January 29, 2022

Beyond Going Long

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We cannot avoid price hikes. But the state has leverage to curb growth

Electricity prices increased by 15 percent. This ruling was recently announced by the Network Industries Regulatory Bureau, which sets, among other things, the price of electricity for the following period each year.

And the resulting price, which we will find in next year’s electricity bill, is not yet clear, but the sharp rise in commodity prices in global markets has long indicated that we will not avoid price hikes.

However, the leader of the opposition, Robert Fico, still wants to hold an extraordinary session of Parliament on this issue, where the National Assembly, by regulation, must order the government to prevent price hikes. But is this possible?

To some extent, yes, the price of electricity – as in many other European countries – is regulated in Slovakia. In addition, electricity is generally only one component of the final amount we find in the account each month.

The price of electricity alone, for example, last year made up only 40 percent of the total. Back in 2019, the price of electricity was only about 30 percent and other components had more weight.

Right after electricity, the biggest component is the power distribution fee. They are directed to the distribution companies and their value is determined by the said Network Industries Regulatory Office. Similarly, the third highest item, which is called the tariff for the operation of the system.

In this case, it is quite a controversial element. Through it, we all compose to support green energy, but ironically also to support the production of electricity from domestic coal. From the total amount collected through the tariff, additional fees are paid to producers of electricity from renewable sources.

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The entire system was created years ago to save these producers. After a period when the price of electricity reached its maximum, it decreased significantly. Consequently, it fell below the value at which the state pledged to purchase electricity from green producers.

To compensate for this difference, a tariff for the operation of the system was created. Its amount is also set annually by the Network Industries Regulatory Office, but the office has not yet confirmed whether there is scope for a reduction.

It increased slightly from 2020 to 2021, but according to the latest information, the system is doing unexpectedly well this year and is charging too much through the tariff. Millions of Euros are still unused in the account.

It is not yet clear what will be done with them, but it leaves room for a possible reduction of this tariff. The whole regime change has been talked about for a long time, and current Economy Minister Richard Sollick has promised reform, but no concrete steps have yet been taken.

15 percent more

In any case, the Networked Industry Regulatory Office has already announced that the situation in the markets will certainly translate into prices for Slovak households.

The formula according to which the price of electricity for the following year is calculated also contains the average price of electricity for the first six months on the Prague Stock Exchange.

The office has already stated that it will take into account the amount of 61.21 euros per megawatt-hour in the calculation. When calculating the price we pay this year, it was based on the market price of €46.

The bureau has not yet announced changes to other components, and a decision should not be made until the fall, but it does guarantee that the increase will come. He explained, “ÚRSO informs the public in advance that the expected impact of the increase in the price of electric energy on the final price of electricity for households in 2022 may be at a level of about 15 percent.”

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Source: kurzy.cz

Dirty electricity is getting more expensive

The rise in prices in the markets is determined by several factors. One of them is the increased demand that came after the pandemic measures were issued. At the same time, it was associated with a decrease in the availability of primary raw materials from which electricity is produced.

This is also natural gas. And its main European supplier is Russia, which, under an agreement with Ukraine, has been supplying gas to the old continent through its territory since last year less than before. At the same time, European countries needed large amounts of gas in the winter and storage tanks reached record levels.

According to Bloomberg Gate, gas is so scarce in Europe that many countries are turning to coal to meet their electricity demand.

Another factor that contributed significantly to the rise in electricity prices is the rise in the price of emissions allowances. This is one of the EU’s tools to reduce greenhouse gas emissions. Each year, the European country as a whole can release only a certain amount, based on the above allowances, which are traded in the markets.

The European Union is gradually reducing its size in order to push for the goals of combating global warming. However, the demand for provisions does not fall at the same rate, which naturally leads to an increase in their prices.

While in January the price of allowances was about 33 euros per ton, at the end of last week it was already 54 euros.

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Evolution of the prices of emissions allowances in the market

Thus, the production of electricity from “impure materials”, such as coal, but also gas, is more expensive, and therefore the market price of electricity is higher.

The situation is bad all over Europe

The problem of high prices affects the whole of Europe and is currently felt especially in countries with high temperatures, which depend on air conditioning. In an interview with the Financial Times, Spain’s Environment Minister Teresa Ribera said she urged the EU to do something about energy prices as a whole.

Spanish wholesale customers, whose changing prices will appear immediately, will currently pay 2.5 times more for MWh than they did at the same time last year. The situation is similar in Germany, where prices for major customers have increased by 60 percent this year.

As household prices are regulated in most countries or paid according to pre-agreed tariffs, they won’t feel the growth right away, but the price will likely go up for everyone next year.

Slovakia still performs well within the European Union, last year, according to the European Statistical Office, the family paid about 17 euros for one megawatt-hour, in Germany it was more than 30 euros.

However, if we look at prices in the purchase price parity, which also takes into account the amount of income and other expenses, then last year Slovakia was the country with the eight highest electricity prices.