Richard Soultanian, NUS Consulting Group, USA
This year’s benchmark report looks at the trends in the price of electricity across 14 countries. It reveals interesting developments in the world’s electricity industry as seven countries surveyed showed an increase in pricing, while seven other countries reported decreases.
Much of the world community has embraced the concept of deregulating electricity supplies, but this mix of price increases and cuts demonstrates quite clearly that competitive markets can be much more volatile, as they are susceptible to numerous factors, not least rising world crude oil prices.
In simple pricing terms, the three most expensive countries in the world remain unchanged year on year, with Denmark, Italy and Germany in that order filling the top spots. However, the Netherlands has climbed a place and is now the fourth most expensive market for electricity. Interestingly, the top eight most expensive markets are European.
In terms of percentage change, however, the biggest increases came from outside of Europe, with Australia (+19.1 per cent), USA (+4.7 per cent) South Africa (+4.4 per cent) and Canada (+3.7 per cent) showing significant increases. In Europe, Italy (+8.1 per cent) Netherlands (+4.2 per cent) and Spain (+1.2 per cent) all showed prices increases year on year.
Purchasing Power Parities
However, when Purchasing Power Parities (PPP), a currency conversion rate that converts to a common currency and equalizes the purchasing power of various currencies, is employed a different story emerges.
In Italy, Netherlands and the USA unit costs of electricity have risen sharply in the face of moderately increasing PPP-based exchange rates, suggesting high volatility of electricity prices and strong dependence on international oil prices. In contrast, in France, Sweden and the UK, the sharp decline in cost of electricity happened in the face of moderately increasing PPP, pointing at systemic issues, ranging widely from increases in efficiency (Sweden), availability of alternatives to oil supplies (UK) or subsidies (France).
A look at some of the key markets illustrates this price volatility and the differing causes.
In Europe, all countries have reported their energy markets as being at their most volatile in several decades, with this trend expected to continue in the future. Many are reporting a decrease in the number of electricity suppliers operating in their markets because of consolidation following the increased number of mergers and acquisitions which have taken place.
Italy, Netherlands and Spain all revealed electricity price increases year on year. Belgium, Denmark, Finland, France, Germany, Sweden and the UK reported decreases, with France having the largest per cent from last year’s survey to 8.54 US cents per kWh.
In France, for example, the survey used pricing in the deregulated market. However, while the deregulated market found prices decreasing by double digits from the previous year, most consumers prefer the relative stability and lower pricing found in the regulated market, which only increased by a modest 1.5 per cent from the previous year.
The French government has recently passed a so-called “market adjustment transitory tariff” wherein deregulated pricing cannot be more than 23 per cent higher than regulated tariff pricing. While the law allowed for a reduction of prices in the deregulated market, this innovation is only temporary and an artificial solution to the pricing imbalance between the regulated and deregulated markets. Regulated tariffs are due for a revision before the end of this year and it is widely expected to result in price increases.
The deregulated market should also see price increases over the next year.
In the deregulated markets of the UK, prices plummeted by 10.6 per cent to 11.16 US cents as it increased its supply of gas from Norway coupled with a mild winter. This all contributed to the lowest wholesale prices since 2005.
In the UK, the cost of 2007 carbon has fallen dramatically – in April 2006 carbon was trading around €28 per tonne but by February 2007 prices were down to around €1 per tonne. The UK government has yet to come up with an acceptable generation plan to replace a number of nuclear power plants, which are being gradually decommissioned. So with the negative factors giving volatility to the market, prices are poised to increase over the next twelve months.
In Germany the average price of electricity decreased by nearly 3 per cent over the past twelve months, but the country still remains the third most expensive country in the survey. Electricity prices in Germany are largely dictated by the European Electricity Exchange (EEX) where most observers have witnessed volatile swings in pricing over this past year. While the country’s regulator is looking into possible price fixing at the EEX, many feel little benefit will result from this investigation.
Transport charges still remain very high, but they did decline a little over the past year as the network regulator began its operations. However, given the current volatile situation, it is difficult to predict future pricing scenario, but NUS Consulting foresees a slight decrease over the next year.
In Italy, where there has been the largest percentage increase in Europe, national demand is at or very near to full capacity levels. The plan for interruptible supplies is in force until the end of this year. Under this scheme, consumers opting for this plan are either compensated annually at €21/MWh, agreeing to direct and immediate interruptions, or at €8/MWh, when requested by TERNA to reduce 10 MW of demand to 3 MW. During the last year, this interruptible option was extended to medium power demand supplies in order to encourage locations belonging to consortia of 1 MW or greater to accept this pricing option.
