Europe: Non-Competitive Power Prices Derail Growth

June 28, 2021 Updated: June 28, 2021

Commentary

Despite an endless chain of monetary and fiscal stimuli, the eurozone consistently disappoints in growth and job creation. One of the reasons is demographics. No monetary and public spending stimulus can offset the impact on consumption and economic growth of an aging population, as Japan can also confirm.

However, there’s an especially important factor that tends to be overlooked: the lack of competitiveness of the eurozone industry due to rising and non-competitive power prices.

Residential electricity prices in the European Union (EU) between 2010 and 2014 were on average around $240 per MWh compared to an average of nearly $120 per MWh in the United States. Gasoline prices were also twice as expensive on average in the EU compared to the United States (pdf).

This trend has not improved. In 2020, the average residential consumer’s electricity price in Europe showed an increase of 13 percent over the average price 10 years before.

Renewable subsidies play an important role. In Germany, household power prices have risen dramatically since 2006. Average household electricity price has increased by 55 percent between 2006 and 2019 while the country invested more than 150 billion euros in subsidies for renewables (pdf). The price of energy only accounts for 23 percent of the average household bill, while renewable premiums account for 21 percent and the cost of the networks 24 percent. Today, Germany depends on coal for almost 24 percent of its energy mix and 16 percent on natural gas.

According to the Strom Report:

“Taxes and levies make the biggest difference. Their share climbed steadily, from 25.6 percent in 2011 to 40.3 percent in 2020, with rates as high as 66 percent in Denmark and 53 percent in Germany.

“The VAT [value added tax] average in the EU is 15.5 percent of the total price and ranges from 4.8 percent in Malta to 21.2 percent in Hungary.”

These high energy prices, where businesses and households face massive taxes and fixed costs, work as a burden on growth and competitiveness. Even in Germany, where exporter industries are exempt from renewable levies, the difference with the United States and China in terms of energy costs remains too high and makes most industries lose competitiveness. We must remember that energy costs can account for up to 30 percent of all costs for an industry. Rising fixed costs in the energy bill mean a working capital burden for businesses that inevitably leads to reduced job creation, as the two most-important costs are energy and labor for industrial manufacturers.

A key negative factor in Europe is the cost of CO2 emissions, which is a hidden tax that governments collect from selling emission permits. The price of CO2 permits has soared to record-highs as the member states limit permits and demand rises. This cost is passed directly to consumers while governments collect billions of euros from selling them. As Europe’s emission cut targets accelerate, this hidden tax is likely to penalize producers and consumers to an even greater level.

The EU is responsible for around 9 percent of the global CO2 emissions but bears 100 percent of the cost as the rest of the large economies don’t impose such a heavy burden on consumers. Additionally, the CO2 tax has not worked. The only reason why the EU’s emissions are falling is because its growth is weaker than its peers. Even the United States has reduced emissions faster since 2007.

“The United States’ carbon emissions have declined since peaking in 2007 and the United States’ emission reduction has outpaced all of the countries that have remained as a part of the Paris Agreement in terms of raw emissions. However, many individual countries have seen their carbon emissions reduced at a faster rate than the United States,” according to The Dispatch.

What’s sad to see is that some of the key drivers of the EU’s carbon emissions reduction are lower growth and industrial relocation to other countries. This burden on competitiveness is not just a negative factor for the existing industries, but also a key element in the decision to relocate to other countries.

Politically designed power markets are not just making the EU lose competitiveness but are also curbing potential growth and job creation.

There’s nothing negative about a cleaner energy transition if it’s competitive and doesn’t generate more negative than positive effects. The problem in the EU is that the energy transition has been politically designed and not driven by competition and technology. Misguided subsidy and tax measures have resulted in higher fixed costs and elevated prices for consumers.

Instead of heavily intervened energy markets, open competition between renewables and natural gas and technology innovation would have been better and cheaper alternatives.

Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Daniel Lacalle
Daniel Lacalle
Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”