What is the Purchasing Power Standard (PPS) and PPP in Energy?

Purchasing Power‍

Purchasing power’ or “purchasing power” is a macroeconomic term that refers to the standard of living of the citizens of a certain territory and at a certain point in time, often for the purpose of comparison with other times or other territories without going into the currency difference.

It is important to keep in mind the basic concept behind the definition, in essence, that we will have more purchasing power the more needs we are able to cover with a given amount of money.

One way to bring the general concept of ‘purchasing power’ into more accessible terms is to think in one place, over time. If, for example, we earned today the same as our grandparents did fifty years ago, we would barely have enough to eat and could not even think of buying a house, but back then, it was enough for a family even larger than the average family today. That is why we say that the purchasing power of a euro (or a dollar) was greater in the past than it is today. Inflation is an example where the purchasing power of a currency falls considerably, i.e. the nominal prices of all goods rise. Another example of falling purchasing power is when we refer to a particular commodity that is in short supply, either because of seasonality or for other reasons. But how does this apply to PPP or PPS?

‍PPS and PPP‍

The PPS is an artificial common reference currency, created by Eurostat, and used within the European Union to eliminate price differences between countries. In other words, conceptually, a PPS allows you to buy the same volume of goods and services in all countries.

This unit of measurement also serves as an indicator of economic volume and consequent comparisons between countries, and is used, like Purchasing Power Parity (PPP) in macroeconomics, to compare the economic productivity and living standards of two countries. PPP is often said to follow the ‘basket of goods’ strategy where two countries are considered to be ‘at parity’ if a basket of the same items costs the same in both countries, after applying the conversion rate of both currencies. In other words, PPS is the name given to the unit in which a country's PPP and sometimes GDP is measured.

In the European Union, the comparative volume index of this GDP (Gross Domestic Product) is the PPS and is defined in relation to the average of the 27 countries of the Union as follows; the average becomes 100 and countries score either below (Spain 91 in 2018 and ‘19) or above the average, such as France (106 in 2019 according to Eurostat data).

‍How is it used in energy?‍

As professionals in the energy sector, one way we interact with PPS/PPT is by comparing EU countries and going to official sources. An example of such sources is Eurostat's report on household energy prices in 2019 and the change in prices since 2018.

The report talks about the average rise in the 27 member states, setting it at €21.6 per 100kWh. After that it compares individual states to this average, Bulgaria 10€ 100kWh or 30€ in Denmark, Belgium or Germany. After this data, a report of this kind will talk about the percentage of taxes that this includes (41% on average for electricity and 31% for gas) and with this data we can represent graphs like this one.

Continuing with the data, if we express in euros the average price of energy in each country, the graph takes the following form, with the lowest prices in Bulgaria (9.6€ per 100kWh), Hungary (11.10€) and Lithuania (12.5€) and the highest prices in euros are Denmark (29.2€), Germany (28.7€) and Belgium (28.6€).

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However, after establishing the methodology and the basis of the study, it is not unusual to see a graph (or a table) like the one below, in which, in order to compare the countries of the Union, not only the euro is used as the unit of measurement, but a new column is added with the Purchasing Power Standard (PPS).

This new variable shows, for example, that the lowest prices (in purchasing power) are in Finland (14.4 PPS per 100kWh) and Luxembourg (14.6 PPS), followed by Malta (15.4 PPS), France (17.5 PPS), Sweden (17.6 PPS) and Estonia (18.2 PPS). 2 PPS) and when we focus on the most expensive energy for their inhabitants, given their purchasing power, we see that they have it worse, countries like Romania (27.8), Germany (26.8), Spain (26.2), Portugal (26 PPS), Belgium (25.9), Czech Republic (25.5) or Cyprus (25.1). ‍‍

‍‍Why is PPS important, even outside the energy industry?‍

Quite simply, because using a currency to talk about a certain country having ‘cheaper prices’ for that good or service (with the connotation that its inhabitants have more access to that resource) is often a biased view in the least case or a manipulation of information in the worst case scenario. An example according to the above data could be Finland, with an energy price around the average, which is nevertheless the most ‘affordable’ in the EU in PPS.

Understanding all the angles of this prism, we will understand that the highest price increases in gas have been experienced by Spain, Croatia, the Netherlands and France, while Latvia has benefited from the most significant price decreases. In electricity, in relation to 2018, the countries where prices rose the most last year were the Netherlands and Lithuania, while price decreases were most pronounced in Denmark and Greece.  

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