REPORT 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
Date: 2016-11-30
Institutions: Directorate-General for Energy, European Commission
Subjects: electrical energy, energy consumption, energy efficiency, energy supply, gas, petroleum, price of energy, retail price, wholesale price

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 30.11.2016  COM(2016) 769 final   REPORT 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 {SWD(2016) 420 final}  
 
 
Introduction 
Energy is an indispensable aspect of our daily lives. We need it for heating, cooling, lighting 
and moving around; it is essential for the functioning of our homes, offices, work places and 
the entire economy. Its importance makes its accessibility a politically sensitive topic. This is 
one of the reasons why the Commission has proposed its Energy Union Strategy. The price of 
energy  is  also  sensitive.  On  the  one  hand,  low  prices  can  be  beneficial  —  they  raise  our 
purchasing  power  and  standard  of  living  and  they  reduce  costs  for  our  businesses  and  so 
increase  their  competitiveness.  At  the  same  time,  since  energy  is  delivered  through  markets, 
energy suppliers need prices to cover their costs and to finance investment to ensure the future 
delivery  of  energy.  High  prices  send  signals  to  reduce  the  use  of  high-carbon  energy  or  to 
encourage  energy  efficiency  and  the  use  of  innovative  eco-designed  products  and  clean 
technologies. 

The history of energy prices and costs shows major changes and major impacts. In the 1970s 
and 1980s, restrictions by oil suppliers drove up prices and triggered economic shocks. More 
recently,  new  energy  supplies  and  growing  use  of  alternative  energy  sources  have  boosted 
supply, while energy efficiency measures and weak growth have reduced demand and brought 
wholesale  prices  down.  The  EU  has  found  that  the  more  competitive  and  liquid  the  energy 
market  is,  the  more  diverse  and  numerous  our  energy  supplies  and  suppliers  are,  the  less 
exposed we are to such volatility. 
The  European  Commission  produced  a  first report  on  energy  prices  and  costs  in  20141.  This 
showed  a  picture  of  high  global  energy  prices, with  prices diverging  considerably  across  EU 
Member States, and significantly higher for Europe than for its international trading partners, 
particularly  the  United  States.  Retail  prices  had  risen  more  than  wholesale  prices  because  of 
increases  in  network  price  component  and  taxes  and  levies.  Data  weaknesses  led  to  the 
recommendation  to  improve  the  detail,  transparency  and  consistency  of  energy  price  data 
collection2. The report’s policy conclusions found that the data and evidence presented showed 
the  partial  development  of  the  internal  market  for  energy  and  a  need  for  further  measures  to 
improve Europe’s energy efficiency and security and diversity of low-carbon energy supplies. 
The energy union framework strategy and its roadmap set the framework for taking this work 
forward every two years, starting in 2016.3 

This second report updates the analysis in a number of ways. First, through extensive  ad hoc 
data collection undertaken with Member States’ statistical offices, the data on energy prices has 
been  greatly  improved,  so  that  some  of  the  conclusions  we  can  draw  are  now  even  more 
detailed and clear. The data has been further updated, so it gives the latest picture available of 
the  state  of  energy  prices  in  electricity,  gas  and  in  the  oil  products  sectors.  In  addition,  the 
analysis of the aggregated and case-study data is improved, enabling us to explore in greater 
depth  the  trends  and  impacts  of  energy  prices,  for  households  (especially  those  with  low 
income)  and  industry  (in  particular,  energy-intensive  industries).  The  review  of  energy  costs 
also  helps  us  understand  how  we  can  respond  to  energy  prices,  often  by  using  energy  more 
efficiently. The report draws on the evidence in the accompanying staff working document and 
of studies prepared on behalf of the Commission. 

1.  COM(2014) 21 /2 
2  This led to the Commission’s proposal and the adoption of Regulation of the European Parliament and of the 
Council on European statistics on natural gas and electricity prices, Regulation (EU) 2016/1952, 26 October 
2016. 

3  See references in the Action Point 8 the Energy Union Framework Strategy (February 2015) and the updated 

roadmap for the Energy Union (November 2015). 

2 

 
 
 
                                                 
1. The EU’s energy import bill 
Given the great proportion of imported energy, the impact of prices and of our consumption of 
energy is starkly displayed in the EU’s fossil-fuel import bill. It shows the exposure of the EU 
economy to global energy price trends and also reminds us that to reduce our import bill our 
consumption  of  fossil  fuels  can  be  mitigated  through  increased  energy  efficiency  and 
cost-effective indigenous alternative energy. 

The  energy  import  bill  rose  from  €238 billion  in  2005  to  €403 billion  in  2013.  Falls  in  the 
prices  of  energy  commodities  and  in  consumption  brought  it  down  to  €261 billion  in  2015, 
some  35 %  below  the  2013  level.  The  price  decline  was  the  main  driver  of  the  reduction 
because,  even  though  consumption  of  all  three fossil  fuels  is  falling,  EU  production  of  those 
fuels also declined, so net imports (and the EU’s fossil-fuel import dependency) increased. 

