By Gerard Wynn
LONDON Nov 21 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
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
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.
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
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
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.