Energy 30 October, 2019 10:00 am   

How to freeze electricity prices in 2020?

The end of 2019 is approaching, but we still do not know what to do with energy prices in 2020. The reduction of VAT on energy or imposing the obligation to provide public services on public companies may allow prices to remain at their current level, but this solution can be as costly as the statutory freeze in electricity prices – writes Piotr Stępiński, journalist of

Although the struggle for the division of positions in the government is still ongoing, the dust is slowly falling after the recent parliamentary elections. However, problems that were raised during the election campaign emerge, but they were not accompanied by ideas of solutions. One unanswered question is how much Poles will pay for energy in 2020. According to the original assumptions of the Energy Prices Act of December 28, 2018, the bills were to be frozen at the price level as at the end of June last year. The mechanism was to cover virtually all energy consumers, both households and small and medium-sized enterprises, excluding the energy-intensive industry. Later, however, it turned out that after the comments of the European Commission and the second amendment to the Act, only households could automatically take advantage of this opportunity. Micro-enterprises, small enterprises, hospitals, public finance sector entities, including local governments, had to make appropriate statements to avoid higher energy bills. Trading companies are to receive compensation for maintaining prices at the end of June 2018.

Contradictory Messages

It is not known, however, what will happen to electricity prices next year. During the election campaign there were conflicting messages. At the beginning of October, the head of the Prime Minister’s office Michał Dworczyk stated that “there will be no significant increase in electricity prices in 2020” and the government is doing everything to keep them at the current level. Just a few days later, Deputy Prime Minister Jacek Sasin, who, according to media information, can head the restored Ministry of the Treasury, guaranteed that energy prices in 2020 will be at the same level as in 2019. With this statement, he could surprise the representatives of the Ministry of Energy, who argued that work on the price freezing mechanism is ongoing. The deputy head of the ministry Tadeusz Skobel stated that specific solutions could be discussed only in the fourth quarter of 2019, i.e. after contracting most of the electricity supplies for next year. This is interesting because during the parliamentary debate on June 12, the Minister of Energy Krzysztof Tchórzewski announced that everything is already taken care of. – In 2020, there is already an amount of 4 bln PLN, settled in excise tax and a transitional fee when it comes to compensating for the increase in energy prices. This is already guaranteed, because it is permanent: decisions have been made. And for this time… We have a lot of time to think again how to deal with this problem – he said.

However, time is running out. The postponement of such important decisions proves that the lesson from last year was not learned when the Electricity Prices Act was being adopted in a hurry. Only eight days elapsed from entering the Sejm (December 21) to signing by the president. This year, this process cannot go so smoothly. Mainly due to the Senate, where the the opposition and independent senators have the majority. While in December 2018 the upper house of the parliament did not propose amendments, it may be different with the new distribution of forces. Once again, time will not be an ally of the ruling camp, although the last time, despite the opposition’s initial opposition, the parliament also adopted the relevant law with its votes.

Time to free energy prices?

However, it is likely that in 2020 the government will not decide to continue controlling energy prices in Poland and will listen to the voice of the President of the Energy Regulatory Office Rafał Gawin, who, like his predecessor in this position, called for the release of energy prices and abandonment of administrative management energy market in Poland.

Currently, the price in BASE contracts on the Polish Power Exchange for 2020 is about 265 PLN / MWh. Although in mid-September the price reached 275 PLN / MWh. For comparison, the average price in the third quarter of 2018 in BASE contracts with delivery for 2019 was 259 PLN / MWh, and in the fourth in 281 PLN / MWh compared to “only” 186 PLN / MWh in the first quarter. If we add costs on the part of companies, the desire to make up for losses, which in connection with the current law will probably be reported, then the level of prices may remain at a similar level or increase slightly compared to last year. Therefore, it cannot be ruled out that tariff applications, which will soon reach the president of the Energy Regulatory Office, will assume tariff increases to a quite significant degree.

Since in Poland nearly 80 percent of energy comes from coal, its price depends, among others on CO2 emission allowances, which remain at the highest level ever. We will not avoid the price increase. However, the government may find a way to free energy prices and not to make any possible hike. Until now, Deputy Minister of Energy Tadeusz Skobel said in response to a parliamentary question that it is too early to make judgments about whether electricity prices for households will be released in 2020.

Tax maneuver

Partially maintaining electricity prices at current levels would require some tax engineering. The Electricity Prices Act introduced a permanent reduction in excise duty on energy from PLN 20 to PLN 5 per MWh and a transition fee of 95 percent. This, however, is not enough. According to attorney Łukasz Batory, a partner at Kancelaria Banasik Woźniak i Wspólnicy Sp. K., repeating the provisions of the Energy Prices Act in a possible new law that would be in force in 2020 is unrealistic. – There is too much legal risk associated with, for example, public aid. Repeating such a solution, especially the mechanism from the first half of 2018, could be associated with great resistance from the new European Commission – he said.

It is worth recalling that the regulations of the Energy Prices Act raised doubts in the public debate. Although the Ministry of Energy argued that after repeated amendments, the Act is now devoid of interpretative ambiguities, the European Commission has still not decided whether the existing freezing regulations do not constitute unlawful state aid. Additional doubts were raised by depriving the President of the Energy Regulatory Office of the competence to set electricity prices in approved tariffs for households, leaving him only the opportunity to approve distribution tariffs. Despite this, the Commission has not yet questioned Polish provisions.

Attorney Łukasz Batory points out that a more likely solution would be to reduce VAT on the sale of electricity, which is currently 23 percent, which, however, would be associated with lower revenues to the state budget, which would be depleted by lower excise tax anyway, or imposing the obligation on trading companies to provide the so-called public services towards consumers (public service obligations in the general economic interest). In his opinion, in the case of the second option, the Ministry of Energy could prepare appropriate regulations that would not raise doubts as to compliance with EU law, both in the scope of regulation of the 3rd energy package, as well as the regulation of public aid. Trading companies would have to sell electricity at certain prices, and the difference to market prices would be paid as compensation by the state treasury. There could be several billion PLN at stake. – In my opinion, such a mechanism could contribute to curbing the rise in electricity prices, which could keep electricity bills at a similar level. The mechanism of support under de minimis aid for small and medium-sized enterprises as well as the preparation of a public aid mechanism for large recipients, which, as demonstrated by last year’s law for the energy-intensive sector, is also possible to consider, is to be considered. However, it is crucial to provide funding for each support model – he said.

Such a solution could, however, be associated with the need to find appropriate financing, because due to the ever smaller pool of CO2 emission allowances held by Poland, the proceeds from their sale will no longer be as high. As a consequence, the government will have to reckon with some budget shifts. The current draft budget for 2020 assumes only maintaining excise duty and the transitional fee at the level of 2019. However, the introduction of the above proposals would require a change to the draft budget act.

It is not known which solution the government will choose. Ultimately, however, it will have to recalculate whether it can afford to keep electricity prices next year at the level of 2019. Politicians of the ruling option are also aware of presidential election in 2020. It is hard to expect that the government will agree to increase energy prices. Customers and electricity sellers who do not know how to plan their activities next year are waiting for settlements in this matter, which may affect their financial results. This, in turn, will not be good news for the future management of the renovated Ministry of Treasury (if it is established), which, according to our information, could take over supervision of the four largest energy companies. There is less and less time for decisions.