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28 | 20Th - 26Th FEbrUarY 2015 | UTILITY WEEK Markets & Trading Market view Vive la difference in energy prices? The cost of energy varies wildly between EU member states E U policymakers and regulators have been working on the completion of the European energy market for decades, with significant benefits on the hori- zon for security of supply, energy prices and the expan- sion of low-carbon energy. There has been progress in the development of com- mon network codes, the integration of wholesale mar- kets and building an interconnected European grid. Interconnection capacity exceeded 8 per cent of installed European capacity last year, not far off the 10 per cent interconnection target Europe has set itself for 2020. The new 15 per cent target for 2030 seems within reach. A modest amount of interconnection already ena- bles a large amount of trading: only net flows have to be physically transmitted. So it is surprising that energy prices in individual countries are increasingly and markedly different. The price of electricity in the central and western European region, including Germany and France, was the same for 65 per cent of the time in 2011, but this plummeted to less than 20 per cent of the time in 2013, the most recent year for which there is available data. The price of electricity was the same only between 5 and 10 per cent of the time in the same period between the UK, Ireland and France. The first reason is the differing energy mixes. Energy policy is becoming more national, and the EU's 2030 framework will further accelerate this trend. Fossil fuel prices are volatile and have a markedly different impact on prices in the various national markets. For example, Germany has significantly higher coal capacity than the Netherlands. The second reason is the lack of physical interconnec- tion. For example, interconnection is lacking between France and Italy (where the highest savings could be made), between France and Spain (where agreement between TSOs was recently reached aer years of nego- tiations) and around the North Sea. The third reason is the asymmetric impact of price convergence. Whenever prices converge, generators in low-price zones receive higher prices and thus benefit, whereas generators in high price zones lose out. With this in mind, will the European energy market ever be complete? As the energy sector goes through a radical transformation, individual countries forge ahead at different speeds. In the mid to long term, energy poli- cies should start to look more similar again centred on renewables. As soon as energy policies re-converge, wholesale markets will follow. Martin Schoenberg, head of policy, Climate Change Capital Analysis Why Power NI can cut its prices The big six are unable to match the Northern Ireland utility's price cuts P ower NI's announcement last week that it will cut electricity prices by 9.2 per cent from 1 April stands in stark contrast to the UK's big six suppli- ers, which have so far only reduced their gas tariffs in response to falling market prices. But Power NI's cuts not only draw attention to the absence of similar cuts from the big six – they go some way to explaining it. Market participants told Utility Week that the reasons Northern Ireland's largest electricity supplier is able to offer a cut of £50 a year for households and £200 a year for small businesses are the same reasons those operat- ing in Great Britain are unable to. Stephen McCully, managing director of Power NI, told Utility Week that the company is unable to hedge its wholesale activity as far in advance as the big six energy suppliers because it operates in the significantly smaller Irish single electricity market (SEM). "In Northern Ireland, Power NI buys wholesale electric- ity from the all-island pool known as the SEM, where opportunities to hedge over a longer time horizon are more limited. Thus, we have been able to take advantage of, and secure, lower wholesale electricity prices earlier and are able to pass on the savings to our customers," McCully said. Also, Power NI is exempt from the government's ris- ing carbon price floor which is set to move from its cur- rent rate of £9.55 a tonne of carbon to £18.08 a tonne from 1 April. A trader told Utility Week that for players in the UK power market this would mean "a jump of around £3 on a gas-fired power plant cost and around £8 on a coal unit, per megawatt-hour". Power NI's cuts come amid strong political pressure on the big six to pass on lower costs as a result of histori- cally low wholesale gas market prices. Most electricity in the UK is produced by burning fossil fuels, with gas generation representing about 40 per cent of electricity demand every year, so electric- ity prices are firmly aligned with the fall in wholesale gas markets. Although the big six gas tariffs have seen modest cuts, none of the largest UK suppliers has passed on lower electricity prices yet. Jillian Ambrose and Lois Vallely "The company is unable to hedge its wholesale activity as far in advance as the big six."