Electricity Tax Works Undercover

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Slovakia is experiencing situation common to many European economies. The price of electric energy on the market is falling, so is the overall consumption of electricity. And yet, the final price for consumers, especially in the industrial sector, remains high. There are several reasons behind this phenomena, which we coined under a term “Electricity Tax”, which is a fictional tax on electricity consumption resulting from various government policies.

Energy market has been one of the leading topics in EU for some years. Numerous goals are often on a collision course – energy security, low carbon emissions, industrial competitiveness, and job security. This has been more than true also for Slovakia, where the public discussion has been rocked by number of issues concerning especially production and distribution of electric energy. The situation in the sector can be called “chaotic”, with sudden introduction of various policies, often going one against the other. This situation is not a result of activities of just one government, but of the last two and half decades of wrong steps since the start of economic transformation.

Electricity in Slovakia – Cheap or Expensive?

Commodity price of electricity has been falling for several years, reaching record low levels also on the floor of Power Exchange Central Europe, which is relevant also for Slovakia.

1Figure 1: electricity price, PXE, €/kWh
Source: pxe.cz and kurzy.cz

Combined with the flat demand trend, which we witness in Slovakia since 1996, one would expect the final electricity price for consumers to be falling. However, this is not the reality. The price fall occurred only in the last 3-4 years and the prices are still higher than before the crisis.

2Figure 2: Electricity prices charged to final consumers (medium household left, medium enterprise right)
Source: Eurostat

The competitiveness of consumer electricity prices for industry does not seem alarming on the first sight, electricity prices in Slovakia are slightly below EU28 average in majority of consumption bands1. However, when focusing just on the East European 11 members, Slovakia appears among the 3 most expensive countries for electricity consumption in each and every consumption band.

3Figure 3: Ranking of Slovak consumption prices for electricity (1 means the most expensive) for commercial consumers in various consumption bands (indicated in MWh/year), taxes included, in EU11 and EU28, 2nd half of 2014
Source: Eurostat

Electricity Price Regulation and Structure

Electricity prices are subject of strict state regulation, conducted by the Regulatory Office for Network Industries. The energy price (commodity) has a set price ceiling for household (based on Power Exchange Central Europe prices). The competing sellers may offer various energy packages for their customers, but cannot go over the ceiling with price. The same goes for small and medium companies (with annual consumption below 30 MWh). Energy sellers may freely create prices only for the larger consumers on the market.

The price ceiling was cancelled for all industrial consumers in 2012, just to be reintroduced a year later after a government change. After the recent ruling of European court of justice, which found Polish price regulation of electricity and gas unlawful, discussion about deregulation is slowly opening in Slovakia.

All other price components are regulated more strictly. They are either calculated by each of the three regional distributors or sent for approval to the regulator (which has list of allowed expenses and defined formulas counting “proportionate profit”), or set centrally by the regulator (according to its internal formulas, or political influences).

Description can be further complicated by including the companies, which are connected directly to the transmission grid (very high voltage – only handful of companies in Slovakia) and are not in contract with a distributor (whose distribution grid is intermediary between the transmission grid and the consumer). There are also companies, which are (partly or completely) reliant on their own electricity production.

Consumer is in contract with two companies2 – the seller (selling the energy, currently with almost 20 companies offering their products) and the distributor (selling the connection, three regional monopolies), with a joint bill with a single payment. All charges, fees and taxes, be they related directly to the commodity/distribution or not, are included on the bill. One notable exception is the electricity excise tax, which requires separate tax filling (see below).

Calculating the Electricity Tax

We decided to find and calculate all price components, which are not natural part of the costs encountered during the production, distribution and sale of electricity. Instead, these costs serve to fulfill policy goals (green, social, fiscal…).

The final electricity price for commercial consumers consists of three main components

  • Energy (commodity)

  • Transmission and distribution (connection)

  • Everything else

As mentioned before, energy price is either market created (consumption 30 MWh per year and more) or regulated, but market influenced (price cap, derived from the PXE market price). The remaining two components are more intensively influenced by the regulator.

