EN31 Energy prices
Assessment made on 01 Nov 2008
ClassificationEnergy (Primary theme)
DPSIR: Driving force
- ENER 031
Policy issue: Are environmental costs better incorporated into the pricing system?
The nominal end user price of electricity and gas for both industry and households in the EU-15 rose from 2007 compared to 2006. This continues a period of rapid price rises from around 2004 onwards. For electricity, this reversed a trend of falling prices throughout the 1990s, due to the introduction of cheaper fuels such as gas for electricity production and increased competition in electricity markets. For gas and road transport fuels, end user prices have been higher this decade than in the 1990s and rose sharply from 2004 onwards. This was driven by rising world oil prices, to which the price of gas is broadly linked. Household and corporation disposable income has broadly kept pace with energy prices over the period, but this relationship has broken down with respect to gas prices in recent years.
Household electricity prices for the EU-15 dropped slightly from around 1995 to 1999, driven by a decrease in gas prices used for electricity generation, but they started to rise again afterwards. From 2000 onwards increased liberalisation and competition in the electricity market, acted to push down prices. These reductions were offset to some extent by rising input fuel prices. Overall price rises have been particularly steep since 2004 and now prices are almost 17 % above 1995 levels. Gas prices have been on a steep upward trend since 1995 but accelerated from 2004 onwards driven by rising oil prices (to which the price of gas is generally linked). In 2007 gas prices were almost 75 % above their 1995 levels.
By comparison, EU-15 household gross disposable income grew steadily over the period, roughly keeping pace with gas price rises and well ahead of changes in electricity but this does not appear to be the case anymore in recent years. Should households have maintained the 1995 levels of energy consumption, they would have had more disposable income (on average) because of the difference between the growth in income and the pace of energy price rises.
However, given the rise in household energy consumption and rapid energy price increases in recent years, the energy bill is likely to increase its share in the household income in the near future. In addition, average EU figures mask fluctuations in energy prices across member states, and low income households will be acutely affected. Gas and electricity prices and disposable incomes have also followed a similar pattern in industry, although the rise in gas prices in the last few years has been even more rapid than in households (to some extent due to fewer remaining price controls in this sector compared to households). For some industries these price rises may be offset to an extent because they have the ability to insulate themselves from large price variations by signing up to longer term fixed price energy supply contracts.
The pattern of price changes for households excluding taxes is similar - household prices shown here include all taxes, whilst industry already excludes VAT (see EN32 for more information on energy taxes). Hence the price increases are driven by other factors such as rapid increase in the price of the fuels themselves and the internalisation of some environmental costs to consumers (e.g. via the EU Emissions Trading Scheme). Similarly, the price increases for diesel and gasoline over the period were driven primarily by rising world oil prices, which have both risen by over 50 % from 1990 to 2006.
Rising energy prices are a key driver of energy efficiency improvements, in particular for energy intensive industry where energy can account for a significant portion of overall costs. It is estimated that end-user energy efficiency has improved by around 5.2% and 10.5% for households and industry, respectively, in the EU-15 from 1995 to 2005 (8.4% and 14.1% for the EU-27) (Odyssee, 2008). It should be noted that these improvements are also driven by a range of other factors (such as legislation on minimum efficiency standards). The existence of market failures (e.g. lack of capital to invest in efficiency improvements) means that the link between prices and efficiency is more limited in some cases.
Household electricity and gas prices vary quite substantially across the EU member states even when compared at purchasing power standards (i.e. comparing the cost of a similar 'basket' of goods and services purchased using local currency) as opposed to foreign exchange rates. In the case of electricity, this varies by a factor of three and a factor of two in the case of gas. The variation reflects differences in taxation rates, fuel input prices, efficiency of generation, the supply structure and any market distortions resulting from differences in the speed of liberalisation of the energy market (e.g. price controls or other subsidies) which mean that prices do not properly reflect the costs of production. Where the price signal for energy is masked, this may lead to higher end-user energy consumption than would otherwise be the case.
For households across the EU member states, the rapid price rises from 2005-2007 have been most significant in natural gas, with an average increase of over 30 % (for EU-15). In particular, countries such as Romania, Ireland, Latvia and the UK have seen rises of over 50 %. Electricity prices also rose rapidly in countries such as the UK, Sweden, Czech Republic and Romania, but not to the same extent as gas, as input fuels for electricity production can be diversified to a certain extent as input prices rise.
Latvia experiences the lowest electricity prices in Europe due to its generation mix (around 68% of gross electricity generation was from hydro in 2005), the configuration of the power system and the geopolitical location (bilateral agreements with Russia). Planned integration with other low price areas in Europe (Scandinavia and Poland) could facilitate lower prices in the future and enhance competition among generators significantly. Energy prices in Romania reflect a complex set of market circumstances, most notably the need for new investments in new generation capacity, market reform and increasing price for imported gas from Russia.
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 1995 due to 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 with the main cause of the most recent increase in prices being the increase in world oil prices. On average, diesel is about 15% cheaper (per 1000 litres) than gasoline in the EU-25. 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.
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