Figure 1:  Estimated EU fossil-fuel import bill 

Source: Commission own calculation 

Prices of all fossil fuels (most notably oil) have declined. This has been driven by increases in 
supply  (US  shale  oil  and  gas,  Canadian  oil  sands,  robust  OPEC  production,  increased  global 
gas (including LNG) and coal production) and weaker demand (slower global growth, notably 
in  China,  but  also  structural  changes  on  the  demand  side,  such  as  growing  energy  efficiency 
and  alternative  fuels  in  the  housing  and  transport  sectors,  driven  by  efficiency  policies  for 
buildings and cars). 

As  the  price  of  imported  fossil  fuels  became  lower  at  the  pump,  disposable  income  for 
households  has  increased.  Similar  effects  can  be  observed  for  a  range  of  sectors,  such  as 
transport  and  energy-intensive  industries.  At  a  time  of  continued  subdued  economic  growth, 
this has led to a ‘one-off’ boost to the EU economy, which has been estimated at a potential 
GDP increase of 0.8 % in 2015 and 0.5 % in 2016.4  

2.  Electricity prices in Europe 
2.1   Wholesale prices 

With  the  development  of  the  internal  market,  wholesale  electricity  markets  in  Europe  have 
undergone  major  changes  in  recent  years.  Wholesale  electricity  exchange  markets  have  been 

4  European Commission 2015 winter forecast simulations. 

3 

 
 
 
                                                 
established in almost  all Member States, to  provide day-ahead, forward and intraday trading. 
Flexible  and  liquid  markets  can  allow  a  more  efficient  matching  of  supply  and  demand  that 
lowers generation costs and therefore prices. Such exchanges should also steer bilateral ‘over-
the-counter’ contract prices in the most mature markets. 

Gradually,  these  separate  national  wholesale  markets  are  being  coupled  with  neighbouring 
markets, which — together with more transmission grid inter-connections – create more liquid 
and efficient markets. 

 Prices  are  driven  by  various  factors,  including  fuel  mix,  cross-border  interconnections, 
market-coupling,  market  supplier  concentration  and  weather  conditions.  Similarly,  consumer 
and  industry  demand,  demand  management,  energy  efficiency  and  the  weather  influence  the 
‘demand side’ of the market. 

Figure 2:  Trends in EU wholesale electricity prices 

Source: Platts and European power exchanges 

European  wholesale  electricity  prices  peaked  in  the  third  quarter  of  2008  and,  apart  from  a 
slight recovery in 2011, have been falling ever since. Prices have fallen by almost 70 % since 
2008 and by 55 % since 20115 and in 2016 reached levels not experienced for 12 years. 

The  pass-through  of  reduced  coal  and  gas  prices,  together  with  other  factors,  have  been  key 
drivers of electricity prices: 
 

econometric analysis suggests that a 1 % increase in the share of fossil fuels (coal, gas and 
oil) in the power generation mix results in an increase of €0.2-1.3/MWh in the wholesale 
electricity price, depending on the regional market; 

  market-coupling:  countries  participating  in  one  or  more  coupled  areas  have  better  price 

 

 

convergence with neighbouring markets and lower price differentials; 
growing  inter-connector  capacity:  markets  with  <10 %  interconnectivity  faced  slightly 
higher  prices  than  those  with  >10 %  interconnectivity.  This  shows  the  importance  of 
further developing the internal electricity market and cross-border interconnectivity; 
in  several  markets,  the  rise  of  low  marginal  cost  solar  and  wind-powered  electricity 
decreases  wholesale  prices.  Econometric  analysis  suggests  that  every  percentage  point 
increase in renewable share reduces the wholesale electricity price by €0.4/MWh in the EU 

5   Platts weighted European average electricity price. 

4 

 
 
                                                 
on average; the actual reduction depends on the regional market and the fuel source being 
replaced  by  renewables.  The  impact  of  renewables  is  greater  (€0.6-0.8/MWh)  in 
north-western Europe, the Baltics and central and eastern Europe; 
lower demand linked to subdued economic growth, combined with capacity expansion, has 
led to overcapacity in several countries; and 
reduced demand for CO2 allowances and strong supply of international credits (CDM) has 
led to a large surplus in the ETS market, resulting in lower CO2 prices, which are passed 
through in wholesale prices. 

 

 

2.2   Electricity retail prices in Europe 

In  perfectly  competitive  markets,  changes  in  wholesale  markets  should  pass  through  rapidly 
and fully to retail markets. However, in Europe, various factors restrict this pass-through6. In 
addition, a large proportion of retail prices is the result of regulation, in the form of taxes and 
levies or regulated network tariffs. 
The  average7  household  price  for  electricity  was  € 208.7 MWh  in  2015.  In  contrast  with 
wholesale prices, the average price increased at an average annual rate of 3.2 % between 2008 
and  2015.  In  order  to  understand  better  the  drivers  underlying  this  trend,  it  is  necessary  to 
investigate  the  different  price  components  in  detail.  Figure 3  shows  the  development  of  the 
weighted  average  EU  electricity  price  for  households,  broken  down  into  its  three  main 
components (energy, network, and taxes and levies). 

