MNI INTERVIEW: Czech Industry At Risk From German Energy Cap

German energy price subsidies will hurt Czech industry just as rising domestic wages undermine competitiveness, a former Czech National Bank rate-setter told MNI,

While the Czech Republic used to supply cheap labour and “not-expensive” energy to outside investors, wages are increasingly converging with those in the west, and it now has the highest energy prices in Europe, Lubomir Lizal said in an interview.

Lizal was “a bit sceptical about the Czech Republic’s longer-term economic prospects, in the sense that if you look at the general development, the change in the EU’s general direction is to make energy more dear - or continue the energy transformation, which is definitely a cost push.”

In contrast, energy-intensive German industries will benefit from government-subsidised electricity at five euro cents per kilowatt - roughly a third of the current price - until 2028, under plans announced by Chancellor Friedrich Merz last week.

That puts industrial economies linked to Germany under renewed pressure, said Lizal, an energy consultant and former supervisory board member at majority state-owned utilities company CEZ, now professor at Prague's University of Finance and Administration.

“When Germany decided to go the expensive way of closing down its nuclear reactors, it put the Czech Republic in the same boat. This is made worse by the exchange rate and relative purchasing power parity, and creates problems that are therefore more severe, with negative consequences for both firms and households.”

REGULATORY FAILURE

High power prices are indicative of authorities’ failure to properly regulate national monopolies, Lizal said, with low levels of competition also leading to unnecessarily expensive food and water.

“It’s really a tough situation for any government to change. But also, because the energy sector has such a long-term investment horizon, it was always viewed, and is still viewed, as something that can be left for the next government, by which time it is too late.”

A proposal by incoming Prime Minister Andrej Babis that the state budget should absorb the charge paid by consumers for renewables - some CZK500-600 per megawatt - will further weaken public finances and could result in a doomed state-aid battle with the country’s powerful neighbour, Lizal said.

“The question is always: if you fight a subsidies war with Germany, who is going to win? We can’t win.”

Another Babis suggestion, that the government buy out CEZ’s minority stakeholders, could work if it leads to the construction of new nuclear power plants, a strategy already seen in France, he said.

“If the company is fully controlled by the state you can afford to say, ‘Okay, we are going to pursue different goals, even including a change of the geopolitical situation.’ That has advantages. When it's semi-private, you have the disadvantages of a company that cannot be controlled by the state, and of a company that is not fully private.”

That approach - supplemented by renewables such as solar - would be cheaper than the alternatives and provide the base load needed to power Czech industry, Lizal said.

“If you want to decarbonise and at the same time lower geopolitical risk that is the only way to do it. Then you have to look at shifting industrial production towards electricity use, which again requires a base load all year round, independent of any seasonal variations in usage.”

Lizal, commissioned by the Finance Ministry earlier this year to assess the latest State Energy Plan, highlighted the overestimation of proceeds from EU emission trading system (ETS) as a “major risk” to the fiscal outlook.

MANDATORY EXPENDITURE

Yet he doubted that fiscal policy under the new government will prove any more or less expansive than its predecessors, given the extent of mandatory and quasi-mandatory expenditure in state budgets. (MNI EM INTERVIEW: Czech Fiscal Gap To Hit 3% GDP-Council Chair)

Having bet big on loss-making sectors like the electric automotive industry, with support from the European Investment Bank, Czech politicians hope private investors will soon crowd in, he said.

“That’s a big assumption, ignoring the fact that private investors are attracted by long term returns, not political desires."

Lizal, a CNB Bank Board member from 2011-17, said that with the exchange rate helping tighten monetary conditions, policymakers are in a “fairly good” position - though their slowness in hiking in the first place means inflation expectations remain elevated. (See MNI EM INTERVIEW: CNB Likely Done At 3.5% - Ex-Governor Singer)

“The only way you could tackle that would be to raise rates, not just use hawkish rhetoric. But I don’t think there is a political will to do that.”