Idea Transcript
EI-FACTSHEET 2013-04
1
Pricing of energy End-users buy energy products in different forms. Primary energy sources like natural gas are typically converted in-house to heat, oil is converted to driving power in one’s car, while secondary energy carriers, such as electricity, are used for services like lighting, heating (e.g., conversion through heat pumps), for electric appliances, etc.This factsheet focuses on the end-use pricing of these energy sources/ carriers, i.e., more specifically on the pricing of oil products (gasoline, diesel and heating oil), natural gas and electricity. Towards this end, first the pricing principles of the actual energy component are discussed (which constitutes an important part of the final end-use price). Second, Belgian retail prices of finished oil products, natural gas and electricity are decomposed (consisting, a.o., of this energy component, distribution costs and taxes).
General principles of pricing of energy The prices of primar y fuels (such as oil and natural gas) are determined by supply and demand fundamentals. Elements that affect the supply are the cost of extraction and transpor t costs, limited resource stocks and car tels. Elements that affect demand are economic growth, the availability of substitutes, specific policy measures, etc. Expectations towards future developments on both sides (demand and supply) also play their role in setting the equilibrium (e.g., prospects on new -undiscoveredreser ves, political unrest, speculation, etc.). Transpor t costs will determine whether there will be strong price differences between regional markets or not. Oil Crude oil can be transpor ted relatively easily through pipelines or large tankers. Hence, a global market exists. The reser ves of oil with low extraction costs are limited so that the price of oil contains a scarcity premium. The owner of cheap oil reser ves can sell today or in the future and he can get a better return by not selling all his oil in the next years. The quality of crude oil (e.g., its gravity ‘API’ and sulfur content) and the costs of deliver y are two more elements reflected in the price. Typical benchmarks for crude oil prices are for instance West Texas Intermediate (WTI) and Brent, and quantities are traded on the spot market or on future markets.
in the US), long term contracts are being replaced by spot and future contracts at the hubs. The resource base of cheap natural gas is limited in the different continents so that in each continent also a scarcity premium is included in the price of gas. Dependent on the market structure and transpor t costs, prices differ by region (US, Europe, Asia). In 2012 there was a moment where the impor t price of natural gas in Europe was 5 times the price in the US, while the impor t price in Japan was 8 times that of the US (this low US price is mainly explained by the recent evolutions in extraction of unconventional gas – see fur ther). On a European level, a relatively high correlation exists between the different hub prices (Nor th-West Europe see Figure 1). This can (at least par tially) be explained by gas-to-gas competition, liquid markets and a good physical interconnection. Additionally, Italian and German prices star t to show some convergence as well, par tly explained by, e.g., renegotiation of German long term gas contracts (oil-indexed) moving more to hub-pricing, or increasing availability of LNG infrastructure in the Mediterranean region.
Natural gas Over land, gas transpor t through pipelines is possible, while over sea, pipelines can also be used, or gas can be liquefied (i.e., LNG) and transpor ted by ship. Prices are hub-based (e.g., Henr y hub in the US, or National Balancing Point ‘NBP’ or Zeebrugge in Europe), and determined by local/ regional supply and demand. When dedicated transpor t infrastructure is still being developed (par ts of Asia and the last 40 years in Europe) , natural gas is often traded under long-term contracts with oil-price indexation, because this allows the users of this specific infrastructure to guarantee the use (and funding) of this infrastructure . Whenever the gas market becomes more mature (as is already the case
KU Leuven Energy Institute
Figure 1. Natural gas wholesale day-ahead price at selected EU hubs, 2009-2012 [€/MWh]; Source: ACER, 2012.
EI Fact sheet Pricing of energy
EI-FACTSHEET 2013-04 Electricity (wholesale) Electricity is an energy carrier, conver ted from a primar y energy source (e.g., uranium, coal, gas, oil, renewable). At wholesale level, the price in liberalized markets is set by the interaction of demand and supply. Electricity needs a physical grid for transpor t, and faces losses propor tional to the distance over which it is transpor ted. Fur thermore, the interconnection between different countries/regions is often limited compared to the internal grid. Hence, generation is currently located more or less nationally in correspondence to demand (countr y basis). The supply cur ve reflects the merit order of electricity generation, i.e., the stacking of power plants according to marginal cost. The price is set by the marginal generating unit (e.g., coal, gas or oil-fired) that satisfies demand at that time. Electricity is not (or only limitedly) storable, so generation and demand have to be in continuous balance (also taking into account network constraints). This means that the intersection of demand and supply changes continually, as demand (e.g., typical daily pattern) as well as available generation (e.g., output from intermittent renewables) fluctuate. When there is not enough capacity available, one needs to either increase prices above the marginal cost (i.e., the price is set by the intersection of the demand cur ve and a ver tical at the aggregated capacity), or cur tail demand. In contrast to the primar y fuels, this leads to a fluctuating electricity price over the day (higher when demand is high during daytime and/or when there is low RES generation, lower when demand is low during the night and/or when there is abundant RES). At wholesale level (the level of actual electricity generation, before transmission, distribution and retail to the final customer), typically hourly prices are set by power exchanges or by power pools. Comparable to the other commodities, electricity can be traded on different time horizons (e.g., day-ahead, first month ahead). For electricity also different products exist, depending on actual generation during the day, e.g., peak, off-peak, base-load.
