Brief analysis 16: Impact of energy prices on the Austrian economy
Prices for electricity and natural gas on the wholesale market have reached new record highs in recent weeks: between the beginning of 2019 and mid-2021, a megawatt hour of electricity on the spot market cost between €17 and €56 on a monthly average, and just under €250 in December 2021 - a multiple of the previous year. Natural gas prices were subject to a similar dynamic. Although prices fell slightly in January, the uncertainty remains: How long will this continue? And how will it affect our lives?
We can approach the first question with the help of "futures market futures". These are the currently traded prices for future electricity and natural gas supplies. Futures prices reflect the market participants' assessment of the future development of supply and demand and are used by energy suppliers to hedge the prices of their end customer tariffs. Extremely high prices are still expected for 2022, even though the peak appears to have passed. In the longer term, market participants expect prices for natural gas to normalize again, while electricity prices are likely to remain at least twice as high as before the coronavirus crisis. In the long term, this will lead to a doubling of electricity costs (excluding grid costs and taxes) for households.
It is possible that market participants consider the current supply bottlenecks for natural gas to be a temporary problem, as it is partly due to political factors. They believe that the costs of electricity production will remain high and rise, partly due to national and international efforts to reduce CO2 emissions. The prices of long-term futures for emissions trading rights under the EU ETS reinforce this expectation.
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Due to the mostly long-term procurement strategies of energy suppliers, only some of the price increases on the wholesale market have reached end customers and further tariff increases are to be expected. The decisive factor will be how households and industry react to these price changes. Demand will not change much initially, as the price elasticity of energy is rather low in the short term. After all, around 900,000 private households need natural gas for heating and hot water. A noticeable reduction in electricity consumption is also a tricky task in the short term. So savings will probably have to be made elsewhere.
These developments could have a dramatic impact on the economy. Not only households, but also energy-intensive industry would have to deal with higher costs. In a further step, the higher energy costs would be reflected in consumer prices. Private households would then not only be confrontedwith very high prices for electricity and gas, but also with general inflationary pressure.
The rise in energy prices is in line with the strategy to reduce CO2 emissions. However, if it is not ensured at the same time that the purchasing power of consumers does not suffer and companies are not further burdened, this would not be very sustainable. Therefore, it must be tightened up elsewhere, for example by lowering income tax, abolishing cold progression or establishing targeted subsidies. And: the other levies on electrical energy, such as the green electricity subsidy or the green electricity flat rate, could be collected again - because if prices rise as expected, their steering effect is no longer relevant.
