EU electricity prices: Will 2024 mark the end of national tariff shields?

Electricity prices on the EU wholesale market have been on a downward trend in recent months, a development some governments see as an opportunity to remove subsidies introduced in response to the energy crisis, while others see as a bad signal for the energy transition. 

Read the original French article here.

Russia’s full-scale invasion of Ukraine in February 2022 saw energy bills soar, with many national governments introducing state aid measures to shield their citizens from the worst of the spike.

However, almost two years on, and with wholesale electricity prices falling back to pre-war levels, things are returning to normality – and energy subsidy measures are being wrapped up across Europe.

In France, Economy Minister Bruno Le Maire, who is now also in charge of energy issues, announced earlier this month that household electricity bills would rise by an average of just under 10% by 1 February 2024.

This increase follows the gradual reintroduction of a tax that had been reduced from €32 per megawatt-hour (€/MWh) to just €1 at the time of the crisis.

On 1 February, it will rise to back up, to €21/MWh. According to Le Maire, this will enable subsidies for producing renewable energy, energy vouchers for the most vulnerable households, and tariff equivalents for overseas territories and Corsica.

In short, the fall in prices on the wholesale electricity market signals “the end of the ‘whatever it costs’ approach” after the €90 billion shield, the minister said on Sunday evening (21 January).

What’s the situation across the rest of Europe?

In Belgium, electricity prices, including all taxes, increased by 61% between the first half of 2021 (€270/MWh) and the first half of 2023 (€435/MWh), the latest Eurostat data shows.

In mid-March last year, the Belgian government lowered the VAT rate on gas and electricity from 6% to 21%. As a result, by the first half of 2023, the tax will account for just 18% of the price per MWh, compared with 35% two years earlier.

However, a so-called “social tariff” for the most disadvantaged households, which has helped reduce the cost of their bills during the crisis significantly, will rise by 9.3%, bringing it closer to commercial prices.

In Germany, prices, including all taxes, have increased by 29% between the first half of 2021 (€319/MWh, of which 52% tax) and the first half of 2023 (€412/MWh, of which 28% tax).

But households will start the year as electricity price reductions are to be phased out.

The price cap was initially due to be extended until March, but the country’s budget crisis and recession are forcing the government to cut spending.

As a small consolation, new customers who have benefited from more favourable market conditions and, therefore, lower electricity or gas prices, will not see prices rise.

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In Spain, prices, including tax, fell sharply in the first half of 2023 (€182/MWh) compared to 2022 (€353/MWh) and 2021 (€257/MWh), mainly due to lower taxes.

Taxes account for 41% of the selling price in the first half of 2021, compared with 16% in the first half of 2023.

However, as in France and Belgium, tax levels are set to rise again. VAT, which fell from 21% to 5% during the crisis, rose to 10% on 1 January 2024.

Another tax, set at 2.5% in the first half of 2024, will rise to 3.8% in the second.

In Britain (England, Scotland and Wales, with a similar system in Northern Ireland), where prices are initially high, prices – including all taxes – easily exceeded £320/MWh (around €373/MWh) during the crisis.

The price is expected to fall back to around €338/MWh between January and March 2024. However, the government has decided to maintain the Energy Price Guarantee, introduced in October 2022, which caps the maximum annual bill for households.

However, its revaluation for the first quarter of 2024 shows an increase of 4.9% compared to the fourth quarter of 2023, before a possible drop in the second quarter of 2024.

In Italy, prices, including taxes, have almost doubled (+78%) between the first half of 2021 (€225/MWh) and the first half of 2023 (€378/MWh).

As a result, the government reduced the cost of taxes by a third, from 36% of the bill in the first half of 2021 to 14% in the first half of 2023.

Consumers will benefit from the safeguards put in place until July when bills should return to pre-crisis levels.

At that point, as in France, prices will be affected by a series of increases, including the end of tax cuts and the return to a VAT rate of 22%, compared with the current 5%.

In the Czech Republic, as in Italy, prices rose by 78% between the first half of 2023 (€180/MWh) and the first half of 2024 (€321/MWh).

The government introduced a price cap, but this expired at the start of 2024, along with the reintroduction of taxes that had been abolished, such as the one used to subsidise renewable energy.

As a result, between the reduction in subsidies and the fall in wholesale electricity prices, Czech households’ bills could rise by around 10% in 2024 compared with 2023.

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Poland, the only country in Europe where the share of taxes in the final price increased between the first half of 2021 (40%) and the first half of 2023 (48%), is among the EU bloc countries with the lowest price increase.

The price of electricity is highly regulated, and tariffs are frozen. As a result, prices, including taxes, increased by 14% between the first half of 2021 (€155/MWh) and the first half of 2023 (€177/MWh).

The new government of Prime Minister Donald Tusk has decided to maintain the price freeze until at least mid-2024.

In Slovakia, prices, including taxes, increased by 30% between the first half of 2021 (€132/MWh) and the first half of 2023 (€189/MWh), while the share of taxes decreased from 21% to 12%.

However, due to the cap on the regulated component of final prices, electricity prices in Slovakia will not rise this year and could even fall.

The government is, therefore, maintaining measures to mitigate price increases, unlike in all major European economies.

Financing the transition

On average, electricity prices in the EU rose by 31% (incl. all taxes) between the first half of 2021 (€220/MWh) and the first half of 2023 (€289/MWh).

However, between the complicated financial situation and public spending to contain the crisis, the European Commission asked member states in May 2023 to reverse their anti-crisis measures from 2024.

At the same time, the share of taxes in the final price will not fall, argues the think tank Bruegel in a note published on 19 January.

While the share of taxes represents 38% of the average EU bill, it could rise, especially for certain categories of consumers, depending on how decision-makers address the situation.

The aim, according to Bruegel, is to ensure the roll-out of energy transition measures, including through the promotion of low-carbon industry and the increased use of renewable energy and the associated grid.

In France, the announcement of the price increase has led to widespread dissatisfaction among experts, industry associations and consumers who point to how it discourages the private sector from investing in the energy transition.

EU economy still grappling with long tail of 2022 energy shock

Although gas and electricity prices have receded below their 2022 peak, they are not forecast to return to pre-pandemic levels in the foreseeable future, the European Commission said on Monday (15 January), warning of the long-term economic consequences of high energy prices on the EU’s competitiveness.

Federica Pascale, Aneta Zachova, Irena Jenčová, Anne-Sophie Gayet, Simone Cantarini and Jonathan Packroff contributed to the reporting.

[Editedby Nathalie Weatherald]

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