Factors Creating Upward Pressure on European Retail Energy Prices

Increasingly rising electricity and gas prices are creating major difficulties for utilities throughout the retail energy sector. As wholesale prices continue on a sharp upward trajectory, the commercial imperative pressures on utilities to pass on these higher prices to their customer base, rises.

Report Highlights
Over the past few years, markets with higher levels of competitive intensity have seen the fastest growth in retail prices; however, in contrast to the power sector, liberalized gas markets have generally seen lower levels of price increase.

In recent years, wholesale energy prices have shown continued upward movements; general taxation and green commitments have played a role in pushing up prices alongside commodity prices, such pressures have inevitably fed through into higher retail prices across Europe as supply conditions tighten.

There remains a sharp divide between liberalized and liberalizing markets in terms of wholesale price dynamics. However, the factors driving wholesale prices differ widely between individual markets; ranging from GPAs to exposure to bullish sentiment on liquid wholesale markets.
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
2007 was a story of two halves 2
Gross mortgage lending in H1 2007 reached new peaks 2
H2 2007 was marred by liquidity issues 3
The credit crunch took time to feed through the performance of the UK mortgage market 3
Buy-to-let was the major driver behind the performance of H2 2007 4
2008 is proving to be one of the most challenging years for the UK mortgage market 6
The credit crunch is showing no signs of abating 6
Availability of credit remains tight and mortgage interest rates high 7
Economic growth is forecasted to fall below the 2% mark in 2008 and 2009 7
After years of high price inflation, house prices have started to fall 7
Consumer debt remains an issue 9
Mortgage arrears and repossessions are increasing 10
House purchase approvals have dropped dramatically 11
Gross lending over the first four months of 2008 is already down by 9.8% over the previous period 12
Gross lending in the UK mortgage market will remain subdued over the next few years 12
Under Datamonitor's view, gross lending will drop by 19.3% in 2008 to reach £293.5 billion 12
Two additional alternative scenarios are presented below as the UK mortgage market remains one of uncertainty 14
The pessimistic scenario assumes a house price crash 14
The optimistic scenario assumes market confidence returns in H2 2008 15
APPENDIX 17
Supplementary data 17
Definitions 20
Balances outstanding 20
Bank of England base rate 20
Buy-to-let mortgage 21
CAGR 21
Fixed rate mortgage 21
Gross advances 21
Sub-prime 21
Remortgaging 21
Methodology 21
Forecasting methodology 21
Further reading 22
Ask the analyst 22
Datamonitor consulting 23
Disclaimer 23
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Figure 1: Dynamics of wholesale/retail prices 2
Figure 2: European gas markets: MCI index 3
Figure 3: European power markets: MCI index 4
Figure 4: European wholesale gas market developments 5
Figure 5: European power market developments 6
Figure 6: The five distinct stages of wholesale market progression 7
Figure 7: Wholesale support services emerge as the cycle builds momentum 8
Figure 8: Players reliant on GPAs as a result of a lack of wholesale liquidity are exposed to a range of possible price drivers 9
Figure 9: A range of competing pressures impact wholesale energy prices to varying degrees in established or establishing wholesale markets 10
Figure 10: Most of Europe's gas producers are struggling to maintain gas production levels 11
Figure 11: LNG continues to see strong growth globally 12
Figure 12: Europe's wholesale gas prices 13
Figure 13: European wholesale power prices 14
Figure 14: Oil price increases 1986-2008 15
Figure 15: Clean dark spread: month ahead 16
Figure 16: Clean spark spread: month ahead 17
Figure 17: Tax rates on European domestic gas prices (indexed to January 2002) 18
Figure 18: Tax rates on European domestic power prices (indexed to January 2002) 19
Figure 19: Breakdown of a typical UK bill showing the full cost components (domestic) 20
Figure 20: European power price increases (excluding taxes) month ahead 21
Figure 21: European gas price increases (excluding taxes) month ahead 22
Figure 22: European retail margins 23
Figure 23: CAGR vs MCI (power) 24
Figure 24: GAGR vs MCI (gas) 25
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