Figure 3:  Components of average EU household retail electricity prices 

Source: Member State, Commission data collection 

The energy component (the part of the price paid to the electricity retailer) declined by 15%  
from  2008  to  2015.  This  change,  small  in  comparison  with  the  major  changes  in  wholesale 
prices,  suggests  that  competition  in  retail  markets  may  not  be  completely  effective.  The 
analysis suggests that the pass-through of the energy component is influenced by the degree of 
competition  in  the  market  and  the  regulation  of  market  prices.  When  regulated,  retail  prices 
were  (logically)  less  responsive  (in  magnitude  and  speed)  to  the  decline  in  wholesale  prices. 
Moreover,  the  extent  to  which  this  energy  component  differed  across  Member  States 
diminished  by  19 %  between  2008  and  2015,  indicating  that  the  development  of  the  internal 
market  has  had  an  impact  on  wholesale  price  convergence  and  on  that  convergence  passing 
through  to  retail  prices.  Overall,  this  suggests  that,  while  there  is  some  pass-through  of 
wholesale market price  changes, the energy component of price could be more responsive in 
the internal market. 

However, as can be seen from Figure 3, other components were subject to bigger changes. On 
average,  the  network  component  increased  annually  by  3.3%.  The  taxes  and  levies 

6     E.g. Market power of incumbents, barriers to entry, administratively regulated prices 
7   Average prices refer to weighted EU-28 average prices. 

5 

 
 
                                                 
component also grew significantly, with its share of the average price increasing from 28 % to 
38 %. 

Figure 4:  National electricity retail prices for households in 2015 

€/MWh  

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Taxes & Levies

Network

Energy

Source: Member State, Commission data collection 

The  Commission’s  analysis  broke  the  taxes  and  levies  component  down  into  10  sub- 
components,8  which  try  to  capture  and  treat  consistently  the  various  taxes  and  levies  that 
Member  States  impose  on  household  electricity  prices.  Levies  are  earmarked  to  support 
specific  policies  although  they  do  not  represent  all  government  expenditure  on  the  given 
policy. Taxes are normally not ear- marked to specific policies. 

8   1. Renewable energy and combined heat and power; 

2.  Social  (vulnerable  consumers,  social  tariffs,  island  system  tariff  equalisation,  last  resort  supply,  pension 
funds, employment policies);  
3. Support to the nuclear sector;  
4. Energy efficiency;    
5. Security of supply (security of supply policies, support for indigenous electricity generation/fuel production, 
emergency stockpile fees);  
6. Concession fees (mostly for the occupation of public land);  
7. NRA & market (financing of the national regulator or market operator);  
8. Other levies (includes R&D, deficit annuities and public television fees);    
9. VAT;  
10. Other taxes (excise duties (listed by some MS as electricity tax, natural gas tax, energy tax, final energy 
consumption  tax,  special  energy  tax,  environmental  tax)  and  taxes  such  as  distribution,  transmission  and 
greenhouse gas emission taxes). 

6 

 
 
 
 
 
                                                 
 
 
 
 
 
 
 
Figure 5:  Breakdown of the taxes and levies component of electricity prices 

Source: Member State, Commission data collection 

VAT is the largest  subcomponent, accounting for 37 % of the taxes and levies component in 
2015,  down  from  48%  in  2008.  As  an  ad  valorem  tax,  VAT  has  the  advantage  of  not 
dampening  wholesale  price  signals  in  retail  prices.  The  largest  reported  subcomponent  of 
relevance for energy policy is made up of  levies supporting  ‘renewable energy and combined 
heat and power’. It accounted for 33 % of the total component in 2015, up from 14% in 2008. 

This analysis of EU average household prices conceals major differences across the EU. Prices 
diverge by a factor of three between the cheapest and most expensive country. Member States’ 
fiscal needs and policy-related levies produce major variations in the share of taxes and levies 
in the final prices: for VAT and other taxes, this share ranges from 59 % (DK) to 5 % (MT); 
RES  &  CHP  levies  represent  12 %  on  average,9  but  range  from  22-23 %  (PT,  DE)  to  0-2 % 
(HU, IE). 
The  figures  for  electricity  prices  for  industry10  show  smaller  increases,  with  the  EU  average 
increasing  between 0.8 % and 3.1 %11 a year from 2008 to 2015. Figure 6 uses a representative 
industrial  consumption  band  (2 000-20 000 MWh/year).  Large  energy  consumers,  including 
more electricity-intensive industries, may produce their own power, have long-term contracts 
for energy supply or often pay lower network tariffs, taxes and levies which can result in prices 
50 % lower than for other industrial consumers in the same country. 

9   In 2015, 28 % of EU electricity was produced from renewable sources. 
10   In the case of industrial consumers, final retail prices exclude VAT, as it is reimbursable. 
11   In industry, prices for large energy consumers (70 000-150 000 MWh/year; i.e. Eurostat IF consumption band) 
increased by 0.8 %/y; for medium consumers (2 000-20 000 MWh/year; i.e. ID band) by 2.3%/y; and for small 
consumers (20-500 MWh/year; i.e. IB band) by 3.1 %. Aggregated data do not reflect all changes to prices for 
individual companies. 

7 

 
 
 
 
 
 
                                                 
Figure 6:  Components of average EU industry retail electricity prices 

As with household electricity prices, there remains major variation across Member States, with 
prices diverging by a factor of 2.75. 

