# EUR-Lex - 52014DC0021 - EN

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# 52014DC0021

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Energy prices and costs in Europe /* COM/2014/021 final */**

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COMMUNICATION FROM THE COMMISSION TO
THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL
COMMITTEE AND THE COMMITTEE OF THE REGIONS

Energy prices and costs in Europe

Introduction

Energy price rises are a major political concern. They create
additional cost burdens on hard-pressed households and industry[1] and affect Europe's global competitiveness. The European Commission, in response to a European Council
request, has prepared an in-depth analysis of energy prices and costs in Europe, to help policy makers understand the background context, the impact of recent price
rises on consumers and the political implications.

The report
provides extensive and detailed data drawn from a wide range of sources. It assesses
trends in energy prices and energy costs and explores their possible causes, as
well as drawing conclusions to help inform decisions on the policy measures
needed to address this issue[2].
The report is attached to this Communication[3].

The focus of
the report is electricity and gas prices. In the global markets for oil and
coal, energy consumers across the globe pay broadly the same price. So price
differentials - that can raise costs to consumers and generate competitive
advantages or disadvantages – are less of a concern. That is why these two
fuels and the transport sector are not covered extensively in the report.

Energy commodity
prices, particularly for fossil fuels, have increased in recent years. Rising
energy prices and costs are not new. For centuries, Europe has faced a constant
struggle for adequate and affordable energy. The difference today is that Europe's energy sector is in the midst of a major shift away from imported fossil fuels and
needs high levels of investment, even at a time of economic uncertainty. Furthermore,
the energy price gap between the EU and major economic partners has widened for
a number of reasons, many of which Europe has little influence over. Moves to
decarbonise electricity generation have led to strong growth in wind and solar
power in particular, which has had a major impact on grids and energy
production costs. Alternative gas supplies, such as shale gas or Caspian gas,
are also being developed, requiring further investment. At the same time, Europe's gas and electricity sectors are moving from public monopolies to liberalised
markets made up of competitive private companies, where users, rather than
tax-payers, bear the cost of new energy investments.

There are different ways to interpret and
anticipate the impact all these changes have on one another. The liberalisation
of the market is expected to deliver more competition and therefore more efficient
and cheaper energy. Environment and climate policy and decarbonisation are designed
to ensure a sustainable energy sector in the long run, with acknowledged higher
costs in the short term, particularly from investment. Governments expect these
changes to deliver short term benefits to consumers – jobs and quality of life
- as well as longer term sustainability objectives. The energy industry itself needs
to adapt to very different environmental, commercial, regulatory and technology
norms. What was not anticipated was a major and prolonged downturn in economic confidence.

To ensure that Europe can manage all these
changes, while continuing to assure its citizens access to sustainable and
affordable energy and maintaining industrial competitiveness, efforts are
needed at both the European and national policy levels, as well as action by
industry and by individual consumers.

To understand which measures will be most
effective, the following sections provide an insight into how energy prices and
costs are evolving, and what is driving these changes. Subsequently, the impact
on EU global competitiveness and future price and cost trends are considered.

In conclusion, the Commission proposes a
number of courses of action with a view to ensuring that Europe's citizens and
industry can deal effectively with the energy price challenge and that the EU
can maintain its competitiveness, today, to 2030 and beyond.

What makes
up our energy bill?

As a preface to
the economic analysis below, it is important to understand what is meant by
energy prices and costs. Our energy bills are partly driven by the quantity of
energy we consume – so energy costs can be reduced by using more energy
efficient products or other energy saving practices. But the price
element of energy bills is often seen as more critical and difficult to
understand. The price that consumers pay for electricity and gas reflects
various elements, influenced by both market forces and government policy.

The energy element
of the bill consists of two parts. First, the wholesale element of prices. This
normally reflects the costs incurred by companies in delivering energy to the
grid. These include fuel purchase or production and shipping and processing, as
well as the costs of constructing, operating and decommissioning power stations.
Second, the retail element covers costs related to the sale of energy to final
consumers. Network costs reflect transmission and distribution infrastructure
costs related to the maintenance and expansion of grids, system services and
network losses. Charges are often added to network tariffs to cover other costs
such as those related to public service obligations and technology support. Finally,
taxes and levies are applied; these may be part of general taxation (VAT,
excise duties) or specific levies to support targeted energy and/or climate
policies.

