Last Updated 1 year by Lukas
We may all remember the situation in 2021/2022 when due to unexpected events in the world the price of electricity and gas skyrocketed. In the case of electricity, for example, it was a jump from 20 EUR per 1 MWh to an all-time high of 1,000 EUR / 1 MWh. It was something that no one had expected, not even in their worst nightmares.
During this period of turmoil, governments/people had to react to situations that no one had faced before. It was definitely not fun as people were faced with a situation where energy prices rose by an average of 4 times, nor was the situation very kind to energy intensive companies. Unfortunately, income did not increase by 4 times during this period. This put a lot of pressure on society and governments.
Governments were forced to do something to prevent the economy from collapsing and to protect people. Fortunately, as usual, mankind proved to be very inventive and resilient. Currently (as of 03/06/2023) the situation has improved a lot, there is an ongoing boom in solar power plants (more on that later) and electricity prices have started to fall back to reasonable levels.
Czech Republic limited prices of electricity and gas in 2023
In order to protect people and the economy, the Czech government has set these maximum prices for electricity and gas for 2023. The maximum payment for electricity is CZK 6,050 including VAT and the maximum payment for gas is CZK 3,025 including VAT per MWh. They also exempted people from paying a fee for renewable energy sources, which was approximately CZK 600 per MWh consumed. Finally, they also limited the regular payment for the consumption tariff to a maximum of CZK 130 per month.
It is important to realise that the price of energy is usually not the only factor contributing to the final price of energy. The government has limited the price of the commodity itself, but there are other factors that contribute to the final price. Put simply, someone has to generate electricity and someone has to transport it to your home/business. And there are costs associated with both of these actions that are passed on to the consumer in the form of the final price.
What are the contributing factor into electricity prices:
- Electricity itself as a commodity – measured in XY EUR per 1 MWh (limited for 2023 – 6 050 CZK / MWh)
- VAT – Government takes this for creating rules, trade friendly environment, etc.
- Distribution charges – someone has to build and maintain the infrastructure that transports the electricity to you.
- System service charge – Someone has to collect data, provide regular reports and support customers.
- Reserved power – the maximum power you can draw from the grid based on circuit breaker maximum
- Power Venue Fee – You pay the company that provides the venue where you can trade electricity.
- Regular fee – Another fee you pay to the company that sells electricity to you for administrative services (limited for 2023 – 130 / MWh)
- Renewable energy support – You pay this for every MWh you use. It’s to support renewable energy sources and be nice to our planet (Not paid at all in 2023)
As we can see, the final price of electricity is definitely higher than the price of the raw material itself, because someone has to transport it, maintain the network and provide additional services to others on a regular basis. Currently, the most basic final price we pay in the Czech Republic for 1 kWh is in the range of CZK 5 – 9. In other words, if you consume 1 MWh, you pay between CZK 5,000 and 9,000 for it.
Solar system boom and what may it cause?
In simple terms, a solar system is a technology that converts solar energy into electricity that can be used to cover some of the energy consumption from the grid. In other words, you produce and consume this energy yourself and you don’t have to buy it from someone else (or pay them to distribute it). So let’s think together about what a massive installation of this technology can do?
First of all, there are massive government subsidies to install it because it’s very environmentally friendly. This makes it very difficult to assess whether this technology can really pay for itself and whether people would be willing to install it out of their own pockets. It also makes this technology very expensive, because you can hide the price increase in the subsidy you get from the government.
We might think that it doesn’t matter if someone takes a lot of government subsidies or if there are companies that specialise in this. The complication is that the government generally does not make anything, it just distributes the money it takes from taxes (our money). Huge installations of this technology without long term planning can create problems inside the under invested energy grid and push the electricity price even into negative territory.
What do we mean by this? If we have many solar systems on the grid, no one is consuming (because they are using their own solar system) and at the same time many people are producing because their solar system is producing excess. The current grid is not ready for this and it will require massive investment. In the end it may lead to an increase in the price of electricity (less people buying it, but you have to invest massively in the grid). Another problem is during the winter months when solar systems produce minimal power.
There is another problem with this approach. If someone can’t install solar panels, but they still pay extra fees to support grid/system improvements. It’s just unfair to those people, they can’t benefit from this new technology, but they’re also supposed to pay into the general budget to expand it. Until there are huge government subsidies, it will be very difficult to properly assess whether it all makes sense. But then it will be too late. The problem isn’t the subsidies themselves, but the people who use them to increase their profits.
How can we buy and sell electricity?
Introduction
Here we need to learn a few things to better understand how it works. Electricity prices themselves are created by simple supply and demand meeting one another within the exchange. The Czech exchange is called OTE. The most important pieces of information from OTE are the daily market and the market for future contracts.
What is daily market. It’s a place where demand meets supply (buy and sell orders for electricity). Based on these orders, OTE is able to calculate average prices for electricity for a given day. There is another invention, originally created by the financial world, called ‘futures contracts’. Simply put, a forward contract is an agreement where one party will deliver something in the future under conditions that are known today when the contract is made.
This may sound a little complicated. We can also say that you agree with a company to sell you 1000 MWh of electricity in 2024 at a price of 200 EUR / MWh. The benefit for you is a fixed price known in advance and the benefit for the other party is the possibility to either buy or produce electricity at a lower price than 200 EUR / MWh and thus make money from this contract.
We also need to understand what is the difference between seller, who is the company that sells us electricity. And who is the distributor of our electricity, which is generally the company that owns the electricity grid through which we get electricity into our home.
