December 7, 2021 (02:45)

Security risks of the winter season 2021-2022 for Slovakia

An influential factor in ensuring the energy security of the Slovak Republic in the winter of 2021-2022 is the possible escalation of the security situation around Ukraine. According to our experts, the security situation around Ukraine is already having negative consequences for the Slovak economy, and the implementation of any scenario of escalation of the crisis will lead to rising prices for natural gas and electricity in the Slovak Republic.

In the event of a large-scale armed aggression by the Russian Federation against Ukraine, supplies of strategic energy raw materials (Russian oil and natural gas) to Slovakia are expected to cease. Another scenario is the strengthening of US and EU political and economic sanctions to deter Russia from aggression, which could be directed against Russian energy companies and lead to even greater gas shortages in Europe.

Currently, the degree of dependence of the Slovak Republic on Russian gas is estimated at 85%. The Slovak Republic’s domestic demand for natural gas amounted to 4.8 billion cubic meters in 2020. In the same year, the Slovak Republic purchased 7.6 billion cubic meters of gas from Gazprom Export and transported up to 57 billion cubic meters of gas through its territory, among which 35 billion cubic meters were transported through checkpoints from the territory of Ukraine (Veľké Kapušany and Budince), up to 18 billion cubic meters were transported through the interstate connection point with the Czech Republic (Lanžhot), up to 4 billion cubic meters were transported through Austria (Baumgarten), and up to 0.004 billion cubic meters were transported through Hungary (Veľké Zlievce).

Slovakia receives Russian gas under two long-term contracts signed between Slovakia’s GTS operator Eustream and Gazprom Export supplier:

by 2028 for the transportation of Russian gas through the interstate connection point on the border with Ukraine (Veľké Kapušany);

by 2050 for the transportation of Russian gas coming through the Nord Stream gas pipeline through Germany and the Czech Republic.

Given that up to 20% of electricity in the Slovak Republic is produced from fossil fuels, mainly natural gas, the increase in gas prices leads to a significant increase in the cost of Slovak electricity. Other concomitant factors of the current winter season (the level of stocks in underground storage, the weather forecast for January 2022) are also unfavorable for the Slovak Republic.

A significant destabilizing factor in the Slovak electricity market is the high demand at the end of 2021, which is due to the fact that a significant number of large consumers at abnormally high prices postponed the conclusion of contracts with energy companies for next year (period).

On the other hand, at present, such consumers have limited opportunities to purchase electricity for the next year or longer, as the market has formed a significant supply shortage – market dynamics do not allow suppliers to guarantee prices (until contracts are concluded) and they do not provide them to potential customers.

The price of electricity on the European Energy Exchange in Leipzig – EEX with delivery in 2022 as of 07.12.21 rose to EUR 170  per 1 MWt / h and tends to rise further. A year ago, annual contracts were four times cheaper – about EUR 50 per MWt/h.

The Slovak Energy market rules provide support for households and small businesses by enabling them to purchase electricity and gas at a government-regulated price. Market growth in prices in energy markets will be reflected in regulated prices in 2023 (due to the linking of pricing to market prices for the first half of this year of 40% for the next year).

The period of high prices has created a threatening situation, especially for private companies, state-owned enterprises, cities and municipalities, which have not yet signed contracts for the next year. According to experts, the share of such consumers is at least 15%. Thus, the situation of state-owned companies, authorities, city administrations and municipalities, which are to operate within the framework of the law on public procurement, is problematic. According to the terms and conditions of public tender procedures, they require suppliers to guarantee a price offer for a period of several weeks to several months and do not find a suitable offer at the market.

Another category of consumers of energy resources, which can suffer significant losses, are large industrial companies, which negotiate prices with suppliers individually. At present, trading companies in the Slovak energy market are forced to reject the offers of large customers due to the inability to guarantee a price offer longer than “the day ahead” and the lack of quite large energy resources required by this category of customers.

Under these conditions, some electricity suppliers have stopped selling energy for the next year, and some consumers are forced to buy electricity in the short-term spot market, where the price (as of 07.12.21) reached EUR 300 per 1 MWt / h. The Slovak government is trying to mitigate the negative impact of high spot energy prices on the country’s economy and its own social obligations by introducing temporary permitting procedures and compensation payments.

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