The diagram below (Figure 76) outlines main drivers and price components of retail electricity prices in Europe.
Drivers
The drivers constitute the factors of influence through which one of several price components prices may be affected. Such drivers include:
Energy supply structure
The energy supply structure encompasses all activities related to the production and supply of electricity. The main factors influencing the supply structure include primary fuels and technologies used for producing electricity. The ratio of imported energy versus national sources also has an important influence. Adequate access to energy infrastructures determines the ability to diversify energy imports and reduce dependency on e.g. a single supplier.
Figure 76: Overview of the main drivers and price components of retail electricity prices in the EU
Source: Study authors
Box 2: Lithuanian dependency on foreign imports
Since the shutting down of the nuclear power plant “Ignalina” in 2009, Lithuania must rely on Russian exports for roughly 80% of its energy consumption, mostly through imports of natural gas and electricity. Moreover, along with the other Baltic states, the country has little or no physical connections to other EU Member States to diversify its energy imports. For this reason it is often referred to as an energy island. The main problem faced by the energy sector therefore relates to the high level of dependency on foreign imports due to the lack of local capacity and the difficulty in diversifying supply sources in the short term.
The case study presented in Annex E shows how retail electricity prices have recently increased, in particular due to an increase in wholesale energy costs. Due to the strong dependency on foreign imports also of electricity, it is often the case that in the Lithuanian merit order curve the marginal price in the wholesale electricity market is set by imported electricity rather than domestic production costs.
Wholesale and retail market structure
Wholesale and retail market structures are determined by the type and size of the market and by the key participants involved. In particular the degree of market liberalisation is an important factor explaining discrepancies at the retail level. A high level of market
concentration may reduce the number of new entrants, hence limit competition and price offers.
Regulatory Framework
The regulatory framework combines legislations and rules that govern the supply, transmission and distribution of electricity. The National Energy Regulator (NRA) defines the regulatory framework and operation charges. The regulatory framework establishes the conditions through which energy suppliers are able to negotiate retail contracts with end-users. The relative “degree of freedom” through which contracts are prepared is also an important factor in determining price levels. With regulated tariffs this freedom is of course highly impeded.
Policy
National policies, such as regarding energy security, energy efficiency, and climate change policies, may impose additional costs on consumers through corresponding charges for the promotion of new technologies or reduction of energy consumption. Other types of horizontal or transversal policies, such as those aiming to improve industrial competitiveness, may also influence price setting through specific levels of taxation for industrial consumers.
Price components
Price components include the different elements that when summed up constitute the final retail price to the end users. Each of these price components can be impacted directly or indirectly by the drivers seen earlier. Components of retail electricity prices include:
Wholesale energy costs
Wholesale energy costs include all costs associated to the purchase of fuels for electricity production or the purchase of electricity itself when imported (see detailed discussion in chapter 2). Such costs also include the cost of capital and trading. Supplier margins are also generally included under this price component.
Network charges
Network charges include all costs related to the transport and distribution of electricity at the low and high voltage level. Capital Expenditures (CAPEX), network expansion, Operational Expenditures (OPEX), which include infrastructure and maintenance costs, and, finally, network charges set up by the NRA are some of the components included in these costs. Metering and billing costs are also part of this component.
Taxes and charges
Taxes and charges include all direct and indirect taxation applied to electricity.
Consumption charges such as Value Added Tax (VAT), excise duties, and environmental taxes are included here. The level and nature of charges and taxes applied vary substantially between countries.
Figure 77 shows the share of VAT and other charges across the EU for household electricity prices. The share of taxes and levies ranges from 56% in Denmark to only about 5% in the UK. The situation for the retail industry electricity price is quite similar.
Figure 77: Household electricity price breakdown for the year 2012
Source: (Eurostat 2013)
It is important to note that the Eurostat data still include e.g. network charges in the main component “energy costs”. A recent report from (Vaasa ETT 2013) on residential energy prices, estimates that the average energy price component (including retail margins) for the EU15 is only around 43% of the total final retail price of electricity, if one excludes direct/indirect taxation and network charges.
Box 3: German retail electricity price tax component
Annex E presents the detailed decomposition of retail electricity prices for German domestic consumers (volume-weighted average across all tariff categories) (Bundesnetzagentur 2013). According to BDEW (2013), electricity prices for domestic consumers have increased by 68% between 1998 and 2013. Among the individual components, taxes have tripled, while production and network charges have increased by only 11%.
Wholesale energy and network tariffs grouped together account for 45% of the final price paid by consumers, while the tax component including a number of different charges accounts for over 50% of the electricity bill. General taxes and levies as percentage of the final price, include the following sub-charges (Bundesnetzagentur 2013):
VAT at 19%, accounting for 16% of the final price (36% of the tax component),
A local licence fee, accounting for 6% of the final price and 14% of the tax component,
The “Erneuerbare-Energien-Gesetz” EEG surcharge, which supports Renewable Energies, accounts for 14% of the final price (31% of the total tax component),
The “electricity tax”, accounting for 8% of the final price (18% of the tax component),
A small charge established under section 19 StromNEV accounting for 0.6% of the final price.