Richard Soultanian, NUS Consulting Group, USA
This year’s benchmark ‘International Electricity Report and Cost Survey’, published by NUS Consulting Group, reveals interesting developments in the world’s electricity industry as all countries in the survey, other than the USA, have reported pricing increases. This survey focuses on delivered prices, which include commodity price, transmission and distribution costs, standing charges and other taxes and imposts that a user has to pay in the delivered price.
As can be seen from the individual country profiles, much of the world community has embraced the concept of deregulating electricity supplies which has led to increasing price volatility as the cost of commodity inputs to generation – i.e. coal, oil and natural gas – has risen.
|Italy maintains its top position in a pricing comparison as the country with the most expensive delivered electricity price|
During the period under review there was a weak rebound in underlying demand for electricity as the fiscal stimuli took effect in Western economies but the high level of demand destruction witnessed during the preceding 12 months has provided some spare generation capacity to absorb the increasing activity.
The generation fuel mix varies considerably between countries and this can have a significant impact on pricing. South Africa, Australia and some states in the USA have electricity generation dominated by coal, while France has a high proportion of nuclear power.
Across Europe, and particularly in the UK, gas generation plays a significant part in the generation mix, and gas, in Europe, if not in the USA, has been closely tied to oil prices, especially supplies from Russia’s Gazprom, which account for over 25 per cent of the market in continental Europe.
RISING OIL PRICES LIFTING POWER PRICES
Since the last survey, the price of Brent crude – the benchmark for European oil prices – rose from the low $50s per barrel in May 2009 to the high $80s per barrel in May 2010, which partly reflected a recovery to an equilibrium pricing from the lows experienced in January 2009, as well as reflecting the weakness of the US dollar during this period. In addition, the €/$ cross rate from January to May 2010 fell from around 1.45 to 1.22 in response to the European Union (EU) credit crisis. These factors explain the lift in electricity baseload prices across Europe from April 2010 after they had generally drifted down through most of the previous year.
One of the more interesting points to arise from our study is that of the 15 counties surveyed the rankings of the top nine (most expensive) and bottom three (least expensive) stayed the same, with only marginal jostling for position between Finland, Sweden and France.
|The survey is based on prices as of 1 June 2010 for the supply of 1000 kW with 450 hours use. For deregulated supplies, 1 June contract pricing was obtained during the week of 26 April 2010. All prices are in US cents per kWh and exclude VAT. Where there is more than a single supplier, an unweighted average of available prices was used. Where available in each country and widely used by the consuming public, deregulated or liberalized contract pricing was used in this survey. The percentage change is calculated using the local currency in order to eliminate currency movement distortion.|
In Europe, Finland experienced the largest single-year increase in electricity at over 20 per cent, while Italy had the second largest year-on-year increase at 8.7 per cent, guaranteeing its position as the most expensive surveyed country. Of interest is that most countries in Europe reported lower commodity prices for electricity, but recorded overall increases mainly because increased costs for transmission/distribution, or increased taxation for supply.
South Africa reported a 32.8 per cent rise in its electricity pricing over the past year. While their country retained its position as the lowest-cost nation in terms of electricity pricing, South Africans are now reeling from two consecutive years of rises, topping over 30 per cent per year. Most analysts, including NUS Consulting, expect this trend of price increases to continue for many years to come.
In North America, Canada remains one of the lowest cost surveyed countries in terms of electricity pricing, with only Australia and South Africa recording lower costs. The United States witnessed a slight decrease in pricing over the survey year making this the second consecutive year electricity prices have declined.
The National Electricity Market (NEM) encompasses the eastern states of New South Wales, Victoria, Queensland, South Australia, Tasmania and the Australian Capital Territory (ACT), and each of these states operates a deregulated market for retail sales. All consumers located in New South Wales, Victoria, ACT and South Australia have contestable supplies, while in Queensland and Tasmania supplies over 100 000 kWh and 150 000 kWh per annum respectively are currently contestable.
Due to its relative physical isolation, Western Australia is not part of NEM, but is separately opening its market, with supplies of more than 50 000 kWh being contestable.
While pricing to June 2011 remains low, this has fluctuated during the survey period with the ebb and flow of the government’s efforts to pass its Carbon Reduction Scheme legislation.
The scheme, which has now been postponed until at least 2013, would have placed additional, i.e. pass-through, costs on the electricity industry. However, the outlook for the NEM is that prices are likely to rise over the next year with volatility being a key component.
The energy markets in Austria have been fully liberalized for both industry and households with over 130 suppliers and this has resulted in greater efficiencies and increased competition.
The negligible increase in electricity prices over the past year is mainly attributed to the worldwide economic slowdown that has affected Austria, along with many other European countries.
Transport and distribution prices have held steady for the past year, and while economic conditions should improve over the next year we do not expect to see significant increases in electricity prices.
