Energy prices in Slovakia – still a risk factor

Energy price inflation had a significant impact on Slovak HICP inflation in recent years. Both energy price inflation and its HICP item weight have been higher in Slovakia than in other EU Member States from Central and Eastern Europe in the last five years. The relatively large role of the energy price component in HICP is partly given by the country's high energy inefficiency. Moreover, Slovak natural gas and electricity prices were among the highest in the new Member States in January 2006. This cannot be attributed to adverse exchange rate developments or higher taxes than in neighbouring countries. In the case of natural gas, high prices resulted from a lack of both import diversification and provider competition and from high distribution costs. In the case of electricity, the lack of effective competition is combined with environmental protection incentives as well as subsidises to ineffective coal production which push up prices. This situation can be improved by promoting higher energy efficiency while continuing to build a competition and investment stimulating regulatory framework. However, since necessary additional investments cannot be realised instantaneously, progress will only be achieved gradually. As a result, the energy price component will continue to have a significant weight and thus, depending on external developments, might considerably affect Slovak HICP inflation in the coming years.