Elements of consumer prices

1. Energy
prices in Europe

In gas and electricity markets, despite a degree of global
tradability of fuels and equipment (such as LNG vessels, wind turbines, etc.),
there are at best regional prices, and more often national or sub national
prices, which affect retail costs and prices for consumers and can undermine
the single market.

European
consumers' electricity and gas prices[4]
have risen and are still rising. Whilst almost all Member States have seen a
consistent rise in consumer prices of electricity and gas, the differences
between different national prices remain large: consumers in the highest priced
Member States are paying 2.5 to 4 times as much as those in the lowest priced
Member States[5].
The gap between the highest and lowest prices paid for electricity and gas by
consumers across Member States has widened over time, especially in the case of
household gas prices. So rather than European prices converging and markets
becoming more efficient, differences at national level persist.

Households
retail price evolution

In the EU on average,
household electricity prices have risen 4% a year for the last five years
(2008-2012)[6].
In most Member States, this is an increase above inflation. For gas, household
prices have risen 3% a year, again above inflation for most Member States. That
said, behind these averages there are significant national variations in how
prices have changed over time:

Household electricity prices (€c/kWh inc. taxes)

Source: Eurostat
energy statistics

Household natural gas prices (€c/kWh inc. taxes)

Source: Eurostat
energy statistics

Industry retail price evolution

For industry, retail electricity prices rose
by approximately 3.5% a year in the same period – above inflation in half of Member States; and gas prices by less than 1% a year over the same period - below inflation
in most Member States.

Industry electricity prices (€c/kWh excl. VAT & recoverable taxes and levies
but also any exemptions)

Source: Eurostat
energy statistics

Industry gas prices (€c/kWh excl. VAT & recoverable taxes and levies
but also any exemptions)

Source: Eurostat
energy statistics

Wholesale
prices

In contrast to
these retail developments, in the period 2008-2012 wholesale electricity
prices declined by between 35% and 45% on the major European wholesale
electricity benchmarks. Wholesale gas prices have fluctuated, falling and then
returning to earlier levels, so no price increases were evident over the
whole period.

Breakdown of
prices by component

These average
European price increases hide significant variation between Member States, between
different industries and over time. Some sectors have experienced much greater
price volatility. e.g. national increases in household electricity prices range from -2% to +47%; whilst EU average industrial
gas prices rose by less than 1% a year in 2008-2012, certain energy
intensive industries reported gas price rises of between 27% and 40% in the
period 2010-2012. The accompanying report explores these differences,
especially between industrial sectors, and highlights that prices and the
impacts of policies differ for different users. In order to better understand
the relationship between energy prices and policy, it is useful to disaggregate
prices into their various elements:

Evolution of
retail electricity price by component

The relative share of the energy element in the retail
price of electricity has generally diminished over time. This is because since
2008 it is the tax/levy component which has seen the
greatest increase[7]
and energy cost elements have seen the smallest increase.  Since 2008
electricity network costs went up by 18.5% for households and 30% industrial
consumers; taxes and levies rose by 36% for households and 127% for industry,
before exemptions. Whilst consistent national data on exemptions is not
available, a number of Member States provide significant tax and levy
exemptions for some energy intensive industries which substantially mitigate
the tax/levy price rises.

Electricity price evolution by
component 2008-1012

Source: Eurostat. Includes taxes in the case of
households; excludes VAT and other recoverable taxes in the case of industry
but other industry exemptions are not included (not available).

Evolution of
retail gas price by component

In the case of retail
prices for natural gas, since 2008 the energy component has also stayed
stable, while on average for the EU the network component has risen by
17% for households and 14% for industry; taxation went up by 12-14% for households
and 12% for industry.

Gas price evolution by component 2008-1012

Source: EC, Metadata Member States. Includes taxes in the case of households; excludes VAT and other
recoverable taxes in the case of industry.

