DIRECTORATE GENERAL FOR INTERNAL POLICIES POLICY DEPARTMENT A: ECONOMIC AND SCIENTIFIC POLICY The Impact of the Oil Price on EU Energy Prices STUDY Abstract Oil prices have increased considerably over the past years at global level, while natural gas and other energy prices have seen differing developments in each world region. The present report examines the level of impact of high oil prices on European energy prices and analyses the underlying mechanisms. Policy options to reduce this impact are discussed. IP/A/ITRE/ST/2013-03 February 2014 PE 518.747 EN This document was requested by the European Parliament's Committee on Industry, Research and Energy. AUTHORS Uwe ALBRECHT, Ludwig-Bölkow-Systemtechnik (LBST) Matthias ALTMANN, Ludwig-Bölkow-Systemtechnik (LBST) Jan ZERHUSEN, Ludwig-Bölkow-Systemtechnik (LBST) Tetyana RAKSHA, Ludwig-Bölkow-Systemtechnik (LBST) Patrick MAIO, HINICIO Alexandre BEAUDET, HINICIO Paola TRUCCO, HINICIO Christian EGENHOFER, Centre for European Policy Studies (CEPS) Arno BEHRENS, Centre for European Policy Studies (CEPS) Jonas TEUSCH, Centre for European Policy Studies (CEPS) Julian WIECZORKIEWICZ, Centre for European Policy Studies (CEPS) Fabio GENOESE, Centre for European Policy Studies (CEPS) Guy MAISONNIER, IFPEN RESPONSIBLE ADMINISTRATORS Cécile KÉRÉBEL Balazs MELLAR Policy Department A: Economic and Scientific Policy European Parliament B-1047 Brussels E-mail: [email protected] LINGUISTIC VERSION Original: EN ABOUT THE EDITOR To contact Policy Department A or to subscribe to its newsletter please write to: [email protected] Manuscript completed in February 2014. © European Union, 2014. This document is available on the Internet at: http://www.europarl.europa.eu/studies DISCLAIMER The opinions expressed in this document are the sole responsibility of the author and do not necessarily represent the official position of the European Parliament. Reproduction and translation for non-commercial purposes are authorised, provided the source is acknowledged and the publisher is given prior notice and sent a copy. Impact of the Oil Price on EU Energy Prices CONTENTS LIST OF ABBREVIATIONS 6 LIST OF TABLES 10 LIST OF BOXES 10 LIST OF FIGURES 11 EXECUTIVE SUMMARY 16 1. OUTLINE OF THE STUDY 21 1.1. Background 21 1.2. Aim and scope 22 1.3. Methodology and data sources 22 1.4. Structure 23 2. WHOLESALE PRICE TRENDS AND PRICING MECHANISMS 25 2.1. Long-term trends 26 2.1.1. Energy commodities 26 2.1.2. Non-energy commodities 28 2.1.3. Future projections of long-term trends 30 2.2. Crude oil 30 2.3. Natural gas 33 2.3.1. Introduction 33 2.3.2. Price trends 34 2.3.3. Market fundamentals 36 2.3.4. Price formation mechanisms 38 2.3.5. Regional differences in EU 53 2.3.6. Impact of oil price on natural gas prices 60 2.4. Steam coal 62 2.4.1. Introduction 62 2.4.2. Price trends 63 2.4.3. Market fundamentals 65 2.4.4. Price formation mechanisms 66 2.4.5. Regional differences in the EU 76 2.4.6. Impact of oil price on coal prices 80 2.5. Electricity 81 2.5.1. Introduction 81 2.5.2. Price trends 82 2.5.3. Market fundamentals 84 PE 518.747 3 Policy Department A: Economic and Scientific Policy 2.5.4. Price formation mechanisms 86 2.5.5. Regional differences in the EU 96 2.5.6. Impact of oil price on electricity prices 99 2.6. Oil products 101 2.6.1. Introduction 101 2.6.2. Price trends 101 2.6.3. Market fundamentals 102 2.6.4. Price formation mechanisms 105 2.6.5. Regional differences in the EU 105 2.6.6. Impact of oil price on oil products prices 106 2.7. Conclusions 107 3. RETAIL PRICE TRENDS AND PRICING MECHANISMS 108 3.1. The European retail energy market 108 3.1.1. Introduction 108 3.1.2. Market fundamentals 110 3.1.3. Electricity retail markets: recent price trends 113 3.1.4. Gas retail markets: recent price trends 116 3.2. Energy bills: main price components and drivers 119 3.2.1. Decomposition of electricity retail prices 120 3.2.2. Decomposition of gas retail prices 123 3.2.3. Analysis of price components 126 3.2.4. National structures of retail electricity and gas prices 135 3.3. Conclusions 140 4. FACTORS INFLUENCING THE OIL PRICE IMPACT 141 4.1. Market factors 142 4.1.1. LNG 142 4.1.2. The impact of US shale gas 143 4.2. Regulatory and political factors 146 4.2.1. The impact of price controls 146 4.2.2. The impact of gas price de-indexation 146 4.3. Other factors 148 4.4. Conclusion 149 5. EVALUATION OF POLICY OPTIONS 151 5.1. Completing the Internal Market to decouple gas and oil prices in Europe 152 5.1.1. The role of infrastructure in enabling wholesale markets 152 4 PE 518.747 Impact of the Oil Price on EU Energy Prices 5.1.2. The completion of the Gas Target Model 154 5.1.3. Policy recommendations 155 5.2. Changes in energy taxation in Europe 156 5.2.1. Introduction 156 5.2.2. Energy taxation in Europe 156 5.2.3. Policy recommendations 159 5.3. Energy efficiency, energy savings and renewable energies 160 5.3.1. Regulatory background 160 5.3.2. Addressing the link between oil and energy prices 162 5.3.3. Policy recommendations 163 5.4. Other possible options 164 5.4.1. Facilitate the import of US LNG 164 5.4.2. Support the Connecting Europe Facility 165 5.4.3. Carbon Capture and Storage (CCS) 166 5.4.4. Innovative shale gas extraction methods 167 5.5. Summary: Towards a full decoupling of oil and gas prices? 