Mercedes replaced Red Bull as Formula 1's dominant team in 2014.
Red Bull's Renault engine did not have the pace of the Mercedes Engine and neither the good reliability.
While the Brackley team won the F1 Championship titles, Red Bull dropped to second best with Daniel Ricciardo getting the only three wins for the campaign.
"I think the difference to Mercedes was far bigger than we expected it would be," Horner told Autosport.
"We feared that there was going to be a deficit, but nowhere near the scale we saw.
"I think first we need to congratulate Mercedes, who have done a truly incredible job with their power unit.
"I think we were in the worst of all situations with Renault in that we were uncompetitive with an unreliable engine. But credit to them for sorting the reliability out on the engine.
"It's now the performance deficit that we really need to focus on," he added.