This graph (source: European Commission) shows the development of the prices of electricity in the United States, Japan and the European member states of the Organisation for Economic Cooperation and Development (OECD) since 2005. The OECD’s membership consists of rich countries, including most Western and Northern European states. In the graph, the prices of 2005 were used as a starting point in order to illustrate the development of the last eight years. As can been seen, in the United States the prices were rising modestly initially but have since fallen and are now lower than in 2005. In Japan, the prices were falling, rising and falling again before they spiked dramatically in the last two years. In OECD Europe, the prices have been rising relentlessly before falling slightly and then rising again. They have increased much more since 2005 than the prices in either the U.S. or Japan.

There are many reasons for the different developments in the three geographical areas. Japan relied heavily on nuclear power to generate electricity. While it is very expensive to construct a nuclear power plant, once it is built it generates electricity very cheaply. After the accident in the nuclear power plants of Fukoshima in March 2011, the Japanese government decided to switch off most of its nuclear reactors. The resulting gap in the electricity generation was filled mostly by expensive LNG (liquefied natural gas) imports.

The falling electricity prices in the U.S. can be mainly explained by the shale gas boom in North America. Massive gas resources in shale rock have been exploited in the U.S. in the last few years through the combination of horizontal drilling and hydrological fracking (an example, pumping huge quantities of water down the drilling hole to crack the fissures in the shale rock and thus liberate the gas which was trapped in the shale). Gas production in the U.S. has increased massively and gas prices have collapsed. This fall in prices has also reduced the prices of electricity.

In Europe, the main reasons for the rise in electricity prices have been the climate targets. Most European countries have implemented several measures to decarbonise their electricity generation systems and have subsidised renewable energy sources like wind and solar power. These subsidies have been financed by increasing the energy bills of households and companies. As inevitable result, electricity prices have been rising relentlessly in Europe.

The consequences of the different developments in electricity prices are serious. European companies in energy-intensive industries like aluminium, steel, ceramic and others are increasingly unable to compete with their American counterparts. These European companies face now the choice between moving production to the United States to take advantage of the low prices there or going bankrupt. Because of the attempt to decarbonise the electricity generation, European countries will lose jobs and investments.

Note: More information about the shale gas boom in the United States can be found here.