Will Serbia’s EPS reduce electricity prices for companies in May?

Author: Dušan Stanar

Almost all companies in Serbia are paying EUR 120 per MWh for electricity, significantly above current market prices. All of them are supplied by Elektroprivreda Srbije (EPS) while the Government of Serbia controls the prices. The price for companies is valid until April 30 so buyers on EPS’s so-called commercial supply are eagerly awaiting the price that this state-owned company will offer them, or rather the state will prescribe, as well as what the duration of offered contracts would be.

The current contracts of EUR 120 per MWh match the timing arranged with the International Monetary Fund (IMF), according to which it is theoretically possible for EPS to increase its prices once again, by 8%, on May 1. But it is clear from officials’ statements that this is an unlikely option.

At the same time, the arrangement with the IMF envisages price increases only in case EPS needs to cover its costs. Judging by the results for the first nine months of 2023 and RSD 87.4 billion (EUR 746 million) in net profit, it is clear that EPS no longer has such worries.

In November 2023, when the currently valid price of EUR 120 per MWh was formed, market forwards (contracts for the sale of electricity at a predetermined time in the future) for the next few months were by about EUR 10 per MWh more expensive, so it is clear that EPS followed market expectations and even offered a more favorable price.

Mild winter pulled down gas and electricity prices

However, Europe had its second consecutive mild winter, with temperatures about 10 degrees Celsius higher than thirty-year averages toward the end of the year in the continent’s northwest. This significantly reduced gas consumption and European gas storage fullness was at a five-year high.

This led the price of gas lower, and with the price of gas, the price of electricity also fell. The spread between the market price and EPS’s price became significantly high. That spread could grow even more if the current three-month forwards come through, as they indicate that the market expects that the price of electricity will continue to fall and almost reach levels last seen before the energy crisis of 2021.

In the unlikely theoretical case that EPS does not offer a price in line with the current market level and what’s expected, it is likely that some companies won’t extend their contracts with EPS and that they will turn to the market for supply instead.

If EPS does not offer a lower price, some companies will probably not renew their contracts

However, taking all of the above into account and assuming there will be no more serious unexpected market disruptions that we have witnessed in previous years (COVID-19 in 2020, the energy crisis in 2021 and the war in Ukraine in 2022), there will likely be no price increase for commercial customers, and after a long time we will see EPS’s prices drop and the offer will be in line with market expectations.

Apart from the new price, there is also the question of the duration of these new contracts and whether they will be valid until the end of 2024 or shorter, for example until the beginning of the 2024/2025 heating season.

Given that the market is still volatile and prone to disruptions, it makes more sense that we will see shorter contracts, in an attempt to follow the market, than longer contracts, as they could diverge from market levels for longer.