The cheapest energy in Europe

It’s time for a bit of context.

We’re constantly told how expensive it is to live in ‘rip-off’ Britain, not least when it comes to gas and electricity rates. And granted, before someone else points it out, it’s often people like me doing the telling.

So in an attempt to maybe... perhaps... possibly write a marginally positive UK utilities story, I’m going to take a look at how British energy prices compare to those of our European neighbours.

Recent hikes

The latest round of energy price hikes have seen rates rise by an average of 18% for gas and 11% for electricity across the UK. That’s on top of the rate increases in late 2010 and early 2011 that pushed up prices by around 6% across the sector. Every energy company blamed these hikes on increased wholesale costs.

These domestic price increases are far higher than those recently experienced by our European neighbours.

Figures from energyhelpline.com show that in France electricity rates rose by just 3% back in January. That’s around half of last winter’s UK rate hikes and a quarter of this year’s increases.

Gas rates in France rose by 15% in the first three months of this year. Higher than last winter’s 5.6% rise in this country, but lower than the recent gas hikes of around 18%.

It’s a similar story in Germany where gas rates have increased by 11% - far lower than UK hikes.

Tight state regulation in Spain is limiting electricity hikes to just 1.5%. That’s 86% lower than the recent round of 11% hikes in UK electricity.

Foreign-owned companies

These hike differences are made even harder to swallow by the presence of many foreign-owned energy companies in the UK sector.

EDF Energy – the supplier that hiked UK gas and electricity rates by 6.5% and 7.5% respectively in March, and 15.4% and 4.5% respectively in November – is based in France, where it provides energy for 85% of the population. As I mentioned earlier, French families have seen a mere 15% rise in gas rates and 3% in electricity this year.

ScottishPower is owned by Spanish company Iberdrola, which is upping electricity rates by 1.5% in Spain. The UK arm hiked electricity by 8.9% last November and by 10% in August.

Npower – owned by German firm RWE – hiked gas rates in the UK by 18% in August. But back in Germany, gas price rises were limited to just 11%.

Indeed, it’s easy to see why many this side of the channel are concerned that multi-national energy companies are subsidising cheap continental rates (brought on by tight regulation) with expensive British rates.

But comparing recent rate rises doesn’t really tell the full story.

Basic rates

Average energy rates for the main EU15 countries show that Britain is one of the cheapest countries for energy in Europe. The latest available figures – obtained from the Department for Energy and Climate Change (DECC) – relate to 2010 and so will not include the recent round of price hikes. But nevertheless, they do give us some indication of the general energy price differences between countries.

For electricity, the UK is fourth cheapest with an average price of 12.89 pence per kilowatt hour (p per kWh). France sits at the bottom of the list with an average of 10.15p per kWh. This can be put down to the country’s reliance on nuclear power - France has 58 operational nuclear power reactors, the second highest number worldwide behind America.

Britain performs even better on the gas table with the third cheapest rate of 4.15p per kWh.

Taxation

Scandinavian countries dominate the top spots of these price tables. Denmark is the most expensive EU15 country for electricity with an average price of 23.05p per kWh – 44% higher than the UK.

For gas, Sweden tops the list with an average rate in 2010 of 9.10p per kWh, over double the UK’s average price. Denmark comes in second with 8.06p per kWh.

However a majority of these high Scandinavian prices are made up of tax;,not wholesale costs (the reason always given by UK companies for price hikes).

56% of Denmark’s average electricity price and 51% of its gas price derives from tax, while in Sweden 42% of the average gas rate comes from tax. This is far higher than the UK where – thanks to the discounted rate of VAT on utilities – only 5% of 2010’s average electricity and gas prices came from state taxation.

That ignores any ‘feed-through’ taxes though, levied on oil companies, but ultimately passed onto the consumer. For example, the Government’s tax rise on North-Sea oil companies in the 2011 Budget has pushed the levy up to between 70% and 82% depending on the size of the oil field.

It would be naive to think that none of these cost-increases are passed onto the consumer.

Regulation

Many continental countries really seem to have made a trade off on energy prices: less volatility in the market thanks to increased regulation, in exchange for higher rates due to tax.

Spain is a good example of this.

In 2009 the Spanish government introduced ‘tarifa de ultimo recurso’  for electricity and natural gas. This state-set rate – roughly translated as ‘the tariff of last resort’ – is applicable to 7.3m homes across Spain and represents the price for the end product. This pulls consumers away from the tariffs of private energy companies.

Households do have the option of going to the open market. But prices here are marginally more expensive. Tight state regulation also keeps rates down and narrows the gap between the cheapest and most expensive tariffs in the private sector.

All of this is great for Spanish consumers, but not so good for businesses. Indeed, Iberdrola – Spain’s largest energy provider – even went to an International Forum in Brussels last week to push for price rises, claiming that it was damaging the economy.

Which side are you on?

When it comes to the energy industry in a European context, the difference is an age-old and easily-identifiable one: regulation vs. the market, public vs. private, left vs. right.

The difficult question is this: which side of this gaping hole should the UK be on?