Drivers of
the "energy" element of price

Of the three
elements of energy prices (energy, network costs and taxes and levies), the
energy cost element is generally the largest, though its share is diminishing. As
mentioned above, in contrast to the energy element of retail prices, there has
been a convergence and fall in wholesale electricity prices. This can be
linked to EU energy policies: the increase in competition following market
coupling, the unbundling of electricity generation from system operation, the
fall in EU ETS carbon prices[8]
and the growth of power generation capacity with low operating costs (such as
wind and solar power, in addition to existing nuclear and hydro power).

However the
fall in wholesale prices has not translated into a reduction in the energy
element of retail prices, even though this is the part of the energy bill where
energy suppliers should be able to compete. The result may imply that price
competition in a number of retail markets is weak, allowing suppliers to avoid
passing on wholesale price reductions to retail prices[9].

The relationship between wholesale and retail prices can be
cut by high levels of market concentration. Moreover, universal retail price
regulation applied in some Member States tends to be detrimental to competition
in the retail markets, as it discourages competitors from market entry and
investment. It might therefore contribute to reducing the responsiveness of
retail prices[10].
In addition, Member States should explore other policy
measures to address the concerns for vulnerable households or industries.

In the gas
market, in addition to market concentration and price regulation, there is
still often a supply constraint (with low numbers of suppliers and competition)
and gas prices are still often indexed to oil prices[11]. This practice
disconnects wholesale gas prices from actual supply and demand for gas,
constraining energy suppliers from responding flexibly to changing market
conditions or passing true costs on to consumers. In these cases, the rise in
oil prices in recent years has directly contributed to rising gas prices for
selected, limited markets, to the detriment of consumers and industry in those
regions.

Drivers of the
"tax/levy" element of price

Within this element it is important to distinguish between
general energy tax measures and energy-system related costs financed by levies.
Taxes and levies for financing energy and climate policies are generally
the smallest element in most Member States but the levies in particular have
increased significantly more than others. This element has caught up with or
overtaken the share of network costs and now constitutes the largest part of
the household electricity price in three Member States,
whereas in some others it remains marginal. In most Member States, taxation and
levies finance energy and climate policy measures, including promotion of
energy efficiency and renewable energy production. Indeed the cost of renewable
energy added to retail prices constitutes 6% of the average EU household
electricity price[12]
and approximately 8% of the industrial electricity price before taking
exemptions into account. Here too, there is a wide range of costs, with Spanish
and German shares reaching 15.5% and 16% of household electricity prices, in
contrast to less than 1% in Ireland, Poland and Sweden.

Whilst some
national energy and climate policies are financed via levies, the EU ETS costs
are reflected in the wholesale element of energy price. National levies,
at whichever point in the chain they are applied, will alter prices and so
cause differences between different national markets. To minimise such
distortions, it is important that government interventions in the energy sector
(financing infrastructure or generation, e.g. renewables, nuclear costs or
flexible fossil fuel capacity) are as cost effective as possible[13].

The European
framework for energy taxation does not provide for a full harmonisation,
so Member States may change their taxes and tax rates individually, going
beyond the core elements or minimum levels contained in EU law[14]. Again, using
electricity as the example, significant national differences are evident in the
relative shares and in absolute values of the tax/levy component of energy
prices illustrated above. Member States use taxes and levies for a wide variety
of purposes. These include general revenue-raising (e.g. for health and
education), but also for internalising the external costs of energy production
and consumption and financing energy specific policies such as climate and
energy policies or fossil fuel sectoral adjustment.

Data on the tax
exemptions and other subsidies offered by Member States, particularly to energy
intensive industries is currently patchy and lacks consistency[15]. For this reason, the
Commission is preparing an in-depth study to gather consistent and complete
data on the full costs of and subsidies to the various
technologies in the electricity sector.

Drivers of the
"network" element of price

The relative
share of transmission and distribution costs, as well as the absolute levels, vary
greatly across Member States, for reasons that are not always easy to understand;
data on the drivers of these shares and their evolution is scarce, in
particular for gas. The following therefore relates to electricity only.

note: certain
Member States add non network costs to network

charges, which are not distinguished
in these data.

Since 2008 electricity
network costs went up by 30% and 18.5% for industrial and household consumers respectively. The sustained increase in network
costs, in particular for households, is not unexpected in the context of energy
sector transformation, but could be mitigated through better network
governance.

