The scale of the increase in utility bills, which Citi estimates as being equivalent to over 3% of GDP, will likely force governments to take action. This implies additional risks for producers of adverse regulations such as price caps or windfall profit taxes, meant to lower the burden on consumers. The Citi report investigates the issues from households/voters’ perspectives and identifies potential vulnerabilities in the utility value chain.
Gas and power price hike impact on GDP — Considering the size of the European gas (c.470bcm) and power (c.2700TWh) markets and gas and power price rises from the 2020 level vs 2024 forwards, Citi analysts estimate that the impact may be over 3% of GDP. In the case of electricity, large profits could stay within power generating companies, especially those with clean power sources and merchant exposure, while the utility sector makes limited profits on gas resale activities.
Utility bills will have a big impact on household disposable incomes — Citi analysts estimate that total power and gas bills are likely to increase in Europe from c. 3.5% of household disposable income in 2021 to 4.5% in 2023 and 4.8% in 2024. The cost-of-living crisis may be most acute in Eastern Europe, where utility bills currently contain lower amounts of fees and taxes and commodity prices have a larger impact. Western European governments may also have more flexibility to reduce fees in order to balance commodity price pressure.
To understand consumer behaviour, Citi Innovation Labs conducted a proprietary survey of 12,000 European residents on their expectations for utility bills —
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On average, respondents spend over 10% of their monthly income on utility bills, with older respondents being most impacted
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Majority of respondents have experienced an increase of mid-teens % in their utility bills in the past year and most expect a similar hike in the next 12 months
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More respondents have delayed payment in the past year than in previous periods. Close to a quarter of younger adults have been behind on their utility bills
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Direct subsidy is the most popular option in terms of government support to mitigate the increase in bills, and
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Most respondents blame O&G and power generating companies and the government for increased utility costs.
European gas prices have increased from below EUR20/MWh in 2020 to over EUR70/MWh for 2023 forwards and EUR58/MWh for 2024. At the same time, power prices in Europe have increased from below EUR40/MWh in 2020 to c. EUR220/MWh for 2023 forwards and EUR185/MWh for 2024.
TTF gas price increase (EUR/MWh) |
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Power price increase across Europe (EUR/MWh)) |
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Source: Bloomberg |
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Source: Bloomberg |
What can governments do to lower the burden?
The current energy crisis has forced almost all European governments to take some short-term steps to lower the burden of rising utility bills on consumers. The most common actions are temporary or permanent reductions of taxes and levies i.e. mainly through lower VAT or lower renewable fees and direct subsidies to end-customers and especially to vulnerable customers. The latter group covers direct payments or subsidies depending on income levels. Government actions concern not only power and gas bills but also fuel prices, especially in Eastern Europe.
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Examples of government actions to lower utility bills |
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Source: E.ON, Citi Research |
Beyond short-term measures, Citi analysts note that there are also a number of ideas to lower energy costs that could be implemented over the medium term. The actions are more structural and so far they are topics of discussions with no real actions. Of note are the following ideas:
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Countries including Italy and Spain are calling for joint action at the EU level to implement joint procurement of natural gas.
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Eastern European countries like Hungary, Czech Republic and Poland want to rethink and reform ETS.
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France is among those calling for reform of the pricing mechanism in the European energy market. This could supposedly eliminate high gas prices out of the merit order.
Even before the Russia-Ukraine conflict, the European Commission had been looking at rising energy costs, publishing a ‘toolbox’ of possible medium-term policies at end-2021. Recommendations included: 1) revising the security of supply regulations to ensure more effective functioning of gas storages; 2) setting up new cross-border regional gas risk groups to work on national preventive and emergency action plans; 3) supporting the development of energy storage solutions; and 4) designing voluntary joint procurement of reserve gas inventories. Despite these recommendations, most of the actions delivered were at the country level.
For more information on this subject, please see Western Europe Diversified Utilities - Higher Bills = Higher Political Risks?
Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.
