COLUMN-Supplier switching can cut energy bills: Wynn

Wed Nov 21, 2012 12:05pm EST

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By Gerard Wynn

LONDON Nov 21 (Reuters) - Helping households switch fuel supplier is a major but one-off measure to save European consumers money where grid upgrades and renewable energy will inevitably lead to rising bills.

Politicians are fond of painting utilities as the villains of higher retail prices.

But governments in fact account for a half or more of residential power and gas prices.

Evidence also suggests that it is government and regulated charges which are accounting for rises in European residential bills, and not wholesale energy costs.

Those charges include energy taxes, transmission and environmental tariffs and value added tax (VAT).

Nevertheless switching suppliers can lead to big savings in countries where energy costs account for a larger portion of retail prices.

Residential bills are destined to continue to rise, given an estimated 1 trillion euros investment required in EU energy infrastructure through 2020, the costs of most of which will be passed to consumers.

In that context, encouraging supplier switching can be a useful measure to contain costs, alongside energy efficiency drives.

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Chart 1:

Chart 2:

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SUPPLIER SWITCHING

Across the 15 older European Union member states, residential power prices break down according to the costs of wholesale energy (including profit margins) at 44 percent of the total, followed by distribution (31 percent), VAT (14 percent) and other energy taxes (12 percent), according to the Helsinki-based information and consultancy firm VaasaETT.

Gas bills follow a similar breakdown, with a slightly higher energy cost component, accounting for just over half the total residential gas price.

The smaller the energy cost component of the residential bills the less gain from switching supplier.

That contribution of wholesale energy costs to residential electricity prices last year varies widely across the EU-15, from 23 percent of the average bill in Denmark to 63 percent in Britain, according to VaasaETT's, "European Residential Energy Price Report 2012". (See Chart 1)

The portion of wholesale prices to British retail bills was the second highest in the EU-15, it found.

That suggests British customers have most to gain from switching suppliers, where relative high wholesale energy prices add to the saving opportunity.

Britain's ruling coalition on Tuesday proposed to force energy companies to move customers "onto the cheapest tariff under their supplier that suits them", which in the context of high potential savings makes sense.

RISING PRICES

The benefit from switching supplier is a major opportunity.

For example, Britain's energy watchdog Ofgem in October estimated savings of an average 72 pounds annually from switching to the cheapest deal in the market, or 6 percent of the total average bill.

That saving is considerably more than the expected higher grid costs by 2021, which Ofgem puts at 15 pounds on the average household bill, in its proposed new schedule of charges announced in July.

It is worth noting, however, that transmission operator the National Grid dismissed as inadequate Ofgem's proposed total investment through 2021 in gas and electricity infrastructure of 22 billion pounds, putting the bill at 31 billion pounds.

And Ofgem reports that 64 percent of consumers report never having switched supplier for gas or electricity - so it is dangerous to assume the saving from switching suppliers.

Meanwhile, VaasaETT reports a firm upward trend in other government charges.

After removing the effects of such taxes EU-15 retail energy prices were broadly flat and followed wholesale prices with a three-month lag or so from 2009-2011, it reported. (See Chart 2)

Once government taxes and charges are added, however, retail prices rose by an average 7 percent in 2011.

That was explained by charges which for example included distribution tariffs which increased by 8 percent in Finland and 12 percent in Italy last year, while energy taxes were multiplied by two in Finland and three and a half in the Republic of Ireland.

Several countries increased their VAT rates on energy, most noticeably in Portugal where the rate on electricity consumption went up from 5 percent to 23 percent, VaasaETT reported.

Supplier switching can yield big savings, therefore, but cannot wish away the mountain of capital investment the EU needs to upgrade and modernise its energy system which end-users will increasingly be on the hook for.

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