2 At the European wholesale level, markets are more and more integrated. Currently, the Belgian day-ahead electricity market is par t of the Central West European (CWE) market coupling, covering the Benelux, France and Germany. In 2011, Belgian and French prices converged during 95% of the time, while Belgian-Dutch prices converged 71% of the time [Acer, 2012]. This leads to strongly correlated prices between Belgium and its interconnected neighbors - see Table 1. Outlook As histor y has demonstrated, it is difficult if not impossible to predict future prices for fossil fuels (as these depend on a wide number of parameters, including anticipations on future demand and supply conditions as discussed above). Some oil price evolution projections of three main scenarios can be found in the IEA’s latest World Energy Outlook (2012). Wor th mentioning are two elements. The first is the uncer tainty on climate policy: if there is a worldwide agreement on a vigorous climate action, fossil energy will become more expensive and this will lead to lower production prices but higher consumer prices for fossil-based energy. The second element is the recent evolution in the extraction of unconventional gas (and to some extent oil) in Nor th-America (US and Canada). This has brought gas prices in Nor th-America down to historically low levels. This is currently making Nor thAmerica attractive for energy-intensive industries (because of its cheap energy), but also has and will have future impact on global energy markets and prices. The LNG that the US was expected to impor t, now comes available for other par ts of the world, putting pressure on natural gas prices worldwide (and on the price setting mechanism if still indexed to the oil price). The US and Canada could even become LNG expor ters once they have the infrastructure set in place. To what extent the shale gas evolution can and will be replicated in other par ts of the world (par tly dependent on the public acceptance, regarding the environmental impact).
Decomposition of energy retail prices (Belgium) The actual energy price is only par t of the final retail price (end-use). This par t focuses on the Belgian price composition of oil products (such as gasoline for cars), natural gas and electricity.
Table 1. Annual average electricity price at European spot exchanges, 2005-2011 [€/MWh]; Source: ACER, 2012.
KU Leuven Energy Institute
EI Fact sheet Pricing of energy
EI-FACTSHEET 2013-04
3
Figure 2. Composition of retail gasoline , natural gas and electricity price (2012-2013). Oil products
Natural gas
The Belgian government and the Belgian Petroleum Federation have a program agreement on setting maximum prices for oil products (end use). The most common fuels are gasoline, diesel, LPG and heating oil. The maximum retail price has increased steadily as from the summer of 2008 (after the sharp decrease due to the financial/economic crisis), now reaching levels slightly above the 2008 peak. This evolution is mainly driven by the crude oil price, but for diesel also due to an increase of the excise tax. The maximum price consists of the following components:
In Belgium, the retail gas price for a typical domestic end user is mainly determined by the energy component, distribution costs and VAT. Significant price differences between different suppliers can exist. The retail gas price has risen on average by 38.4% between 2007 and 2012. For a typical professional end user, the price on average increased by 47%. The retail price of natural gas consists of the following components:
•
•
•
•
Price ex-refinery (energy): This component is linked to price quotes of finished oil products on the market of Rotterdam. It is influenced by the international price for crude oil, the exchange rate of the euro compared to the dollar and the supply/demand for these finished products (e.g., affected by the refiner y capacity). Maximum gross margin on distribution: This component covers the entire chain from the refiner y to the actual end-user (e.g., transpor t to petrol station, storage). Public levies: This consists (most impor tantly) of the so-called APERTA levy (contribution for the agency for petrol, to maintain strategic oil reser ves) and the BOFAS levy (fund for soil remediation). Taxes and VAT: These consist of the excise taxes and VAT. The level of the excise taxes is set by the federal government in absolute values [€/l]. The VAT is 21% on the overall sum of the price components (including excise taxes).
The composition of the final retail gasoline price is presented in Figure 2 (gasoline 98, official maximum price, June 2013 [BPF, 2013; FOD ECO, 2013]). The excise tax on diesel is slightly lower (about 45% together with VAT in final price). The excise tax on heating oil is ver y low (more than 20 times lower than that on gasoline and diesel), while on LPG, no excise taxes exist.
