European energy price hike partly fueled by statistical short-term effects – German KfW bank

The European energy price hike in the second half of 2021 is due in large part to the drop in prices caused by collapsing demand in the 2020 coronavirus pandemic, Germany’s public development bank KfW has said in an analysis. “Part of the increase is due to bottlenecks in energy supply, but the lion’s share of the energy price inflation is due to below-average crude oil and energy prices in the previous year,” KfW’s Jens Herold says. The so-called statistical basis effect has an impact on relative price increases and may distort the perception of actual price increases, as a peak in the price curve is exacerbated by an earlier bottom as the point of reference, the bank explains. Several aspects of the pandemic had an impact on prices, Herold writes. These include the collapse of crude oil prices in 2020 and the subsequent economic recovery; temporary tax cuts; the introduction of carbon pricing in Germany at the beginning of the year, and the closure of many shops due to pandemic containment measures which meant that customers could not benefit from sales offers. According to the bank, the influence of basis effects will subside eventually, as it did after similar instances in the past. 

Energy prices have increased at the fastest rate in decades across Europe in the second half of 2021 due to a variety of factors. These include the aforementioned recovery effects in the wake of the pandemic’s first waves, low gas storage levels due to a long previous winter and below-average output by renewable power installations. The incoming new German government has signaled it will assist customers struggling with high energy costs in the short run and stick to the agreed slow path to increase the national carbon price for heating and transport.