Do you think that the trend of rising energy prices will continue this year? If so, what will be the main factors and how far prices can go?
About three months ago, the main factor that increased the price of electricity was the price of emission allowances. Natural gas was already expensive, but today we are doubled. We thought that the gas would become cheaper and that this would happen at the beginning of March at the latest with the end of the heating season.
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Looking now at the price of gas for 2023, we were at our peak somewhere around Christmas, when it cost around 60 euros per megawatt-hour, and now we are worth about 55 euros. Gas is still expensive, but there is still hope that the price will fall with the arrival of spring. But it will very much depend on what happens to the potential conflict between Russia and Ukraine.
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The wholesale price of electricity will be three times what we are used to. And he will probably stay there for a long time
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When we look at the price of allowances, they attack the highs again. We are therefore skeptical about the fact that the price of electricity will fall sometime in the next quarter. For 2023, its price is now around 140 euros per megawatt-hour, while in 2015 to 2019 we were used to the price of around 30 to 40 euros.
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That doesn’t sound very optimistic.
From everything I see in the markets, it follows that for everyone, including small customers, there is likely to be another increase in price, as suppliers will buy more expensive. It will be a little less than in the autumn and the beginning of the year, but in the end it will be a similar increase in crowns as in the first wave.
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And what will be the prices in the longer term?
We do not expect gas prices to remain at € 50 to € 60. We expect that within a year or two at the latest they should return to the value of 30 euros and below. Expensive natural gas as a pricing factor should recede into the background.
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But there will be other factors, such as the price of allowances and the question of the adequacy of resources, where the situation is not developing well. Electricity is probably at its peak now, but we expect its wholesale price to be around € 100 per megawatt-hour, three times what we were used to before 2021. And it is likely to remain at that level for a long time.
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We often hear the argument that we produce enough electricity, we even export it, but then we pay for it just like the Germans, because the price is formed on the Leipzig Stock Exchange. How is it?
I understand the context of these discussions that people are asking why, if we are able to produce electricity cheaply in the Czech Republic, pay a lot for it, and if we close the borders, we will pay a lower price here. But this assumption is wrong. If we did not trade with the surroundings, the price would not fall. We have excess capacity, but the price of electricity is linked to the price of natural gas and the price of allowances. It is not true that we produce cheaply and sell expensively. It is true that in the Czech Republic we produce expensively, at least from natural gas, and sell expensively on the stock exchange, no matter what the customer is from.
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The organized market has long generated the lowest possible margins. Let’s not look for the problem in the stock market, but in the basics. It is a conglomeration of different effects, and behind it all is the European Union’s rapid effort to decarbonise not only the electricity sector. Decarbonisation itself is fine, but it is bad.
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Is it possible to leave the market with emission allowances, as proposed by the former head of the Energy Regulatory Office Alena Vitásková?
We cannot back down from the system of emission allowances if, technically, we do not want to leave the European Union. This is an absurd and utterly insane idea. And even if we did, we would still have to accept the rules of the game of Europe. To leave the system of emission allowances would mean a huge conflict with the EU, which the Czechia cannot afford. Another thing is to work in the Union in such a way that the system of emission allowances can be modified or at least reasonably extended to the whole of energy, in order to eliminate illogical disadvantages.
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How to modify?
The buried dog is that it should never have allowed an allowance trade to exist the way it was and still is organized. Their price is unpredictable. The alternative that has been here since the beginning is to charge for CO2 emissions from any source, not just large issuers. It does not make sense that household boilers do not pay for CO2 emissions, but heating plants pay. It is unfair.
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The allowance trade should never be allowed to exist as it has been and is organized
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The system should work better by charging for CO2 emissions and keeping the charge small at first. Then, say in 2050 or rather 2060, it should be so high that it would avoid the vast majority of CO2 emissions. The system would be predictable, everyone would know what to source or shut down, and all the huge unknowns would stop working.
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And is it real?
At the moment, many players are basically pleased with the expensive allowance, and it is very difficult to agree on how the system should be redesigned or regulated. Today, some circles in Germany can no longer imagine that its price would fall again to 30 to 50 euros. This would harm the economics of their investment plans. They have already decided and bet that the permit will be expensive. We will have to get used to the permit for a price of around 100 euros and above, it will probably never get lower.
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The problem is that there is now a large surplus of allowances, and yet they become more expensive. We can argue whether it is speculation or whether people think that they would buy the allowance even more in the future, and therefore they buy for 90 to 100 euros.
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And was it happy to allow allowances to be traded as investment instruments? Shouldn’t it be allowed only to those who actually produce emissions and need allowances?
In any case, it probably couldn’t be prevented. A smaller circle of subjects would speculate with it, the price might be lower now, but I do not think that the price would be dominated by speculation. Rather, it is a concern that there will be great pressure to reduce CO2 emissions.
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The EU can withdraw allowances from the system, it can do some manipulation. At the moment, it would be curious to withdraw allowances when there is a surplus, and at a high price, but it is possible. Energy is terrified, he feels that the allowance will go up all the time.
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Could the state, for example, exercise its influence in CEZ and order price reductions? The French government did the same with EDF. The state owns about 84 percent of the shares there, in ČEZ it is about 70 percent…
Every company is here to create value. We can express this in different ways, it is best expressed in money, because it is well measured. The company can also look at it comprehensively and include ecology and calculate externalities, but in any case it must have some economy. When a company has the opportunity to generate value and profit, it should do so.
