Whether in Germany, the Netherlands, Belgium or the UK, many consumers’ power bills are set to increase in 2019. The reasons for this hike are not stated on the bill, and small wonder when they are so complex.
To understand the reasons behind the rise, it is instructive to look more closely at the breakdown of consumer prices. Broadly speaking, these are made up of four components: procurement and distribution costs, electricity grid costs, taxes and levies payable by all consumers, and expenditure that businesses can claim back, such as VAT.
Whilst all four components feed into prices more or less everywhere, the extent to which they do so varies – sometimes markedly – from one country to another. This may be due to differences in the energy mix, in distribution costs and grid usage fees, or in the taxes and charges levied by different governments.
In our two-part mini-series on the ‘ABC of electricity pricing’, we explain the factors determining power prices. In this second instalment, we will be looking at what proportion of the cost is determined by governments and regulators.
European climate targets place a number of demands on EU member states, and many of the measures governments are taking to drive the energy transition have a direct impact on electricity prices. Others have an indirect influence.
One of these instruments applies across all EU countries: the EU Emissions Trading Scheme, or EU-ETS, requires all energy producers to obtain a CO2 certificate for every metric ton of CO2 they emit. How much this affects a country’s electricity prices will depend on the share of fossil fuels in that country’s energy mix. This varies enormously: in 2017, Poland produced over 80 percent of its electricity from coal, whilst France, Austria and Sweden had almost no coal-powered generation.
Outside of the ETS, EU member states’ approaches vary widely when it comes to the transition to renewable energy. In Germany, the key policy instrument is the EEG (Renewable Energy Act) surcharge. In 2017, this made up 24 percent of electricity prices – more than the cost of procurement and distribution. On top of this, there are other direct taxes, such as levies to subsidise combined heat and power generation, which have a direct effect on German electricity prices. Not forgetting the electricity tax, which the federal government has used since 1999 to increase energy prices and encourage consumers to use power more frugally.
In the Netherlands too, a renewable-energy surcharge is added to electricity prices, though it is much more moderate than across the border in Germany. For a normal household consuming under 10,000 kilowatt hours (kWh) per annum, the Dutch surcharge in 2018 was 0.0074 euros per kWh. For a household consuming the EU average of 3,500 kWh/annum, this represents a mere 2.16 euros out of a monthly bill of around 50 euros.
However, it is not just levies to fund climate-friendly policies that are driving energy prices skywards. In the UK, for example, the cost of certain social programmes is factored into the tariff. All UK bill-payers contribute to the ‘Warm Home Discount’, via which low-income households are refunded a part of their energy bills.
In the statistics, these contributions are counted under the ‘environmental costs’ component of electricity prices. There is a very similar scheme is Belgium, where consumers’ contributions are also included in their electricity bills. Where it differs from the British version is that for statistical purposes it is considered as part of the grid costs, says Brussels distribution network operator Sibelga.
In Belgium, this statistical item also includes charges paid by electricity customers to the municipalities for burying power lines under the roads. All of which explains, in part at least, why ‘grid fees’ account for such a large proportion of Belgian electricity prices: they simply count so many things under the same item.
German municipalities also receive such a “public highway usage fee”, though it is called a “concession charge” and is recorded under “non-refundable taxes and charges” alongside the other levies and the electricity tax.
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