We can buy electricity from anyone who is allowed to sell it and who fulfils the requirements of the Regulatory Entity (ERU). But in the case of distributors (owners of the network) there are only a few in the Czech Republic. Of course, in the case of CEZ (the largest electricity supplier and distributor in the Czech Republic), for example, the seller and distributor is a single company.
Buying electricity
If we as individuals want to buy electricity, we have several options. We can sign a non-fixed contract with the electricity supplier. In this case, the price of electricity changes up or down from time to time. Usually after a few months.
Alternatively, we can sign a fixed price contract. If we agree with the selling company, they will sell us electricity at a given, fixed price for a known period of time. The most common type of these contracts are for 1 to 3 years.
Finally, we can sign a contract called SPOT price. This means that the selling company will allow us to buy electricity at the daily prices announced by OTE (the place where demand meets supply). And of course they will increase this price by their profit called margin.
In general, non-fixed and SPOT contracts can be cancelled with no fees and with three months’ notice. In the case of a fixed contract, you’ll usually have to pay a penalty if you want to cancel before the contract expires. Please bear this in mind if you wish to change electricity supplier.
Selling electricity
As a small consumer of electricity and owner of a solar system, you can also sell electricity. From a contractual point of view, it is very similar to buying electricity. You can either sell at the current SPOT price announced by OTE. Or you can sign a fixed price contract with a company that will buy the electricity from you.
It’s good to know what EAN means. It’s a unique number that identifies you within the electricity distribution system. In general, if you are just buying (consuming) electricity, you have a single EAN that identifies the place of electricity consumption and details about it.
If you install a small solar system and connect it to the external grid, you can ask your distribution company (the owner of the electricity grid) to generate a second sales EAN. After fulfilling their conditions, signing the contract, connecting your solar system and finally receiving the second EAN. You can buy electricity from one supplier and sell it to another. You can even mix contract types, such as buying at a fixed price but selling at a SPOT price.
Word of caution
If you generate (sell) EAN for yourself and don’t register it with OTE (either directly or indirectly through the selling company), you may be fined. Please also note that there is a maximum amount of power that you have agreed to export to the external grid when you sell electricity. Again, if you exceed this maximum power, you may be fined by the distributor.
If you want to sell electricity directly without a third party. You need a licence for this, which effectively makes you a self-employed person. If this is the only reason why you need to register as a self-employed person, it makes no sense. Because there are rules associated with being self-employed (even if it coexists with standard employment). For example, you have to pay minimum insurance.
At the moment, it’s not possible to switch to SPOT pricing unless you have a smart meter that can report your readings remotely, so it’s possible to bill you every month (you pay at the end of the month based on your exact consumption). This technology is provided free of charge to people who have connected solar systems to the grid. Otherwise, you can request it from the distributor for a regular (usually quite small) fee.
In the Czech Republic we have a rarity. We bill electricity on a phase basis. This is very convenient for electricity suppliers and not ideal for electricity consumers. It simply means that instead of calculating the total over all 3 phases, you calculate the total for each phase separately.
This means you need special, more expensive solar inverters called ‘hybrid inverters’. These inverters are limited in how much power they can deliver per phase. Put simply, if your inverter can only give you 3kW per phase, but you use more than that, the rest is taken from the grid. And you pay electricity and distribution charges for that.
How can we take advantage of SPOT prices?
Introduction
Let’s start with a word of caution. In the period of very high prices, some companies tried to use a trick to get people to SPOT prices, so they transferred the risk of high prices to them. Simply put, the company originally agreed to sell electricity at a much lower price within a fixed contract, it did not buy it in advance and so it found itself in a very bad position. We may all remember the fall of a few such companies.
In case to protect people who may not have all the necessary information to assess what is happening. The Czech government enforced the rule that only those with an energy meter of at least level B can sign this contract. The reasoning behind this is that this device can remotely report readings every month, so you have an overview and are not surprised at the end of the year.
Of course, there are two sides to every coin. At the moment, the situation on the electricity market has eased considerably, and more and more solar systems are being installed. We are even seeing the interesting phenomenon of negative electricity prices. In other words, someone is paying you money to consume electricity. This is actually a self-regulating mechanism. If there is a lot of electricity, you have to somehow force people to stop producing it.
Our current grid can’t easily regulate itself, so it’s also solved at the electricity price level. Now the problem is that companies (the sensible ones) have bought electricity in advance with future contracts. In other words, many companies are unable or unwilling to sell you electricity at lower prices. This is understandable, but as mere employees we also have to provide for our families. In other words, if there is a way to pay less with a reasonable amount of risk, we should do it.
The strange year 2023
Now we understand why the electricity companies that sell us electricity may not be willing or able to reduce prices for us below the government limit. But wait, there is a way to take advantage of this. We know there is a way to pay SPOT prices. We know there are companies that offer it. We know that for 2023 the Czech government has limited prices up to 6,050 CZK (including VAT. It also applies to SPOT prices). If we look at the daily market on OTE, we also know that the prices are much lower than the government limit.
In other words, if we switch to SPOT prices, we can pay at most CZK 6,050 for electricity, but we can definitely pay much less according to OTE prices. This means that the disadvantages are limited and the benefits (theoretically) unlimited. Please also understand that if someone charges you more than 6,050 CZK, this money (above the limit) is covered by the Czech government. But if we remember, it is actually money from our taxes. This means that money from our taxes is transferred from the government into the pockets of the owners of the electricity distribution company.
We should assume that people are kind and honest. The idea here is not to say that electricity companies are proactively abusing this opportunity. It’s up to everyone to assess the situation and make up their own mind about this unprecedented situation and its consequences. The point is that money transferred from taxes (our pockets) will always catch up one day as a huge loan within the Czech Republic. And one day someone will have to pay it.