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: 2019-01-09
Institutions: Directorate-General for Energy, European Commission
Subjects: EU energy policy, electrical energy, energy consumption, energy efficiency, energy supply, fuel, petroleum, price of energy, retail price, wholesale price

   EUROPEAN COMMISSION  Brussels, 9.1.2019  COM(2019) 1 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(2019) 1 final}  
 
 
 
1.  INTRODUCTION 

Energy  is  critical  to  our  daily  lives:  from  switching  the  lights  on  in  the  morning  to  driving 
home from work in the evening; from heating our homes and running hospitals, schools and 
offices  to  industrial  operations.  Transitioning  to  clean  energy  is  essential  to  substantially 
address  climate  change.  Our  economic  performance,  our  global  geopolitical  relations  are 
shaped  by  energy.  Thus,  monitoring  and  understanding  past  and  future  drivers  of  energy 
prices  and  costs  provide  critical  background  information  to  energy  and  climate  policy 
discussions and to economic developments across the EU. 

The  energy  sector  and  energy  policy  are  evolving  to  enable  the  clean  energy  transition. 
Across the EU and its Member States, plans and pathways to reach agreed 2030 energy and 
climate targets are being put in place, the design of electricity and gas markets is evolving and 
improvements  are  being  implemented.  Policies  and  measures  to  support  innovation  and 
investment are continuously under development and the  European  Commission has recently 
adopted  its  long-term  strategy  for  greenhouse  gas  emissions  reductions  by  2050 1 ,  in 
accordance with the Paris Climate Agreement commitments. 

This report, and the accompanying staff working document, present detailed data and analyses 
of trends in  energy  prices and  costs for  households and industry,  for electricity,  gas and oil 
products, in the EU as a whole, in Member States and in our trading partners. The report also 
examines data on  energy taxation,  revenues  and  subsidies. The report’s  data is mostly from 
Eurostat (supplemented by sectoral studies and other data collected specifically). Looking at 
trends in prices helps assess competition and the producer and consumer relationships in the 
energy  markets.  Looking  at  trends  in  costs  helps  assess  the  impact  on  energy  poverty,  on 
industrial competitiveness and the affordability of energy in general and on the efficiency of 
market  designs.  It  also  helps  assess  the  efficacy  of  subsidy  regimes,  the  consequences  for 
national budgets and revenues and the needs for investment in the European energy sector in 
transition.  

This report highlights the  ongoing volatility of energy prices,  particularly those for globally 
set  fossil  fuel  prices,  whose  recent  price  increases  have  a  significant  impact  on  the  EU 
economy and raise the EU energy bill. Price rises underline the strong economic rationale for 
decarbonising the EU and increase the economic benefits of decarbonisation. The report also 
assesses the ongoing improvements in the functioning of Europe’s energy markets and related 
legislative framework. This is important because efficient energy markets will lower energy 
costs,  keep  industry  competitive,  but  also  deliver  revenues  needed  to  finance  future  major 
investment in the sector.  

The report’s exploration of energy costs highlights the need to protect vulnerable households 
and  to  ensure  that  industry  is  not  disadvantaged  and  driven  away.  Addressing  these 
transitional  and  distributional  aspects  of  the  energy  transition  will  ensure  that  the  transition 
and  the  EU’s  delivery  of  its  Paris  Climate  Agreement  commitments  provide  economic 
opportunities for industry and households alike. 

1 COM(2018)773 

1 

 
 
 
 
 
 
 
                                                 
2.  TRENDS IN ENERGY PRICES 

This report provides data and evidence on wholesale and retail price trends for electricity, gas 
and petroleum products, for the EU, Member States and certain G20 countries.  

2.1. 

ELECTRICITY PRICES 

In the wholesale electricity market, increasing market coupling and interconnectors are clearly 
creating price convergence (an indication of more efficient markets2), except during extreme 
price  spikes  and  troughs  when  local  supply  differences  are  too  great  to  be  bridged  across 
Member  States.  While  increasing  renewable  energy  penetration  generally  lowers  prices  in 
spot markets, overall price trends are still dominated by coal and gas prices, which usually set 
the  marginal  price  and  are  responsible,  for  instance,  for  the  price  rise  since  the  summer  of 
2016 (exacerbated by the extreme winter of early 2017). 

