Since the Energy Agency gave the green light – now it’s official what we all assumed would happen: electricity for households went up by 6.5%. But this does not mean that our bills will increase as much, because the price of a kilowatt forms the basis for the calculation of excise duty on electricity and VAT, so that in the end households will have to pay about 8.3% more per month than it was until now the case. Why did electricity become more expensive?
EPS’s party business is paying off
The main reason for the increase in the price of electricity is the breakdown of the power system, due to the thermal power plant in Kolubara dropping out of production. In order to maintain the supply without electricity restrictions, EPS started with a large import of electricity from abroad, precisely at the moment of the energy crisis in Europe, due to which the price of electricity on the spot exchanges was very high.
This led EPS to a situation where it buys MWh of electricity at a price of over 300 euros, and then sells it on the domestic market to businesses at a price of 75 euros and to households for about 40 euros (a total of about 2,900 GWh of electricity was imported, which should be compared with a multi-year average of total annual production in Serbia of 39,000 GWh).
But this state of affairs is not the fault of the energy crisis, which in Europe was caused by external factors related to gas supply, weaker wind and the closure of nuclear power plants. In normal times, Serbia produces electricity from its own resources – about 2/3 comes from coal-fired thermal power plants (which use domestic lignite) and 1/3 from hydroelectric power plants; electricity production from other sources is negligible in the overall mix for now.
This means that international trends in energy have no impact on our electricity production. Therefore, if the situation in EPS had been normal during the previous heating season, not only would that company not have imported expensive electricity, which it sold to end users at a loss, but it would actually have exported it and made good money from it.
Or it would only be like that if the company was managed by an independent and capable management. But this was opposed by our good old partocracy, which does not allow such management. Instead, EPS became synonymous with Augie’s stables. It is a company whose performance, measured by the production of electricity and coal as the main source of energy, has been decreasing practically throughout the previous decade; not enough was invested in new capacities, especially coal mines, so we came to a situation where there was less and less coal and its quality was getting worse, which directly led to the accident, since the boilers were not designed to burn mud but coal.
Also, the overhauls were not carried out according to the planned schedule, so before the accident and the energy crisis it led to, EPS produced electricity from its old gas power plants to compensate for the lack of capacity, which then emptied the warehouse in Banatski dvor, and that was right before winter.
This then forced Srbijagas to buy more gas beyond the previously agreed quantities, and to pay for it at spot exchange prices, which also skyrocketed due to the energy crisis in Europe. All this led to losses of 1 billion euros (500 million at EPS and 500 million at Srbijagas). So far, the party management of EPS has cost us so much. Per household, these losses amount to 400 euros.
How to fill a bottomless hole?
That is why the question arises how to put EPS on its feet, and compensate at least part of these losses. One logical way out is to increase the price of electricity, the other is direct subsidies from the budget. The first one is not politically popular among the domestic public, because the main electorate of the ruling party is the one with lower average incomes (often pensioners, with below-average pensions) and reducing the price of electricity was once upon a time a big pre-election promise of SNS. The second one is not popular among foreign actors, because it would mean a large increase in the deficit and consequently the public debt (by about 2% of GDP) and that on top of an already high deficit, taking into account economic trends; on the one hand, interest rates are rising due to inflation, which means that the cheap financing of the deficit has come to an end, and on the other hand, such a large increase in the deficit would also mean recognition of the bad state of public finances. The third way out is, of course, a little bit of one thing, a little bit of another, that is. to increase the price of electricity as much as possible, then by better using the resources of the company itself, and finally to fill the hole with money from the budget through subsidies and the deficit.
The upcoming heating season
The biggest problem lies in the fact that the problems in EPS have not been solved, and the summer will pass quickly and the new heating season is approaching. We still import electricity because we don’t produce enough to cover existing consumption. How will it be in the peak of the heating season?
Anecdotal information from the company says that the new management has started work and that they are working to recover the company, but the question is whether this is enough, because it takes time to open new coal mines. One of the attempts to improve the situation is the import of coal, but this was prevented by the drought because the waterway on the Danube is difficult due to the low water level.
Recent projections of the Fiscal Council and with the increase in coal production show that this would only mean a reduction of imports by a third compared to the previous winter season, which with similar electricity prices again means losses of 400 million euros for EPS (about 500 million would be the purchase price of electricity abroad, and about 100 million of its domestic selling price).
Unfortunately, this increase in the price of electricity will not be enough to cover these losses because it means an increase in income in the amount of less than 100 million euros on an annual basis. And since it comes with a delay, the effect of the increase in the price of electricity per EPS will be much smaller – if something had been wanted to be done about this issue, the increase in the price of electricity for households should have happened in the spring, when the problems in the energy sector due to whose management was changed. But the elections got in the way.
Will EPS “eat” the new electricity price increase?
The price of electricity was increased several times in previous years, but EPS would “eat” that increase in its income instead of using it to build new capacities. That money was used to increase the salary fund of the company’s employees, but also to cover some systemic illogicalities of the contract economy, such as the obligation of EPS to pay public media services for the collection of subscriptions, and financing the subsidized price of electricity from renewable energy sources even though they were collected funds for these two obligations were lower than needed, so the difference fell on the company itself.
There are also companies that EPS took over again after their failed privatization, which have no connection with the energy sector (these are companies engaged in construction work and even horticulture), which survive only because they are attached to it.
All this is a noose around the neck of the EPS, but the policy governing the EPS says that it must remain so. The price of that is bad business and an increase in the price of electricity. Precisely because of the situation in which EPS irrationally spent the increased income from the higher price of electricity, it led the state to introduce an excise tax on electricity (in the amount of 7.5% of the value of consumed energy) because they were aware that this money would end up directly in the budget, so there should be at least some control over its consumption, unlike the situation in which it would amount to an increase in the price of electricity.
The Fiscal Council made a list of recommendations on what the company should do to reduce losses and improve its operations. Short-term measures include:
- increase in the price of electricity by 15-20% for households
- a 15% increase in the price of electricity for the economy
- freezing of wages in this year and next year (wages can be increased only if the number of employees is reduced, or if some other wages are reduced)
- increasing the tax for energy production from RES by 25%
- improvement of public procurement (increase in the number of bidders and consequent price reduction)
- acceleration of works on the opening of replacement coal mines.
For now, something is being done on the last item, but those efforts are not transparent, ie. we won’t know how successful they will be until the winter season itself. The price of electricity was increased only for households, by approximately one third of the proposed increase, and the other measures are not even mentioned.
We can very easily end up in a situation where an increase in the price of electricity leads to an increase in wages in the company, especially taking into account the high inflation and the rise in prices of basic foodstuffs, which gives unions a great incentive to demand an increase in wages, especially when the state also announces a high increase in wages in the public sector. With all that in mind, we can only hope that the next winter will be short and mild, Talas writes.