Lift energy price caps by year-end, European Commission advises. Due to state deficit

The European Commission has issued fiscal policy recommendations for all EU member states. With electricity and natural gas prices gradually falling, the recommended measures also include a proposal to abolish price caps by the end of this year at the latest. If necessary, price caps should be reintroduced, but only in a targeted manner for vulnerable customers. In the Czech Republic, however, energy prices are untouchable, and the government avoids any increase in them.

At the end of May, the European Commission issued targeted recommendations for EU member states on fiscal policy. From an energy perspective, the key message is the recommendation that the Czech Republic end its support for high energy prices by the end of this year. Should the support continue beyond that point, it should be targeted only at selected groups of customers. It would therefore focus, for example, only on vulnerable consumers or businesses.

In the Czech Republic, price caps were introduced with effect from 1 January 2023, at a time when the energy crisis was already receding. After more than five months in force, they now mainly concern customers who chose fixed-price contracts for at least one year during the period of high prices and who will be subject to these higher prices, or to the price cap if contractual prices exceed it, until their contracts expire.

New offers from electricity and gas suppliers are overwhelmingly below the price caps. A number of suppliers also offer monthly fixed-price contracts, which essentially track prices on spot markets.

The European Commission’s recommendation is logical. Electricity and natural gas prices are at 2021 levels, i.e. at the level prevailing before the energy crisis. Experts agree that these are no longer excessively high prices, but a new normal that is entirely justified given the very likely permanent interruption of gas supplies from Russia and the transformation of the energy sector towards renewable energy sources.

The procedure is set out in the Energy Act

How should the government respond in such a situation? It set out the procedure itself in the Energy Act. Under the Act, if the extraordinary market situation ceases to exist—in this context, the extraordinary electricity and gas price situation—the government must promptly abolish the price caps by regulation, even before the period for which they were introduced expires.

The Energy Act gives the government no choice: if the conditions are met, it must abolish the price caps. According to the Ministry of Industry and Trade, however, abolishing the price caps is not currently on the agenda:

„Although developments on energy markets appear favourable and stability currently prevails on the markets after a well-managed winter period, the energy crisis cannot be considered unequivocally over. We view it positively that energy suppliers are currently reflecting trends on the energy market and offering products below the set price cap. In the current situation, the Ministry of Industry and Trade therefore sees the established price caps more as an emergency brake for further developments in 2023,“ David Hluštík said on behalf of the Ministry of Industry and Trade in response to an enquiry.

Price caps are one of the main reasons why the budget reached a record deficit of 271,4 bn. Kč in May. The full-year deficit is expected to be 295 bn. Kč.

According to the Czech Ministry of Finance, spending on helping citizens and companies with high energy prices rose year on year by 40 bn. Kč in the first five months. This raises the question of whether support for households facing high energy prices should be reduced as part of austerity measures. After all, this is also what the European Commission suggests.

Energy prices are untouchable, even amid a record deficit

Energy prices have, however, become a highly political issue in recent months. Any intervention that would ultimately result in higher prices for end customers is taboo for the government.

One example of how sensitive energy prices have recently become is the contemplated reinstatement of fees to support renewable energy sources in electricity prices. Their reinstatement was supposed to save the state up to 18 bn. Kč. When it became clear that customers would have to pay the fee again, Finance Minister Zbyněk Stanjura instead announced, to everyone’s surprise, that he would abolish the subsidies entirely without replacement.

„We want to reduce the amount by at least 14 billion so that nobody pays it—neither the state nor consumers. We know it will not be easy and that those receiving the support will threaten lawsuits and arbitration proceedings. Nevertheless, we have assessed that risk and are prepared to take it,“ Stanjura told Respekt.

The second example is the subsidy for ČEPS. In mid-February, the state awarded the company a subsidy of 22,7 bn. Kč to cover electricity loss costs and ensure system services. The Ministry of Industry and Trade adds that under normal circumstances these costs would be reflected in regulated prices. Instead of regulated charges, ČEPS will receive these funds directly from the state treasury. Put simply, everyone is paying this amount again, but it is not visible in energy prices and instead burdens the state budget.

„Our goal is to minimise the risk of energy prices rising for households and businesses. This is why the state will provide ČEPS with a subsidy of 7,2 billion crowns to cover electricity loss costs and a subsidy of 15,5 billion crowns to ensure system services for 2023. This amounts to a total of 22,7 billion crowns,“ says Minister of Industry and Trade Jozef Síkela.

The state sent another 15,4 bn. Kč to distribution system operators. In this case too, these companies would normally have received this amount through regulated charges.