Source: Member State, Commission data collection 

8 

 
 
 
 
 
Figure 7:  Average industry retail electricity prices in 2015 

Source: Member State, Commission data collection 

The  energy  component  of  average  industrial  electricity  prices  fell  by  2.8%  a  year  between 
2008 and 2015. The difference in this component across Member States also shrank, by 12 %. 
This  partial  price  convergence  implies  that  EU  energy  policies  promoting  increased 
competition,  that  results  from  market  coupling  and  cross  border  trade,  are  having  a  positive 
impact.  That  said,  seven  Member  States12  actually  saw  a  rising  energy  component  over  the 
period  which,  in  some  cases,  could  be  an  indication  of inadequate price  competition  at retail 
level, allowing suppliers to avoid passing on lower wholesale prices. 

The network component of the industry price increased annually by 3.2% over the period and 
the share of the taxes and levies component increased significantly, from 12 % to 32 % of the 
price.  On  average,  almost  two  thirds  of  the  network  price  component  are  attributed  to 
distribution  networks,  but  data  remains  weak  due  to  calculation  methods  differing  across 
Member States. As with household prices, the taxes and levies component of industry data was 
broken down into subcomponents.7 As some sub- components (VAT and certain other taxes) 
are  reimbursed  to  industry,  this  component  remains  significantly  lower  than  for  households: 
Industry pay €34/MWh and households pay €79/MWh. 

12   HR, FR, IE, LV, PL, PT and UK. 

9 

 
 
 
 
 
 
                                                 
International electricity prices 

While it is clear that EU industry electricity prices vary significantly across Member States and 
sectors, it is also important to note the different average trends across the world. 

Figure 8:  Average industry electricity prices in the EU and major trading partners 

Source: Brazilian Ministry of Mining and Energy, Chinese Price Monitoring Centre, NDRC, Indonesian State Electricity Company, Russian 
Federal State Statistics Service; EIA data for Turkey, S Korea, Japan, USA and Mexico. 

The  analysis  shows  that  average  EU  industrial  electricity  prices  are  notably  lower  than  in 
Japan,  more  or  less  similar  to  Brazil,  China  and  Turkey,  and  higher  than  in  Korea,  the  US, 
Russia and Indonesia. From 2008 to 2015, EU prices increased by 17 %, but price rises were 
significantly higher in China (66 %), Indonesia (41 %), Japan (34 %) and the USA (32 %). The 
analysis incorporates the effect of exchange rates, which is significant in some cases (e.g. the 
yuan’s appreciation explains the increase for China; prices rose only marginally in the national 
currency).  Table 1  shows  the  development  of  the  ratios  of  EU  prices  to  those  of  its  trading 
partners. 

Table 1:  EU electricity prices for industry compared with other countries’ 

Year 
2012 
2013 
2014 
2015 

USA 
2.2 
1.9 
1.3 
1.7 

Japan 
0.4 
0.4 
0.4 
0.5 

Brazil  China  Turkey  Russia 

0.8 
0.9 
0.8 
n.a. 

1.1 
1.1 
1.1 
1.0 

0.9 
1.0 
1.1 
1.0 

2.1 
2.2 
2.6 
3.5 

Source: EIA, Platts, Brazilian Ministry of Mining and Energy, Chinese Price Monitoring Centre, Russian Federal State Statistics Service 
e.g. EU prices were 2.2 times those of the USA and have fallen to 1.7 times. 

3.  Gas prices in Europe 
Gas constitutes 23 % of EU primary energy consumption. It fuels 15 % of our electricity and 
almost a third of both households’ and industry’s final energy needs. At the same time, the EU 
increasingly has to import gas13 from a limited number of suppliers. For this reason, prices are 
even  more  exposed  to  global  trends  and  properly  functioning  markets  and  infrastructure  are 
even more important. 

13   In 2015, import dependency for gas was 69 %. 

10 

 
 
 
                                                 
Figure 9:  Trends in EU wholesale gas prices 

EU gas wholesale prices were rising until 2013, but have fallen by over 50 % since. More than 
is the case with electricity, recent evident declines in wholesale gas prices in Europe are driven 
by global developments. Weak global demand resulting from the slow economic recovery and 
the  restarting  of  certain  Japanese  nuclear  power  stations,  (falling)  oil  price-indexed  gas 
contracts  and  significant  increases  in  the  supply  of  LNG  have  generated  downward  pressure 
and led to a convergence of wholesale gas prices. 

Source: Platts 

Gas retail prices in Europe 

EU  household  gas  prices  have  increased  since  2008  by  almost  2 %  a  year.  Prices  have 
converged significantly in that period, but the highest prices (SE) are still almost four times the 
lowest (RO). 

Figure 10: Components of average EU household retail gas prices 

Source: Member State, Commission data collection 

11 

 
 
 
 
 
 
 
Figure 11: Average household retail gas prices in 2015 

Source: Member State, Commission data collection 

The  energy  component  increased  by  0.3%  a  year  between  2008  and  2015  although 
experienced  fluctuations  during  that  period.  The  network  component  increased  annually  by 
2.5 %,  contributing  significantly  to  the  overall  price  increase  for  households.The  taxes  and 
levies component saw an increase of 4.2% a year, to € 15.6  MWh. The increase of this last 
component  is  largely  driven  by  general  taxes.  (Sub  components  are  not  significant  and  are 
discussed in the staff working document).  
Gas  prices  for  large  industrial14  consumers  in  2015  were  below  those  of  2008.  The  energy 
component  remained  by  far  the  largest  component  and  thus  the  most  prominent  price  driver. 
The  impact  of  taxes  and  levies  is  low,  accounting  for  only  8 %  of  the  price.  Industrial  gas 
prices are determined by international commodity prices rather than highly divergent national 
taxes and levies, so prices for large industrial consumers show relatively small variation across 
Europe. The composition of prices for large industrial consumers remained remarkably stable 
over time. Industry gas price shows the greatest pass-through of wholesale to retail price and 
has converged across national markets by 58 % since 2008, indicating that EU gas markets are 
more integrated and competitive than in the past. 

