| Energy Price Can Stimulate Economic Recovery Location: New York Author: Martin Dunlea Date: Tuesday, March 24, 2009 As the ongoing global recession continues to dominate news channels and papers throughout the world, two articles that dealt with renegotiations and price reductions recently caught my attention. The first outlined a call by the Danish Social Democratic Party for a renegotiation of the Danish energy agreement following a new report that Denmark may not succeed in meeting their Kyoto Protocol targets for 2008-2012. Granted, the Kyoto protocol preceded the current economic downturn by some years, but the proposal to review the Danish government's climate strategy is significant. The Danish story is not unique in Europe, and many governments are now predicting that they are unlikely to meet the reduced carbon emission quotas. EU states have started to adopt different strategies in trying to meet the published emission targets including significantly increasing the amount of renewable in their energy mix. On the worldwide stage, the economic crisis is prompting a growing number of countries to back away from pledges to cut greenhouse gas emissions and invest in clean energy, as talks in Poland on a new worldwide climate change treaty are underway. The second article was a price reduction announcement by the Irish Gas Energy Board (BGE) that it intends offering double digit discounts to electricity customers who switch providers. Its prices could be up to 14 percent below those which the incumbent electricity provider, ESB, is obliged by the regulator to charge its customers. The discounts will apply to the price of the electricity and not to the "standing charge" element of domestic bills, which is imposed to cover network costs. Ireland currently has the most expensive electricity in the European Union. A 2008 report stated that domestic consumers in Ireland pay 20 percent above the European average principally as a result of high taxes and a dependency on imported fossil fuels. In addition, a planned 25 percent saving on gas bills in 2009 will knock about EUR 250 (USD 343) off the average gas bill, currently estimated at EUR 987 (USD 1355) per annum. A 10 percent cut in electricity costs would reduce a householder's average annual bill by about EUR 110 (USD 151) giving a combined annual saving of EUR 356 (USD 490) in a full year to dual customers of the gas group. The move by BGE, the country's first dual-energy supplier had an immediate impact with the Irish Government and the Energy regulator cutting ESB's electricity prices by 10 percent in an effort to boost competitiveness and cut costs for business. In the first week of the electricity discount offer, BGE reported some 60,000 customers had switched energy providers. A recent survey in Austria by the energy regulator E-Control revealed nine percent of Austrians have switched their gas and power provider. This comes despite the fact that the majority of people in the country find gas and electricity prices too high. The regulator agrees with this, saying that gas and electricity prices are 30 percent and 10 percent too high. Switching providers could save average households EUR 250 (USD 343) a year. One reason why so few people do this is that the energy sector does not advertise much, compared to other industries. Another factor is that people are worried that the new provider's quality may not be the same. And this at a time when utilities are reporting more cut-off notices, late payments, partial payments, and customer pleas for more time and payment plans. It would appear that difficulties with paying energy bills are not confirmed to low-income people anymore, with evidence indicating that more people from different socioeconomic background are also been affected. According to the National Energy Assistance Directors' Association, January 2009 saw record numbers of applications for energy payment grants and the numbers are estimated to increase 25 percent, compared with last year. This year, the number of applications is expected to reach 7.3 million households nationwide. An Incentive to Control Costs The Irish competitive price story is but a small example of where, from time to time, competition and government action can act in the interest of the end user. In the United States and Europe, different regulatory approaches have had limited impact on creating competition and lowering energy costs. In the United States in the mid-1930s, the government tried to protect consumers by imposing regulations on utility companies to prevent nationwide monopolies and to better control the price of a commodity that everyone needed. State public commissions approved any rate increases and kept a close watch on electric company profits. But some argued that this system discouraged innovation, since electricity companies had no incentives to control costs. Competition, it was claimed, would give consumers more choices at lower costs. Yet instead of the predicted lower prices, residents in some states are experiencing sharp spikes. In Europe, incumbents, having had a near monopoly in their own countries for many years, were encouraged under regulatory rules to facilitate new competition entry into the markets. The reality is somewhat different and