MONETARY POLICY REPORT | WINTER 2022 (box 3)
(author: Ondřej Michálek)
Energy prices are hitting historical highs on both domestic and world markets. The rise in prices of energy commodities is so intense that it will significantly affect not only the financial situation of households[1], but also the costs of firms. Which sources of energy do Czech firms most often use in their production, and what prices do they face? What is the structure of their total costs? Does the growth in energy prices imply any significant risk to the international competitiveness of the Czech economy? These questions are answered in the following text.
The Czech economy does not differ much from the European average in terms of the sector structure of energy consumed (see Chart 1). The largest amount of energy is consumed by the household sector, closely followed by industry and transport. Services, which create almost half of total gross value added, are at the opposite end of the scale. Given their relatively low energy intensity and the limited availability of suitable indicators for conducting a detailed analysis of the services sector, this box focuses mostly on industry.
Chart 1 – As in neighbouring countries, domestic firms account for around two-thirds of total energy consumption in the Czech Republic
share of energy consumed by sector in %; data for 2020; source Eurostat
Electricity and gas, whose exchange prices have increased several fold over the last six months, are dominant energy sources for the whole of European industry. In terms of the competitiveness of national industrial sectors, it is therefore important to compare how much of their energy consumption is covered by these commodities. Chart 2 shows the current competitive edge of the Czech industry, whose share of electricity and gas is lower than the EU average due to its significant consumption of solid fossil fuels. Fossil fuels are also used to a high degree to generate electricity in the Czech Republic (especially brown coal in thermal power stations). This, combined with lower electricity and gas consumption compared with the EU average, has long kept unit prices of the two commodities[2] at lower levels in the Czech Republic (see Chart 3). Solid fossil fuels are currently a cheaper source of energy than other commodities. From the long-term perspective, however, the enforced transition to a greener energy mix will be a great challenge for domestic industry.
Chart 2 – Electricity and gas now have a dominant share of total energy consumption in industry
share of electricity and gas in total energy consumption in industry in %; source Eurostat
Chart 3 – Electricity and gas prices for firms in the Czech Republic have long been below the EU average
price in EUR/kWh inclusive of tax for firms; electricity is depicted as a solid line and gas as a dotted line; source Eurostat
For the Czech economy to stay competitive during the current energy price shock, it is crucial that any increase in the share of energy costs in industrial firms does not exceed that in their foreign competitors. Developments to date suggest that Czech firms are capable of using energy increasingly efficiently, and the share of energy in their total costs[3] has decreased at a similar pace as abroad. According to the latest data, this share has declined to almost 2% in Czech manufacturing and is virtually the same as in neighbouring countries (except Slovakia) (see Chart 4). A more detailed sectoral breakdown reveals that energy expenditure in the automotive industry, for example, accounts for less than 1% of total costs. Costs in manufacturing are generally affected mainly by expenditure on purchases of goods and services. Labour costs are also significant. They are lower in the Czech Republic than in its Western neighbours and represent a traditional competitive edge.
Chart 4 – Industrial firms’ costs are affected mainly by expenditure on intermediate goods and compensation of employees; the share of energy in the Czech Republic is low and comparable with other countries
breakdown of industrial firms’ costs in 2019; shares in %; source Eurostat
Another way of comparing economies’ competitiveness in the context of the current growth in electricity and gas prices is the energy efficiency of output. It shows how efficient an economy is in using energy sources in production. Chart 5 indicates that the domestic economy is below the EU average in this respect and has long been failing to converge significantly towards it. This is due probably to the different structure of the Czech economy, in which industry has a large share. The energy intensity of Czech industry is also below the EU average, although this difference is not as large as that across all sectors.
Chart 5 – The Czech economy lags well behind in terms of energy efficiency
amount of energy in KTOE required to produce unit of GDP in EUR; source Eurostat
The overall financial condition of domestic firms has been improving following the first wave of the pandemic in spring 2020. Non-financial corporations’ profit rate[4] is slightly above the pre-pandemic level, indicating that they are gradually making up for the profit lost during the shutdowns. This is happening amid renewed economic growth and related solid growth in domestic demand. The number of firms in industry complaining recently about a lack of domestic demand is lower than before the pandemic. The solid financial condition of firms is also apparent from the insolvency index, which is currently below its 2019 level.[5] The November data on new industrial orders (CZSO) and leading indicators of expected orders and demand in retail, industry and services (European Commission) also bode well for industry, as do the recent trend in the PMI index and the latest business surveys conducted by the CNB and the Confederation of Industry. By contrast, an increased share of firms in services which, according to the European Commission, were constrained by financial problems at the start of this year, is sending a contradictory signal.
To sum up, solid demand, full order books and efforts to make up for profit lost during pandemic shutdowns will allow domestic firms to at least partially incorporate the ongoing significant rise in energy prices into consumer end prices in the near future. As mentioned above, Czech industrial companies are currently in a better position than their foreign competitors (due to wider use of solid fossil fuels). However, Chart 6 shows that foreign firms have to a large degree already felt the impact of the rise in energy prices, whereas Czech industrial producers are probably yet to face it. In addition to the gradual pass-through of foreign prices, the usual January repricing will raise the prices of domestic industrial production. This notwithstanding, the cumulative growth in energy prices for domestic industry is not expected to exceed that in the rest of Europe in the coming months, so Czech industry should maintain its current ability to compete.
Chart 6 – Energy prices have probably yet to peak for domestic industrial producers
y-o-y growth in energy prices for industrial firms for domestic market in %; source Eurostat
[1] The impact of the rise in energy prices on household consumption is described in more detail in box How will the high energy prices affect household consumption? in Monetary Policy Report – Winter 2022.
[2] Eurostat publishes unit electricity and gas prices for firms only for the economy as a whole by consumption band. The total price in Chart 3 is derived as the arithmetic mean of these bands.
[3] The methodology applied is based on Study on energy prices, costs and subsidies and their impact on industry and households, Publications Office of the European Union. Energy costs cover all energy purchased. Personnel costs represent employers’ staff costs. Purchases of goods and services exclude purchases of capital goods, i.e. investment.
[4] The profit rate is defined as the ratio of gross operating surplus to gross value added.
[5] See https://www.seznamzpravy.cz/clanek/index-insolvenci-ceka-se-na-definitivni-podobu-statnich-podpor-110360 (available in Czech only).