Figure 12: EU average components of large industrial retail gas prices 

Source: Member State, Commission data collection 

14   Refers to industrial consumers with an annual consumption of 1 to 4 million GJ (Band I5) 

12 

 
 
 
 
 
 
                                                 
Figure 13: Average large industrial retail gas prices in 2015 

Figure 14: International gas prices 

Source: Member State, Commission data collection 

Source: Platts, ThomsonReuters 

International  gas  prices  showed  a  marked  convergence  in  2014  and  early  2015.  The  ratio  of 
EU gas prices to US gas prices has evolved favourably over the last two years. EU gas prices 
were on average two and a half times the US gas prices in 2015 while this ratio in 2012 was 
between 3 and 5. This was driven by factors such growing global supplies of gas and European 
access to  LNG,  weaker  European  and  Asian  demand  and  oil-indexed  gas  prices.  Asian  LNG 
prices decreased significantly in 2014 to converge with European prices by early 2015.  

Table 2:  EU gas prices for industry compared with other countries’ 

Year 
2012 
2013 
2014 
2015 

USA 
3.3 
2.7 
1.9 
2.5 

Japan  Russia  China 
4.0 
4.1 
4.3 
5.1 

0.6 
0.6 
0.6 
0.9 

1.0 
1.0 
0.9 
0.7 

Brazil  Turkey 

1.0 
0.8 
0.9 
n.a 

1.2 
1.2 
1.3 
1.2 

Source: EIA, Platts, Brazilian Ministry of Mining and Energy, Chinese Price Monitoring Centre, Russian Federal State Statistics Service. For 
the USA and Japan, wholesale and LNG import price data are compared with west European LNG import prices. 
e.g. EU prices were 3.3 times those of the US and have fallen to 2.5 times those of the US. 

13 

 
 
 
 
 
 
 
4.  Petroleum product prices in Europe 
Crude  oil  prices  have  been  declining  since  mid-2014,  driven  by  weak  demand  and  robust 
supply  growth.  From  a  USD 115/bbl  peak  in  June  2014,  Brent  dropped  to  USD 26/bbl  on 
20 January  2016,  its  lowest  level  since  2003.  This  means  the  price  decreased  by  77 %  in  19 
months.  By  June  2016,  prices  had  recovered  to  USD 50/bbl  and  have  since  been  in  the 
USD 40-50/bbl range. 

The sharp fall in oil prices has passed through to retail markets, but its effects are mitigated by 
the the depreciation of the euro and the excise duties on oil products, which represent a large 
proportion  of  the  consumer  price.  Still,  gasoline  and  diesel  consumer  prices  (including  taxes 
and duties) decreased by 24 % and 28 %, respectively, between the end of June 2014 and mid-
February  2016,  when  retail  prices  bottomed  out  and  average  European  consumer  prices  for 
motor fuels were at their lowest level since 2009. 

Taxes and levies on gasoline and automotive diesel are high, but have varied little over time. 
The  EU  Energy  Taxation  Directive15  sets  minimum  excise  duty  rates,  but  nearly  all  Member 
States choose to set higher rates. Excise duties on gasoline range from €0.36/litre in Bulgaria 
(the  minimum  rate)  to  €0.77/litre  in  the  Netherlands.  For  a  combination  of  environmental, 
economic and fiscal reasons, gasoline and diesel are a significant tax base for Member States. 
In 2015, taxes accounted for 63 % of the average retail gasoline price and 57 % of the diesel 
price. 

Figure 15: Breakdown of gasoline prices by Member State (2015) 

Source: European Commission 

5.  Energy costs in Europe 
From the above discussion, it is clear that wholesale prices for electricity, gas and petrol have 
been declining due to a number of factors (e.g. increasing supply and reducing demand). This 
has resulted in falling retail prices for petroleum products. However, retail electricity and gas 
prices  remained  constant  or  increased  slightly  as  rising  network  costs,  taxes  and  levies  have 
absorbed such falls in wholesale prices. Such price trends, in conjunction with our consumption 
of energy, are important for assessing the impact on household and industry energy costs. 

15   Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of 

energy products and electricity (OJ L 283, 31.10.2003, p. 51). 

14 

 
 
 
 
                                                 
5.1   Household expenditure on energy 

For households,  the final  energy consumption of electricity, gas  and heating  oil has fallen or 
risen only slightly since 2008. The rise in retail electricity and gas prices, however, meant that 
EU household energy expenditure (excluding transport (petrol), which is reported separately) 
rose from 5.3 % of household expenditure in 2008 to 5.8 % in 2014. At the same time falling 
retail  petroleum  products  prices  contributed  to  the  drop  on  transport  fuel  expenditure,  which 
fell from 4.3% of household expenditure to 3.9%.  

Figure 16: Different consumer goods in household consumption expenditure (2014) 

Source: European Commission, national statistical institutes and own calculation. 

