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EU Energy Bills Compared

    EU Energy Bills Compared: The grass is not greener on the other side, but ours could be even greener

    British Gas’ announcement of a price increase at the beginning of this month fuelled a heated debate on the issue of energy provision. As in all these discussions, the roles were already set. On one side, British Gas representatives claiming the increase was justified. On the other side, Labour and few consumer watchdogs decrying the barbaric act and calling for price caps. Quite predictably, the discussion was far from productive, with each side offering opposing truths.

    One thing that was certainly lacking in the debate on energy provision was perspective, both in the sense of time and space. 

    One way to understand if we need to radically rethink the energy market is to make a comparison of the same sector with other countries and through time. Of course, this kind of exercise shifts the focus from the specific case of Centrica and the upheaval it created, to a more general question: have UK consumers been paying a fair price for their bill compared to their continental neighbours. 

    A quick look at the Eurostat data on the price of electricity for households gives some encouraging results. If we compare the UK to countries with similar level of development and infrastructure in Europe, only France and Finland managed to fare better. Between 2007 and 2016 British consumers have had a far better deal than the average European one (Figure 1).  

    Figure 1:

    Source: Eurostat

    An often heard refrain is that wholesale electricity prices have been falling in the UK. This could surely account for the better deals British consumers are getting compared to the rest of Europe and cast some doubts on the justifiability of the recent price hikes.

    However, if we look at international comparisons, UK suppliers have been facing by far the highest wholesale electricity prices in the EU during the same time frame and remained 70 percent more expensive compared to the continental average. This is partly due to the limited level of electricity interconnection between the UK and the European market, which made it harder to import electricity from cheaper providers. Overall, this means that despite high cost, the notorious “Big Six” retailers performed well.

    How was this possible? Well, if we look at the different countries’ market structures (Table 1) one thing seems very clear: the UK energy market is more competitive than the others.

    Table 1: Selected Market indicators for retail electricity suppliers

     

    Producers (Representing 95% Total

    Main Producers ( >5% Total)

    Main Retailers (Sales >5% Total) - Nr

    Cumulative Market Share, Main Retailers - %

    UK

    22

    6

    6

    77.8

    France

    5

    2

    2

    86.7

    Germany

    NA

    4

    4

    NA

    Spain

    10

    4

    4

    78

    Italy

    654

    3

    2

    41

    Finland

    36

    4

    4

    NA

    Netherlands

    650

    4

    4

    72

    Source: European Commission

    With more electricity retailers having less market share, competitive pressure helps keeping costs down and forces companies to add consumers’ into their equation. It is no coincidence that people’ satisfaction with electricity supply is among the highest in the EU and the G20. Privatization and regulation did not lead to any collapse in service provision either, as UK is one of the country with fewer minutes of electricity disruption.

    These results are the product of the successful implementation of two regulatory regimes: RPI-X during the nineties and RIIO since 2007. The first –centred around cost efficiency and secure provision- has stood the test of time and is internationally applauded and adopted as soon as state monopolies are dismantled and regulation takes their place. The second has so far met the objective of incentivizing investments and suppliers’ focus on customer, which were famously neglected by RPI-X. Data on the share of electricity produced by renewables confirm this and imply that the 2020 energy target, which requires the UK to produce 30 percent of its electricity through renewables, can safely be reached.

    Figure 2

    Source: European Commission

    Having said that, it is still too soon to dismiss the criticism against the current regulatory framework as unfunded. Despite its success, RIIO still has some shortcomings to address.

    Firstly, the amount of cost pass-through is still low. If we look at the gap between wholesale price and retail energy component, it is clear that suppliers are not very sensitive to wholesale price changes. In turn, this means that competitive pressures could be higher 

    In addition, more could be done for poorer households, who between 2004 and 2014 have seen the share of energy products in their total household expenditure rise from 6 to 10 percent.

    Indeed, it is true that, on average, British consumers spend less than European ones. But it is also the case that inequalities between income groups persist and the UK is among the countries in which the difference in energy expenditure between rich and poor is highest.

    In conclusion, the last price rise and the follow up statements by angry commentators should not conceal the more general picture: in the past 10 years the regulatory framework mimicking competitive forces has provided the right kind of incentive to suppliers. UK citizens are on average getting a better deal than their European neighbours.

    Stefano Merlo

    Stefano Merlo is a CPS Economic Research Intern. After finishing a Masters in Economic Policy at UCL, he is now studying for a second Masters in Legal and Political Theory. He is interested in European macroeconomic policy and international solidarity.

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