The Czech energy exchange is not to blame. Help with energy prices must be swift, we cannot wait years

Many recent commentaries have focused on proposals for curbing high electricity prices. Jaroslav Míl attempted to do so here in Hospodářské noviny on 12 April. The fact is that high energy prices are a major problem, and we need to discuss and seek ways to resolve it. Unfortunately, most of the options being put forward will not lead to the desired goal, as they seek solutions where the problem does not exist or arise.

But let us start at the beginning: why has the price of electricity risen as much as fourfold? More than 70% of the increase in electricity prices is attributable to expensive gas and uncertainty over its future supplies, while allowances account for 25%, with the remainder due to more expensive hard coal. The rise in gas prices was caused primarily by Gazprom cutting supplies to roughly half the levels of previous years. Empty gas storage facilities operated by Gazprom in north-western Europe also contributed to higher gas prices. Unlike other operators, it did not refill them after last winter. The approaching war in Ukraine and its actual outbreak only reinforced the impact of these factors. More expensive allowances reflect Europe's decision to contribute to curbing climate change. Under the proposed directive currently under discussion, CO2 emissions will need to be reduced not only in the energy sector but also in industry. This is far more costly, which has been reflected in rising allowance prices.

The first misconception, therefore, is that the exchange is the cause of high prices. This is not true. The exchange does not invent electricity prices; it is merely a tool that matches supply with demand and thus creates a market price. At the price established on the exchange, everyone has enough electricity: producers generate it and consumers pay for it. Mr Míl's proposals for the state to purchase electricity (instead of it being sold directly on the exchange) mean that electricity prices would be regulated, resulting in supply and demand not being matched. Demand would very probably exceed supply, there would not be enough electricity, and it would be available only to some and rationed.

Besides the fact that regulated prices distort the market, the route towards them would be disproportionately long. Changing this fundamental approach would take a long time, most likely several years, which certainly would not help Czech consumers and households now, when we need it most.

The commentary in question also contains several factual errors: for example, a lignite-fired power plant does not generate electricity for CZK 1/kWh, as he claims. The CO2 it emits alone costs CZK 1.50-2/kWh, depending on the plant's efficiency. The mine supplying the power plant has annual costs in the billions of Czech crowns, and the plant has similar costs for maintenance and staff. Purchasing electricity at the price proposed by Mr Míl would therefore mean operating power plants at a loss and ultimately closing them.

Another problem is that Mr Míl entirely ignores existing contracts, the rights and obligations of producers arising from them, and the rights of their shareholders. This is a direct route to lost court cases and enforceable damages claims against the state. We have already experienced this in Czechia, and there is no reason to repeat it.

The misconception regarding purchase prices for the new nuclear unit also needs to be clarified. The electricity it generates will indeed be bought by a state trader at a pre-agreed price, but it will then be sold at the market price – on the exchange or through any other market-based means. Any profit or loss will be reflected in bills for end consumers. The state can apply a similar mechanism today – it can use energy-sector revenues in the form of CO2 allowance payments, electricity taxes or ČEZ dividends to mitigate the impact of high prices on customers, without having to settle matters with the shareholders of generating companies or introduce complex new legislation.

Energy supplies are a service, but they operate in a liberalised market with normal market principles, which we agreed on within the European Union 20 years ago. Any change would therefore have to be notified to the European Commission. This is a process that takes at least several years and has a highly uncertain outcome.

However, high energy prices are affecting consumers right now. Measures that help quickly must therefore be introduced. The basic measure is to use targeted support: establish a social tariff for vulnerable customers. Similarly, the renewables levy could be reduced, for example for industry, in no time. And where would the money come from? As I have already mentioned, the state could use, for example, additional revenues from high allowance prices and VAT revenues from the current high energy prices, or dividends from ČEZ, for these measures.

Pavel Řežábek, Chief Economist at ČEZ