Figure 1 — Monthly wholesale electricity prices; range of maximum and minimum prices — Sources: Platts, European power 
markets 

International  comparisons  continue  to  show  that  EU  wholesale  electricity  real  prices  are 
higher than in the US, Canada or Russia (where power is provided through mostly indigenous 
hydro and fossil fuels) but lower than in China, Japan, Brazil and Turkey. 

In 2017, EU household retail prices decreased for the first time since 2008. The trend of rises 
in  network  charges  and  taxes  and  levies  stopped.  Levies  did  not  increase,  partly  due  to  the 
falling  unit  costs  of  renewable  energy  investments  which  reduced  the  revenues  needed  to 
invest. Taxes and levies make up 40 % of average EU electricity prices.  

2 Electricity prices became 21 % less spread-out over the last decade and intra-EU trade increased. 

2 

 
 
 
                                                 
Figure 2 — Household electricity prices in 2017 (most representative consumption band) — Source: DG ENER in- 
house data collection3 

Industry  (non-household)  prices  have  been  falling  since  2015  due  to  lower  energy  price 
components.  Industry  (for  competitiveness  reasons)  is  often  exempt  from  or  faces  lower 
electricity taxes and levies than households and also faces lower network charges.  

Figure 3 — Industrial electricity prices in 2017 — Source: DG ENER in-house data collection    

Given the support provided to industry and the general concern that European industry should 
be able to compete fairly in international markets, it is also useful to explore comparisons of 
EU  retail  prices  with  those  of  international  trading  partners.  Latest  comparisons  show  that 
overall the historical trend remains the same: EU retail (real) prices are higher than in the US, 
Canada,  Russia,  China  and  Turkey  but  lower  than  in  Japan  and  Brazil.  Retail  prices  are 
generally less volatile than wholesale markets as retailers provide mostly fixed price contracts 
with little dynamic pricing as yet to reflect the true costs of energy supply visible in wholesale 
prices. 

3 The price of the ‘Most representative’ band is the price for which the most electricity was sold to households in 
each country. The most representative band varies across countries from Eurostat band DB to DE. 

3 

050100150200250300350DEDKBEPTESITSEEUEUCYIEELATLUFIUKPLFRLVNLCZSKSIMTEEHRHULTNOTRMEBGEUR/MWhTaxesNetworkEnergy 
 
 
 
                                                 
Figure 4 — Retail electricity prices for industry — Sources: Eurostat, CEIC and IEA 

Changes  in  electricity  prices  are  dominated  by  taxes  and  levies  (rising  until  recently), 
though a recent slight decline came from a short-term fall in gas prices and stable network 
tariffs. 

2.2. 

GAS PRICES  

While  electricity  prices  are  partly  set  as  a  result  of  fossil  fuel  prices  (with  other,  more 
national  or  regional  factors  also  shaping  price),  natural  gas  prices  are  based  on  global 
fossil  fuel  —  including oil  —  prices.  Clearly  the  great  dispersion  between  gas  prices  in 
2011-2014  has  diminished  with  the  growth  of  global  LNG  markets  and  other  supplies; 
however more recently the economic recovery and rising oil prices have led to higher gas 
prices. As noted by President Juncker in July 2018, the EU continues to be a market open 
for  increased  US  gas  exports4.  Convergence  of  the  European  and  Asian  prices  in  the 
spring  and  summer  months  could  be  particularly  advantageous  to  replenish  storage. 
Producer countries (US, Russia, Canada) continue to have lower prices than net importers 
(Japan, China, Korea), with the EU in between.  

