Swiss electricity consumers who had the most unfortunate timing on the free market now have to accept price increases by a factor of 5 or more. The question of state aid is once again on the political agenda. But how many companies are in existential jeopardy because of electricity prices?
The price explosion on the electricity market is causing problems for some customers.
Prices rise by more than 60 percent in one fell swoop, and consumers can still count themselves lucky. That is currently the finding in the Swiss electricity business. The Federal Electricity Commission (Elcom) announced this week that tied electricity customers will receive an average surcharge of 64 percent on electricity tariffs at the beginning of 2023. This corresponds to the median: half have higher and half have lower surcharges. The middle premium is steep, but compared to the open market premiums, this is small. For example, the electricity prices on the European exchanges have risen by a factor of 5 to 15 since 2021 for daily transactions (spot market) or deliveries on the date of the first quarter of 2023, depending on the day and comparative period.
Private households and most companies are still in the fixed segment and are therefore largely protected from short-term fluctuations. Because in the tied sector, the prices of the 600 Swiss energy supply companies have to be based on their production costs. Since 2009, consumers with an annual consumption of at least 100,000 kilowatt hours have been able to switch to the free market. This threshold roughly corresponds to the consumption of around thirty four-person households. According to the law, a change is final – that means, in principle, there is no going back to the restricted area.
Clearly cheaper in the past
Electricity customers in the free market initially benefited. According to market participants, the tariffs were often 20 to 40 percent lower than for tied customers. This picture has changed radically with the crisis. If you have a contract that is about to expire and need a new one, you may currently have to pay many times the old price. Above all, the bad-sounding cases quickly reached politicians and the media: These are, for example, the bakers and hoteliers who received contract offers from providers at ten times the previous price and say that they have to close on this basis.
Or there is also this example that a gastronomy entrepreneur describes. According to a previous three-year contract, he had paid an electricity tariff of 6 centimes per kilowatt hour, the contract expired at the end of 2020, but the supplier’s offer for renewal for 30 centimes seemed far excessive at the time. Therefore, the entrepreneur accepted an offer to fix the price based on the average of the respective daily exchange rates. In a sense, this is comparable to a variable-rate mortgage instead of a fixed-rate mortgage. In recent months, customers have paid around 45 to 55 centimes on average, and the offers for delivery next year are even more expensive.
In the past, electricity bills were not the top priority for many companies. The prices were low and the share of electricity costs in the total costs was small. According to one study from 2015 on behalf of the federal government, the electricity costs in most of the sectors considered accounted for between less than 0.5 percent and 2 percent of the gross margin (gross value added), measured by the average values. Measured against the total operating costs, these shares were even lower. However, the differences between the individual companies were large; the extreme values in the individual sectors could amount to three to ten times the mean sector values. And even an average value doesn’t have to be reassuring: If a block of costs suddenly increases by a factor of 5 from, for example, 1 to 2 percent of the total effort, this can be very painful. According to industry information, electricity costs accounted for around 3 percent of sales in the catering trade; only a doubling of the electricity costs carries weight here.
Multi-year contracts are common
But how many companies are currently in a critical situation because of electricity costs? In 2021, there were a good 23,000 end customers in the free market. Elcom gave this figure in its most recent activity report. The number is based on feedback from 76 electricity suppliers, who together serve around 70 percent of end users. According to one market participant, Elcom should have covered most providers with customers in the free market. A good two-thirds of all companies that are allowed to switch to the free market have so far switched. Based on the electricity consumption of eligible end customers, a total of 83 percent were in the free market in 2021. The customers in the free market combine almost half of the total electricity consumption in the covered supply areas.
At the beginning, only relatively few consumers switched to the free market. But as a result, according to Elcom, the switching rate has risen sharply due to lower market prices (see chart).
Consumers whose contracts have recently expired or are about to expire have a potentially major problem: the price explosions on the electricity exchanges are having a major impact on offers to renew their contracts. According to those involved, many different constellations can be seen in practice: one- to two-year contracts, three-year contracts, five-year contracts, division into tranches with extensions at different times and, in the case of the large companies, often individual solutions. However, various respondents named three-year contracts as a common model. The trade association therefore estimates that in this difficult phase around a third of all end consumers in the free market are likely to be confronted with the expiry of their contracts. Meanwhile, the Bern-based electricity group BKW says that the vast majority of its end-consumer customers in the free market have longer-term contracts. According to its own information, BKW has around 1,300 customers in the open market and concludes contracts with terms of up to six years.
Smoothing through long contracts
Another provider referred on Friday to the current futures market prices as a calculation basis for contract extensions: around 60 centimes per kilowatt hour for electricity supplies in 2023, 27 to 28 centimes for 2024 and 19 to 20 centimes for 2025. That would be an average price of a good 35 centimes smoothed over three years . Compared to the prices of older contracts, this would correspond to a six-fold increase. The total electricity costs, which, in addition to the energy tariffs, also include the costs for network access and fees, are likely to increase by a factor of about 3 in this example.
Similar to long-term fixed-rate mortgages, long contracts would allow further smoothing. For example, there was talk of an offer from a provider in which the electricity tariff “only” doubled instead of being increased sixfold, for example, but in return the buyer had to commit to this price for ten years; the buyer may therefore pay “too much” in the future in order to be able to breathe better in the present with a lower price increase.
Not all companies whose contracts expire in this critical phase should be faced with the question of their existence. The savings potential must also be taken into account. But a few thousand companies could find themselves in a tricky spot. This has already triggered calls for relief measures in politics. For the trade association, however, instruments à la the Corona crisis, such as special loans and hardship payments, are currently not on the agenda; instead, the association wants companies in the free market to be able to go back into the restricted area. That sounds like a classic five-and-away policy. The trade association’s answer to this: “There is no really free market in the electricity sector. The possibility of changing would be a disciplining instrument against the oligopoly of state suppliers.”
What does “excess gains” mean here?
In Switzerland as well as abroad, the following criticism can often be heard: it is unfair that the market prices are based on the costs of the most expensive market participant and that the providers with much lower production costs make “excess profits”. You have to “skim off” these profits somehow. For the textbook of economics, things look very different: In a market for a homogeneous good, the most expensive supplier among all marketable suppliers determines the market price – and those who produce cheaper receive a producer surplus and thus higher profits. This is quite normal, and the market price thus provides the “right” scarcity signals for producers and buyers.
Conversely, there are also consumer surpluses, since certain consumers would be willing to pay higher prices than the market price. The sum of producer and consumer surpluses reflects the wealth gain through trade. In real life it’s more complicated (e.g. a distinction has to be made between marginal costs and total costs), but in principle there is no economic reason for a special levy beyond ordinary profit taxes. In political reality, of course, this can look very different.