4.3
Competitiveness and affordability of electricity solutions
Energy bills are a significant cost component for all industry, with different weights depending on the type of industry, the goods produced, the importance of domestic versus international markets, and overall energy consumption. A thorough comparison across countries should take into account these different factors and the overall structure of the economy.
The cost of energy paid by industries in each country depends on many factors. Some of the most important ones are the available resources, the market structure and the mechanisms used to form the end-user prices. The amount of taxes varies considerably across countries, contributing to these differences. In 2019, the average electricity prices paid by industrial customers ranged over a ratio from 1 to over 3 among the countries analysed.24
The energy crisis has worsened this situation, increasing the cost for the countries that already faced higher electricity prices (such as the European countries), but did not significantly change the relative position (Figure 4.10).25 This situation happened also because industrial customers were less shielded than residential ones, with increases that reached up to 40% for electricity and 150% for gas, compared with 2019 (see section 4.1). These surges were often accompanied by even stronger daily or hourly price spikes, with very high volatility, which have in turn become an important contributing factor for a further deployment of energy storage.
These surges were also smoothed by the introduction of government aid, although only about one-quarter of the total went to industrial customers (see previous Figure 4.9). In some countries, the situation was also worsened by the introduction or reinforcement of cross-sector subsidies between residential and industrial customers.
Industrial customers were shielded less than residential ones, with increases that reached up to 40% for electricity and 150% for gas.
24 The average price for industrial customers depends also on the structure of the economy. Electricity prices for small and medium-sized enterprises (SMEs) are typically higher than for larger consumers. Countries with a higher share of SMEs will therefore automatically see a higher average electricity price in the industrial sector.25 The countries shown in the figure are subject to availability of data.
The combined consumption in the residential sector of electricity, gas and oil products (mainly kerosene and liquefied petroleum gas [LPG]) ranges from about 80% in France, Germany, Italy and Spain to more than 90% in the United States, Canada and Japan. The associated bills account therefore for most of the energy expenditure in average households. The relative weight of the combined consumption of electricity, gas and oil products varies significantly across countries, ranging from around 8 000 kWh to 13 000 kWh per household in Japan, France, Germany, Italy and Spain, up to 22 000 kWh to 24 000 kWh per household in Canada and the United States. The effect of increasing energy prices for household affordability depends therefore on the price increase and on the volumes consumed (Figure 4.11).
The impact of energy bills expenditure on average household disposable income has therefore been very different across the countries analysed. Milder weather and behaviour change helped to cushion the impact of price increase by limiting the volumes consumed (IEA, 2023c). Even with the support measures put in place, though, the share of residential energy bills in total average household disposable income (HHDI) increased significantly, and in particular in the four European countries analysed and Japan.
The spending on energy bills relative to the average household disposable income grew considerably between 2019 and 2022 – by about one-third in Germany, Italy and Spain, about one-fourth in Japan and about 15% in France (Figure 4.12). The impact was larger on poorer households, where a larger share of income goes to meet basic energy needs, and that suffered the strongest hit. Nonetheless, these large increases were much lower thanks to the support measures. If no subsidy had been provided, the share of energy bills in total household income would have doubled in Germany, Italy, Spain and France. These increases could have very profound implications and hinder the ability of households to afford other goods, with important effects on the overall economy. Furthermore, they could prevent investments in efficient technologies, due to their high upfront cost.
If no subsidy had been provided, the share of energy bills in total household income would have doubled in Germany, Italy, Spain and France.
The increase in energy prices that occurred at the end of 2021 and over 2022 had impacts that varied significantly according to the country analysed. While some countries were relatively unaffected (both in terms of prices and in terms of policies to further develop electrification), other countries were faced with much larger effects and chose to put in place a series of measures to help ameliorate these.
As observed previously in this chapter, the burgeoning energy prices led several countries to introduce support measures to cushion businesses and households from the decreasing competitiveness and affordability, with significant impacts also on government budgets and on debt levels. This raises several questions, from the sustainability over time of such measures, to the functioning of energy markets and the need for reforms of their structure.
Affordability and energy security have traditionally been at the centre of policy making. The energy crisis exacerbated and made even more urgent the transition towards cleaner energies and towards a reduction of fossil fuel imports. Overall, the crisis reduced competitiveness and affordability, while putting more strain on government budgets. Nonetheless, some important and long-lasting trends can emerge from these difficult times that can enhance further electrification in the coming years.
Higher prices inherently promote the use of efficient technologies, with an overall major boost in global clean energy investment (IEA, 2023d). This is particularly the case for heat pumps and electric vehicles (EVs), for which the price increase is felt much less than for equipment with standard efficiencies, leading to energy bill savings with respect to comparable technologies (Figure 4.13 and Figure 4.14), although the differences are also subject to the subsidisation level of the various energy sources. The reduction of energy bills contributes to lessen the impact on affordability seen in the previous section.
The additional upfront investment cost faced by these technologies and the increased interest rates remain important issues for the wider affordability perspective, however, in particular in times of reduced affordability. To solve this problem, many countries have been putting in place additional funds and support measures (IEA, 2023c), resulting in unprecedented growth levels for both heat pumps and EVs in 2021 and 2022. Heat pump sales in Europe grew by 35% in 2021 and accelerated further during the first half of 2022 (IEA, 2022b). EVs accounted for 14% of the global car market in 2022, up from less than 5% just two years earlier (IEA, 2023e).
A further acceleration of electrification can therefore be expected in the coming years in those countries where a combination of high prices and well-designed support policies is leading to the faster deployment of efficient electricity-based technologies. Preliminary figures for the first half of 2023 (e.g. in Germany) show a possible decline in EV sales, after the robust increase observed in 2022. A reduction of the associated support measures can be identified as one of the key factors.
A further acceleration of electrification can be expected in the coming years in those countries where a combination of high prices and well-designed support policies is leading to the faster deployment of efficient electricity-based technologies.