4 http://europa.eu/rapid/press-release_IP-18-4920_en.htm 

4 

ChinaJapanUSAEU28 -Weighted Avg.050100150200250EUR2017/MWh 
 
 
 
                                                 
Figure 5 — European, US and Japanese wholesale gas prices — Sources: Platts, Thomson Reuters 

EU retail gas markets are taxed at lower rates for business, for competitiveness reasons, and 
for  households  in  some  Member  States,  where  gas  has  been  the  main  source  of  household 
heating and therefore a primary need. Thus retail prices are largely determined by wholesale 
prices and the energy component accounts for up to 80 % of the price. In absolute terms the 
energy  component  decreased  by  2.4 %  annually  for  industrial  consumers  and  became  11 % 
less spread-out over the last decade indicating progress towards the completion of the single 
gas  market.  It  is  also  interesting  to  note  the  lower  taxes  and  levies  faced  by  large  energy 
industrial consumers compared to medium energy industrial consumers. 

Figure 6 — Household gas prices in 2017 — Sources: DG ENER in-house data collection5 

5 Data for Greece is for 2015 

5 

020406080100120140SEPTNLDKITESATFREUELDECZBEIESIPLSKEELULVLTHUHRBGROTREUR/MWhTaxesNetworkEnergyCombined Energy & Network 
 
 
 
 
 
 
                                                 
Figure 7 — Median and large industrial gas prices in 2017 — Source: DG ENER in-house data collection 

2.3. 

OIL PRICES  

After the fall in prices in 2014-2016, crude oil prices have broadly been rising again. The rise 
that  began  in  spring  of  2016  has  been  driven  by  global  factors  (demand  growth,  OPEC 
strategic behaviour,  Middle East  tensions,  the  announcement  of US sanctions on  Iran,  etc.). 
Exchange  rate  developments  also  add  to  price  uncertainty,  as  global  energy  markets  are 
commonly denominated in US dollars rather than euro-based.  

The relatively high tax shares of retail oil products prices in EU Member States dampen the 
impact  of  oil  price  volatility.  Nevertheless,  by  mid-2018,  retail  prices  had  returned  to  2015 
levels.  

Figure 8 — Crude oil (Brent) and European wholesale gasoline, diesel and heating oil prices — Source: Platts, ECB 

Rising  fossil  fuel  prices  are  for  the  EU  a  reminder  and  an  incentive  to  increase  energy 
efficiency and speed up decarbonisation efforts and the energy transition. Oil and gas prices 
are set on global markets. They are volatile according to global supply and demand changes, 
and have been rising (overall) since 2016, reminding most EU Member States of their ‘buyer-
dependant’ position as net importers. Electricity prices also fluctuate indirectly due to fossil 
fuel prices. Thus  the EU continues to be exposed to external  market forces  and geopolitics, 
leaving industry and households vulnerable to price changes and affecting the trade balance 
and performance of the overall economy. The European Commission’s modelling shows that 

6 

010203040506070I3I5I3I5I3I5I3I5I3I5I3I5I3I5I3I3I3I5I3I5I3I3I5I3I5I3I5I3I5I3I5I3I5I3I5I3I5I3I5I3I3I5I3I5I3I5I3I5I3I5SEFIDKIEFRATNLLUSIELDELTEUSKLVEEPTESITROHUHRCZUKBGBETREUR/MWhTaxesNetworkEnergy 
 
 
 
 
oil  prices  at  75 US$/barrel  on  average  in  20186 would  reduce  EU  GDP  by  around  0.4 %  in 
2018  and  2019  and  increase  inflation  by  0.6  percentage  points  in  2018,  compared  to  what 
would otherwise be expected if oil prices had stayed at 2017 levels7. 

EU policy responses to protect itself against such forces include improving the functioning of 
the internal market and decarbonising the European economy; EU energy and climate policy 
diminish dependence on global fossil fuel supplies.  

3.  ENERGY COSTS 

It  is  the  overall  cost  of  energy  (not  just  the  price)  which  is  important  when  it  comes  to 
understanding the question of affordability and competitiveness, for Europe’s households and 
businesses.  Unlike  our  ability  to  affect  global  fossil  fuel  prices,  cost-effective  options  for 
reducing consumption and altering the type of energy we consume are available.  

To  understand  what  sectors  and  industries  to  support,  and  how  to  best  provide  policies  and 
measures to mitigate the negative effects of energy costs, it is useful to explore in detail the 
nature  of  such  costs  for  both  households  and  business,  including  multiple  energy  intensive 
industries. 

