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Powerful and topical findings, especially relating to soaring wholesale prices and their impact on household retail prices, were released this week in the latest European Commission Quarterly Reports on Electricity and Gas. VaasaETT is honoured to be one of the key sources of the research, confirming once more its status as a leading provider of data on residential electricity and gas markets.
Electricity market findings
The ease of the covid restrictions in the European capitals has initiated a strong economic rebound and the recovery of the industrial activity has led to a 3% rise in electricity consumption during the last quarter of 2021 in comparison to the end of last year. Wholesale electricity prices have reached unprecedented highs due to the growing demand, gas supply issues and several other non-measurable factors. Processing data from all EU capitals, VaasaETT’s team, produced extremely interesting data analysis – incorporated in the EC’s report – regarding the effect of this spike on the retail markets.
One of the key discoveries presented in the report, partially based on our data analysis, is related to the profitability indicator of the suppliers. Analysts examined the reaction of the energy component of average EU residential retail electricity price to the variations in the wholesale price, determining the mark-up between them in a space of six years (2015-2021). Notably, it starts declining at the beginning of summer 2021 and after August it becomes negative for the first time on account of the wholesale price spiking above 100€/MWh and ultimately surpassing the retail price.
However, as one might suspect, the different conditions of the markets are the ones critically affecting the correlation between the household retail energy component and the wholesale price of electricity. Comparison of the historical evolution of the retail energy price component and also wholesale prices with selected market characteristics provides an up-to-date view on how market concentration, public intervention and different tariff types (fixed or dynamic) determine the fluctuation of prices and gross margins. Evidently, markets with high levels of concentration (e.g. Croatia, Lithuania) tend to take a bigger hit from the rise of wholesale prices, showing a higher mark-up than more competitive markets (e.g. Sweden, Finland). Markets with dynamic rates (e.g. Estonia, Denmark) present 60% lower mark-ups (on average 14€/MWh) than markets that prefer more fixed rate contracts (i.e. Austria, Germany) indicating that retailers are less exposed at the wholesale increases. As for the highly regulated markets (e.g. Hungary), variations in wholesale prices are less relevant than in markets without public price intervention. Overall, the average price of the energy component in EU markets without public price intervention was found to be 11% lower than in less competitive markets between 2015-2021. In any case, during the period of soaring prices, particularly since the summer of 2021, the vast majority of markets indicate negative gross margins as a result of energy component prices falling behind wholesale prices.
But how quickly do member states pass these wholesale price changes through to households? The analysis shows that during the last years in some countries the changes in the wholesale prices have taken up to five months to be incorporated into retail prices, while in countries like Greece or Spain the pass through happened almost immediately. On the other hand, some markets, namely Bulgaria, Malta and Poland took more than a year. The degree that retail price is affected by wholesale price also differs among countries. Countries with low correlation appear to be Hungary, Croatia, Portugal and Germany, while Spain, Denmark, Sweden and Belgium are the most highly-correlated (correlation coefficient > 0.85).
Useful information about the year-on-year change in electricity prices by cost components (energy, network charges, energy taxes and the value added tax) in the European capital cities is also included in the report, sourced exclusively by VaasaETT, comparing November 2021 with November 2020. Here are some key findings:
- London’s households paid the most expensive electricity bill with the price reaching 39.1 c€/kWh. Interestingly enough, only 44% of the bill accounts for the energy component. The lowest bills in EU were observed in Budapest and Valetta (10.4 c€/kWh and 12.3 c€/kWh, respectively), with the energy taxes close to zero.
- The EU average for the energy component rose from 7.2 c€/kWh to 11.6 c€/kWh in November 2020. Amsterdam is the capital with the highest prices on the energy component (21.7 c€/kWh).
- The EU average energy tax component reached 2.3 c€/kWh (down from 2.7 c€/kWh) in November 2020. The highest energy taxes were recorded in Copenhagen and Berlin (12 c€/kWh), while the households in Sofia and Budapest pay zero energy taxes.
- The EU average network charges was 5.7 c€/kWh (up from 5.4 c€/kWh in November 2020). The network charges in Lisbon (10.2 c€/kWh) are the highest among the EU capitals, accounting for 33-43% of the total bill. The lowest charges are observed in Valetta 2.3 c€/kWh
Gas markets
During the third quarter of 2021 the prices of spot contracts reached record highs, rising from 37 to 85 €/MWh. It is important to note that the highest average storage of filling in the EU reached as high as 77% in October 2021, however it still accounts for the lowest percentage of the last five years. Gas supplies issues and reliance on volatile imports are undoubtedly driving the energy crisis in Europe. Limited LNG imports due to the increased demand and consumption in Asia have resulted in a 9% fall since last year. At the same time, the gas storage shortfall is increasing the uncertainty and dependency on imports.
Based on VaasaETT’s data on monthly average retail gas price paid by the EU household customers, the report highlights the longer-term evolution of end-user prices over the last few years that has resulted in rising wholesale prices closely impacting end-user retail contracts over the fourth quarter 2021. Comparing November of 2021r to the same month of 2020, – with the distinct exception of Bratislava – prices have increased in most capitals by almost 50%, while in Brussels (169%), Athens (118%), Copenhagen (102%) and Bucharest (239%) have more than doubled. The breakdown of prices also indicates a 9% increase of the energy component share in the total gas bill since the summer of 2021, from an average of 45% to 54% in November 2021. The rest of the cost covers distribution/storage (22%), energy taxes (8%) and VAT (16%).
Are we at the end of this unprecedented phenomenon? Certainly not, since further household price rises are still possible, if not probably in some markets over the coming months where wholesale market developments are not yet fully filtered in the retail contracts. The report, with VaasaETT’s scientific contribution, reveals the true scale of energy crisis during the last quarter of 2021, acting as a reminder of a -now more than ever- imperative need for the EU to turn to more sustainable solutions.
VaasaETT collaboration with DG ENER
VaasaETT is DG ENER’s current provider of retail data for the market observatory for energy. Since 2015, we collect, process and aggregate data and information on European retail electricity and gas markets in all EU Member States (EU27) and selected non-EU markets (Great Britain, Montenegro, Norway, Serbia, Switzerland and Ukraine) and delivering monthly updates to the European Commission. Data and information include retail prices, customer switching rates, financial savings potential for consumers from switching retailer and other measures of competitiveness. Quarterly European Commission reports can be found here.