Key Factors Driving European Retail Energy Prices 2009 to 2013

In recent years, wholesale energy prices have shown unprecedented volatility across all commodities and markets. Inevitably these factors have exerted a considerable impact on retail prices in both the B2B and B2C sectors. Going forward, utilities will need to contend with the impact of rising prices, as well as the transition away from regulated prices in many markets.

Report Highlights
The extent of price-liberalisation in gas and electricity retail markets is essentially a function of the government's political disposition. Current and future levels of European retail market liberalisation vary widely between states, creating different potentials for net margin.

The relationship between wholesale and retail prices is determined by an array of factors whose influence varies between markets. Whilst the precise relative importance of each factor changes between markets, end-user price regulation exerts particular pressure. This distorts the pass-through mechanisms between wholesale and retail markets.

Price regulations produces bottle necks, in which the utility runs at a reduced margin, or is subsidised. The pressing need for investment in Europe's energy infrastructure means that in time, utilities will have to be run profitably. the EU knows this and is exerting increasing pressure on certain states to desist from favouring incumbents.
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
Current and future levels of European retail market liberalization vary widely between states 2
The First and Second EU Energy Packages sought to open gas and electricity markets, in order to allow consumers to select their supplier 2
Implementation has varied according to national governments' disposition towards liberalizing energy markets, producing uneven levels of competitiveness 3
Many European markets have continued to regulate end-user prices 4
Margins between wholesale and retail gas prices fluctuate significantly across European markets due to varying degrees of regulation and competition 5
The relationship between wholesale and retail prices is determined by an array of factors which vary in influence between markets 6
Wholesale prices account for different levels of the overall retail price in different markets, as fiscal structures vary between states 6
Retail prices do not always follow wholesale prices closely since utilities may not procure gas or power at the day-ahead price 7
Even if utilities have not hedged effectively against high or low wholesale prices, they may still choose not to pass on changes into retail prices 8
The UK gas market shows responsiveness to wholesale price increases but a slower reaction to decreases 9
The French retail market is less responsive than the UK to wholesale price increases 11
UK retail prices have followed NBP wholesale prices more closely than French retail prices followed the TTF 12
Regulated prices distort markets and produce unsustainable bottlenecks 13
In many states, regulated prices move slowly due to political agendas, producing unsustainable bottle-necks 13
Assuming long-term wholesale price increases, retail price increases can only be prevented through effective government subsidy 14
Over time government subsidization of utilities will become unsustainable even if wholesale prices do not continue to rise sharply 15
Intransigent attitudes towards eliminating price regulation among many EU governments remain but this is slowly changing 16
APPENDIX 17
Methodology 17
Further reading 17
Ask the analyst 17
Datamonitor consulting 17
Disclaimer 17
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Figure 1: Market competitiveness in European gas markets 3
Figure 2: End-user price controls in European markets 4
Figure 3: Average month-ahead and retail gas price, October 2008 5
Figure 4: Breakdown of the average German and UK household electricity bill showing the full menu of cost components 6
Figure 5: The NBP trading price for gas delivered on October 31, 2008 was generally below the eventual day-ahead price 7
Figure 6: UK average B2C retail/wholesale prices 2002-2008 9
Figure 7: Average B2C retail/wholesale prices in Germany, 2002-2008 10
Figure 8: Average B2C retail/wholesale prices in France, 2002-2008 11
Figure 9: French and UK retail and wholesale index prices, using 2003 as base 12
Figure 10: Gas retail prices in the UK increased at a faster rate than in Germany or France 13
Figure 11: Gas retail prices in France have not risen commensurately with wholesale price increases 14
Figure 12: Projected European gas demand by sector, 2005-2030 15
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