4.2
The impact of the energy crisis
European countries and Japan witnessed the greatest impact of the energy crisis on final-user prices – as observed in the previous section. The strong increase of TTF and Asian spot LNG was one of the key drivers that pushed wholesale electricity prices to unprecedented levels. High coal prices and carbon prices in the European Union Emissions Trading System (EU ETS) also contributed, as well as conditions specific to domestic power markets – such as the unavailability of part of the nuclear park in France.
Several European countries moderated this increase thanks to support measures starting in late 2021, while Japanese power companies were only partially able to pass on to consumers the impact of the price increase in 2022, and support policies for electricity producers in Japan were later introduced in 2023. This resulted in a net loss for the ten major electric power companies which, according to the Nikkei newspaper (Nikkei, 2023), recorded a combined deficit of JPY 586.1 billion over the fiscal year 2022,19 equivalent to USD 5.1 billion (2019). The losses varied significantly across the major companies (Table 4.1).
The governments of several European countries announced a series of support measures to (partially) shield end users (households and business) from the effects of surging fossil fuel and electricity prices starting in fall 2021. The initial measures were followed by stronger and stronger ones during 2022, in parallel to the soaring energy prices. According to Bruegel (Sgaravatti et al., 2023), from September 2021 to January 2023, almost EUR 650 billion20 was allocated by EU countries, three-quarters of which was from Germany, France, Italy and Spain.
Europe accounts for two-thirds of the global spending for energy support measures, more than 80% of which is for electricity, gas and heating and less than 10% each for transport fuels and for other support (IEA, 2023b). Several actions were put in place by different governments, with actions broadly directed to all energy users and only about one-quarter directly targeted to lower-income households. The principal measures, mainly adopted on a temporary basis in the four EU countries in focus, were (Table 4.2):
Limit the increase for electricity and gas tariffs.
Excise and value-added tax (VAT) reductions.
Vouchers, grants or one-off payments to lower-income families
The estimated combined support of France, Germany, Italy and Spain totalled EUR 490 billion (equivalent to USD 500 billion [2019]) over September 2021 to January 2023 (Sgaravatti et al., 2023). However, this amount may not have been entirely spent or was insufficient to cover the entire increase in cost, resulting in additional losses for energy companies (similar to the Japan situation). It compares with the estimated subsidy of USD 420 billion (2019) presented later in this chapter, which is estimated for electricity and gas end users only (hence excluding oil and other energy sources).
The estimated combined support of France, Germany, Italy and Spain totalled EUR 490 billion over September 2021 to January 2023.
19 The 2022 Japanese fiscal year spans from April 2022 to March 2023.
20 This estimate is about 10% higher than the USD 600 billion reported by the International Energy Agency in its Government Energy Spending Tracker (IEA, 2023b).
Energy taxation varies significantly across fuels and countries. Oil products for transport often have the highest tax rates (after accounting for both VAT and other taxes and levies), followed by electricity and heating oil for domestic uses. Natural gas typically has the lowest taxation levels across these fuels, although in some countries such as Chile and Mexico, only VAT is applied for domestic uses.
Until the introduction of the support measures, taxes for oil products used in the transport sector were highest in European countries, increasing the ex-tax value two- to threefold. Taxation is also elevated for electricity, in particular in Germany where taxes double the ex-tax value both for residential and industry prices, and for residential prices in all the other three European countries analysed. Conversely, gas tax rates are much lower, typically around three to five times lower than for electricity prices, with the notable exception of France, where they are 20-40% higher.
The marked difference between the taxation of electricity and gas prices is due to taxes and levies other than VAT. In 2019, these taxes were 10 to 16 times higher for electricity than for gas in Spain and Germany, while they were 3-3.5 times higher in France and Italy for residential prices. However, for industrial prices they were 12 to 20 times higher for electricity than for gas, apart from France, where this difference was reduced to 2.5 times. Additionally, electricity ex-tax prices include the carbon pricing due to the EU ETS, while residential gas prices are not exposed to this incremental component.
One of the first measures to reduce the impact of the surging wholesale electricity and TTF prices in late 2021 and in 2022 in Europe was to reduce taxation. This was achieved by reducing other taxies and levies, and in some cases by lowering the VAT rate.
As the taxation is much higher for electricity prices, in 2022 all four EU countries significantly reduced the related taxes for both residential customers (by USD 25/MWh to USD 95/MWh [2019], or 10-20% depending on the country) and industrial customers (by USD 10/MWh to USD 60/MWh [2019], or 5-15% depending on the country).
The marked difference between the taxation of electricity and gas prices is due to taxes and levies other than VAT. In 2019, these taxes were 10 to 16 times higher for electricity than for gas in Spain and Germany.