Currently, energy may cost somewhere between 40-60€/MWh. The remaining components cost summary is in the range of 80-100€/MWh. Their share on the final price (without energy) can be seen on the picture below.

4Figure 4: Price structure (energy cost excluded) for a commercial consumer, low voltage connection, 3x50A circuit breaker, annual consumption 100 MWh, overall price (without energy) 9412,03 € annually, or 94 €/MWh, 2014
Source: sse.sk (SSE-D, distribution company website calculator)

Distribution (energy movement from the transmission grid to the place of consumption) takes around half. Distribution loss tariff (used to cover the loss of energy in the grid due to physical reasons) accounts for around one tenth. So does the tariff for system services (used to pay for services keeping stable quality in the grid, like power on demand).

Three remaining components are of our special interest:

Tariff for system operation is a special charge, used to pay for 4 specific policy goals: renewables subsidies, heat and power cogeneration, lignite production3 and short-term electricity market organization. Only the last subcomponent is directly related to the functioning of electricity market, the three remaining are direct results of government policies (green and social).

5Table 1: Decomposition of the Tariff for system operation
Source: Regulatory Office for Network Industries

National Nuclear Fund contribution is used to pay for the legacy of decommissioned nuclear power plant A1, which was shut down after a major accident in late 70ties. There were no decommissioning reserves created beforehand nor any kind of accident insurance. The contribution is set at 3,21€/MWh.

Electricity excise tax is charged on every MWh of electricity consumed by commercial consumer. The rate is set at 1,32 €/MWh. However, there are numerous exceptions, which means only part of the commercial consumers pays the tax in reality. If the tax revenues are divided by electricity consumption, we come to the real rate of 0,49€/MWh4.

However, there is one more cost we take into account. Majority of companies from energy sector are partly state owned, highly profitable, with dividends flowing into the state budget. There are big political incentives to manipulate the cash flow of the companies, which indeed materialized in the recent years in Slovakia – the government asked several companies for advanced dividends. It is impossible to tell how much dividends would be paid out if the companies would be fully private. However, we can count the dividends of the single 100% state owned in electricity sector – the monopoly transmission company SEPS. Average annual dividend revenue in 2008-2017 is 27,7 million euro, which makes 0,97€/MWh „dividend“.

6Table 2: Components of the „Electricity Tax“ in Slovakia

Therefore, we can conclude the “Electricity Tax” is 26,27 €/MWh. This is a very rough number. The real influence of various policies goes much deeper. Price regulation puts constraints on the market and inhibits development of cheaper and better products. Political influences of state nominates changes motivations in the companies’ management. Regulatory instability5 rises the risk premium investors ask for their capital.

Conclusion

We believe public policies should be primarily covered by tax revenue. Shifting the burden on prices of various goods, in this case electricity6, has two maligns implications: it hides the real cost of the policy and it disturbs the market process in the sector and the whole economy. The goal should be to fully identify this hidden “tax” and either move to the public budget expenditure side, or eliminate completely.

1 Unlike in the case of households, there may be very large differences between the consumption of electricity of various commercial and industrial consumers. There are many possible variables, depending on the connection type (low/high/very high voltage, reserved capacity, connection ampere value, etc.), different regulations depending on consumption and different bargaining power. Therefore it is desired to relate any price comparison to the exact consumption band.

2 Again, may not hold true, if considered rare case of self-reliant company, or consumer connected directly to the transmission grid

3 Lignite mines in central Slovakia directly employ almost 4000 people. The company (and the thermal power plant which consumes majority of their production) is kept afloat by regular subsidies of around EUR 70-100 million annually

4 This tax is a result of somewhat obscure EU legislation, notably 2003/96/EC, which sets minimum rate of 0,5€/MWh, and is riddled with numerous sectoral and geographic exceptions

5 There have been several sudden regulatory changes in the last three years, introducing new fees and changing legislative rules

6 In this case, the groups of electricity consumers and taxpayers are almost 100% identical, since virtually every household purchases electricity

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