3.1. 

THE EU ENERGY BILL  

To start from a macroeconomic perspective, a key indicator of the impact of global fossil fuel 
prices is the ‘import bill’ the EU pays to fossil fuel suppliers in other countries. In 2017, this 
was estimated to  be EUR 266 bn,  a  rise of 26 % compared to  2016  (but 34 % less than the 
2013  peak  of  EUR  400 bn).  The  rising  oil  price  is  the  main  cause  of  this  increase  with  oil 
responsible for 68 % of the total import bill in 2017, gas for 28 %, and hard coal for 4 %. 

The fossil fuel imports have a significant impact on the EU trade balance, reflecting the EU’s 
energy  dependence  and  highlighting  the  economic  cost  of  fossil  fuel  exposure.  The  cost 
impacts  directly  and  significantly  on  overall  economic  growth.  The  EU  is  still  heavily 
dependent  on  fossil  fuel  imports  and  subject  to  the  impact  of  volatile  global  fossil  fuel 
(especially oil) prices. A decline in coal imports and the coal contribution to the import bill is 
partly attributable to the growing penetration of renewable energy in the EU electricity mix. 
But while the energy bill declined with global oil and gas prices, it has started to rise again as 
prices  rise.  And  the  bill  may  grow  even  more  rapidly  depending  on  the  uncertainty  and 
volatility of US dollar-to-euro exchange rates. Denominating the transactions of the imported 
energy commodities in euros would help to reduce the uncertainty of their costs8. 

3.2. 

HOUSEHOLD EXPENDITURE ON ENERGY 

Europe’s  households  spend  a  varying  amount  of  their  income  on  energy,  depending  on 
Member  State's  overall  household  expenditure.  In  20159,  9.8 %  of  the  expenditure  of  the 
poorest ten percent of households was spent on energy,  excluding transport. Middle income 
households spent 6 % of their expenditure on energy, and higher income households less still. 

6 And 70 US$/barrel in 2019. 
7 Commission  own  calculations  based  on  internal  modelling  (European  Commission's  global  multi-  country 

(GM) model). The annual average in 2018 may be slightly lower than this assumption. 

8 COM(2018)796 ‘Towards a stronger international role of the euro’ 
9 Latest Eurostat data available on household energy expenditure (excluding transport) 

7 

 
 
                                                 
Variations  also  occur  across  the  EU,  with  northern  and  western  European  households 
spending 4-8 % and central and eastern Europeans spending 10-15 %.  

Measures to address energy poverty have traditionally focused on price support or price relief. 
Regulated prices have been used to fix energy prices across the board. This measure does not 
target low income households and also weakens price incentives for producers and consumers 
alike,  while  hampering  the  deployment  of  technologies  such  as  smart  meters.  Increasingly 
retail market competition is expected to bring greater benefits for all households. In particular, 
retail  electricity  companies  in  several  Member  States  have  introduced  ‘dynamic  price 
contracts’  which  take  advantage  of  new  technologies  to  provide  flexible  and  market 
responsive  pricing  through  automated  services  and  smart  metering.  This  can  empower 
households and reduce their energy bill, even without requiring any change in behaviour. For 
households with modest electricity consumption, the use of such contracts has been estimated 
to bring annual savings in the range of 22 % to 70 % of the energy supply component in the 
annual bill. Only slightly lower benefits can be expected in the case of natural gas. 

Beyond  household  pricing  measures  to  manage  energy  prices,  the  EU  leads  the  world  in 
energy  efficiency  policies  and  measures  to  reduce  costs.  The  use  of  energy  efficiency 
appliances  under  the  eco-design  and  energy  labelling  regime  established  by  the  EU,  and 
building renovations facilitated by EU legislation and EU and national financing schemes, are 
all means to reduce energy consumption and thus household energy bills. 

3.3. 