The  average  value  of  household  energy  expenditure  (separate  from  transport)  hides  wide 
variations between Member States (wealthier and less wealthy, warmer and colder) and across 
income  groups  within  Member  States.  The  share  ranges  from  3 %  in  Malta  to  14.5 %  in 
Slovakia. Analysis of different household types demonstrates that  poorer  households spend  a 
higher share of their income on energy than wealthier households. 

Figure 17: Share of household energy expenditure by income group (2014) 

On  average,  the  share  of  household  expenditure  accounted  for  by  energy  is  8.6 %  for  the 
poorest  households  (as  against  5.7 %  in  2004),  6.2 %  for  middle-income  and  4.3 %  for 

Source: European Commission, National Statistical Institutes and own calculation. 

15 

 
 
 
high-income households. This demonstrates that, especially in times of low economic growth, 
vulnerable  consumers  are  relatively  more  affected  by  price  increases  than  the  average 
household,  highlighting  that  social  measures  targeting  vulnerable  consumers  are  needed  to 
address energy poverty. 

The  analysis  also  shows  that  households  in  some  Member  States  have  reacted  to  increasing 
energy prices and costs by reducing their energy consumption (see Figure 18). EU household 
energy  consumption  (excluding  transport)  declined  over  the  period  by  approximately  4 %, 
despite  the  increase  in  the  number  and  size  of  households.  This  has  been  driven  largely  by 
energy savings. In many cases, it has been the result of improved residential energy efficiency, 
but in some countries purchasing power constraints might have driven the dramatic decreases 
in consumption. 

Figure 18: Changes in energy consumption in some Member States (2004-2013) 

Source: ODYSSEE database 

5.2   Industry energy costs 

The  energy  price  developments  in  recent  years  have  not  increased  the  energy  cost  share  of 
production costs for European businesses, which lies at less than 2 %. However, to reduce the 
cost  of  energy  to  industry,  most  Member  State  governments  provide  subsidies  through 
exemptions  and  reductions  in  energy  taxes  and  levies  (e.g. renewable  energy  or  energy 
efficiency  levies,  or  network  tariffs).  Depending  on  the  characteristics  of  a  business  and  the 
Member  State  in  which  it  is  based,  it  may  enjoy  energy  prices  50 %  lower  than  another 
company in the same sector. 

That  said,  for  some  industries  in  which  energy  costs  are  more  significant  and  exposure  to 
international competition is high, there is a need to assess energy costs more closely. These are 
energy-intensive  industries  of  a  certain  economic  significance  and  trade  exposure  (where 
energy costs account for at least 3 % of total production costs and for up to 40 % on average or 
more  in  some  cases).  The  analysis  undertaken  for  the  Commission  shows  that,  for  the  14 
sectors selected, energy cost shares and absolute energy costs fell in most cases between 2008 
and 2013. This is the result of the fall in energy prices, tax exemptions and reductions, lower 
energy  consumption  related  to  reduced  production  levels,  a  shift  in  production  to  less 
energy-intensive products, the uptake of energy efficiency measures and slower reductions in 
other production cost factors. 

16 

 
 
 
 
 
An international comparison of energy costs 

The European economy overall is not a highly energy-intensive economy. For decades, the EU 
has  been  restructuring  its  economy  in  the  face  of  changing  domestic  and  global  markets  and 
demand  for  different  goods  and,  increasingly,  services.  Restructuring  also  results  from 
changing resource availability, price signals and technology developments. However, as noted 
above, certain energy-intensive industries face international competition. For this reason, it is 
important  to  assess  how  energy  prices  and  costs  developments  in  the  EU  compare  with 
international developments. 

the  world  suggests 

that  Chinese  energy-intensive 

As  noted  in  earlier  sections,  average  EU  electricity  and  gas  prices  for  industry  rose 
comparatively moderately from 2008 to 2015 and those in Asian countries (China, S Korea and 
Japan in particular) rose significantly faster. 
The (limited) data available for comparing the industry's energy costs and energy intensities16 
around 
industries  are  far  more 
energy-intensive than US and EU industries17. In contrast, some EU industry sectors appear to 
be more energy intensive than its US counterparts Despite this, in most cases, energy appears 
to  account  for lower proportions  of the production  costs of energy-intensive industries in  the 
EU than of those in the USA and higher proportions than those in Japan. However, energy cost 
shares  have  fallen  faster  in  the  USA  than  in  the  EU  since  2008,  which  signals,  beyond  the 
lower enery prices in the US, that US energy-intensive industry could also be ‘catching up’. As 
from 2008, evidence on energy efficiency improvements18 in some European energy intensive 
industries  signals  that  these  seem  to  have  slowed  down  or  even  stopped.  This  could  be 
explained  by  factors  such  as  possibly  limited  scope  for  technical  improvement,  reduced 
capacity utilisation rates but also insufficient availability of capital to invest. 