The Belgian electricity market is still very much controlled by Electrabel. However, it seems the French government is the largest player in the Belgian energy market via its control of Suez, which is the majority owner of Electrabel, Gaz de France (GDF) and EDF. Approximately 30 per cent of electricity generation is based on fossil fuels, including natural gas. Belgium does not have any domestic production of gas and is totally dependent on imports for its supply.
The current government crisis is having an effect on the energy markets as rumours abound regarding the expansion of nuclear generating facilities. A decision to curtail expansion is likely to have an adverse effect on supply and prices in the longer term. In the short term, prices are likely to rise with the improving economic outlook, but the prospect of Dutch and German suppliers entering the market may provide greater competition in the medium term.
The electricity markets in most Canadian provinces are still regulated to the extent that consumers buy their requirements from the incumbent utility provider. The only exceptions are the provinces of Ontario and Alberta, where consumers are free to purchase their electricity needs from competing suppliers, as well as their incumbent utility company.
Reflecting Eskom’s need to finance extra capacity, South Africa had the biggest percentage increase between 2009 and 2010
Ontario, the country’s largest province, introduced the ‘Green Energy Act’ in the first half of 2009, with the goal of generating a larger percentage of its electricity from renewable sources. The act includes significant subsidies for solar, wind and biomass projects, as well as a simplified approval process and requirements for local utilities to connect these projects to the grid.
While the 2010 electricity price of C$7.7 cents ($7.41 cents) per kWh seems relatively low, when taking into consideration the price on a population weighted basis, the 2010 price is aboutC$8.8 cents per kWh, reflecting a rise of nearly 14 per cent over the past year. We expect electricity prices to continue to rise next year.
The Finnish electricity market is deregulated and is part of the larger Nord Pool, which also includes Sweden and Norway. The economic downturn has resulted in industrial production falling by more than 20 per cent since 2008, with energy consumption falling to 2000 levels.
Renewable energy consumption also fell by around 13 per cent over the past year with electricity production suffering from a drier than normal winter causing hydropower generation to fall by more than 26 per cent. As the economy is expected to pick up during the latter part of 2010 and into 2011, we foresee energy prices at least stabilizing over the next 12 months.
The electricity market in France is deregulated; however, the vast majority of households and businesses continue to purchase their requirements via the regulated tariff market as this offers lower pricing in a more stable environment.
The ‘Market Adjustment Transitory Regulated Tariff’ or TaRTAM, which was created three years ago, has been extended through the remainder of 2010. The ‘Nome Law’, which requires the dominant supplier EDF to reduce its monopoly hold on the market, will take effect in 2011, which should allow for greater competition, while providing incentive for increased domestic generation. Over the past year, EDF has also agreed to stop its practice of locking large industrial loads into long-term purchasing contracts and begin the process of opening more of its dominant market share to competition.
As market reforms begin to take hold next year in the electricity sector, we foresee prices increasing by double digits. While this rise may be considered dramatic, one must bear in mind that electricity prices in France are currently low, when compared with those in many of itsEuropean neighbours.
The electricity and natural gas markets in Germany are deregulated and highly competitive with numerous suppliers including the major companies of RWE, E.ON, Vattenfall, EnBWand Rheinenergie.
A combination of market speculation with rising oil prices has led to this year’s increase in electricity pricing. In Germany, as well as elsewhere, electricity is a traded commodity with pricing largely dictated on the European Energy Exchange.
Prices have also increased as a result of a large increase in the German Renewable Feed Law. The calculation was modified this past April, resulting in a price increase for electricity of nearly €1 cent ($1.25 cents) per kWh. While largely dependent on further economic recovery, we see electricity prices rising over the next year.
More than 80 per cent of the country’s electricity supplies are purchased in the deregulated market. Seventy per cent of all electricity consumption is traded on the country’s Energy Exchange (PUN) with the remaining amount being consumed through bilateral contracts.
Electricity consumption in Italy increased by 1.9 per cent during the first quarter of 2010 when compared to the same time last year. This was encouraging news as Italian electricity consumption had decreased by 6.4 per cent in 2009 when compared to 2008.
For the most part, electricity commodity prices fell during 2009 and into 2010. The predominant reason behind the rise in delivered prices was twofold: the newly established Green Certificate costs and carbon dioxide (CO2) emission trading fees; and an increase in transmission costs of over 13 per cent, with distribution charges rising by more than 11 per cent. Electricity commodity prices are expected to rise by the later part of 2010, leading to stronger increases in the upcoming year.
As reported in last year’s survey, the merger of Essent with RWE went through as regulatory permission was granted, while the authorities also permitted the purchase of Nuon by the Vattenfall Group.
The Dutch economy seems to be improving and electricity prices have begun an upward climb after bottoming out in 2009. Price increases are likely following the EU announcement that it intends to significantly reduce CO2 emissions while at the same time curtailing the number of emission certificates available to businesses.
The resulting upward price pressure on emissions rights is already visible with many expecting that emissions prices will double within the next few years. We believe that electricity prices will climb throughout the reminder of this year and into 2011.