With absolute
values ranging from 2€c/kWh to 7€c/kWh[16],
it is clear that such costs can have a significant impact on total electricity
prices and thus the total energy price differentials across Member States and
with trading partners. Such differentials are also partly driven by widely
differing national practices regarding network tariff regulation and cost
allocation practices, as well as by physical differences in the networks and
the efficiency of their operations.

2. The cost of
energy in Europe

Whilst energy
price levels receive most attention, energy costs are in practice more
important for households and for industry, since they reflect actual bills paid.
Price rises can encourage, to some extent be compensated by energy efficiency
gains and reduced consumption. This occurs as a result of improvements in
process, product or household energy efficiency or through reductions in
sectoral or even overall energy intensity of industry. However, price decreases
can also be outweighed by increased consumption, for example because a higher
number of electric goods are being used.

In the
household sector, significant improvements in energy efficiency have been seen
across all energy uses, but perhaps most visibly in household heating:

Energy consumption
trend for household heating (koe/m2).

Source: Odyssee

Overall,
household electricity consumption declined by 1% in the period 2008-2011 and
gas consumption by 15%. Despite this, household energy costs have
increased, for example because of low refurbishment rates of inefficient
housing and replacement rates of inefficient equipment have not been sufficient
to offset rising prices. Data for all Member States
shows that the energy share of household consumption[17] has
risen 15% over the period 2008-2012, from 5.6% to 6.4% of total consumption.
As energy costs often form a larger part of poorer households' costs, such an
increase has further negative distributional consequences on
"vulnerable" households.

Source: Eurostat

Over the period 2008-2011, continued
improvements in European industry's energy efficiency and falls in production
due to the economic crisis and international competition led to a reduction in
electricity consumption of 4%. However, increases in electricity prices have
outweighed these improvements and caused cost increases of about 4% for
industry overall, before taking tax and levy exemptions into account. In
contrast, gas, for which industrial consumption declined by 5.3%, costs over
2008-2011 declined by 6.8% overall.

European industry overall is a global
frontrunner in efficiency. However, there is still potential for further
efficiency measures (partly already under way with the EU's implementation of
the new energy efficiency directive and on-going improvements in energy
products) particularly given the large differences among and within Member States.
Access to standardised data on energy costs is not easy. The figures available suggest
a highly divergent range of performance when looking at the share of energy
costs in production costs. For this reason it is worth looking at energy
intensive industries in detail, including manufacturing sectors such as paper
and printing, chemical products, non-metallic minerals, iron and steel and
non-ferrous metals, which all have a high share of energy costs compared to
production costs. EU companies taking part in in-depth case studies in energy
intensive sectors reported that their electricity and gas prices after
exemptions, were on the rise between 2010 and 2012.

The share of energy costs in production costs in energy intensive
industries

(Different bars are sub sectors[18], with lowest, highest Member State values and EU averages, 2010)

Source: Eurostat,
Structural Business Statistics

3. Energy
and Europe's international competitiveness

While Europe
has never been a cheap energy location, in recent years the energy price gap
between the EU and major economic partners has further increased: on average,
EU industry gas prices are now three to four times more expensive than
comparable US, Indian and Russian prices, 12% more than China's, comparable to
those of Brazil and less than those of Japan.

Cheaper
regional prices resulting from, for example, the shale gas boom in the US and progressive increase in LNG trade, have not yet translated into cheaper prices on
the European market. This is due to domestic subsidies in certain producer
countries, trade restrictions and/or infrastructure limitations and the effects
of oil indexation. Moreover, rising demand in Asia, particularly Japan after the Fukushima nuclear accident, has also widened the gap between EU and US prices.

For
electricity, wholesale prices in Europe declined over the period, are
relatively low and are of a roughly comparable level to wholesale electricity
prices in the US. At present exchange rates however, EU industrial retail
electricity prices[19]
are more than twice those in the US and Russia, 20% more than China's but 20% less than those in Japan. Here again, lower US and Russian gas prices (and
subsequent lower coal prices) have helped bring down those countries'
electricity prices. Yet, in the majority of Member
States the supply of electricity (based on interruptions/fluctuations) is more
reliable than that of the US and Japan, China and Russia[20]. These
interruptions also have costs. International data on network costs is not
readily available to validate the hypothesis that EU networks are more
expensive but more reliable than elsewhere in the world. Taxation data is somewhat
more available and demonstrates that EU electricity and gas taxation is on
average higher than in other regions of the world.