In 2006, demand for electricity matched the increased productivity in the national economy. A mild winter also led to higher energy consumption in some specific commercial/industrial sectors. At the same time, tensions grew between government and industry officials over the country’s plan to reduce carbon dioxide (CO2) emissions over the period of 2008-2012. Specifically, the plan calls for a reduction in special permissions or allowances to meet certain CO2 emitting levels.
As most Italian domestic electricity generation relies on fossil fuels, world oil prices will largely influence future pricing. Look for a modest increase over the next year.
North American Outlook
In North America, both Canada and the USA experienced price increases into double digits in deregulated areas, whilst the increases in regulated areas were modest. However, prices are still significantly below those of, for example, the UK: 6.18 US cents per kWh in Canada and 9.28 US cents per kWh in the USA.
Canada remains one of the lowest cost surveyed countries, but where deregulation has been enacted, the markets have been extremely volatile. The average price of electricity in Canada rose by 3.7 per cent. While non-deregulated areas have experienced modest increases in wholesale electricity prices, in the deregulated provinces of Alberta and Ontario prices increased by double-digits.
Electricity rates largely grew as a result of population growth, which placed additional demand on electricity for heating and cooling needs. The average price increase was kept to a minimum as the country’s previous winter was the mildest in 40 years and the 2006 summer season was also relatively mild. Additionally, one nuclear generating station returned to service in spring.
Weather will inevitably have a major influence on future pricing, however, NUS Consulting Group foresees rate increases over the next year in line with inflation.
The USA has once again seen its average price of electricity grow by 4.7 per cent, as its struggles with rising generation costs and market deregulation. Some of the utility systems experienced double-digit increases, including Commonwealth Edison of Illinois, Northern States Power of Minnesota, Baltimore Gas and Electric of Maryland, Con Edison and Niagara Mohawk of New York and Consumers Energy of Michigan.
The largest and by far the most controversial price hikes were in Illinois where double-digit increases with Commonwealth Edison and Ameren led state government officials to call for the reinstatement of price caps, which had been lifted in January 2007. These price caps first went into effect back in 1996.
The country is still divided between deregulated and non-deregulated states, with the latter being in the majority. Of note is that certain deregulated states still have almost all consumers purchasing regulated supplies because market-based pricing cannot effectively compete against regulated utility tariff rates. Average prices are expected to continue to rise over the next year.
Australia’s de-regulated market saw a jump of nearly 20 per cent in its electricity pricing. Like the UK, last year Australia experienced unusual weather patterns, which contributed to a prolonged drought and resulted in the largest price increase seen across all of the 14 countries surveyed.
The biggest price hike was experienced in Melbourne at 36.6 per cent. One reason behind this was the drought’s direct impact on generation facilities. Generators require water to either cool coal fired turbines or for generating power at hydro-electric facilities. The increased water restrictions led to a limit on supply in a market with ever increasing demand. Increased demand for power is playing a major role in the price hikes for Australian consumers.
Recent acquisitions and mergers have also reduced the overall number of electricity retailers in the National Energy Market leading some commentators to question whether decreased competition will give rise to increased pricing. The State government of Queensland has sold off its retail assets, which include Sun Retail (formerly Energex) to Origin Energy and Powerdirect (formerly Ergon Energy) to AGL.
Looking forward with the El Nino weather pattern ended, NUS Consulting foresee some relief in drought conditions. This occurrence should ease water restrictions on generators and, in turn, lead to prices coming down slightly over the next 12 months.
South Africa reported a modest increase of 4.4 per cent, but warns larger increases are inevitable as the country finds itself having to invest huge sums in new generation and existing infrastructure. Unlike all other surveyed countries, South Africa remains totally regulated in terms of electricity sales. The government is currently exploring the option of liberalizing its electricity market, however, it will be several years before any action is taken. Eskom, the country’s main electricity generator, is currently undertaking several large capital expenditure projects in order to meet the country’s rapidly increasing demand for electricity. Latest estimates have capital expenditures increasing from R96-R150 billion ($14-22 billion).
South Africa’s national financial newspaper, Business Report, is predicting electricity pricing tripling in the next three years should Eskom have its way with NERSA, the country’s national electricity regulator. With the price of coal (Eskom’s main generating source) increasing by more than 18 per cent over the past year, the expectation is that prices will rise above the rate of inflation over the next twelve months.
Looking at the global energy scene overall the current situation facing commercial consumers is summed up in the following sentence. With fleeting opportunities for savings and the cold reality of ever higher prices, consumers must be encouraged to take an active role when it comes to their electricity purchases. They need to positively manage their costs during this sustained period of volatility.