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Serbia’s electricity prices and prospects: Will the state utility adjust to market trends?

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The entire economy in Serbia currently pays 120 euros per megawatt-hour for electricity, which is significantly more expensive than the current market prices. The state-owned company Elektroprivreda Srbije (EPS) supplies all of them at a price set by the Serbian government.

This price is valid until April 30th, so customers on commercial supply from EPS eagerly await the new pricing and contract terms that will be set by the state-owned company or the government. The existing contracts at 120 euros per megawatt-hour are time-bound according to the arrangement with the International Monetary Fund (IMF). There is a theoretical possibility of another 8% increase in prices by EPS from May 1, 2024, but officials have stated that this is a less likely option.

The agreement with the IMF allows price increases only if cost coverage is maintained. According to results for the first nine months of 2023 and a net profit of 87.4 billion dinars, it is evident that EPS no longer needs to worry about cost coverage, as mentioned by the portal.

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In November 2023, when EPS established the current price of 120 euros per megawatt-hour, market forwards (contracts for the sale of electricity at a predetermined future time) for the next few months were about ten euros higher, indicating that EPS followed market expectations and even offered a more favorable price.

However, Europe experienced an unusually mild winter for the second consecutive year, leading to reduced gas consumption and the highest gas storage levels in the last five years. This resulted in lower gas prices, subsequently affecting electricity prices, creating a significant difference between the market and EPS prices.

If current forwards for the next three months materialize, the difference could grow even further, with the expected continued decrease in electricity prices. In the unlikely theoretical scenario that EPS does not offer a price in line with current market expectations, some businesses might choose not to renew contracts with EPS and opt for market supply.

Considering the mentioned factors and assuming no significant market fluctuations due to unexpected factors witnessed in previous years (such as COVID-19 in 2020, the energy crisis in 2021, and the Ukraine situation in 2022), it is likely that there won’t be an increase in prices for commercial customers. Instead, after a long time, there might be a decline in EPS prices, aligning them with current market trends.

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Apart from the new price, the duration of these new contracts is also a question: will they be valid until the end of 2024, or will they be shorter, perhaps until the start of the 2024/2025 heating season? Given the current market instability and susceptibility to disturbances, shorter contracts that aim to follow market trends seem more sensible than longer-term contracts that could deviate from market levels for an extended period.

Regarding this situation, the Minister of Mining and Energy of Serbia, Dubravka Đedović Handanović, stated that there won’t be an increase in electricity and gas prices this year. She emphasized that the focus for 2024 is on the restructuring of EPS, with no indications of a kilowatt-hour price increase. This statement applies to gas prices as well.

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