To assess the
impact on industrial competitiveness of this increasing energy price gap two
indicators are key: exports and European production by energy intensive companies.

·
EU energy-intensive goods still dominate global export
markets despite the widening disparities in energy prices since 2008. But in
recent years the EU has significantly reduced the energy intensity of its
exports, whilst emerging economies such as Brazil, Russia and China are becoming increasingly important sources of energy intensive intermediate
components. According to the IEA[21],
the growing disparity in the EU and other regions' energy prices and costs is
expected to reduce the EU's share in global export markets for energy intensive
goods.

·
Production levels in energy intensive industries have been in
decline since 2008 and the overall share of energy intensive industries in
European GDP is falling[22].
However, it is not possible to attribute this to energy prices alone at this
stage, as tax and levy exemptions for energy intensive industries, recession,
structural changes in the world economy and corresponding global shifts in
consumer demand are also important factors. Manufacturing in the EU has indeed been
restructuring towards lower energy intensity and higher
value added production for decades and this has partially mitigated rising
energy prices. Moreover, many other factors have played a role, including
labour costs and the attractiveness of markets outside the EU, driving
investments to those markets.

There is a link
between these two dimensions. In recent years, some European energy intensive
industries have turned to global markets to compensate for the recession and
the related fall in demand in Europe through exports or international
investments, even in such local industries as bricks and roof tiles. As such,
they are further subject to international competition and must decide whether
to invest in Europe or abroad, in countries with much more promising market
dynamics. As competitors in other countries seek to improve their energy
efficiency, energy price differentials have more impact on investment decisions
and companies' ability to compete and develop.

4. Future
price and cost trends

The
Commission's 2030 energy and climate policy framework reflects a wide range of
work to understand future expectations of energy costs and final prices, taking
into account the dynamics of global and European markets, government policies
and consumer and industry behaviour. The Commission's analysis confirms the
findings of the 2050 Energy Roadmap that fossil fuel prices are expected to
continue to rise and to drive energy costs. Specifically for electricity, costs
are likely to increase up to 2020, due to rising fossil fuel costs coupled with
necessary investment in infrastructure and generation capacity. Beyond 2020,
costs are expected stabilise and then slightly decrease as fossil fuels are
replaced by renewable energy. Capital costs, however, decrease only slightly
while tax/ETS auction payments rise.

5.
Conclusions: actions to reduce energy costs

Looking at
trends in energy prices since 2008, the following main conclusions can be drawn:

Electricity prices,
but even more importantly, costs, continued to rise overall for both households
and industry, despite falling or stable levels of consumption. Gas prices have
fluctuated but did not significantly increase over the period 2008-2012;

This rise in
prices is driven mainly by increases in taxes/levies and network costs. The evolution
of the energy component of prices was uneven; in countries with high
penetration of wind and solar power there has been downward pressure on
wholesale power prices, but not in other. Progress made in the functioning of
the internal energy market should have had a positive impact by ensuring that
wholesale market prices converged across Europe. This was not the case for
retail prices, where network distribution systems, uncoordinated national energy
and climate policies, taxes, levies and network tariff regulations differ, fragmenting
the internal market.

EU trends
disguise significant disparities across Member States and across industry
sectors. This points to weaknesses in the internal energy market, with wide
differences between Member States' policies on network costs and taxes/levies.

Both for electricity
and gas, the price differential with external competitors (with the main
exceptions of Japan and Korea) is increasing. The sharp fall in gas prices in
the US contrasts with the stable level in Europe over the period.

The EU has
until now retained the lead in exports of energy intensive goods. But European
industry's efforts to compensate for higher energy costs through constant
energy efficiency improvements may need to go even further, bearing in mind
physical limits,  as competitors also increase their efficiency and as European
industry decides to invest abroad to be closer to expanding markets.

There is a
serious lack of credible, comparable and verifiable information on certain
aspects of prices and costs, in particular on the drivers of transmission and
distribution costs, on the exact impact of energy on costs at the level of
production facilities and on the levels of taxation and subsidy, in particular
for industry.

