Czech coalition to decide on taxing energy companies and banks in the coming weeks

The taxation of windfall profits has become a much-discussed topic recently, not only in Czechia. Opinions on it differ even within individual political parties. According to experts, the very course of the debate on taxing windfall profits is damaging Czechia's reputation and discouraging investors from investing in the country.

Definition of undeserved profits?

It is already quite difficult to navigate the debate over the possible taxation of the energy and banking sectors. At first, government representatives spoke of a sectoral tax. Now, the discussion is more focused on taxing windfall profits. Politicians generally define these as profits made by a company that has not changed its product but, due to external circumstances such as the war in Ukraine, earns more from it than in previous years. Politicians also often refer to windfall profits as “undeserved” and the tax as a “war tax”.

Views on the windfall tax differ even within individual parties. For example, in the Civic Democratic Party (ODS), its economic expert and deputy speaker of the Chamber of Deputies opposes the tax.

"I will tell colleagues on the executive council that this is simply not an economic policy measure, but a measure of a populist nature,"Skopeček said to Czech Television.

Finance Minister Zbyněk Stanjura (ODS), on the other hand, holds the opposing view. In recent months, he has said that other sectors could also be included.

"There are no limits and no sector is excluded from this debate. No one can be sure,"Finance Minister Zbyněk Stanjura (ODS) told SZ Byznys.

The finance minister's statement shocked many experts, all the more so because it came from a representative of a right-wing party. Such statements may also cause an outflow of investors by undermining the stability of the business environment. The impact on the shares of ČEZ, Komerční banka and others has been, and remains, clearly visible.

Pirates: We were first to propose the tax

Taxing windfall profits of energy companies has support among representatives of the Pirate Party. Through their parliamentary group leader Jakub Michálek, they claim to have been the first to propose it.

"The Pirates were the first to come up with a proposal for a solidarity contribution from energy companies in the form of a windfall profits tax in May, because it was clear to us that current resources would not be enough to support households at a time of record price rises. There will be a debate on the tax rate; in our view, it should be around 25 percent of unexpected profits, as in Britain," Pirate parliamentary group leader Jakub Michálek told iDNES.cz.

However, if we look at the design of the tax in the United Kingdom, it does not apply to electricity producers at all. While it is set at 25%, it applies to natural gas and oil producers in the North Sea. Taxation of electricity producers was rejected by former prime minister Boris Johnson.

Factors that need to be taken into account

The very definition of undeserved profits is highly problematic. In previous years, energy companies' profits were reduced as a result of the COVID-19 pandemic. At that time, energy prices were at record lows and producers' margins were often negative. The situation hit the domestic heating sector particularly hard, as it is undergoing decarbonisation, which requires, among other things, high capital expenditure.

Another fact highlighted by experts is European Union energy policy and the price of emission allowances. The price of an emission allowance is now around 90 EUR/t CO2, while in March last year, allowances were reaching what were then new highs of around 40 EUR/t CO2. Therefore, claims that energy companies' costs have not risen unexpectedly do not apply in every case. Even European Commission representatives did not forecast such a high allowance price.

If we look at ČEZ's April presentation, a rise in the allowance price of 1 EUR/t CO2 meant a change in the electricity price of roughly 0.6-0.7 EUR/MWh. It can therefore be inferred that the new standard for electricity prices will be substantially higher in the coming years than it was in the past, and that more decarbonised producers would therefore be taxed more heavily. Yet they took on greater risk by investing in decarbonised sources at a time when allowance and electricity prices were lower, and correctly anticipated future developments (in relation to allowance price trends).

Another fact remains that electricity producers hedge a large part of their positions years in advance. They are therefore not immediately or substantially positively affected by the current increase in electricity prices. According to its August presentation, ČEZ had sold 45.1 TWh in Czechia for this year at an average realised price of 91.4 EUR/MWh. As of 30 June, it had sold approximately 33 TWh in Czechia for next year at 90.5 EUR/TWh. The baseload electricity price for the following year on the PXE exchange exceeded 500 EUR/MWh this week.