6.  Energy subsidies and government revenues 
A  competitive  and  properly  functioning  energy  market  is  expected  to  deliver  the  energy  that 
households and industry need in the most cost-effective manner. The clearer the price signals 
and  the  closer  the  alignment  between  prices  and  production  costs,  the  more  efficient  energy 
production  and  consumption  will  be.  However,  in  various  respects,  the  energy  market  is  not 
functioning  properly.  A  range  of  market  and  regulatory  failures  have  led  governments  to 
intervene  in  a  wide  variety  of  ways  over  the  years  to  steer  the  development  of  the  energy 
sector.  Regulatory  or  financial  measures  affecting  energy  producers  or  consumers  have  been 
introduced  to  achieve  policy  goals such  as  reducing  pollution  and  greenhouse  gas  emissions, 
improving security of energy supply or reducing the cost burden of energy on poor households 
or  vulnerable  businesses.  Such  measures  often  subsidise  energy  production  and  consumption 
and  may  correct  price  signals  to  reflect  market  failures.  They  include  explicit  measures 
reflected in prices, as illustrated in the energy taxes and levies subcomponents discussed above. 
However, some (e.g. some energy demand measures or below-cost regulated prices) may also 
blunt  price  signals  that  would  otherwise  steer  energy  consumption  and  production,  energy 
efficiency  and  investment.  Fossil-fuels  subsidies  are  particularly  problematic,  as  they 
disadvantage clean energy and hamper the transition to a low-carbon economy. 

In  2014,  the  Commission  produced  an  extensive  study  on  the  nature  of  energy  costs  and 
subsidies  in  Europe19.  This  found  that  a  wide  range  of  government  interventions  constituted 
significant  subsides  to  the  energy  sector  (excluding  transport),  amounting  in  2012  to 

16  Energy  intensity  is  defined  as  the  energy  used  per  Gross  Value  Added.  Energy  intensity  can  be  used  as  an 
indicator of technical energy efficiency but it will be influenced by the economic factors affecting the evolution of 
Gross Value Added.  
17 The available data is not representative for basic chemicals, steel or aluminium.  
18 Energy used per physical unit of production 
19http://ec.europa.eu/energy/sites/ener/files/documents/ECOFYS%202014%20Subsidies%20and%20costs%20of
%20EU%20energy_11_Nov.pdf 

17 

 
                                                 
€113 billion,  of  which  approximately  €17.2 billion  was  for  direct  fossil  fuel  subsidies  to 
electricity and heating20; fossil fuels for transport were separately estimated at €24.7 billion. If 
broader  international  (IMF)  definitions  are  applied,  including  external  costs,  fossil-fuel 
subsidies  rise  to  €300 billion21  both  in  the  EU  and  Russia,  €250 billion  in  India,  over 
€2 050 billion in China and €630 billion in the USA. The EU is committed to removing fossil-
fuel  and  environmentally  harmful  subsidies,  so  that  the  energy  market  becomes  more 
competitive and price signals improve to help steer a more efficient allocation of resources in 
line  with  the  EU’s  commitments  to  tackle  climate  change.  The  recent  relative  fall  in  energy 
prices  should  make  it  easier  for  governments  to  remove  tax  exemptions  and  other  price  and 
energy demand subsidies. In addition, it would also contribute to fiscal consolidation. 

A  further  common  form  of  intervention  in  energy  markets  is  energy  taxation.  As  indicated 
above, this can be used to correct market failures, but governments also often seek wide, stable 
tax  bases  for  delivering  stable  public  revenues  to  finance  government  expenditure.  The 
consumption of energy has long provided such a base. In 2014, energy taxes22 collected by EU 
Member States totalled €263 billion, equivalent to 1.88 % of EU GDP. Excise duties make up 
the largest part of energy taxes. In 2015, excise duty revenues alone amounted to €227 billion. 
Reduced consumption of energy products would have resulted in a fall in excise duty revenues, 
but Member States often increased the rate of excise duty. Thus energy consumption continues 
to  provide  an  important  tax  base  for  public  revenues,  helping  Member  States  to  consolidate 
difficult fiscal positions. More generally, energy taxation can have a positive impact on growth 
compared to taxation on labour and investment.  

Energy prices have a further impact on broader, macroeconomic aspects of the EU economy, 
through  inflation.  Energy  plays  a  clear  role  in  household  expenditure  and  industry  costs,  as 
well as a role through petroleum  prices, in the transport sector in particular. As such, energy 
prices  are  a  significant  factor  affecting  inflation.  Energy  price  peaks  in  2008  and  even  2011 
contributed 1 % to EU inflation at the time, just as lower prices are now having a deflationary 
impact on the EU economy. 

Figure 19: Impact of energy prices on inflation in the EU 

Source: Eurostat 

20  This  includes  subsidies  for  coal  €9.7bn  and  gas  6.6bn;  the  subsidies  came  from  the  legacy  of  historical 
investment subsidies, fossil fuel investment grants, feed in tariffs, fuel tax exemptions, electricity production, and 
decommissioning and waste disposal. (Source: 2014 study on energy costs and subsidies, for transport (petroleum subsidies), quoting 
OECD inventory 2013. https://ec.europa.eu/energy/sites/ener/files/documents/ECOFYS%202014%20Subsidies%20and%20costs%20of%20EU%20energy_11_Nov.pdf) 
21 2015 estimates (https://www.imf.org/external/pubs/ft/wp/2015/wp15105.pdf) 
22   Energy-related environmental taxes as defined by Regulation (EU) No 691/2011 on European environmental 

economic accounts; these do not include VAT on energy products. 

