Energy Prices

What could energy prices be by 2020 in Europe?

Energy Prices

One of the key variables in an Energy Efficiency project, with the discount rate, is energy prices and their evolution through the time. Quite profitable Energy Efficiency projects have usually a few-year payback time. You may want to choose a not too bad ballpark value in order to make your project secured in the long run. Let’s not read in a crystal ball, but try to understand the main determinants, which influence energy prices.

First of all, there is a wide range of different energy prices in Europe from 50 €/MWh to 150 €/MWh for electricity’s B2B consumers depending on the country you are in. A longstanding goal promoted by the European Commission is to create comprehensive natural gas and electricity grids within the continent. However, this should take a while before having a consistent impact on a overall homogeneous grid-based energy prices. Let’s simplify the issue and consider that we have homogeneous European energy prices.

Second of all, European Commission set out a regulation framework, which pushes Member States to liberalize their energy markets. But today, the liberalization of the energy sector in Europe is being set up, despite the reluctance of certain countries, which wish to preserve their control because of the strategy issues linked to the energy on the one hand and on the other hand because of a public service management approach (and the political benefits of it).

Economical crisis, European governance crisis, US Shale Gas blooming, European Utilities’ grievances are amongst the reasons why potentially EU Member States will maybe take the power back on their national energy policies. However, these reluctances seem to have an impact more importantly on the liberalization implementation delays than on its basis.

The expected effects of the liberalization are manifold. They aim firstly at reducing the energy price in Europe, by an increased competitiveness of the companies. However, the reality of the market prices balks this trend.

If a competitive system is by nature deflationary, the energy market is not guaranteed to work this way. Indeed:

  • The worldwide energy demand is constantly climbing. In Europe, under Energy Efficiency policies and economical crisis it should remain constant by the end of 2020.
  • The mass production of additional energy, especially electricity, requires major investments.
  • The price of primary non renewable energies such as oil, coal, natural gas… is eminently volatile and presents in the long term upward trends (even though US Shale Gaz make coal go down).
  • From an historical monopoly position, the energy market has evolved towards an oligopolistic situation organized around a few major energy players. This situation leads towards a price increase since there is an important gap between the low number of suppliers and the important number of applicants.
  • Most of the European producers have made important external purchases leading them towards a debt situation and often preventing them from reducing their prices.
  • The externalities driven by the production, the transport and the energy consumption, including the pollution, stimulate the implementation of strong regulatory constraints, which affect the energy price, such as with carbon taxes.
  • By an effect of energy substitution (we can heat a house thanks to electricity or natural gas or heating oil for example), the energy markets impact each other. Thus, a sustainable rise of oil prices, for instance, also has an impact on the prices of natural gas or electricity.

The service life of the regulated tariffs seems limited (to a horizon 2015-2016). The inflation might affect the competitive market. Local and regional authorities and firms must protect themselves and anticipate in order not to bear the volatility of the prices.

We’ll see soon how Energy Efficiency can dramatically reduce related risks.
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