014 seem to confirm this opinion since distribution tariffs have increased in number of countries. Distribution companies and regulators often justify the price rise by the large investments required to modernise the network and to support the integration and development of renewable energy sources.

The unknown variable relates to the direction wholesale prices will be heading. Wholesale electricity prices are largely driven by the price of fuel (mainly oil, gas and coal) while wholesale gas prices by developments in the oil markets. Demand (and therefore prices) for these commodities is in turn largely influenced by the state of the global economy, which is to say the least dire with Europe in turmoil, a sluggish US economy and signs that some large emerging countries’ economies’ are slowing down. Enerdata, in its latest review of World energy demand21, says “The energy consumption growth in the G20 slowed down to 2% in 2011, after the strong increase of 2010. The economic crisis is largely responsible for this slow growth. For several years now, the world energy demand is characterized by the bullish Chinese and Indian markets, while developed countries struggle with stagnant economies, high oil prices, resulting in stable or decreasing energy consumption.” However, the economies of the large emerging countries are showing signs of a slow down and their economic growth forecasts have therefore been revised downwards for 2013. By looking at fundamental factors, wholesale prices may decrease in 2013.

However, with all things considered, I believe that the aggregated effect of lower wholesale prices on residential electricity prices will be more than compensated by increasing taxes and distribution tariffs. It is perhaps more difficult to foresee the development of residential gas prices but the analysis of prices in early 2013 shows a steady increase with prices at around their highest level in over three years.

If you would like to know more about the latest developments in residential energy prices, visit our project webpage energypriceindex.com and subscribe to the free monthly update of the HEPI index for Europe.

20

ENTSO-E 2012 Ten-Year Network Development Plan (TYNDP) identifies the need to invest €104 bn in the refurbishment or construction of roughly 51 500 km of extra high voltage power lines clustered into 100 investment projects across Europe.

21 Enerdata, Sluggish growth of World energy demand in 2011, 2012.

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The methodology behind the Household Energy Price Index

The methodology surrounding the HEPI project is designed to reflect the prices typically paid by residential customers in state capital cities in order to obtain: 

Comparable prices for household energy consumption (both electricity and gas)



In relatively short time intervals (monthly)



Taking into account different national consumption patterns (typical consumption levels)



Reflecting different emerging tariff schemes, such as standard and competitive tariffs offered by incumbents and tariffs offered by competitors.



Clearly separating out between the price for energy as a commodity, distribution and transmission charges, associated taxes and VAT.

It does so by aggregating the incumbent supplier’s standard tariff and the tariffs offered by the main players in each city according to their respective market shares (in most cases the local incumbent and its main competitor). By using these three tariffs, we cover most customers in each capital city (from 60% in London to over 99% in many other cities).

Individual city prices are then weighted according to the national electricity or gas consumption to calculate the HEPI indexes.

Definitions

1. Incumbent: The former (or current) monopolistic electricity supplier, which typically sells electricity to customers in the state capital city area.

2. Standard incumbent price: The price that residential customers in the incumbent’s area receive without any negotiation (by default).

3. Competitive incumbent price: The price which residential customers of the incumbent supplier receive if they leave the regulated price or request a better or different price or tariff type but remain with their bydefault supplier. This price may be a variable or fixed term tariff (real-time, spot and other market based tariffs are at present not included).

4. Leading competitor price: The price which residential customers of the leading non-incumbent competitors (most successful in terms of organic customer wins) in the state capital city receive. This price may be a variable or fixed term tariff (real-time, spot and other market based tariffs are at present not included).

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Other Data Characteristics

All prices and other statistics relate to: 

The first day of the month the data is collected;



Residential customers with a typical consumption for the state capital city;



Customers in the state capital city area of the state concerned;



To ensure comparability, sign in and other temporary bonuses and other forms of non-monetary benefits are not taken into account since they can distort the overall tariff offered, especially in cases where they are offered on a “one-off” basis;



Standing fees are added to the price per kWh so that the entire end-user cost is taken into account.

Energy Price Formula

1. Incumbent Standard Price Component = Incumbent Standard Price x Incumbent Standard Price Weighting* 2. Incumbent Competitive Price Component = Incumbent Competitive Price x Incumbent Competitive Price Weighting** 3. Leading Competitor Price Component = Leading Competitors Price x Leading Competitors Price Weighting*** 4. Total Price (State price) = Incumbent Standard Price Component + Incumbent Competitive Price Component + Leading Competitor Price Component

*: Proportion (%) of all customers in that city who remain of their by-default price. **: Proportion (%) of all customers in that city who have one of the incumbent’s competitive prices. ***: Proportion (%) of all customers in that city who have the non-incumbent competitive price.

Limitation: It is possible that in some states, competitive tariffs actually offered by incumbent and competitors may in some cases be lower than those officially published (price matching). This may raise the apparent relative price averages of such states within HEPI. In addition, it should be noted that it is accepted that not all customers receiving competitive prices receive the same price. This price represents the average price of the most popular players for the period being measured.

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Meet the Author Christophe Dromacque - Head of Research - VaasaETT Global Energy Think Tank Christophe Dromacque is VaasaETTâ&#x20AC;&#x2122;s Head of Research and Internal Knowledge Manager. He is also a member of the SEDC, an industry group promoting demand side management based in Brussels.

Christophe has participated in numerous research projects and consulting work for various organizations such as the European Commission, NordREG, ESMIG, Wartsila, Panasonic, CRIEPI of Japan, ADEME of France, and the World Energy Council among others. Christophe is currently involved in different EU-funded FP7 projects in particular the Cassandra and Advanced projects. Finally, he is the manager of the Household Energy Price Index (HEPI) project which tracks residential price development in Europe.

Christophe has a broad understanding of residential energy pricing, the influence of pricing on customer loyalty and switching behavior, the potential of dynamic prices and feedback to reduce electricity consumption and a good knowledge of the recent developments and dynamics in international retail energy markets. He is also able to understand the opportunities and challenges arising from the introduction of smart meters and intelligence in electricity networks as well as increased residential customer involvements in energy markets.

Christophe is experienced at gathering, analyzing and presenting data and information from various sources in a form which delivers clarity, transparency and added value to clients, regulators, consumers and other interest groups.

-

Christophe Dromacque (English / French) Office: +358 (0)9 4159 0344 Mobile: +358 (0)44 906 6822 @: christophe.dromacque@vaasaett.com http://fi.linkedin.com/in/cdromacque/

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Sources Autorità per l'energia elettrica e il gas (Italy), BDEW (Germany), BnetzA (Germany), BRUGEL (Brussels), Cap Gemini, CEER, Central Research Institute of Electric Power Industry of Japan (CRIEPI), CNE (Spain), Commission for Energy Regulation (Ireland), CRE (France), Dansk Energi (Denmark), DECC (Great Britain), DG Health and Consumers, ECME Consortium, Enerdata, Energiamarkkinavirasto (Finnish Energy Market Authority), Energie Control Austria, Energie-info (France), Energiezaak (Netherlands), Energy Customers (Ireland), Entidade Reguladora dos Serviços Energéticos (Portugal), ENTSO-E, Eurostat, Institut Luxembourgeois de Regulation (Luxembourg), NordPool, OFGEM (Great Britain), Platts, RAE (Greece), Statistics Norway, Statistics Sweden (SCB), The Energy Markets Inspectorate (Sweden)

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www.energypriceindex.com

European Residential Energy Price Report

2013 ď&#x192;Ł2013 VaasaETT

VaasaETT Global Energy Think Tank European Residential Energy Price Report 2013 www.vaasaett.com

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