The government announces that from July 1, 2024, price freezing in its current form will not be continued. Minister of Climate and Environment Paulina Hennig-Kloska announced the unfreezing of prices and an aid package for those in need, including: retirees living alone or large families with low incomes. According to the Ministry of Climate in response to Forsal.pl's questions, electricity prices quoted on the Polish Power Exchange reach levels similar to, or even lower than, frozen prices. – Target solutions are needed: dynamic development of renewable energy sources, investments in power grids and actions stabilizing investments in new generation capacities. The aim of the Ministry of Environmental Protection is to prepare solutions that will protect customers who need it and, on the other hand, allow for a rational and gradual restoration of market conditions, says the ministry. Rafał Benecki, chief economist at ING Bank Śląski, explains in an interview with Forsal.pl what effects the decision to unfreeze electricity prices will bring and in what form the so-called energy voucher.
Forsal.pl: At the end of June, the protective regulations regarding electricity prices cease to apply. Should Poles be afraid of this?
Rafał Benecki: If electricity prices were liberalized today, the tariff would apply and the price would jump from PLN 412 per megawatt hour to PLN 739/MWh, i.e. by 80%. However, we know that wholesale prices are much lower than when the tariff was set, so we would have to reduce them back in January. In order to ensure fundamental stability of household budget planning, not to raise households' inflation expectations or to ensure some basic sense of household security, it would be better to only partially unfreeze prices for the next six months and release them when a new tariff comes into force, probably very similar to the level of the current frozen price.
So, can you imagine a situation in which energy companies will submit new, lower tariff applications to the Energy Regulatory Office around the middle of the year, so that the lower rates will apply from July to the end of the year?
As is the case in the first half of this year, the decision to extend the freeze or to gradually unfreeze it may be made by adopting an act that is superior to the decision of the President of the Energy Regulatory Office regarding tariffs, so such a possibility is there and has been mentioned recently by the Minister of Climate and Environment.
How do you respond to the idea of the so-called energy voucher for people most at risk of energy poverty?
Generally, we stick to the average increase in bills announced by the Minister of Climate and Environment by PLN 30 per month, i.e. 15% for a bill of PLN 200, and we treat the voucher for the energy poor as an additional solution. Such an increase in the bill may result from either an increase in the energy tariff or an increase in distribution fees. Increase in the average electricity bill by approximately 15%. will slightly increase inflation, by approx. 0.6-0.7 percentage points. An energy voucher could support the energy poor, but what matters is how it will be addressed. It is crucial to avoid a sudden increase and then decline in electricity prices. Such an increase could send a signal to households that energy prices are unpredictable, so it is better to continue to refrain from spending, because this means that the current weak economic situation will continue. We are afraid of a scenario in which the liberalization of electricity prices will result in a larger increase in the bill than we expect, and the voucher will not be recognized by the Central Statistical Office as a tool that effectively reduces the price. Then the CPI inflation index would show a large jump.
How can we be sure that tariffs for 2025 will be lower?
In recent years, electricity prices have been as volatile and difficult to predict as exchange rates. However, there are a few arguments that suggest that we will not have electricity prices as high as in 2022-2023 next year. Gas prices, which have a greater impact on electricity prices in Europe than in Poland, are the lowest in years, because in the European Union we have a very poor economic situation, the second warm winter in a row is behind us, and warehouses are full, above long-term averages. Additionally, from 2025, new LNG export terminals will be launched in the United States. Imports to Europe may be even higher, especially since the moderate recovery in China does not increase global LNG rates. If gas prices increase, the Americans may launch new drilling rigs, which may have a stabilizing effect. This will also translate into coal prices.
Currently, the prices of CO2 emission allowances in the EU are relatively low now, a year ago they cost almost 100 euros per tonne, currently there is a debate whether they will cost 30 or 70 euros at the end of this year. However, these prices also dropped because the EC allocated a larger number of allowances to the market in 2024 to finance the REPowerEU program. The proceeds from the allowance auction serve to support member countries for green investments. The European economy is stagnating and therefore consumes less energy and therefore needs fewer emission allowances, which means lower demand remains. We also see that there have been speculative flows in this market and the recent period has been a period of profit-taking. This may also be related to the fact that the EU's very ambitious climate goals encounter resistance from societies and even politicians themselves, as can be heard in the statements of, for example, Manfred Weber, head of the largest faction in the European Parliament. For these reasons, there is a chance that electricity prices will not return to such high levels as in 2022-23.
What effects would liberalizing electricity prices have on the economy? Would they be long lasting?
In the scenario of complete unfreezing of electricity prices and the distribution fee, the tariff price, which consists of the electricity price and distribution costs alone, would apply. Our bills would jump by over 60%. This would add 2.5 percentage points to inflation. An additional element is the still frozen gas prices. Such a spike in electricity and gas bills could make households very cautious with other expenses. Yes, the rate of income growth has improved significantly, usually two or three quarters after such improvement, people start spending more. Today, the increase in spending related to the increase in earnings comes a year later, much later than historical data would indicate. If we gave people a 60% increase in electricity bills, and maybe also a sudden release of gas prices, we would prevent them from spending any more, and this would have a negative impact on the economic situation. Therefore, the decision to completely unfreeze would be very confusing for households. It would also affect trust in the state.
What about support for the energy-intensive industry? In Europe, the competitiveness of industry is often determined by the level of state support. What should the government do about this?
First of all, if we wanted to assess where we are today and what the cost of inaction in the energy transformation is, it is worth looking at the available data from 2022. They are telling, because then the Polish economy as a whole bought CO2 emission rights abroad worth 1 percent GDP. These were mainly energy companies. We had to buy so many of them outside Poland. This is approximately the total annual investment in new electricity capacity at that time. This is a huge, wasted amount spent outside Poland. This is a punishment for the delay in the energy transformation over the last dozen or so years. In 2022, more than half of the cost of electricity from coal consisted of CO2 emission allowances. The cost of the raw material itself is 30-40 percent.
The conclusion is that the best way to support the energy-intensive industry is to accelerate investments in green energy and power grids. This is the first form of assistance for energy-intensive sectors. We had plenty of time for this. These investments cannot be further delayed.
We should also consider supporting energy-intensive companies so that they do not go bankrupt, but it is worth making the support conditional on investments in efficiency improvement or clean energy. We see that even in Germany, industrial companies are going bankrupt because of electricity prices, and that Europe is at risk of further deindustrialization. In conditions when the world has divided, it is better to have secured production in one's own zone of political and military alliances. It is clear that, for this reason, European politicians are starting to be cautious about raising emission reduction targets for 2040.