after 14 years of market liberalisation, huge barriers remain and prevent sufficient levels of competition. This prevents end users from reaping the full benefits of liberalisation. Today Europe's energy market situation still comprises essentially of fragmented national markets with dominant incumbents who often have both supply and transmission businesses. In light of failed regulated strategies and as economies around the world struggle for innovative approaches and solutions to kick-start their economic recovery, many of which are focused on tax rebates, or tax increases, can energy providers and energy regulators start to play a significant role in the competitive stimulus many of these economies need? In short, can and should current energy contracts, including end user charges, be renegotiated as an integral part of the recovery package and offer relief to businesses in what has now become a major competitive issue. One of the few bright spots in all of this uncertainty is the recent fall in commodity prices and inflation, which should lend support to real household disposable income. The sharp fall in oil and other commodity prices amid the worsening global growth outlook has been the main driver of the reduction in inflation. Ironically it was less than eight months ago that inflation was driven almost entirely by prices on global commodity markets. At the time the U.S. Fed was expressing concern about inflation and signalled that interest rate hikes would be a possibility later in the year. The recent global downturn also means that many of the recent economic predictions, including positive GDP growth for the United States and Europe over the next 20 years are now outdated. Low Prices—Low Demand During 2008 many residential, commercial and industrial users saw significant increases in fuel and energy costs, some running at twice and three times the rate of inflation. As such, general indicators like inflation do not tell the true story and for many small and medium sized companies, the price increase effect was more pronounced. For larger industrial users, the past year has also seen increases in energy costs, running costs and an escalation in raw materials costs as suppliers pass on the effects of fuel and energy increases. Over the past seven months, the monthly average price of West Texas Intermediate (WTI) crude oil fell from $133 per barrel in July to $41 in December and January. According to the Energy Information Administration short-term energy outlook, WTI prices are projected to average $43 per barrel in 2009 and $55 in 2010. But the downturn is also contributing to a decline in consumption in oil and natural gas. This includes everything from reduced demand for cars and transportation fuel to a severe manufacturing weakness that is impacting on natural-gas demand. The forecast is for oil and natural gas prices to remain low in 2009 and for energy demand to continue downwards. Summary The falling cost of crude oil has helped household disposable income and the sharp fall in commodity prices amid the worsening global growth outlook has been the main driver of the reduction in inflation. This has provided some relief to residential and commercial end users, who face uncertainty and challenges on a daily basis. But western economies continue to face competitiveness issues. Innovative alternatives are required and further energy price reductions can go a long way towards lowering their cost base. The depressed price and demand conditions present an ideal opportunity for regulators and energy companies to work together and pass further energy savings to end users. The approach could form an important part of an overall economic stimulus strategy for residential and commercial users, many of whom are experiencing short-term credit and sustainability challenges. In addition, to close on my opening remarks, increased emissions of CO? in Europe and a growing dependency on fossil fuels continues to drive the carbon factor. For now, investment uncertainty and credits issues are slowing the rate of investment in utility infrastructure projects. But as countries assess their ability to meet near-term Kyoto Protocol targets and as increased investments in European gas and electricity infrastructure continues to address demand and environmental concerns, the likelihood is that prices will rise and energy will become even more expensive in the near future. The U.S. stimulus package announced by President Obama will channel the funds into roads, bridges and national transmission systems and help create a modernised network that can save energy, maximize energy production and improve reliability, but the big picture investment should be accompanied by government intervention as that is the most pragmatic approach to easing national burdens during recessionary times. UtiliPoint's IssueAlert® articles are compiled based on the independent analysis of UtiliPoint consultants. The opinions expressed in UtiliPoint's® IssueAlert® articles are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. UtiliPoint's sole purpose in publishing its IssueAlert articles is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. © 2008, UtiliPoint® International, Inc. 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