Recent figures indicate that Estonia saw the fastest spike in electricity prices in the EU last month, but the historical relationship of prices paid by Estonian consumers to prices on the Nord Pool exchange indicate that the increase in electricity prices in Estonia is nonetheless inexplicably large, Bank of Estonia economist Kaspar Oja said Wednesday.

Eurostat data indicated a 129.6 percent increase in the price of electricity in Estonia in June, Oja wrote in a blog for the central bank (link in Estonian).

A comparison of more detailed data shows a sharp contradiction between prices on Nord Pool and the consumer price index (CPI). From September to June, for example, prices in Estonia's Nord Pool region rose by 42 percent while the CPI indicated that the electricity price paid by consumers increased by a much more significant 69.8 percent.

If the electricity component of the CPI were in line with the relationships of recent years, the inflation in Estonian consumer prices would have been 2.6-3.1 percentage points lower in April through June, depending on the month.

In the past, the connection between the Nord Pool price and the price of electricity sold to consumers as reflect in the CPI has been very strong; this is illustrated by the blue dots in Figure 1 below. The blue dashed line shows the regression line between commodities prices and consumer prices before measures to ease the impact of high energy prices were introduced last fall.

As the CPI does not take fixed-price electricity contracts into account, a linear equation should illustrate the relationship between Nord Pool prices and consumer prices very well, as Figure 1 shows.

The key point of note in Figure 1 is the observations since April, which are indicated with red dots. The exchange price was lower this April than it was last September, but consumer prices are shown by statistics to have been 33 percent higher in April despite this.

The electricity price that statistics show consumers paid in April was as much as 50 percent higher than the price in statistics prior to applying alleviation measures. There was a small rise in network fees in the meantime, but that does not explain such a large increase in household electricity prices.

Network fees were around 3 percent higher in March than in September, and in June they were raised again by around 10 percent.

The yellow line in Figure 1 illustrates the relationship during the period when price alleviation measures applied. The yellow line is somewhat below the blue line, but rises a little more steeply. The shift downward is in line with the reduction in network fees, but while the partial price cap applied, the slope of the line should be flatter.

The observation for February stands out during the period when network fees were reduced, and is shown by the orange point that is furthest along the yellow line. Although the Nord Pool price was at that time lower than in October, the consumer price level was higher. This does not seem logical, as network fees were reduced in both of these months, and there was a price cap in February as well.

Figure 1 indicates that there has been a shift in electricity prices measured since last September. Measures taken to alleviate the increase in prices reduced the price of electricity, but it appears that the rise in prices shown in consumer price statistics after those measures ended was greater than the initial downward effect.

The electricity price reflected in the CPI should be in line with the actual prices that consumers pay, though it currently seems that this is not the case.

To test this, I used another data source by collecting data on electricity prices paid by staff in my department at the Bank of Estonia since September 2021 (see Figure 2).

This was of course not a randomized sample and was not very large, but different consumer groups are represented, as people within the sample have different consumption habits.

These electricity bills came from people living in prefabricated apartment buildings and in private houses in the suburbs, meaning there are households with very low electricity consumption as well as those that use a lot of electric heating.

One household in the sample had had a fixed electricity contract throughout the period, one had their fixed contract canceled at the end of the year, and one fixed their electricity price from the start of the new year.

Bills were analyzed in full, including taxes and service fees. Not everyone included in the sample had received their June electricity bills yet, so I calculated the rise in prices for the sample from September 2021 through May 2022.

Statistics Estonia estimates that the price of electricity for consumers rose by 53 percent in this period. The average electricity price in the sample weighted by consumption, however, increased by only 13.2.

For the entire observation period, families with a flexible price contract with prices from the electricity exchange had electricity prices on average 15.1 percent higher in May than in last September, with 95 percent confidence bounds at 14.4 percent and 15.8 percent.

The historical relationship between the electricity component in the CPI and the price on Nord Pool, however, would predict a price increase of 14.6 percent in the same period (see Figure 3 below).

It should be noted here that the increase in the electricity price is calculated based on the entire bill. It is probable that the electricity price calculated thus is more seasonal than the estimate from Statistics Estonia, as part of the bill with a fixed price component, such as fixed network fees or service fees, is relatively larger during months with lower consumption. This means that the price estimated by the approach used here should, if anything, be too high during warmer months when electricity consumption is lower.

Overall, this analysis indicates that the earlier relationship between electricity in consumer prices and Nord Pool prices does not explain why the the price of electricity in Estonia has increased so much.

The sample of electricity bills from Bank of Estonia staff shows that the price increase is generally more in line with what is suggested by the earlier statistical relationship between Nord Pool prices and the electricity component of the CPI. This suggests that the increase in electricity in consumer prices may be overestimated.

If the increase in the price of electricity is what this relationship shows it to be, then inflation in Estonia is a little lower, though still close to 20 percent.

This means that high inflation cannot be attributed solely to the factor assessed here. The possible total impact of around 3 percentage points of this factor, however, is large enough to noticeably distort statistics regarding national accounts and real growth rates, which are usually around this amount given Estonian income levels.

More attention needs to be paid to the possible overestimation of electricity inflation.

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