INDUSTRIAL ENERGY COSTS 

Significant  as  it  is  for  Europe’s  economic  growth  and  prosperity,  the  costs  of  energy  for 
European businesses also need to be monitored. The range and impact of energy costs varies 
widely across different sectors of the economy: 

Table 1 — Energy share of industry production costs across sectors 

Examples of sectors 

Average European business  
Computers  and  electronics,  motor  vehicles,  other 
equipment  
Waste management and accommodation and restaurants 
Energy intensive sectors in manufacturing 
Cement, lime and plaster, Clay building materials, Pulp and paper, 
Glass, Iron and steel, Basic chemicals, Non-ferrous metals 

transport 

Source: Eurostat, Trinomics10 

Energy share of production 
costs (range) 
0-3 % 
1 % 

3-5 % 
3-20 %  

Confirming earlier findings from the 2016 energy prices and costs report, energy cost shares 
in production costs have been falling for the vast majority of the sectors studied between 2008 
and 2015 (latest available data), with the most significant declines appearing in some energy 
intensive sectors. The aggregated amount of the energy costs of the sectors studied fell by 8 % 
over 2010-2015. This happened despite  increasing  prices,  stable output  effects  and  partially 
due to improvements in energy intensity. Energy costs have not contributed to an increase in 
total  production  costs  in  the  vast  majority  of  manufacturing  sectors  analysed  over  the  last 
years. However, this was not the case for all subsectors within energy intensive sectors. For 
instance,  for  primary  aluminium,  energy  costs  increased  and  represented  40 %  of  total 
production costs in 2017. 

10 Study on ‘Energy prices, costs and subsidies and their impact on industry and households’ by Trinomics et 

altri (2018).  

8 

 
 
 
 
                                                 
Energy  intensity  varies  considerably  across  the  sectors  studied  according  to  production 
processes. Energy intensity fell, overall, in steel, refineries, paper, land transport, electricity-
gas,  other  mining  and  agriculture,  and  increased  in  cement,  grain  products,  sawmills  and 
chemicals,  and  remained  relatively  stable  in  the  less  energy  intensive  sectors.  However, 
results can vary significantly across subsectors within the same industrial sector. 

While  finding  comparable  data  across  countries  is  difficult,  the  studies  launched  by  the 
European  Commission  have  allowed  some  comparisons.  The  data  for  the  available  sectors 
show  that  energy  cost  shares  in  production  costs  in  the  EU  are  usually  higher  than  in  Asia 
(Japan,  South  Korea)  and  comparable  to  the  US  (with  the  exception  of  aluminium  or  steel, 
with  lower  energy  costs  shares  in  the  US).  Energy  intensity  in  the  EU  sectors  studied  is 
systematically  lower  than  in  China  and  Turkey  and  comparable  to  the  US,  although  with 
considerable variation by sector. 

Figure 9 — Electricity prices for industry in EU and G20 in 2016 — Source: IMD, Eurostat, CEIC, ACCC 

There have been significant improvements in energy intensity in EU industry and recent falls 
in the energy share  of  production costs.  However, other countries’ industries are sometimes 
more efficient than those in Europe, and volatile prices imply that the energy cost exposure of 
businesses  can  still  deteriorate.  In  fact,  Japanese  and  Korean  industry’s  exposure  to  higher 
energy prices has made them more energy efficient; energy producing countries (Russia, US) 
are less energy efficient. China is an exception. Thus, we see again that rising energy prices 
may  in  themselves  spur  the  drive  for  reduced  energy  consumption  and  greater  energy 
efficiency. However, such price signals need accompanying measures to facilitate the ongoing 
decarbonisation of industry. Such measures may be regulatory or financial, and thus the scope 
for government intervention in support of industrial innovation becomes a necessary part of 
the policy mix for the energy transition.  

