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Utility Week 14th February 2014

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Policy & Regulation Market view A report published last week by the European Commission contained some interesting comparisons of energy prices in the UK and the rest of Europe. It highlighted that UK domestic gas and electricity end prices are the cheapest and fih cheapest, respectively, in the EU15. However, there is an important distinc- tion between tariffs and the bill you end up with. The other big variable that influences the size of the bill is the amount of energy consumed. Despite having much cheaper energy prices than, say, Sweden, UK house- holds end up paying more because they are much less energy efficient (http://bit. ly/1b8iw2h). The unit price of gas in Sweden is more than double that in the UK, which shows just how significant a factor the energy efficiency of our housing stock is in determining how much we pay. These kinds of comparisons are useful in getting a sense for how competitively priced energy is on a country-by-country basis. However, when it comes to exactly how bills are made up in different countries, like-for- like comparisons of the individual compo- nents can be misleading. As Eurelectric – the Europe-wide elec- tricity trade body – pointed out last week: "The breakdown of other price components remains unclear. In many countries the cost of power generation support, most notably for renewables sources, is hidden in net- work costs and various taxes and levies. The Commission acknowledges that this makes a meaningful comparison between network charges and end-user prices across Europe impossible, but fails to explain the differences between countries sufficiently. This may lead the reader to draw wrong conclusions." The graph, taken from the Commission's report, shows how varied the bill breakdown appears to be in each country, and looking at this in isolation without understanding the market make-up could lead to simplis- tic conclusions (the UK is on the far right of the graph). Put simply, while the report does its best, it doesn't necessarily compare apples with apples. For instance, UK network costs (in red) appear to account for a smaller propor- tion of the bill than they do in other coun- tries, while the wholesale element (in blue) seems disproportionately high. This is because in the UK some network and metering costs, such as transmission charges and the smart meter rollout, are included in the energy or wholesale compo- nent, which is not the case for much of the rest of Europe. In some of the data, such as that compiled by Eurostat, social and envi- ronmental levies are included in the energy component for the UK. Another major discrepancy is the fact that, in many member states, policy costs (particularly social policy costs) are paid for through general taxation rather than through energy bills. In the UK this isn't the case, meaning that the price people pay for their energy is higher than it would be if these costs were recouped through direct taxation. At SSE we've been campaigning for these policy costs to be transferred to general taxa- tion and the Government has taken an impor- tant step in the right direction by committing to provide all electricity customers with a £12 rebate in the autumn, funded through taxa- tion for the next two years and providing a small amount of relief to customers from the burden of social and environmental schemes on their bills. But more could be done and in time all policy costs should be transferred to general taxation. Another progressive solution would be for the revenues the government receives from carbon taxes, also paid for by consumers through their energy bills, to be used to fund energy efficiency programmes. This idea, put forward by the Energy Bill Revolution campaign group, would have the advantage of reducing energy consumption and therefore bills by using existing rev- enues already paid for by energy consumers. Countries including France and Germany have pledged to adopt this approach. So overall, the report highlights that despite the relatively low prices paid by cus- tomers in the UK, it is difficult to draw mean- ingful comparisons between the different components of the bill, and more work needs to be done to improve transparency so that consumers across Europe know they are pay- ing a fair price for energy. The UK still has a lot to do to improve the efficiency of its homes, bring costs down and ensure they are paid for more fairly. At SSE we'll continue to campaign for this, and we are encouraged to see that the Commission's report agrees that "it is generally more effi- cient to protect such vulnerable consumers through social policy measures rather than through energy pricing". Richard Westoby, director of retail economics, SSE Beyond comparison A European Commission report into energy prices across Europe illustrates the difficulty of making direct comparisons between end user tariffs. Richard Westoby explains why. EU15 ElEctricity rEtail rEsidEntial pricEs, 2009-12 35 eurocent/kWh 30 eurocent/kWh 25 eurocent/kWh 20 eurocent/kWh 15 eurocent/kWh 10 eurocent/kWh 5 eurocent/kWh 0 eurocent/kWh AT BE DE DK ES EU15 avg FI FR GR IE IT LU NL PT SE UK 09 - 12 Energy Network Energy taxes VAT 09 - 12 09 - 12 09 - 12 09 - 12 09 - 12 09 - 12 09 - 12 09 - 12 09 - 12 09 - 12 09 - 12 09 - 12 09 - 12 09 - 12 09 - 12 Source: E-Control, Vaasa ETT utILIty WeeK | 14th - 20th February 2014 | 19

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