UK residential electricity cost spike subsidises usage of large industries

12 November 2018 Authored by Consultancy.uk

When purchasing power parity was accounted for, consumers in the UK faced one of the largest jumps in the cost of electricity in Europe last year, with the 5% increase only surpassed by Estonia and Romania. At the same time, the cost per megawatt-hour of large industries in the country did not grow at the same rate, while still remaining at a far lower level.

Global energy consumption has more than tripled in the past 50 years, and while technologies to improve energy efficiency will ultimately see this growth plateau and eventually reduce, while the growing use of renewables will hopefully reduce the negative externalities of consumption, the spiralling price of electricity shows no sign of slowing. The state of play has become so drastic in Britain in recent years that even the usually laissez-faire energy ombudsman Ofgem has been forced to back a new energy price cap as of 1 January 2019, saving 11 million customers an average of £76 a year on their gas and electricity bills. While the move means suppliers will have to cut the price of their default tariffs to the level of the cap or below it, however, the benefits may be short-lived, as Ofgem said the cap could rise in April 2019, reducing the annual saving.

When considering spot prices – the half-hour price of wholesale market electricity – a new study from Capgemini has also found that the UK presently hosts the most expensive energy across a multitude of European markets. The World Energy Markets Observatory Report 2018 shows that having fallen beneath the prices of France, Spain and Italy in early 2017, the 7-day rolling average price on a megawatt per hour (MWh) basis, the UK’s EPEX, an exchange for power spot trading, soon reclaimed its position as the most expensive among comparable economies.Electricity spot prices on the main European markets (2017 and H1 2018)

At the same time, Britain saw residential electricity prices increase at one of the fastest rates among EU economies. The total bloc of 28 countries saw an increase of well below 1%. The price in euros per MWh – with purchasing power parity taken into account – of the UK for household electricity meanwhile spiked by 5%, double the increase seen in Germany. While Germany’s electricity remains the most expensive in Europe meanwhile, it is largely due to levies placed on consumption to encourage people to lessen their usage, accounting for more than a quarter of the overall price.

While the UK was surpassed by Estonia and Romania in terms of its rising prices, the increase in electricity prices in Eastern Europe largely related to the upward trend of coal prices combined with a severe winter. This saw Estonia and Romania witness increases of 7% per MWh. Elsewhere, the largest falls in electricity prices were recorded in Italy (-11%) and Croatia (-7%).

Residential electricity prices in Europe - all taxes includedWhile these results suggest consumers are facing tough conditions in the UK, the energy industry would still point out that the analysis shows that the UK is still among the least expensive nations for residential electricity. At the same time, the UK hosts the most expensive scene for MWh use of electricity for medium to large corporate sources. These high electricity prices in the UK are partially explained by a higher domestic carbon floor price of £18/ton (€20/ton) compared to other EU countries (€6/ton for the EU-ETS quotas).

At the same time, however, it is also worth pointing out that even in this context, the price per MWh of electricity for large industrial use is cheaper than it is for residential rates. Sitting at just under €120 per MWh, the price for electricity of medium to large industries is more than €40 less, while according to Capgemini’s analysis, the price increased by less than 1%, compared to residential use.Industrial & Commercial electricity prices in Europe - VAT excluded

Indeed, this is a pattern seen across the remaining European nations, perhaps best illustrated by Germany. While previously mentioned levies see German electricity prices sit at close to €300 per MWh, compared to close to €90 per MWh for medium and large industries. Similarly, Italy sees its MWh price for residential use at over €200, while for medium to large industries, it is at just under €120.

The nature of the economy is that it is always cheaper to buy in bulk, and large industries use a larger amount of energy than residential consumption accounts for. However, these figures could be pointed at in order to argue that firstly, consumers are to an extent subsidising the prices of electricity for some of the world’s largest and wealthiest corporate interests, while they are being expected to contribute significantly more to tackling climate change thanks to the substantial levies mentioned..

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