9 

0.00 EUR/kWh0.02 EUR/kWh0.04 EUR/kWh0.06 EUR/kWh0.08 EUR/kWh0.10 EUR/kWh0.12 EUR/kWh0.14 EUR/kWh0.16 EUR/kWh0.18 EUR/kWhArgentinaSwedenUSALuxembourgIndonesiaMexicoFinlandCanadaPolandNetherlandsRomaniaCzech RepublicHungaryKorea Rep.SloveniaEstoniaRussiaDenmarkGreeceSaudi ArabiaAustriaTurkeyBulgariaFranceChina MainlandSpainIrelandAustraliaLithuaniaPortugalSlovak RepublicUnited KingdomBelgiumGermanyIndiaCyprusCroatiaLatviaJapanBrazilItalySouth Africa 
 
 
 
4.  GOVERNMENT REVENUES FROM ENERGY TAXATION AND ENERGY SUBSIDIES  

GOVERNMENT REVENUES FROM ENERGY TAXATION 

In 2016, energy taxes collected by EU Member States amounted to EUR 280 bn or 4.7 % of 
total tax revenue. The relative importance of energy tax revenue has been rather stable since 
the 2008 economic crisis. Excise duties (of which more than 80% comes from oil products) 
constitute the largest part of energy taxes. 

It  is  important  to  note  the  role  that  energy  taxation  plays  in  the  economy.  It  first  provides 
significant revenues to contribute to the general budget; important not only in times of fiscal 
constraints. High shares of taxes in energy prices can dampen the impact of volatile fossil fuel 
prices; the mitigation of the impact of unexpected price swings protects both consumers and 
industry.  In  addition,  energy  taxes  and  levies  can  be  used  for  amplifying  price  signals  to 
discourage  certain  behaviour  (such  as  the  excessive  consumption  of  polluting  or  otherwise 
damaging  fuels).  Finally,  government  revenues  can  be  used  to  counter  market  failures  by 
subsidising desirable developments such as investment in areas not adequately addressed by 
the (energy) market. There is, therefore, a link between government energy taxes and levies, 
revenues and energy subsidies. 

It is important to note in any discussion of subsidies that there are multiple legitimate reasons 
for intervening in the energy sector with financial or regulatory support, to correct imperfect 
markets and to give long-term strategic direction not provided otherwise. As noted above, the 
need  to  stimulate  innovation  in  new  sectors,  materials  or  processes  is  a  highly  pertinent 
rationale  in  the  context  of  decarbonisation  and  the  energy  transition.  That  said,  it  is  also 
possible that there are subsidies, which changing circumstances have rendered redundant, or 
excessive. The EU (and the G20) have notably called for inefficient fossil fuel subsidies to be 
removed as they hamper the clean energy transition. 

Overall European energy subsidies have increased in recent years, from EUR 148 bn in 2008 
to EUR 169 bn in  2016, with the  energy  sector  being  the main  beneficiary  (EUR 102 bn in 
2016),  followed  by  the  residential  sector  (EUR  24  bn),  the  energy  intensive  manufacturing 
industry (EUR 18 bn) and transport (EUR 13 bn). The increase was driven by the growth in 
renewable energy subsidies which reached EUR 76 bn in 2016. Over the period 2008-2016, 
free emission allowances fell from EUR 41 bn to EUR 4 bn, due to decreasing carbon prices 
and fewer eligible sectors for receiving free ETS allowances. 

Clearly, in line with the Paris Agreement, a range of measures are in place at EU level and 
nationally, to facilitate decarbonisation and innovation in the energy sector, in households and 
in transport. However, despite this and the international commitments made in the context of 
G20 and G7, fossil fuel subsidies in the EU have not decreased and are estimated to be EUR 
55 bn,  remaining  roughly  stable  across  sectors  and  implying  that  EU  and  national  policies 
might  need  to  be  reinforced  to  phase  out  such  subsidies.  According  to  the  latest  available 
international  comparisons  (2015  data),  subsidies  to  fossil  fuels  are  even  higher  outside  the 
EU.  Subsidies  to  petroleum  products  (mainly  tax  reductions)  account  for  the  largest  share 
within fossil fuels. 