The Polish electricity market is still largely regulated with prices under tariff offerings, and with day and night pricing. As Poland is part of the EU, it will in due course need to open its electricity market to comply with EU mandates.
Within the electricity market it is possible to effect changes to the tariff structures to reduce overall costs. There are currently no energy taxes but a CO2 (emissions) tax is on the way as a result of EU regulation. As the country continues to modernize both its industry and energy infrastructure, we foresee electricity prices rising to levels comparable with neighbouring European countries.
The South African power market is still regulated with primarily one supplier – Eskom, which provides electricity either on a direct basis or sells power to municipalities who, in turn, resell electricity to their community.
In 2009, the nation was shocked as electricity prices climbed by more than 33 per cent over a one-year period. Rivalling last year’s increase, electricity rose once again by over 32 per cent driven mainly by Eskom having the responsibility of financing and building extra capacity without substantial assistance from the government. The current credit environment is expensive for such projects.
The short- and long-term outlook for electricity is increased prices as Eskom continues to expand capacity and meet commitments to extend and reinforce electricity infrastructure.
Over the last 12 months, the Spanish government has pushed forward the liberalization of the electricity sector. Since July 2009, all supplies with a maximum capacity demand of over 10 kW have been required to enter the deregulated market for a supply contract.
Households with a maximum capacity demand of less than 10 kW can still purchase their electricity requirements in the regulated market through the Tarifa de Último Recurso or TUR. There is currently no interest amongst the suppliers to compete for this share of the market.
While the commodity price of electricity has fallen, the 4 per cent increase in delivered prices is largely due to increases under transportation and distribution tariffs.
The tariffs for high-voltage supplies were increased by 30 per cent in July 2009 and again by 24 per cent in January 2010. These tariffs were increased to lessen the costs of the ‘Déficit de Tarifa’, which over the past decade forced distributors to buy energy at prices higher than they were allowed to charge customers. We foresee continuing electricity price increases over the next twelve months.
The nation’s electric network is comprised of three distinct parts – the national grid, regional networks and local networks. Following deregulation in 1996, three main suppliers – Vattenfall, E.ON and Fortum – control the electricity market.
In 2008, Sweden was a net exporter of electricity. However, in 2009, Sweden became a net importer even though domestic consumption of electricity dropped during this period.
A drier than normal winter was mostly to blame for the need to import electricity, and also explains this year’s reported survey price increase. Although consumers had experienced a price increase over the past year, Sweden still has some of the lowest-cost power in Europe.
District heating plants, which rely on natural gas, are being modernized to increase production by 440 MW of electricity and 250 MW of heating. Natural gas only has a very small share of the overall energy market. Expectations are that electricity prices will start to climb in the latter part of 2010, with further increases anticipated in the first half of 2011.
The electricity market in the UK was deregulated in the 1990s and there are approximately nine main suppliers. Deregulation led to dramatic reductions in pricing but a significant increase in volatility. Between 40–50 per cent of the UK’s electricity is generated from natural gas with price movements in gas being closely followed by similar movements in wholesale electricity prices.
The increase over the past year is largely attributed to the non-commodity portion of electricity billings such as transmission and distribution of supply.
The ‘Distribution Use of System’ or DUoS has seen two major changes both of which came into effect on 1 April of this year.
The first change was the ‘Distribution Price Control Review’ that details the amount of revenue the network operators can recover over the next five years, for which Ofgem agreed on a figure of £22 billion ($34.3 billion) to be collected from customers – this includes £7.2 billion($11.1 billion) of new investment over the period.
The second change was the unification of the charging methodology that the network operators use to pass costs along to end-users. The change has had a wide-ranging effect on users depending on load profile and location.
While some users have seen a slight decrease in DUoS charges, others have witnessed increases of up to 50 per cent. The forecast for electricity prices over the next year is expected to show anupward trend.
United States of America
The United States electricity market is best described as ‘Balkanized’, with deregulation being accepted in some states while others continue to operate under the traditional monopoly model. Currently, the federal government takes no position on the deregulation of the retail markets, with it being enacted on a state-by-state basis.
The drop in the average price of electricity was due mainly to the softening of prices for natural gas, of which approximately 25 per cent of the commodity is used for power generation. Overall, approximately one third of all fossil fuels consumed in the USA are used to generate electricity, with coal predominating.
The price for electricity varies widely with the highest reported survey price found in New York City (Consolidated Edison) at $0.16 per kWh and lowest survey price in Saint Louis, Montana (Ameren UE) at $0.06 per kWh.
The largest increase in price (14.3 per cent) was reported by Xcel in Colorado, which largely stemmed from the loss of a tax exemption for manufacturers. Electricity prices continue to show volatility, with the expectation of price increases during the first half of 2011.
The main conclusion that can be drawn from this latest International Electricity Report and Cost Survey is that as we move forward, the days of cheap electricity prices are coming to an end, and coming to an end abruptly.
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