The cost of energy frequently makes the international headlines, as we continue to witness increased volatility in pricing as well as a steady increase in overall costs. That energy is becoming more expensive is not surprising; the rise in worldwide demand in combination with limited supply has logically had an upward effect on prices. There are also several other factors at play which have made the energy landscape gradually more complex, notably the growing emphasis on renewable resources. However, Belgium’s fragmented regional policies and infamous tax regime have pushed the country into an even more uncompetitive position.
Belgium's price disadvantage
In March 2013, a benchmark study by Febeliec revealed that the cost of electricity in Belgium is significantly higher than in our neighbors: France, Germany and the Netherlands. The difference varies as much as 12-45%, depending on the region and the amount consumed. This translates into a price difference for industrial base load consumers of approximately €6.5/MWh (for 1000 GWh consumers in Flanders in 2013) to €25/MWh (for 100 GWh consumers in Wallonia in 2013), compared to the average of neighboring countries.
For a 100 GWh base load industrial consumer, this ultimately represents a difference of €1 million a year in Flanders and €2.5 million a year in Wallonia. Moreover, the more you consume, the higher your electricity bill. For a 1000 GWh base load industrial consumer, this financial disadvantage amounts to €6.4 million in Flanders and €6.9 million in Wallonia a year.
“The cost of electricity has a decisive impact on competitiveness.”
For energy-intensive companies, energy costs represent an important part of their variable production costs. The cost of electricity is therefore a critical cost component that needs to be managed carefully as it has a decisive impact on the competitiveness and viability of such companies in the global markets in which they compete. The fact that there is a significant difference between Belgium and its neighbors is highly detrimental to the country’s industry and exhibits Belgium’s weak competition and structural barriers.
The variation in prices is largely due to the country’s tax regime and the fact that it did not have a system of regressive tariffs for energy-intensive industries. This stands in stark contrast the Netherlands and France, which have low taxes on electricity. France has also ensured its electricity remains competitive by maintaining a low regulated market price. Germany has also taken steps to keep electricity prices competitive for industry through limiting the tax charged to energy-intensive activities.
Energy subsidies raise the overall cost of energy
Belgium’s commitment to the EU’s 20-20-20 targets also contributes to the uncompetitive energy prices.
Renewable electricity generation requires substantial investment, not just in the technology itself, but also in its integration with existing grids. To offset the investment costs, numerous support schemes have been put in place to accelerate the uptake of renewable resources in order to meet the EU’s goal of sourcing 20% of its energy from low-carbon sources by 2020. Yet the subsidy cost is high and has ultimately been shouldered by consumers in Belgium and across Europe.
In Belgium, the three regions have large autonomy over the design and implementation of policy supporting renewable energy sources and the energy efficiency of residential housing. At both federal and regional level, schemes have been developed that require transmission system operators (TSOs) to purchase green energy certificates or Combined Heat and Power Certificates (CHPC) at a guaranteed minimum price. Additionally, a growing quota of renewable power production is based on the yearly electricity sales of each provider. However, electricity suppliers recover the cost of the quota obligation imposed on them through tariffs. It is therefore the end-consumer who effectively carries the cost of the support system.
Green certificates differ substantially from region to region, effectively creating three separate markets in addition to the federal certificate scheme for electricity from offshore wind power. The lack of coordination between the regions leads to fragmentation of an already small energy market in Belgium. Aside from administrative complexity, these differences also add to the cost of producing electricity from renewable resources.
Finally, Belgium’s subsidy system itself is inherently flawed. Highest support goes to the generation of electricity from solar photovoltaic which, given Belgium’s frequent grey skies, is the most costly to produce. Furthermore, while the support scheme has resulted in substantial investment in solar panel installations in recent years, the volume of energy produced by these is insignificant, and in 2011 accounted for less than 0.2% of Belgium’s renewable energy production. It is therefore clear that Belgium’s green certificates are not cost-effective, to say the least.
Europe's knock-on effect
While Belgium has the ability to reform its taxes and create a more efficient, cost-effective system of green certificates, it cannot always avoid an overall increase in energy prices. This is due to global market dynamics and due to the fact that Belgium is part of the European energy grid.
This was clearly demonstrated in 2011, when Germany closed seven of its nuclear power plants. A report by Belgian electricity regulator CREG revealed that, as Germany switched from an exporter to an importer of electricity, this had a knock-on effect for prices in Belgium. Having previously imported electricity from Germany, Belgian prices rose by 8% or €4.50 per MWh. The same report predicted that by the time all of Germany’s nuclear plants close in 2022, prices will increase by 20%.
Over the past 30 years, European governments have been trying to deregulate energy markets, privatizing state-owned companies and ‘unbundling’ electricity generation from transmission and distribution in order to avoid such situations. The aims were to increase competition, boost efficiency and cut prices. Renewable energy has, unfortunately, made the energy landscape increasingly complex, thereby making these goals significantly harder to achieve.
Electricity generated from renewable energy has grid priority, meaning the grid is legally obligated to take their electricity first. This is to encourage the use of renewable resources and also serves a logical function, as the marginal cost of wind and solar power is zero. However, unlike the main providers already in place, such as gas and nuclear, solar and wind power are intermittent, rising and falling with the weather conditions. Energy markets fundamentally differ from other commodity markets as their demand is highly variable – by day, time and season – and power cannot be stored in large volumes at competitive prices. This means that the green foundations of the grids, and their prices, are in a constant state of flux. Ever dependent on weather conditions, one country may experience a surplus due to ideal wind conditions with plenty of sunshine, while a another country may risk a blackout on days where the weather is cold, the wind does not blow and the sun does not shine.
While renewable resources have made the energy landscape more complicated, the creation of a European grid, based on green energy, is virtually the only way to guarantee security of supply for the future of the continent. Europe, and Belgium, must therefore proceed with caution to ensure they do not damage the competitiveness of their industry through inadequate reliability or increased costs, while attaining the goal of a unified European grid.
Cost competition is global
In addition to growing energy challenges on the European continent, America’s shale gas revolution has renewed concerns about price competitiveness and creates a real risk that Europe will be left behind. In May 2013, the Commission revealed that, between 2005 and 2012, gas prices for industry fell by 66% in the US, while in the same time, rose by 35% in Europe. This cost trend is a serious concern for Europe’s industry, as the continent continues to subsidize renewable energy resources in addition to becoming increasingly dependent on energy imports.
“America's shale gas revolution has renewed concerns about price competitiveness.”
A report by the International Association of Oil & Gas Producers (OPG) has revealed that the development of shale gas in Europe could add as many as one million jobs, make industry more competitive and decrease the region’s dependence on energy imports. Roland Festor, OPG’s EU Affairs Director, says that Europe cannot afford to forego such an opportunity. “Every cubic meter of gas produced from EU shale resources means one cubic meter less of imported gas. This would translate into more jobs, more disposable income, better security of supply and ultimately more prosperity.” However, while the economic benefits of shale gas become increasingly clear, the environmental consequences remain a subject of intense debate. For now, Europe, and Belgium, must focus on creating a coherent long-term energy policy, which will limit their energy dependence and keep prices in check.
For more of our policy recommendations, please refer to our Priorities for a Prosperous Belgium.