10 

 
 
Figure 10 — Financial support to fossil fuels in the EU- Source: EC, Trinomics9 

5.  PRICES, COSTS AND INVESTMENT 

The above discussion highlights the impact prices have on consumers of energy, but the role 
prices have in providing energy companies with revenues to cover their costs and investments 
is another important aspect. Despite price fluctuations and price rises, growing competition in 
the  European  energy  market,  market  design  weaknesses11 and  the  need  for  significant  new 
investments have meant that the market is not always capable of financing investment; prices 
are not always sufficient to cover costs. For this reason, it is important to explore the trends of 
energy and fuel prices in relation to the costs of energy investments, in particular in relation to 
the  ‘levelised  cost  of  electricity’  (LCOE)  that  captures  both  capital  and operating  costs  that 
need  to  be  covered.  Currently,  as  discussed  above,  significant  subsidies  are  paid  to  power 
generators,  through  renewable  energy  subsidies  and  capacity  mechanism  payments  in 
particular,  to  cover  costs  of  investment  that  are  not  financed  through  normal  commercial 
transactions undertaken with the current electricity market design.  

Despite  the  rising  share  of  investment  needed  in  renewable  energy  power  production,  the 
falling costs of  such technologies, combined  with the anticipated improved operation of the 
European  power  market,  including  an  expected  increasing  contribution  of  storage  and 
demand-side  management 12,  should  result  in  the  market  providing  revenues  increasingly 
adequate to finance and cover the investment costs of all or most new capacities in the coming 
decade.  At  the  same  time,  projections  of  fossil  fuel  prices,  capital  costs,  carbon  costs  and 
reduced load factors suggest that future investments of fossil fuel power generation will find it 
less easy to cover the (levelised) costs of fossil fuel power generation capacity.  

11 See the impact assessment on revised rules for the electricity market  (‘Market Design Initiative’):  

https://ec.europa.eu/energy/sites/ener/files/documents/mdi_impact_assessment_main_report_for_publication.p
df 

12 More  storage  and  flexible  demand  will  help  smoothing  the  prices,  in  particular  driving  the  prices  up  when 
there  is  an  abundant  supply  of  variable  renewables,  thus  counterbalancing  the  downward  effect  on  prices  an 
increasing production by wind and solar, both with close-to-zero variable production cost, will have at the time 
they produce.  

11 

 
 
 
 
                                                 
Figure 11 — EU28: electricity prices and cost — Source: Left graph Platts, METIS(2030); right graph: PRIMES 

Note 1: the box plots show the minimum observed in a given period (lower whisker), the first quartile (lower 
bar), the median (black line), the third quartile (upper bar) and the maximum (upper whisker). 
Note 2: for visualisation purposes the left graph has been capped to 200 €/MWh.13  
Note 3: costs for storage and additional interconnections are not accounted for in this Figure. 
Note 4: historical prices are in current euros, values for 2030 are in 2013 euros. Prices and costs are averaged 
over the EU28. 

In a context of a slowly increasing demand for electricity, and an ageing fossil fuel fleet, the 
projected range for future electricity prices is similar to the range of costs of many renewable 
energy  technologies.  This  means  that,  beyond  market  prices,  less  (or  even  zero)  public 
support  would  be  needed  for  enabling  investments  in  the  most  mature  renewable  energy 
technologies. 

6.  CONCLUSION 

This  report  has  illustrated  how  prices  are  rising  and  falling  in  different  ways  in  different 
markets for different fuels. In fossil fuel markets, prices are largely driven by global forces or 
set in global regions by factors we can do little to control. Global oil prices rise and fall with 
OPEC, Middle Eastern, South American or US changes in production; gas prices may follow 
oil prices or also change due to new discoveries or new sources reaching European markets. 
In turn, electricity, while produced within the EU, and increasingly produced with indigenous 
renewable  energy  resources,  is  priced  according  to  the  price  of  the  ‘marginal  fuel’,  often  a 
fossil fuel such  as  gas.  Such  price  exposure has implications  for households and businesses 
but also more broadly for the EU’s balance of trade and macroeconomic performance.  

The  EU’s  response  to  this  situation  has  several  dimensions.  First,  the  creation  of  the  single 
market  helps  to  protect  the  EU  from  volatile  prices  affecting  an  individual  Member  State. 
With  interconnections,  gas  (reverse  flow)  pipelines  or  LNG  terminals,  coupled  markets  and 

13 Projections  of  spot  prices  are  uncertain  and  actual  prices  will  depend  on  a  number  of  factors  difficult  to 

predict, including the weather conditions or unforeseeable events affecting the grid. 

