Power costs shrink as share of Europe's rising energy bills

By Karolin Schaps and Barbara Lewis

LONDON/BRUSSELS (Reuters) - Europeans are paying the steepest energy bills in four years and face ever higher payments as governments pile on extra charges to help finance a 1 trillion euro (872 billion pounds) modernisation of Europe's energy infrastructure.

Politicians from Britain to Germany, Italy to Romania, under pressure from electorates squeezed by economic downturn, are promising to cap energy prices or at least draw their sting.

Even so, consumers will continue to bear the bulk of the costs of replacing ageing power networks and kickstarting renewable energy projects.

The European Commission has estimated that infrastructure improvements will have cost a trillion euros by the end of the decade.

Legally binding targets to lower carbon emissions by 2020 mean that energy markets need to become cleaner, but the utilities say they cannot afford to finance the costs, so these will increasingly find their way onto customers' bills.

The wholesale price of energy, which previously made up the vast majority of a household bill, is a dwindling proportion; indeed wholesale prices in many EU countries have fallen in recent years as cheaper renewable energy enters the system, but retail prices have still been rising.

RWE npower, the British unit of German utility RWE (GER:RWE), said it expected the share of commodity prices as a component of energy bills to drop to 35 percent in 2020, down from 50 percent three years ago.

"The cost of funding government policies for renewable energy, social support and energy efficiency is increasing faster than any other part of an energy bill," said Paul Massara, chief executive of RWE npower.

"These initiatives are all important, but consumers need to be aware that delivering them is causing energy costs to increase and will continue to do so for some time."

Utility bills differ from nation to nation, and how they are compiled is opaque, but analysts say the commodity price will continue to fall as a proportion of energy bills across Europe.

Danish households, for example, pay Europe's highest electricity bills at around 31 euro cents per kilowatt-hour because more than half of the cost, or 55 percent, is made up of taxes, according to a report into energy bills by VaasaETT energy research group.

Across Europe's 15 oldest member states (EU15), transmission charges, taxes or renewable subsidies account for roughly half the average household bill, VaasaETT said.

In Denmark, where there is cross-party political agreement on the need to limit energy use, taxes and charges have found a relatively high level of public acceptance.

In Britain, where electricity prices are below the EU average and the wholesale cost is a greater proportion of bills than in any of the EU15, news that utilities will raise prices has kicked up a political storm.

GREEN SUBSIDIES

Prime Minister David Cameron has promised a review of green subsidies as part of efforts to curb prices, after the opposition Labour Party pledged to freeze prices if elected in 2015.

The European Commission, the EU's executive, is reassessing green subsidies as technologies such as onshore wind and solar power become more competitive with conventional energy forms.

The Commission has also promised to analyse the impact of energy costs on industry.

Some major users such as metal smelters have threatened to leave Europe, where they say they are punished relative to their peers in, say, the United States, where shale gas has driven down power prices to roughly half EU levels.

It's not all bad news for EU industrial consumers.

In Germany, renewable energy support costs have risen this year to 20.4 billion euros from 1.9 billion euros a decade ago, energy association BDEW said, but industry, which uses most of the energy, doesn't shoulder its fair share of those costs.

German households use only 26 percent but bear 36 percent of this cost, or 7.4 billion euros.

In some cases, the Commission is investigating to determine whether industry waivers distort competition.

For many experts, the obvious way to cap energy bills is by using less, but that requires upfront investment in improved building insulation, for instance, which some nations are reluctant to shoulder.

In Denmark, it is becoming a way of life for businesses and householders.

Denmark's state energy company DONG Energy (DOENRY.UL) has adapted its business model to sell energy savings measures as well as energy.

"It may seem paradoxical that energy companies go ahead and tell customers that they can reduce their energy consumption. But it is possible to develop new business opportunities from binding energy savings," DONG Vice President Torben Harring told Reuters.

($1 = 0.7262 euros)

(Graphics by Christian Inton; Editing by Will Waterman)