Based on the above, the Commission believes it is important
to maintain our commitment to completing the internal energy market in
2014 and further develop energy infrastructure. Thanks to EU market
liberalisation, industry (particularly SMEs) and household consumers can
already reduce their prices by changing to better
tariff regimes with existing suppliers or by switching to cheaper energy suppliers, where
suppliers are sufficiently numerous.
Further effort is still needed to
liberalise the market, to increase investment and competition and generate
efficiencies which can bring price reductions. At the same time, dynamic pricing and smart metering
technology remains out of reach of most European households. This limits
consumers' ability to control their energy bills. To address these issues, the Commission intends to launch a
Communication on retail markets before the summer of 2014.

Where fuel prices are global (e.g. oil and coal) and
difficult to influence, EU policies of diversifying energy supplies and supply
routes, negotiating with major energy partners with one European voice, and
promoting energy efficiency internationally, all help strengthen the EU's
influence. In addition, increasing renewable energy production and energy
efficiency helps to reduce the fossil fuel import bill.

For the energy policy levy and tax component of prices, which has seen the greatest rise in recent years, it is
important to reflect on the value of such measures and ensure that the policies
financed by such measures are applied as cost effectively as possible. It
is therefore important that Member States review their different national
practices and follow best practice, including the Commission's guidance
regarding government interventions in the energy sector, to minimise negative consequences
for energy prices. A cost effective approach to 2030
climate change, renewable energy and energy efficiency policies will be
critical in this respect, as in other policy areas[23].

The network element of prices has grown in most Member
States, with great variations between countries, particularly in distribution costs. This suggests that further work is needed to benchmark
network costs and practices to ensure that European convergence in network
practices improves the efficiency of the distribution and retail markets and so
reduces the network cost element of prices.

To keep energy
costs in check, households and industry in Europe can improve their energy
efficiency and adopt demand response and other novel energy technologies and
innovations to save energy and money. The ongoing
financial and economic crisis makes addressing energy poverty and/or
vulnerability more important today, given that energy cost rises are hitting
poor households harder. For households, fiscal transfers can be considered to
provide protection, bearing in mind that it is generally more efficient to protect such vulnerable
consumers through social policy measures (such as fiscal transfers) rather than
through energy pricing.

For industry, the EU should continue its efforts to ensure
a level playing field for energy prices. In particular,
energy subsidies to local industries and export restrictions related to energy
goods should be addressed with its international partners, both bilaterally as
well as at WTO level. These measures will also help European industry to
improve its international competitiveness, despite recent rises in Europe's relative energy prices and the growing cost of paying
for necessary investment. Where such measures are inadequate, fiscal
transfers, exemptions
and reductions in taxes and levies could be means of protecting certain industrial
consumers from higher energy
costs, provided they are compatible with state aid rules and the internal
energy market rules. The existing guidelines on state aid measures in the
context of the ETS allow for state aid for undertakings in certain energy
intensive sectors to compensate indirect ETS emission costs. In addition, the proposed
text for the revised State aid guidelines in the field of energy and the
environment (currently in public consultation) foresees that Member States may
wish to grant partial compensation for additional costs for financing renewable
energy support so as to facilitate the overall funding of support to energy
from renewable sources and avoid carbon leakage. This is particularly relevant
for energy intensive industry. However, it should be remembered that targeted subsidies
must be financed by other consumers or by taxpayers. They also reduce the
direct incentive for taking efficiency measures and, as they are generally
applied nationally, they further distort competition within the single energy
market.

Europe must confront the energy cost challenges
of the energy transformation through the tripartite efforts of the EU, Member States and European households and industry. With flexible
energy systems, responsive consumers, competitive markets and cost effective
government instruments, Europe will be better equipped to contain price rises,
pay for investments and minimise cost increases. It can thus set a practical
example of how a competitive economy can be built on a sustainable and
affordable energy system.

[1]               "Industry" and
industry data in the report broadly covers commercial activity and is not just
manufacturing or heavy industry sectors.

[2]               EUCO 75/1/13 REV1, 23 May 2013

[3]              The collection of consistent and complete
data in the energy sector is a challenge and constrains analytical efforts to
assess the state of play and the impacts of policy. The data presented here and
in the accompanying report contains the most consistent and latest available
data from across the EU.

