The Paradox of Energy Prices

Published: Tue 04 Jun 2013
A blog entry by Sasha Bermann

Contributed by:

Sasha Bermann
Chief Dissemination Officer

Sasha Bermann's Blog

Prices represent one of the biggest paradoxes within the field of energy. Most people use energy on a daily basis, almost every household and business pays for it yet few people actually understand what makes up the price they pay.

Broadly speaking, energy prices  or more specifically electricity prices comprise 4 elements: VAT, tax, distribution costs and the actual cost of the electricity itself (which also includes the supplier’s margins). The 2 first elements are as such artificially imposed on the consumer by governments and are therefore not related to the product consumed directly, but instead related to political aims. A political aim could be, for example, to simply generate revenue for the government or it could be a part of a specific political agenda such as “the green agenda”. The latter 2 elements are on the contrary directly related to the product consumed as they represent actual costs. How dominant each element is varies enormously from country to country. However within the EU it is usually the cost of the electricity itself and its distribution that makes up the lion share of the total costs. Yet there is one very unique exception: Denmark.

For a typical Danish household, the tax element is dominant and makes up an astonishing 35% of the total costs. Meanwhile the cost of the actual electricity only make up a mere 18%. VAT is 20% and distribution is 26%. Thereby the governmentally imposed part of the costs amounts to 55%. Even though these are the facts, few customers are believed to be aware of it.

On average in the EU-15 the electricity price for a typical household is composed of 14% VAT, 13% taxes, 30% distribution and 43% electricity cost. All data provided by this article stems from the newly released report on Residential Energy Prices 2013 by VaasaETT – global energy think tank.