EN31 Energy prices

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Energy

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The absolute level of final energy prices and their trends may influence overall energy consumption or demand for specific fuels in different sectors. Increasing energy prices may provide an incentive for end users to reduce their energy consumption and so reduce the burden on the environment. Changes in relative prices between substitutable fuels are also drivers for fuel switching.

In the last year for which data was available (2005 for gas and electricity, 2004 for transport fuels) end user prices for all three fuels (to both industry and households) rose. This was largely due to the influence of higher prices for oil and gas globally. In the case of electricity, this was the first significant increase in prices since 1991. For gas and transport fuels, it was the continuation of a general upward trend in prices over the first half of this decade. There are much fewer time series data available for new Member States, but the available evidence is that prices have risen significantly since the early 1990s. However they are still generally lower than in the EU-15. The increase is the result of a gradual liberalisation of energy prices and the removal of cross subsidies in the new Member States from central and Eastern Europe. While under the former communist regimes energy prices were regulated and subsidised, and thus were much lower than their production costs, prices now better reflect the costs of production. In recent years this process has accelerated, as full price liberalisation was a necessary step before accession to the European Union.

The most significant price decreases since 1991 in both households and industry in the EU-15 have been for electricity (-13.7 % and -18.1 %, respectively, over the period 1991-2006), due to greater competition in electricity markets as a result of market liberalisation, fuel switching and the move towards the use of cheaper technologies for electricity production such as combined cycle gas turbines. Electricity prices were also greatly influenced by the development of the gas distribution infrastructure in the EU and a sharp decrease in gas prices during the 1990s, closely following a decrease in oil prices. Between 2000 and 2005, electricity prices to both households and industry were relatively stable as any reductions from liberalisation were offset by higher gas prices. Between 2005 and 2006 however, prices did increase. In 1991, there were wide differences in electricity prices between EU-15 Member States, with more than a factor of two between the most expensive and cheapest electricity prices to both industry and households (at market exchange rates - MER). Since then, prices have started to converge, particularly in industry. It can be expected that the developing single market for electricity will lead to a continued trend towards more consistent electricity prices across the EU-15, although different tax levels (particularly in the household sector) mean that some variation will remain. In new Member States, electricity prices are typically around half of the EU-15 average for households and around 30 % less for industry, when converted to Euros at market exchange rates, but are very similar or sometimes even greater when expressed in purchasing power standards (PPS). Currently, the highest electricity prices (at MER) are in Denmark (households) and Italy (industry), with the lowest prices in Greece (households) and Latvia (industry).

Natural gas prices in the EU-15 declined through much of the early 1990s, reflecting increased production of natural gas from the North Sea and falling natural gas import prices (which historically have been linked to world crude oil prices). However, since the late 1990s natural gas prices have started to rise, reflecting higher import prices as a result of increases in the price of crude oil. The recent rise in gas prices has been particularly noticeable in industry (with prices now above their 1991 levels), as prices in this sector tend to be closest to the underlying costs. For the domestic sector, households in the EU-15 usually buy their gas under fixed price tariffs that do not respond to short term cost increases, but even in this sector prices rose sharply between 1999 and 2001. A slight decline in prices to 2004 was then followed by further sharp increases. In the new Member States gas prices are currently below the level seen in the EU-15 and in the household sector this difference can be more than 50 % (at market exchange rates). However, when calculated at PPS gas prices in households are similar and, in industry, gas prices in the new EU-10 are often higher than in the EU-15. Currently, the highest gas prices (at MER) are in Denmark (households) and Sweden (industry), while the lowest gas prices are in Latvia (households) and Estonia (industry).

Road transport has the highest end-user fuel prices of any sector, due to the large share of taxation in the final price. Both gasoline and diesel have seen a significant increase in the EU-15 since 1991 due to both increasing tax rates and, more recently, rising world crude oil prices (see EN32 for more information about taxation). Over the 1990s, the level of tax applied to unleaded gasoline dominated price trends. When unleaded gasoline was first widely introduced in 1991, a lower tax was applied in order to encourage rapid uptake to replace leaded gasoline (which was being phased out). This tax break was progressively removed as gasoline consumption switched to unleaded gasoline, and led to increases in the end user price for unleaded gasoline. Diesel prices have also increased in most Member States since the 1990s and again tax rates, although lower than for unleaded gasoline, are important in determining the final user price. Tax rates have been relatively stable since 2000 however and the main cause of the most recent increase in prices is the increase in world oil prices.

On average, diesel is about 10% cheaper (per 1000 litres) than gasoline in the EU-15. This, together with its higher energy content, the higher efficiency of diesel engines and improved diesel technology may explain the rapidly growing share of diesel vehicles in European countries. Although a diesel engine is more expensive and the annual road tax higher in most countries, for higher mileages, driving a diesel vehicle is cheaper than a gasoline fuelled vehicle, since it is about 20 % more efficient. While an increase in the share of diesel vehicles may help to reduce CO2 emissions from transport, it still poses air quality problems, as even a new diesel vehicle (meeting Euro IV standards) emits considerably more NOx and PM10 than a new gasoline vehicle.