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The idea that there are huge margins on electricity generation today is basically wrong. In recent years, margins have been extremely low and are now slightly higher, with only some sources. The idea that we would calculate the margin of the manufacturer, we would go back to the days of the CMEA. It’s a game with fire.
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After EDF introduced regulations for small customers, its market capitalization fell by a quarter. I definitely warn against regulating the pricing of power electricity itself. The prize should be the result of a competition. And if the state wants to compensate for the high costs that its own policy has caused, then in some cases it is possible to reach into the social system. But the price of electricity should definitely not be regulated.
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Such a situation is in Slovakia, where household prices are capped…
In Slovakia, I guess they set maximum prices for retail on the basis of the average of the first six months for the following year. They there in this way filter out the biggest price fluctuations, but the high price of electricity catches up with them. It will only be delayed.
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If energy costs are at any level, we cannot order companies to go at a loss. In Slovakia, however, it is not just a question of energy, it is a slightly different country at the system level than the Czech Republic, Austria or Germany. In a way, the state is interfering more in the free market.
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What are the approaches to pricing in the surrounding countries and what are the energy prices there compared to the Czech Republic?
If we look at countries that do not intervene much, such as the aforementioned Austria, Germany and the Czechia, the prices of power are very similar – and the same is true for gas. Hungary, Poland and Slovakia regulate some market segments. In Hungary, there is de facto state energy, so there is some way to do it, but where the market is undeformed, the price level is similar.
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But then there is the second part of the price and these are the services for transmission, system control capabilities, distribution and the like. There is such a situation that, for example, in Germany the costs are tens of percent higher than in the Czech Republic. We still have relatively cheap services here at the moment.
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What about long-term contracts with Gazprom, from which they now benefit in other European countries. Why doesn’t the Czech side have it? Until recently, the largest supplier of innogy had German owners, now Hungarian…
A few years ago, the price of gas attacked an incredibly low value, around 8 euros per megawatt-hour. Previously, the price was at the level of up to 20 euros for several years. Customers were not motivated to enter into long-term contracts because they would go for a higher price. From the point of view of that time, it was probably reasonable not to fix the price. However, a large part of consumption, approximately 60%, is supplied in the Czech Republic on the basis of long-term contracts with Gazprom, where the price is determined by a formula.
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Hungary probably went a slightly different way, but there is a connection to Russia of a different order and today it earns on it compared to the rest of Europe. But we do not see exactly in the contract itself.
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The growing share of heat pumps, photovoltaics and cogeneration will not solve the dependence on gas
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But I have to stand up for traders. It was difficult to predict what happened during 2021. I hope that the situation will calm down and that we will return to gas prices at the level of 20 to 30 euros, perhaps even lower.
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Is it possible to replace natural gas supplies from Russia with liquefied LNG?
They can be replaced under certain circumstances. Not in the horizon of years, but there is an alternative to gas supply from LNG terminals. It is mainly gas from the USA, Qatar or Australia. It would not be a gas for 8 to 15 euros, but I think a price level of 20 to 35 euros could be achieved.
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LNG is now significantly more expensive than natural gas. But if we leave that out, do they have enough capacity? Is there enough? Are there enough special ships and terminals for that?
There is no capacity for full compensation now, because there was simply no such demand. In short, it is quite realistic that mining and transport capacities would be increased so that the EU can do without Russian gas. However, I emphasize that this would be a longer process.
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In the event of an outright crisis, we can temporarily suspend the transition from coal to gas and temporarily replace the production of electricity and, to a lesser extent, heat, with decommissioned coal, which is hampered by a bad economy due to high political demands for decarbonisation.
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This answer will certainly provoke controversy, but the supply by LNG certainly does not have to be significantly more expensive than the supply by gas pipeline from Russia, in the coming years it could be quite the opposite. At the same time, it is certainly not an attempt to ostracize Russia, it is an effort to diversify resources so that trade with Russia is fair and mutually beneficial. In a situation where one party has at least a clear opportunity to claim, fairness is at stake.
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Will the current situation put more pressure on the EU to supply households with photovoltaics on the roofs and heat pumps themselves?
It is a tempting idea and it is undoubtedly already happening today. Many houses, but also companies are trying to generate electricity. What a household can buy to get rid of, or at least reduce, its dependence on energy supply is photovoltaics. Unfortunately, this is usually the least suitable in households. It is technically feasible, but it does not work out financially. The household consumption diagram does not coincide at all with the photovoltaic production diagram. The situation is different in manufacturing companies that operate during the day. There, some form of photovoltaics is almost always used without the need for accumulation.
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Other options are heat pumps as a replacement for a gas boiler or direct heating with electricity. This is a big help, but if we replaced all gas boilers with heat pumps, electricity consumption would increase by tens of percent – and we have to produce that. It would therefore be another pressure on its price to rise. It is certain that heat pumps would not pay off from a certain level. The share of heat production in pumps, the share of electricity production in photovoltaics and cogeneration production will certainly increase, but dependence on gas will not solve it. We deal with cogeneration production, ie joint production of electricity and heat, with many clients, and for companies with more significant heat and electricity consumption, it is often a very advantageous form of our own energy.
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