168 5.6. Putting policy options into perspective 169 REFERENCES 170 ANNEX A: Market fundamentals of natural gas 185 ANNEX B: Market fundamentals of steam coal 192 ANNEX C: Fuel costs of international maritime coal transport 197 ANNEX D: Methodology applied for the selection of 10 Member States 198 ANNEX E: Individual Member States energy price components 200 PE 518.747 5 Policy Department A: Economic and Scientific Policy LIST OF ABBREVIATIONS a year ACCC Australian Competition and Consumer Commission ACER Agency for the Cooperation of Energy Regulators ARA Amsterdam Rotterdam Antwerp AU Australia bbl barrel bcf Billion cubic feet (used in the USA; 1 bcf = 0.283 bcm) bcm Billion cubic meter btu British thermal unit (a traditional unit of energy equal to about 1055 Joule) BDEW Federal Association of the Energy and Water Industry (Germany) BDI Baltic Dry Index BE Belgium BEH Bulgarian Energy Holding BG Bulgaria BGR German Federal Institute for Geosciences and Natural Resources (Bundesanstalt für Geowissenschaften und Rohstoffe) CA Canada CAPEX Capital Expenditure CCL UK Climate Change Levy CDG Single Balancing Point (Spain) CEF Connecting Europe Facility CEGH Central European Gas Hub (Austria) CHP Combined Heat and Power CIF Cost Insurance Freight CNE Comision National de Energia (Spain) CNG Compressed natural gas CO Colombia CPI Consumer Price Index 6 PE 518.747 Impact of the Oil Price on EU Energy Prices CY Cyprus CZ Czech Republic d day DE Germany EC European Coimmission EDF Electricité de France EE Energy Efficiency EED Energy Efficiency Directive EEX European Energy Exchange EIA Energy Information Administration EMIR European Market Infrastructure Regulation EMV Energy Market Authority (Finland) EPEX European Power Exchange ES Spain ETS Emission Trading System EU European Union EU15 Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom EU-27 All EU Member States up to 30 June 2013 EUA EU Allowance FERC Federal Energy Regulatory Commission FERC Federal Energy Regulatory Commission FI Finland FOB Free On Board (buyer pays for transportation of goods) FR France FSU Former Soviet Union FTA Free trade agreement FTT Financial Transaction Tax GDP Gross domestic product GOG Gas-On-Gas (competition) PE 518.747 7 Policy Department A: Economic and Scientific Policy GPL Gaspool (Germany) GWh Gigawatt hour HCPI Harmonised Consumer Price Index HFO Heavy Fuel Oil hl hectolitre HU Hungary ID Indonesia IEA International Energy Agency IGU International Gas Union IT Italy kWh Kilowatt hour lb Pound LNG Liquefied Natural Gas LT Lithuania LTC long-term contract MMBtu One million btu (1 MMBtu = 1,055 Megajoule) MS Member State of the EU MWh Megawatt hour NBP National Balancing Point NCG Net Connect Germany (Germany) NEK National Electricity Company (Bulgaria) NG Natural Gas NGPA US Natural Gas Policy Act NL The Netherlands NYMEX New York Mercantile Exchange OECD Organisation for Economic Co-operation and Development OPEX Operational Expenditure OTC Over-the-counter PCI Project of Common Interest PEG Point d'Échange de Gaz (France) 8 PE 518.747 Impact of the Oil Price on EU Energy Prices PEP Pan European Power Index PGNiG Polish Oil and Gas Company PL Poland PRB Powder River Basin PSV Punto di Scambio Virtuale (Italy) RED Renewable Energy Directive REMIT Regulation on Energy Market Integrity and Transparency RES Renewable Energy Sources RU Russia t Ton tcm Trillion cubic meter TAP Trans Adriatic Pipeline tce Ton of coal equivalent TEN Trans-European Networks TFF Title Transfer Facility (Netherlands) TJ Terajoule TSC Taxes and Social Contributions TUR Tariff of last resort (tarifa de último recurso) UA Ukraine UK United Kingdom US United States of America USA United States of America VAT Value Added Tax WTI West Texas Intermediate (grade of crude oil used as a benchmark in oil pricing) ZA South Africa ZEE Zeebrugge Platform (Belgium) PE 518.747 9 Policy Department A: Economic and Scientific Policy LIST OF TABLES Table 1: Physical hubs vs.