12 

020406080100120140160180200InstalledcapacitiesNewcapacities€/MWhEU28, LCOE in 2030Solids-firedCCGTOther oil/gasNuclearBiomassHydroWindSolarPower mix0204060801001201401601802002008-20122013-201720182030€/MWhEU28, day-ahead electricity price 
 
 
 
 
 
 
                                                 
dynamic  pricing,  flexibility  and  growing  trade  between  Member  States  provide  a  buffer 
against international price spikes. The broadly growing convergence in prices across Member 
States suggests that these efforts are bearing fruit. A second response of Member States has 
been taxation. Quite significant taxes and levies on electricity and petroleum products dampen 
the  impact  of  price  rises  and  at  the  same  time  provide  revenues  to  governments.  These 
revenues are used to finance general government expenditure and energy investments for the 
clean  energy  transition,  support  for  low  income  households  or  businesses  facing  unfair 
international  competition.  Rising  carbon  prices  can  also  strengthen  the  price  signal  to 
encourage  greater  investment in  renewable  sources of  energy  while  fossil fuel subsidies are 
signals  in  the  opposite  direction  and  risk  stifling  the  necessary  investment  and  promoting 
wasteful consumption of energy. 

A third response of the EU is to focus on the cost of the energy to households and businesses 
rather  than  the  unit  price.  It  is  the  overall  cost  which  is  important  when  it  comes  to 
understanding the question of affordability, and it is by considering cost that the question of 
consumption  is  brought  into  focus.  If  there  is  limited  scope  for  affecting  price,  options  for 
adjusting — reducing — consumption are readily available, and options for altering the type 
of energy we consume are also available. This is where EU objectives to improve security of 
supply,  address  climate  change  and  stimulate  innovative  new  industries  come  together. 
Energy efficiency measures, first adopted by (more price-sensitive) business, have resulted in 
European  businesses  being  amongst  the  most  energy  efficient  in  the  world.  However, 
different  levels  of  efficiency  and  energy  intensity  exist  across  Member  States,  and  there 
continues to be room for businesses, especially SMEs, to become more energy efficient. For 
energy  intensive  industries  the  challenges  are  greater  even  if  many  measures  have  already 
been taken. However even here industry is producing plans to reduce fossil fuel consumption 
and  to  develop  carbon  neutral  materials  and  production  processes  cost-effectively.  For 
households, multiple EU policies and measures are in place to facilitate major reductions in 
energy  consumption  (while  at  the  same  time  fostering  EU  companies  developing  new 
materials, processes and services in a growing global market).  

Renewable energy growth also plays a direct role in mitigating and diminishing the negative 
impact of uncertain global fossil fuel prices and exchange rate risks. Thus, the ambitious 2030 
renewable  energy  and  energy  efficiency  targets  recently  agreed  will  help  reduce  the  EU’s 
dependence  on  fossil  fuel  imports  and  vulnerability  to  global  fossil  fuel  price  shocks  and 
uncertainty. At the same time, energy efficiency and renewable energy investments set the EU 
on the path to compliance with the Paris Agreement and will stimulate the innovation needed 
to achieve the energy transformation.  

The fourth response explored in this report has been the EU investment strategy for energy. 
Improvements  to  market  design  are  making  markets  more  dynamic  and  flexible  and, 
critically, more able to finance the investment needed — energy saving or renewable energy 
investment  —  from  market  revenues  rather  than  from  government  support.  In  addition,  EU 
financial  instruments  and  the  EU  sustainable  finance  initiative  is  working  to  reorient  global 
capital  markets  to  have  a  better  understanding  of  and  thus  facilitate  the  provision  of 
investment  capital  for  the  low  carbon  technologies,  infrastructure  and  service  companies 
needed to complete the energy transition. Thus, a solid framework is in place, ranging from 
national  taxes  to  EU  energy,  climate  and  capital  market  policies  to  ensure  Europe’s  energy 
prices  and  costs  evolve  in  an  efficient  manner  consistent  with  ensuring  affordable  and 
sustainable energy for all. 

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