[4]               Industrial prices reported in
line with Directive 2008/92/EC on industrial electricity and gas price data
collection and may include other non-residential user. In the case of gas all
industrial uses are considered. However, the system excludes consumers who use
gas for electricity generation in power plants or in CHP plants, in non-energy
uses (e.g. in the chemical industry), above 4,000,000 GJ/y.

[5]              The ratio is similar for all energy
products (electricity or gas); consumer types (domestic or industrial),
consumer bands (modest, median or big consumers), time periods (2008 - 2012)
and monetary units (Euro, national currency or purchasing power standards).
For this last element, the ratio does not change significantly, but the ranking
of different Member States does change significantly: a country with a low
nominal price may end up with a comparatively high price in PPS terms.

[6]  This time period
is used extensively throughout the report because Eurostat energy retail price
data methodology changed considerably at this point and is not consistent with
earlier data or complete for all Member States.

[7] For both households
and industry (+36.5% and +127%) for the EU weighted average electricity price.
For industry, this percentage change excludes VAT and other recoverable taxes. This
percentage does not take account of industry exemptions.

[8]               Carbon prices constitute part
of the wholesale price and have fallen from 14-29 €/t in 2008 to 6-9 €/t
in 2012. It is not clear however, to what extent this price reduction is passed
on to the wholesale price, or relevant, in light of the merit order effect of
low operating cost technologies.

[9]               The combination of weak
demand and wholesale power price dynamics (stable or falling when hydrocarbon
prices were on the rise) has put pressure on conventional generation assets. In
many cases both the profit margins from the generation business and company
share prices were affected negatively, and access to finance has been more
difficult. As a rule, EU utilities need to adapt to this new business
environment and have done so by focusing more on downstream services, including
decentralized generation and energy efficiency and by gradually divesting their
conventional power generation assets.

[10]             In
liberalised markets, easier market entry increases competition which should increase
incentives to reduce costs and pass on lower prices to consumers. This is
illustrated in the lower retail industrial electirity prices in the UK, BE and NL.

[11]             51% of gas consumption in Europe was still oil-indexed in 2012, as opposed to 44% that was priced on a gas-on-gas
competition basis (IGU 2012 annual survey). The share of gas-on-gas priced
volumes has increased by a factor of 3 since 2005, but strong regional
differences persist in wholesale price formation mechanisms with about 70% of
gas in North-West Europe (UK, Ireland, France, Belgium, Netherlands, Germany,
Denmark) priced on a gas-on-gas basis in 2012, compared to less than 40% in
Central Europe (Austria, Czech Republic, Hungary, Poland, Slovakia and
Switzerland). Some Member States have their total gas imports on oil-indexation
basis.

[12]             Renewable energy taxes and
levies as a share of household electricity prices range from less than 1% to 15.5%
in Spain and 16% in Germany. The share is increasing due to rising renewable
energy shares and falling wholesale prices (which increase the gap between
wholesale price and renewable energy support). However when the merit order
effect (hydro, wind and solar power lowering wholesale prices) is also taken
into account, the net effect of renewable energy on retail prices can be to
reduce, not raise prices. This appears to be the case in Spain and Ireland but not in Germany. (See Annex  of the report). The decreased wholesale prices
should pass through to final consumers in the form of lower costs of the energy
supply component.

[13]             See Communication C(2013) 7243
Delivering the internal electricity market and making the most of public
intervention

[14]             See Directive
2003/96/EC

[15]             See section
1.1.1.3. of the associated report for details.

[16]             Industrial
consumers network costs. For households the range is 2.2 cents/kWh (MT) - 9.7
cents/kWh (ES).

[17]             As measured by the harmonised
index of consumer prices.

[18]             See report, Figure 90.

[19] Not taking account
of tax or levy exemptions for energy intensive industries, and noting the
difficulty in finding comparable international data on electricity prices

[20]             See chapter 3 of the Staff
Working Document

[21]             IEA WEO 2013, Fig. 8.17

[22]             Gross value added (2008-2011)
and volume index of production (2008-2012) for paper and printing, chemicals,
other non-metallic mineral products (incl. building materials, glass,
ceramics), basic metals (incl. iron and steel), non-ferrous metals (aluminium).

[23]             Competitiveness
"proofing" of all EU policies