18 

 
 
                                                 
Conclusion 
The rapid decline in energy commodity prices in the last years, notably for oil but also for gas, 
stems  from  technological  change  as  well  as  market  and  geopolitical  developments.  It  has 
changed the energy landscape dramatically. In Europe, a major energy importer, it has brought 
welcome temporary relief for households and businesses in difficult economic conditions and 
given a ‘one-off’ boost to the economy. It shows the importance of developing global markets 
for  energy,  especially  for  an  energy-importing  region  such  as  the  EU,  and  it  reduces  price 
differences  vis-à-vis  other  regions.  This  is  especially  relevant  for  gas,  where  the  global 
development of LNG markets and new sources of supply are creating opportunities for Europe: 
it can help narrow the gas price differential with other parts of the world such as the USA and, 
from a decarbonisation perspective, it improves the competitive situation of gas versus coal. 

However,  lower  prices  may  distract  attention  from  the  energy  challenges  we  are  facing  of 
energy security, competitiveness and climate change. These have not disappeared. Indeed, the 
data and analysis in this report show a much more nuanced picture and can help us to identify 
the right approaches and policies as we develop the Energy Union within this changing energy 
landscape.  Low  prices  should  be  not  taken  for  granted.  The  data  in  this  report  shows  how 
supply  and  demand  can  shift  abruptly.  This  is  even  more  the  case  as  new  resources  such  as 
shale  gas  and  oil  wells  are  rapidly  exhausted  and  need  constant  replacement  investment  to 
maintain production.  

While  most  business  activity  incorporates  energy  costs  as  a  small  share  of  total  production 
costs, Europe’s energy-intensive industries continue to be sensitive to price rises. As measured 
through energy intensity, available evidence suggests that the USA's energy-intensive industry 
could be catching up in energy efficiency terms with the EU in some sectors. More investment 
in energy efficiency may help to redress this, together with a shift to innovative, higher added 
value  products.  With  large  differences  across  Member  States,  significant  tax  reductions  and 
exemptions  are  available  to  certain  energy-intensive  industries.  Such  subsidies  should  be 
granted  only  where  needed  to  support  the  European  industry  in  the  event  of  unequal 
international  competition  while  minimising  price  distortions.  More  broadly,  Member  States 
should take advantage of the current lower energy prices to remove inappropriate subsidies and 
tax exemptions which distort price signals and delay the transition to a low-carbon economy. 

A multitude of factors shape energy prices and costs trends in Europe. One clear finding of this 
report  is  the  divergence  between  wholesale  and  retail  electricity  price  developments.  While 
wholesale prices have reached in 2016 their lowest levels for 12 years, household prices have 
increased by an average 2-3 % per year23. It results from improved market functioning mixed 
with market failures, and increased taxes and levies. 

The  fall  in  wholesale  prices  is  linked  to  energy  commodity  prices,  reduced  demand  and 
improved  market  functioning,  through  market-coupling.  Depending  on  the  regional  market, 
there  is  also  overcapacity  in  power  generation  and  new  capacity  is  not  warranted  until  older 
capacity  withdraws  from  the  market.  National  measures  such  as  capacity  mechanisms  and 
renewable  energy  support  also  drive  down  wholesale  prices,  further  reducing  revenues  and 
countering the built-in rebalancing price signals of the market. Given the major investment in 
generation  capacity  that  will  be  needed  in  the  longer  term  to  achieve  its  security  of  supply, 
competitiveness  and  decarbonisation  objectives,  the  EU  needs  a  market  design  and  energy 
policy framework that relies on market mechanisms, enabling investment in low- carbon and 
flexible generation with demand-side management, storage and cross-border connectivity. 

The  decreases  in  wholesale  prices  seem  to  feed  through  only  slowly  and  partially  to  retail 
consumers,  albeit  faster  for  industrial  customers.  This  suggests  that  competition  in  retail 
markets can improve further. In addition, rises in network tariffs, taxes and levies have mostly 

23   Industry electricity prices increased by around 2 %; industry gas prices were stable or declined. 

19 

 
                                                 
outweighed  the  decline  of  wholesale  prices.  Such  rises  may  be  the  result  of  much  needed 
investments in cross-border interconnections and smart grids, which deliver benefits in terms 
of  efficiency,  the  internal  market  and  energy  security.  Tax  and  levy  increases  may  be 
introduced  to  correct  market  failures,  for  general  fiscal  reasons  or  directly  to  finance  energy 
generation investment. (It is essential that the energy system costs are fully covered within the 
sector by the consumers, and that tariff deficits are not allowed to be accumulated.) However, 
they  should  not  reeuce  the  incentive  for  energy  producers  to  invest  The  low  pass-through  of 
wholesale to retail  prices  and household and industry  responsiveness to prices imply that the 
EU  should  continue  to  drive  forward  the  development  of  the  internal  energy  market,  with  a 
functional electricity market design in particular. Competitive markets must develop across the 
EU,  where  both  consumers  and  producers  are able  to  flexibly  respond  to  either  wholesale  or 
retail price signals. Wholesale energy prices that fully cover investment and operating costs are 
necessary if investment in the energy sector is to be driven by market forces. 

On  all  these  aspects,  the  Commission’s  forthcoming  proposals  on  market  design,  retail 
markets,  renewable  energy  and  governance  are  crucial  to  establish  an  innovative  and 
competitive  energy  sector  which  can  deliver  affordable  energy  to  Europe’s  households  and 
industry, enabling European industry to compete effectively in the global economy.   

20