Prices on European exchanges skyrocketed in the autumn of 2021, reaching an all-time high in October: the price for 1 MWh of gas at TTF was EUR 116.53, having risen almost 900% on the previous year (from EUR 15.62). December saw a new record: EUR 180.27 per 1 MWh, over 1,000% more than the year before (EUR 16.95). Gas bills in Poland are mainly driven by the prices of gas traded on the Polish Power Exchange (PPX). As winter approached, gas prices on the PPX continued to rise reaching PLN 770 per 1 MWh just before Christmas. Gas prices in Poland closely follow the trends on other European markets, notably Germany and the Netherlands. This is why soaring gas prices abroad translate into high gas prices at the PPX, ultimately feeding into the prices of gas we use to cook meals and heat our houses.
What are the reasons behind the soaring gas prices? The price paid at an exchange is a function of supply and demand. As less and less natural gas is flowing to Europe from countries east of Poland and gas stocks in Europe hit new record lows, buyers are competing for natural gas, which drives up prices. The cost of gas is also being pushed up by the economic recovery of global economies, notably China and other Asian countries, following a slowdown induced by COVID-19. All this was further exacerbated by a longer-than-usual winter in 2020/2021 and other weather factors, for example, lower-than-expected wind speeds experienced at the end of the year. This had led to a reduced supply of electricity from wind power plants, which had to be supplied by gas-fired power plants instead.
But the key driver of the gas price hikes is the policy pursued by Gazprom, which accounts for about 40% of gas supplies to Europe. In recent months, Gazprom has supplied to the EU only as much gas as provided for in its long-term contracts, although previously the company did sell additional gas volumes to cover any increased demand. Shortly before Christmas Gazprom completely halted gas supplies to Germany via the Yamal-Europe pipeline that runs through Poland, which further pushed up gas prices across commodity exchanges in Western Europe.
Rising prices on commodity exchanges increase the cost of gas for gas resellers. They have to pass the cost onto customers as part of their commercial activities, hence the rising bills.
‘Given the skyrocketing gas prices, sometimes by a whopping 1,000% year on year, we had to pass some of that increase onto retail customers. No business in Poland could have taken the entire burden of the price hikes on their shoulders as, at the country level, it amounted to tens of billions of Polish złoty,’ said Paweł Majewski, President of the Management Board of PGNiG .A, whose retail subsidiary PGNiG Obrót Detaliczny raised gas bills as of January 2022.
The tariffs applied by distributors supplying gas to households are ultimately approved by the Polish Energy Regulatory Office. The energy regulator is responsible for ensuring that price increases proposed by distributors are justified by the costs they incur and that they are not excessive.
To mitigate the impact of rising prices on households, the government and the parliament have prepared a package of relief measures intended to reduce gas bills. Firstly, amendments to the Energy Law allow gas companies to spread the cost of gas over several years, which is to prevent the cost from being immediately passed onto customers and to avoid large one-off increases. Purchasing gas for resale is the largest cost item for gas suppliers. If it had not been for the new regulations, companies that sell gas to households would have had to request a price increase several times that they actually had requested.
Secondly, the implementation by the government of the anti-inflation shield allowed the Ministry of Finance to reduce VAT on gas from 23% to 8% in the first three months of 2022, which will help lower gas bills for the winter when demand for gas is the highest. Furthermore, a special electricity and gas allowance is planned next year to help households pay the rising energy bills, which can range from PLN 400 to PLN 1,150 depending on the household.
‘Bills paid by customers would have been much higher if it had not been for those measures and the anti-inflation shield approved by the government. The responsible behavior of MPs, quick response by the government, and amendments to regulations have allowed us to curb the increase in gas prices to 83% and bills for retail customers to 54% on average,’ said PGNiG’s CEO. ‘As a listed company we are committed to acting in the best interests of our shareholders, but with our customers in mind, we very much appreciate the actions taken by the government, not only the amendments to the Energy Law but also the ‘anti-inflation shield’, including reduced VAT on electricity and gas. These measures protect customers against soaring prices and the global inflationary impulse,’ noted Mr. Majewski.
Source: Poland Daily 24, PGNiG