KU Leuven Energy Institute
•
•
•
• •
Energy price (supplier): For gas, this component is the main driver of the final retail price. A reasonable correlation between this price and the wholesale gas price exists. On average, for domestic end users, prices increased by 39% while professional consumers faced an average increase of 49%, but large differences between suppliers can exist. Especially the suppliers with oil-indexed gas prices display a large increase. Suppliers with long-term oil-indexed gas provision (e.g., Electrabel, Luminus, Nuon,) are currently not able to take advantage of the relatively low prices of natural gas we face now, while gas-indexed suppliers are able to do so (e.g., Lampiris and Essent). For domestic consumers, these energy prices (under a variable price contract) were temporarily frozen by law in the period April 1 till December 31, 2012. As from 2013, indexation of these prices is to be revised by the regulator (CREG). Transmission: The Fluxys transmission tariffs are a minor component and this has been relatively stable over the period considered. Distribution: This component increased on average by about 25% for domestic and 45% for professional consumers, mainly due to new tariffication regulations. Public levies: This minor component is strongly dependent on the region and distribution grid. Energy taxes and VAT: The energy tax is 1 €/MWh, while VAT is 21% on the overall sum of all components (including the energy tax).
EI Fact sheet Pricing of energy
EI-FACTSHEET 2013-04 The share of the different components in the final retail gas price is presented in Figure 2 (source: CREG, 2012; domestic consumer, retailer Electrabel, DSO IGH).
4
•
Electricity The final retail electricity price consists of several components (see below), with the energy price, the distribution tariff and VAT and energy taxes being most impor tant. Relatively large differences can exist between energy suppliers, the distribution zone (distribution system operator - DSO) and the region. On average, the retail price has risen for a typical household (domestic consumer) by 30.5% between 2007 and 2012. Over this same period, prices for a ‘typical’ professional end consumer at low voltage have experienced an average increase of 22.1%, while a consumer at medium voltage saw his price reduced by on average 2.2%. Professional consumers pay much lower distribution tariffs, and can recover the VAT. In Belgium the retail price of electricity consists of the following components:
•
•
•
Energy price (retailer): This par t of the final price relates to the actual electricity (energy). The evolution of these energy prices is determined by the evolution of specific indexes on which they are calculated. On average, they have increased by about 5% during the period 2007 – 2012 (domestic), while there was an average reduction for a professional consumer of 9.7% (low voltage) to 22.4% (medium voltage). The temporal freezing of this energy price in 2012 has been applied here as well (in full analogy with natural gas). This retail energy price is to some extent linked to the wholesale price of electricity. According to a recent ACER repor t (2012), Belgium is one of the few countries (next to Sweden and Finland) where there is an actual (though relatively modest) correlation. Other European countries display a ver y low correlation (also because a significant share of these countries still feature regulated end-consumer prices). Contribution renewable energy and cogeneration: Electricity retailers need to achieve a cer tain quota on renewables and cogeneration in the overall supply. This tariff component reflects the corresponding costs for green cer tificates and/or penalties paid, and has on average doubled between 2007 and 2012. Transmission: This minor component reflects Elia’s
•
•
transmission grid tariffs (corrected with the losspercentage of the distribution system operator). Distribution: The distribution tariffs have risen dramatically over the period 2007-2012 (on average +71.7%; in Flanders on average +100%; maximum about +130%). The main reasons for this increase are some changes in determination of the tariff, but mainly the obligation for DSO’s to buy green cer tificates (solar PV) at cer tain minimum prices, and actions enhancing rational use of energy. The tariffs for medium voltage consumers are lower, as they do not have to carr y the cost of downstream infrastructure (lower voltage). Public levies: This minor component consists of the federal contribution (e.g., denuclearization of BP1 and BP2 Mol-Dessel), the contribution for green cer tificates from off-shore wind (currently about 1 €/ MWh) and the financing of the connection of off-shore wind (about 0.14 €/MWh) Energy taxes and VAT: There is an energy tax of 2 €/ MWh. On the total sum of all the components above (including the energy tax), residential customers pay a VAT of 21%.
As an example, the share of the different components in the final retail electricity price is presented in Figure 2 (source: CREG, 2012; domestic consumer, retailer Electrabel, DSO Gaselwest). Sources and further reading: [ACER, 2012] Agency for the Cooperation of Energy Regulators (ACER) and Council of European Energy Regulators (CEER), Annual Repor t on the Results of Monitoring the Internal Electricity and Natural Gas Markets in 2011, November 2012. [BPF, 2013] Belgische Petroleum Federatie (BPF), website available at http://www.petrolfed.be/nl [accessed June 2013]. [CREG, 2012] Commissie voor de Regulering van de Elektriciteit en het Gas (CREG), Studie (F)120906CDC-1183 over “de componenten van de elektriciteits- en aardgasprijzen”, September, 2012. [FOD ECO, 2013] FOD Economie, website available at http://economie.fgov.be/nl/ [accessed June 2013]. [IEA, 2012] International Energy Agency (IEA), World Energy Outlook (WEO) 2012, OECD Publishing, Paris, 2012.
KU LEUVEN ENERGY INSTITUTE Celestijnenlaan 300 box 2421 B3001 Heverlee www.kuleuven.be/ei
KU Leuven Energy Institute
EI Fact sheet Pricing of energy