Pricing of Energy - KU Leuven · • Energy component • Linked to price quotes of finished...

Pricing of Energy

Overall Scope • Energy sources & carriers used by end-consumers

o Oil products • Gasoline, diesel, heating oil

o Natural gas o Electricity

• Final price paid by end-consumers

o Energy component o Other: transmission, distribution, levies, taxes and VAT

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• Outline o General principles of pricing energy

• Primary fuels (oil, natural gas) • Electricity (wholesale market)

o Decomposition of energy retail prices (Belgium)

o International positioning

o Final reflections

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General principles of pricing of energy • Primary fuels

o Supply-demand fundamentals

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• Supply • Cost of extraction • Transport costs • Limited resource stocks • Cartels • Policy • Etc.

• Demand • Economic growth • Availability of

substitutes • Policy • Etc.

• Expectations on both sides • Prospects on new - undiscovered – reserves • Political unrest • Speculation

General principles of pricing of energy Oil

• Can be transported relatively easily o Pipelines, tankers

• Global market

• Quality (e.g., gravity ‘API’ and sulfur content) and costs of delivery affect price

• West Texas Intermediate (WTI) and Brent

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• Transport through pipelines, liquefied to be transported by ship (LNG)

• Long term contracts o When dedicated infrastructure still being developed o Indexed on oil price o To guarantee pay-back

• Hub-based prices

o E.g., NBP, Zeebrugge, Henry hub

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General principles of pricing of energy Natural Gas

• Significant differences between regions globally o US < EU < Asia o Dependent on market structure and transport costs

• Good convergence among European hub’s

o Gas-to-gas competition o Liquid markets o Good physical interconnections

• Also renegotiation of long-term contracts

o More to hub-based o Availability of LNG infrastructure

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Source: ACER, 2013

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Source: CREG, 2014

• Wholesale markets o Price set by supply – demand intersection

• Instantaneous balance continuously changing price o Peak, off-peak, specific profiles

• National character

• Interconnections and market coupling

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General principles of pricing of energy Electricity

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Source: ACER, 2013

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Source: ACER, 2013

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Source: CREG, 2014

General principles of pricing of energy • Outlook

o Global politics and economic developments

o Reserves? • Unconventional hydrocarbons

• Impact on prices for fossil fuels worldwide - Coal, LNG

o International climate agreement?

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Decomposition of energy retail prices

• Oil products

• Natural gas

• Electricity

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Oil

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Decomposition of energy retail prices Oil

• Program agreement between the Belgian government and the Belgian Petroleum Federation on maximum prices for oil products (end use)

• Most common fuels: gasoline, diesel, LPG and heating oil

• Components o Price ex-refinery o Maximum gross margin on distribution o Public levies o Taxes and VAT

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• Components o Price ex-refinery

• Energy component • Linked to price quotes of finished products on Rotterdam market • Influenced by international price for crude, exchange rate €/$, the

supply/demand for finished products (e.g., affected by refinery capacity)

o Maximum gross margin on distribution • Chain from refinery to end-user

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• Components (cntd) o Public levies

• APERTA levy • Contribution for agency for petrol maintain strategic oil reserves

• BOFAS levy • Fund for soil remediation

o Taxes and VAT • Excise tax [€/l] • 21% VAT on sum of all the above (including excise tax)

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• Composition

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Source: BFP, 2014

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Source: BFP, 2014

Natural Gas

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• Consider following consumers (following CREG report)

o Household (“T2”) • Natural gas 23,260 kWh/y

o Professional consumers (“T4”) • Natural gas 2,300,000 kWh/y

• Evolution of price from January 2007 till May 2013

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Decomposition of energy retail prices Natural Gas

• Evolution of final price – domestic consumer

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Source: CREG, 2013

• Composition of final price o Energy price o Transmission o Distribution o Public levies o Energy taxes and VAT

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• Composition of final price – domestic consumer

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Source: CREG, 2013


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Source: CREG, 2013

• Energy component o Component based on index parameters

• Oil-indexation phasing out • Indexation formula changes not frequently

o Prize ‘freeze’ between April 2012 – December 2012

o As from 2013, changes (indexation) in variable pricing contracts require approval regulator CREG (ex-post)

o +9.74 €/MWh (+229.86 €/y; +36.29%) • Due to evolution index parameters

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• Transmission tariff o Fluxys transmission tariff

o Uniform (T2 and T4)

o Rather stable

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Source: CREG, 2013

• Distribution tariff o Covering distribution costs o Some new tariffication elements o Price evolution:

• Flanders +3.75 €/MWh (+37.71%) • Walloon region: +5.34 €/MWh (+32.42%) • Brussels: +2.56 €/MWh (+23.34%)

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• Public levies o Minor component o Strongly dependent on region and DSO

• Energy tax and VAT

o Energy tax: 0.99 €/MWh o VAT of 21% on sum of all components (incl. tax)

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Electricity

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• Consider following consumers (following CREG report)

o Household (“Dc”) • Electricity 3,500 kWh/y

o Professional consumers • Electricity 160,000 kWh/y, low voltage (“Ic”) • Electricity 160,000 kWh/y, medium voltage (“Ic1”)

• Evolution of price from January 2007 till May 2013

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Decomposition of energy retail prices Electricity

• Evolution of final price – domestic consumer

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Source: CREG, 2013

• Composition of final price o Energy price o Transmission o Distribution o Public levies o Contribution RES and CHP o Energy taxes and VAT

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Source: CREG, 2013


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Source: CREG, 2013

• Energy component o Component based on index parameters

• Indexation formula changes not frequently

o Prize ‘freeze’ between April 2012 – December 2012

o As from 2013, changes (indexation) in variable pricing contracts require approval regulator CREG (ex-post)

o Dc: Flanders -1.53 €/MWh (-2.83%) o Dc: Walloon region & Brussels: +2.72 €/MWh (+3.63%)

• Due to evolution index parameters

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• Transmission tariff o Elia’s transmission grid tariff

• Corrected with loss-percentage of DSO

o Minor component

o Same for Dc and Ic; Ic1 different

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• Distribution tariff o Introduction of multi-year tariff o Public service

• Flanders: “Free electricity”, public lighting, green certificates and actions for rational energy use

o Consumers on MV face lower tariff • Cascade principle do not bear costs of infrastructure

downstream

o Price evolution: Overall +71.7% • Flanders +41.64 €/MWh (+99.96%) • Walloon region: +13.80 €/MWh (+32.42%) • Brussels: +19.28 €/MWh (+47.81%)

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• Evolution and composition distribution tariff

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Source: CREG, 2013

• Public levies o Federal contribution (2.98 €/MWh)

• E.g., denuclearization of BP1 and BP2 Mol-Dessel

o Connection off-shore wind (0.14 €/MWh)

o Green certificates (2.2 €/MWh) • Off-shore wind

o Costs +99.57%

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• Contribution RES and CHP o Obligations supplier o Costs +119.67%

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Source: CREG, 2013

• Energy tax and VAT o Energy tax: 1.9 €/MWh

o VAT on sum of all components (including tax)

• 21% till March 2014 • 6% as of April 2014

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International positioning • Natural gas

• Electricity

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International positioning Natural Gas

• Comparison neighboring countries – domestic consumer

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Source: CREG, 2014

• EU comparison – domestic consumer

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International positioning Natural Gas

Source: ACER, 2013

• Comparison neighboring countries – domestic consumer

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International positioning Electricity

Source: CREG, 2014

• EU comparison – domestic consumer

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International positioning Electricity

Source: ACER, 2013

Some final reflections

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Long

run

ener

gy p

rice

~[€/

MW

h]

Energy Intensity ~[MWh/GDP-€]

Final reflections • Final price – domestic consumer

o Natural gas: 60-70 €/MWh

o Electricity: 200-230 €/MWh

o Gasoline (36 MJ/l): 1.712 €/l = 171 €/MWh o Diesel (36 MJ/l): 1.451 €/l = 145 €/MWh o LPG (26 MJ/l): 0.599 €/l = 83 €/MWh o Heating oil (36 MJ/l): 0.813 €/l = 81 €/MWh

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energy 31%

renewables and

cogeneration 5%

transmission 5%

distribution 50%

public levies 3%

taxes and VAT 6%

retail electricity price

energy 56%

transmission 2%

distribution 19%

public levies

4%

taxes and VAT 19%

retail natural gas price

energy 36%

distribution 10%

public levies 1%

taxes and VAT 53%

retail gasoline price

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Final reflections

Pricing of Energy - KU Leuven · • Energy component • Linked to price quotes of finished...

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