The rapid growth of regulated energy price components can fatally threaten the competitiveness of companies

The Steel Union rejects the proposed increase in the regulated components of energy prices, as it will directly lead to a drastic increase in the costs of steel and other industrial companies in the Czech Republic by tens to hundreds of million crowns per year. Unfortunately, the government is also planning other steps that may increase companies’ costs by hundreds of millions of crowns. All this will lead to a weakening of their competitiveness at a time when they face a drop in demand due to the generally unfavorable macroeconomic situation at home and in key EU markets.

The government’s decision to allocate only CZK 9.35 billion to the support of RES (POZE) in 2024, together with the ERO’s proposal for a price decision for the electric power industry dated 30 October 2023, means for Czech steelmakers the threat of a sharp increase in energy costs. The amount paid by companies for regulated ingredients will increase by 200 to 250% in 2024 compared to 2022. Compared to 2023, the increase is even more striking. For a model company with an annual consumption of 70 GW of electricity, this would mean an increase in costs by CZK 51 million (227%) compared to 2022. For a large metallurgical company, annual costs would increase by more than half a billion crowns.

The government’s argument to the effect that the higher costs of the regulated components of the electricity price will be compensated by the lower price of the commodity, i.e. power electricity, does not apply, because large industrial companies usually ensure the supply of power electricity by purchasing forward products in so-called tranches. In this case, the force component of the price of electricity will not decrease quickly or significantly.

Between 2016 and 2023, the state allocated an average of almost 25 billion crowns per year from the state budget to POZE. “This is not a subsidy to large industrial companies, but primarily an absurdly high support for photovoltaic power plants set almost 20 years ago,” says Daniel Urban, chairman of the board of the Steel Union. The regulated components of the electricity price are and will be very high mainly due to the growth of renewable sources, the costs of strengthening the infrastructure, as well as the expensive power electricity that system operators have to buy to cover losses and balancing.

According to recent Eurostat data, the Czech Republic has the fourth most expensive electricity for large customers in the EU. “Smarter EU member states know that in this situation, supporting industry is key, because otherwise it will not survive the demanding and costly green transformation. At the same time, nowhere is the role of industry as macroeconomically important as in the Czech Republic,” adds Urban.

For example, in Germany, funds for the support of RES were historically collected from customers, but from 1 July 2022, German companies and households do not pay anything, and POZE is newly financed through the Climate and Transformation Fund. At the time of cancellation, the fee was 37.2 euros/MWh, i.e. approximately 1000 CZK/MWh. In France, on the other hand, large consumers are entitled to cover a significant part of their electricity consumption at a price of 45 euros/MWh within the ARENH scheme. In the United States, both electricity and natural gas are many times cheaper than in Europe.

In addition, the European Commission approves state subsidies to the economically stronger EU states for the steel industry so that it undergoes an unprecedented transformation in health. “Not only are we not playing on a level playing field against competition from non-EU countries, unfortunately the match with European competition is not fair either,” says Roman Heide, CEO of Třinecké železáren.

Another threat on the cost side is the increase in the price of gas for end customers due to the need to rehabilitate the billion-dollar debts of the over-indebted operator of the gas transmission system Net4Gas, which is bought indirectly by the state.

The rise in energy prices comes at a time when steel producers across the EU are facing a very difficult market situation due to a drop in demand in key consumer sectors including construction, low prices and pressure from imported steel. The volume of crude steel production in the first half of the year in the Czech Republic fell by 20% year-on-year, while the production of long products, which are key for Czech smelters, fell by a quarter. European steel association Eurofer estimates that apparent EU steel consumption will fall by 5.3% in 2023, the fourth decline in five years.

In addition to the dramatic increase in the regulated components of energy prices, the government, as part of the consolidation package, proposes to cancel the exemption of certain fuels used in metallurgical processes from tax on “dual-use” energy products. However, this exemption is possible thanks to an exemption at EU level. In the draft state budget for 2024, the government does not even count on funds for the payment of compensation for the indirect costs of the EU ETS, even though it has promised to do so in the past. “All these steps represent a huge threat to Czech steelmakers at a time when they are expected to invest in the order of tens of billions of crowns in decarbonization,” adds Heide.