Annex 2C International comparisons of gas and electricity prices

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1 Annex 2C International comparisons of gas and electricity prices Wholesale gas prices in the UK have risen between 23 and 24. This has caused industrial and domestic gas prices to increase and the gap between s and the EU median to narrow. UK gas prices in 24 are, however, still below the EU median. Estimates for April 25 indicate that domestic gas prices for medium consumers remain below the EU median, while industrial gas prices are at or below the EU median depending on consumption level. Wholesale electricity prices in the UK have risen between 23 and 24. This has caused industrial and domestic electricity prices to increase and the gap between s and the EU median to narrow. UK electricity prices in 24 are, however, still below the EU median. Estimates for April 25 indicate that domestic electricity prices for medium consumers remain below the EU median, while industrial electricity prices are below the EU median for all but the largest consumption level. Introduction 2C.1 Prices in Europe are an important comparator to prices in the UK. For industrial prices, these show whether the price of energy increases or decreases the competitiveness of UK enterprises relative to other European enterprises, while in the domestic sector they show whether the competitive market in the UK has delivered lower prices to customers. Special emphasis in this annex is given to comparisons to Germany and France, as well as relative to the EU median. On most measures, the UK still remains at or below the EU median, despite recent price increases.

2 Gas prices Background 2C.2 As described in Chapter 2, gas prices for domestic consumers between 2 and 23 were at their lowest levels over the period 197 to 23 in real terms, but have increased to around 1998 levels in 24. Prices are still, however, low in historical terms. Industrial gas prices have increased from their low point in 2, but remained below their level over the whole period from Wholesale gas prices 2C.3 Wholesale prices for gas are normally about the same at the Great Britain national balancing point (NBP) and the Zeebrugge hub in Belgium, because of the presence of the interconnector between the UK and Belgium. In theory, were the price in the UK to exceed that of continental Europe for a period of time, imports would flow into UK until the prices are balanced again. However, if the interconnector is in full export mode in either direction, no more imports are possible, and UK and Continental prices diverge. 2C.4 In the last two years, wholesale gas prices in the UK have increased from around 2p/therm in gas year 23 (which runs from October 22 to September 23) to 24p/therm in gas year 24, or by 2 per cent. Most of this increase in spot outturn prices can be explained by the increase in oil prices, to which Continental prices are contractually linked, in the corresponding period from $28/bbl to $34/bbl, or by 21 per cent. 2C.5 Looking forward, for gas year 25, average wholesale prices (using a forward price for December to September) predict a further increase to around 36p/therm, or by another 5 per cent. For the corresponding period, (forward) oil prices have also increased very significantly, to $44/bbl, or by 29 per cent, explaining a large proportion of the gas price increase. However, given that gas forward prices are not necessarily a good predictor of actual outturn gas spot prices in winter, prices may not increase to this level.

3 Industrial gas prices 2C.6 Since, average s have consistently been within the two lowest prices for countries in the EU, with only prices in Finland being lower since. s were around the median price between and The largest prices have tended to be in Ireland and Portugal, at around 7 per cent higher than those in the UK. Since, s have been around 2 per cent lower than the. Chart 2C.1 Prices in the UK compared to the EU median and prices paid in Germany and France for industrial gas prices Source: DTI analysis based on IEA, Energy Prices and Taxes Note: Denmark, Luxembourg and Sweden have been excluded from this analysis due to lack of available data. German prices for to 24 have been estimated. 2C.7 The position in terms of gas prices in the UK compared to the other nations in the EU has worsened from 24, with UK gas prices rising faster than those in other EU countries. As described above, wholesale gas prices have increased and forward prices (which are often used as the basis for contracting) in the UK are now above those on the Continent. 2C.8 In the UK, gas suppliers have limited ability or incentives to absorb wholesale price increases, which therefore tend to get directly passed through to industrial user prices. The combination of these drivers, i.e. higher wholesale prices and faster pass-through, will mean that UK industrial gas prices are less competitive than in the past. Estimates for April 25 based on Energy Advice data, however, still show the for industrial users is at the EU median price for small and median size bands, and below the for large sizebands.

4 Domestic gas prices 2C.9 Average UK domestic gas prices, including taxes, have consistently been within the four lowest prices for countries in the EU since. In recent years, prices in Finland and Luxembourg have tended to be lower than the, whilst those in Denmark tend to be approximately double those in the UK. Since, s have been around 2 per cent lower than the EU median price. Chart 2C.2 Prices in the UK compared to the EU median and prices paid in Germany and France for domestic gas prices Source: DTI Analysis. Note: Sweden has been excluded from this analysis due to lack of available data. German prices for to 24 have been estimated C.1 Increases in wholesale prices tend to have a larger lag in terms of the pass through of prices to domestic customers, compared to industrial users. This is due the fact that wholesale costs only make up about 5 per cent of domestic costs, compared to a much higher proportion of industrial costs. Prices are now increasing in the UK for domestic customers, although estimates for April 25 based on Energy Advice data suggest that prices to medium domestic consumers of gas remain significantly below the EU median

5 Electricity prices Background 2C.11 Electricity prices in 23 for both domestic and industrial customers were at their lowest level in real terms since 197. There have been increases in prices to both the industrial and domestic sector since 23, although real domestic and industrial prices in 24 are still below prices seen over the period 197 to. Wholesale electricity prices 2C.12 Evidence suggests that average wholesale electricity prices for the UK have been higher than France and Germany since October 23, although the volatility of the UK market has been less than both Germany and France and the difference in prices has not been very large. Gas is a substantial component of the UK fuel mix in electricity generation and therefore the gas price rises are probably the largest factor behind recent wholesale electricity price increases, but electricity price increases also reflect the fact that wholesale prices had reached historically low (and essentially unsustainable) levels in 22, leading to widespread business failures in the industry. 2C.13 Some price increases in the UK are also inevitable as a market signal for the need for additional generation capacity in the future. This is the market working to ensure diversity of supplies. The fact that the UK is more reliant on gas to generate electricity than either Germany or France is an additional reason for the likely larger increases in the price of electricity. Industrial electricity prices 2C.14 The average UK electricity price is normally around the median level for the EU, although estimates suggest that prices were slightly below the median in 23 and 24. France generally has a lower industrial price for electricity (normally close to the lowest in the EU). The largest prices have tended to be in Italy, Denmark, Ireland and Portugal. Estimates for April 25, derived from Energy Advice data, show that the UK international position has remained similar, with s remaining below the EU median for all but the very largest industrial consumer size bands.

6 Chart 2C.3 Prices in the UK compared to the EU median and prices paid in Germany and France for industrial electricity prices Source: DTI analysis based on IEA, Energy Prices and Taxes Note: Luxembourg has been excluded from this analysis due to lack of available data. German prices for 24 have been estimated. Domestic electricity prices 2C.15 Average UK domestic gas prices, including taxes, have been below the median price for countries in the EU since. In recent years, prices in Finland and Greece have tended to be lower than the, whilst those in Denmark tend to be approximately double those in the UK. In the last five years, U K prices have been between 1 and 2 per cent lower than the EU median price, and about the same level as those seen in France.

7 Chart 2C.4 Prices in the UK compared to the EU median and prices paid in Germany and France for domestic electricity prices Source: DTI analysis based on IEA, Energy Prices and Taxes Note: German prices for 24 have been estimated. 2C.16 There is lag between rising in the wholesale price of electricity and the passing on of this increase to domestic customers, however prices are now increasing in the UK for domestic customers. Estimates for April 25, derived from Energy Advice data, show that the UK international position is similar, with s remaining below the EU median for the medium domestic consumer size band.