Since gas prices have lower taxation rates, the preferred action was often to put a cap on the ex-tax price. Italy has the highest taxation rates among the four EU countries analysed and was therefore the only one to significantly reduce taxation for residential gas users, by around USD 33/MWh [2019], or 20% (Figure 4.6 and Figure 4.7). In addition to the tax reductions, caps on the ex-tax prices and on the gas price used for power generation were introduced, contributing to the overall subsidies to consumers (see next section).
The tax reductions applied to electricity consumers proved to be an effective measure to counteract the strong increase of energy commodities. This, in turn, also reduced the tax gap between electricity and gas prices, contributing to a move towards a level playing field among energy sources. Whether these measures could be maintained in the future, further fostering the adoption of efficient electricity-based technologies, is an important question for policy makers.
The tax reductions applied to electricity consumers proved to be an effective measure to counteract the strong increase of energy commodities. This also reduced the tax gap between electricity and gas prices, contributing to move towards a level playing field among energy sources.
Tax reductions, time-limited vouchers, limiting and freezing of consumers’ tariffs, and caps to gas prices are among the main measures that were implemented to soften the impact of the energy crisis. An estimate of the impact of these measures can be of help to understand their magnitude and related impact. Energy commodity prices typically comprise four main components:
wholesale or commodity production price
additional costs associated with the delivery of the energy source (such as transmission and distribution costs, metering and retail)
other taxes and levies
VAT (for residential users).
We can use these components to estimate the residential and industrial electricity and gas prices that would have resulted if no protection measures had been put in place and if the entirety of the increase in wholesale electricity price and of the increase of TTF gas price had been passed on to consumers. The mechanisms of updating retail tariffs change from country to country, and there is often a lag between the increase of wholesale prices and the corresponding increase in retail tariffs. These estimates could therefore be in excess of what could have been realised without any protection measure. Conversely, this would entail a continued increase over 2023, despite a significant drop of wholesale electricity prices during the first half of the year.
Wholesale electricity prices in 2022 increased six- to sevenfold in France, Germany and Italy compared with the 2019 levels, and by a factor of 3.5 in Spain21 (Ember, 2023) and by a factor of 2.3 in Japan (JPEX, 2023). In the United States, the average of the wholesale price doubled from 2019 to 2022 (EIA, 2023) in seven major hubs,22 in line with the increase of Henry Hub gas prices (see section 4.1). Similarly, in Europe TTF gas price increased almost eightfold, while the Asian spot LNG price increased 5.5 times above 2019 levels and Henry Hub doubled from 2019 to 2022.
The increase of wholesale prices to end users depended on the market structure of the different systems, on the existence of regulated end-user tariffs (and therefore the possibility for electricity suppliers to increase such tariffs), and on eventual subsidies put in place to shield final consumers. If the entire wholesale electricity prices in France, Germany, Italy and Spain had been passed on to residential customers (with no cap on gas prices) and taxes and levies had remained at 2019 levels, we estimate that electricity prices for residential would have been substantially higher, from an additional 45% in Italy to a doubling in France (Figure 4.8), with the overall support ranging between USD 150/MWh and USD 240/MWh.
Applying the same methodology to both residential and industrial prices, the support per unit of energy sold to consumers in the four European countries would amount to (Figure 4.9):
USD 150/MWh to USD 240/MWh for electricity for residential customers.
USD 100/MWh to USD 180/MWh for electricity for industrial customers
USD 110/MWh to USD 135/MWh for gas for residential customers
USD 50/MWh to USD 90/MWh for gas for industrial customers.
This results in a total estimate of USD 420 billion (2019) for electricity and gas subsidies in 2022 for Germany, France, Italy and Spain combined,23 almost three-quarters of it for the residential sector. This estimate captures direct budget allocations, forgone tax revenues, and eventual losses of electricity and gas companies. It compares to the USD 500 billion (2019) presented in Table 4.2, which includes additional fuels and spans over a larger time frame (16 months). The potential impact of these subsidies on affordability of residential customers is analysed in the next section of this chapter.
21 The wholesale electricity price in Spain saw a lower increase than in the other countries thanks to the price cap on gas prices used for power generation (https://ec.europa.eu/commission/presscorner/detail/en/ip_22_3550).
22 The seven electricity hubs published by the US Energy Information Administration include Mass Hub (New England), PJM West (PJM), Indiana Hub (Midwest), Mid-C (Northwest), NP-15 (Northern California), Palo Verde (Southwest), and SP-15 (Southern California).
23 This estimate also includes the services sector, for which the residential unit subsidy has been applied.