While wholesale electricity prices are determined by a large number of factors specific to each electricity market, changes averaged over a quarter are most often due to shifts in the balance of supply and demand and in the price of key input fuels. Prices are also highly seasonal due to heating and cooling needs, with the highest prices normally experienced in the summer (United States, Japan, Australia) or winter (Europe). A quarterly wholesale price index, therefore, can be a useful tool to track the changes in individual markets and deduce overall trends.

Since 2016 the IEA has been tracking wholesale prices in the main advanced economy electricity markets and in selected emerging and developing economy markets. The graph shows a selection of these markets, with prices indexed to 100 for the average in the first quarter of 2016.

To understand the underlying trends, we have combined the four-quarter rolling average indexed prices (to smooth seasonal effects) of advanced economy wholesale electricity markets, weighted by demand, to create an advanced economy wholesale electricity price index. This is shown as the thick black line. The index increased by 34% between the fourth quarter of 2016 and that of 2018. This trend began to reverse in 2019, when the index fell by 12% due to falling electricity demand in advanced economies, increased renewable production that ensured a plentiful supply in most markets, and falling natural gas prices.

2020 has seen an acceleration of this decline. Dramatically lower demand for electricity, increases in renewable production and a fall in spot natural gas prices of between 20% and 50% (depending on the market) drove down wholesale electricity prices in the second quarter to their lowest levels since we began tracking. The most dramatic price fall took place in the Nordic electricity market, owing to abundant hydro supply. While market prices recovered in the third quarter, thanks to higher demand and higher natural gas prices, the rolling 12-month average electricity price index continued to fall to a level 28% below the level seen in the final quarter of 2019 – and in fact below the level observed in quarter four of 2016. Results for the final quarter of 2020 are expected to be similar to Q3.

Electricity end-user prices differ significantly between countries. Some influencing factors are: the type of end-user price (i.e. regulated or market based) and the composition of the tax structure (e.g. VAT, excise taxes, renewable energy and capacity levies, environmental taxes).

Industrial sector prices are especially high in Italy, Japan, Chile, the United Kingdom, Slovakia and Germany. In Italy and Germany this is due to relatively high excise taxes, which many other countries do not impose on industrial consumers. At the lower end of industrial prices are Norway (despite charging VAT), Sweden and Denmark together with the United States. These markets benefit from low production costs due to access to favourable renewable sites (Scandinavia) and low fuel costs (United States).

In most countries, household prices are significantly higher than industrial prices due to the presence of higher taxes and network charges (the provision of electricity at lower voltages to households requires more infrastructure and incurs higher costs, which leads to a higher price). Very high spreads can be observed in Denmark, with household prices being four times the price for industry, and Norway, Sweden, Spain, and Germany, where household prices are double those for industry.

In many countries with the highest household electricity prices – including Germany, Denmark and Italy – relatively high excise taxes are collected. In Germany, for example, the EEG surcharge for renewables is borne by residential customers while large industrial consumers are exempt, which partly explains the high household cost of electricity. Mexico has the lowest electricity prices for households by far (close to half the value of Korea’s as the second-lowest price). This is due to consumption being subsidised in part by the federal government and in part by the state-owned electric utility, resulting in the rare case of household prices being lower than those for industry.

The pattern of end-user electricity prices has been affected by different factors this year. Among them is the drop in wholesale prices caused by the fall in electricity demand and higher levels of renewables in the system. These are reflected to various extents in the countries we have selected for analysis.

The highest impact was observed in Norwegian end-user prices. The declines of around 77% for industry and 42% for households were closely coupled with the fall in wholesale prices (down by 86% in quarter two of 2020 compared to the same quarter of 2019), caused by low demand and exceptionally high hydro and wind generation.

Most other countries do not show such close coupling of wholesale and end-user prices. This is especially true for household prices, which on average consist to a larger extent of fixed grid charges, taxes and levies (for example, around 77% in Germany). Also, a higher share of customers are still subscribed to regulated tariffs (e.g. 78% in France in 2018), which could explain a delay until lower procurement costs are reflected in end-user prices. Households in Spain, Germany, the United Kingdom and the United States paid on average 9%, 6%, 5% and 1% less in quarter two of 2020 compared with the same period in 2019 – whereas wholesale prices dropped by much more. Prices for industrial customers did not closely follow wholesale prices in this quarter either (except as previously mentioned in Norway).

In Europe dynamic pricing contracts are only available in seven EU countries and Norway. As pointed out by the European Commission, these contracts could help to reduce the energy supply component of electricity prices significantly – and at the same time offer incentives to final consumers to participate in demand response and thereby foster the integration of renewable energy in regions with a high share of variable renewables and increasing levels of electrification.

Globally the status of market liberalisation varies. Wholesale markets that are fully competitive comprise 40% of global demand, with a further 47% having some form of hybrid competition, such as unbundled generation and transmission ownership with state-owned companies or independent power producers, or full competition in a portion of a jurisdiction. Vertically integrated utilities comprise the remaining jurisdictions that make up 13% of global demand.

Retail markets are liberalised to a lesser extent than wholesale markets, with fully competitive markets accounting for 22% of global demand, partially competitive accounting for 45%, and fully regulated monopolies the remaining 33%.

Europe is the region in which markets operate under the greatest degree of liberalisation: 93% of demand in Europe operates under full wholesale market competition, with 85% under full retail competition. In North America 48% of demand is in fully competitive wholesale markets, with 29% under full retail competition. Central and South America (25% under full wholesale competition), Asia (18%), and the Middle East and Africa (0%) show lower levels of liberalisation.

In the western United States wholesale market competition has been limited by the lack of a transparent and efficient mechanism to facilitate trade and allocate transmission among neighbouring utilities. The California independent system operator (CAISO) spearheaded the creation of the Western Energy Imbalance Market in 2014 in an attempt to address this issue by creating a real-time wholesale market. While not a truly regional system with fully competitive energy and ancillary services markets, it operates 15-minute and 5-minute dispatch markets that allocate available transfer capability on an economic basis. Its membership stands at 11 balance areas today, with eight others planning to join by 2022. By then, the footprint will extend to 10 US states and British Columbia.

The southeast is another region in the United States in which market competition is limited to independent power producers operating within franchised monopoly service territories. In Alabama, Georgia, Florida and South Carolina the loads of all customers, accounting for 2.5% of global demand, as well as large portions of North Carolina, Tennessee and Mississippi, are served by vertically integrated utilities. In July two of the largest utilities in the region (Duke Energy and Southern Company) announced that discussions were taking place to potentially create a regional wholesale market, which would be modelled on the Western Energy Imbalance Market. A recent study reviewed the potential benefits for consumers, new entrants, carbon emissions and system efficiency if realised.

In China dispatch reform is being considered as a mechanism to improve efficiency and accommodate more variable renewables. Currently the fair dispatch system allocates energy volumes administratively rather than through economic optimisation. In 2016 the government released Document No. 9, a major energy market reform package, which foresees the withdrawal of the administrative system in favour of economic dispatch. In June 2019, eight provinces began spot market pilots, which the government hopes will reduce the number of renewable curtailments and lower power prices.