‘We made a mistake’: Swiss town sees electricity prices soar by 263 percent

Electricity prices are rising in Switzerland, but nowhere as much as in one municipality in the Aargau canton - and it's all because of a mistake by officials.

'We made a mistake': Swiss town sees electricity prices soar by 263 percent
An energy customer examines her electricity meter in her flat. (Photo by Susannah Ireland / AFP)

As The Local reported on Wednesday, energy costs will increase in Switzerland by between 20 and 60 percent in 2023, depending on the place of residence, the size of the dwelling, and the electricity supplier.

This is not just a Swiss phenomenon; prices are increasing worldwide due to the ongoing war in Ukraine, the predicted gas shortage, and inflation. In Swiss regions such as Vaud, Lausanne and Geneva, prices are set to increase by between 49 percent for the vast majority of household customers but up to 61 percent for some specific modes of consumption.

READ ALSO: Which Swiss cantons will see the biggest hikes in electricity bills?

However, even those hikes seem low when compared to the price of electricity in the Swiss municipality of Oberlunkhofen in Aargau, where costs have risen by an eye-watering 263 percent. For an average household, this means additional annual costs of over CHF 2,000.

How is this possible?

“We made a mistake”, said Hans Hagenbuch, president of the local electricity distribution cooperative Elektra.

He explained that the company had long-term contracts to buy electricity on the open market, benefiting from relatively low rates all along.

READ ALSO: READER QUESTION: What are the rules on heating my Swiss home this winter?

When the price of 1 kilowatt of gasoline reached 30 cents this summer, Elektra decided to buy a supply at this price. However, someone had forgotten to place the order.

By the time the error was discovered, the price of electricity had tripled.

“It was absolutely not intentional”, Hagenbuch said, adding that “all we can do now is own up to our mistake and provide the public with honest information about how events unfolded”.

“We could never have expected something like this. It was a disaster”, he added.

No doubt local residents will agree.

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EXPLAINED: What the steep rise in Swiss interest rates could mean for you

The Swiss National Bank (SNB) raised the key interest rate by 0.75 percentage points, putting it back in positive territory at 0.5 percent.

EXPLAINED: What the steep rise in Swiss interest rates could mean for you

As announced by Switzerland’s central bank on Thursday, the rate change applies from Friday, September 23rd.

“The bank’s aim is to counter the renewed rise in inflationary pressure and the spread of inflation to goods and services that have so far been less affected”, according to SNB.

The SNB has not said how long the current rate will be in place, but noted that “it cannot be ruled out that further increases in the SNB policy rate will be necessary to ensure price stability over the medium term”.

READ MORE: Swiss central bank announces big rate hike in inflation fight

Inflation rate in Switzerland currently stands at 3.5 percent. While it is much lower than in the eurozone, where it exceeds 9.1 percent, it is still higher than its usual rate of below 1 percent.

Why has the SNB raised the interest rate for the first time since 2015?

For the same reason that other central banks have done so, including the European Central Bank and the Federal Reserve in the US: price stability

In general, central banks see increasing interest rates as a response to rising inflation: higher rates help reduce the overall level of demand and, subsequently, also the upward pressure on prices.

Whether this strategy will work is another matter.

The SNB rate hikes will “have a fundamentally dampening effect on inflation”, Felix Oeschger, analyst at Moneyland price comparison platform, told The Local.

“However, it is far from clear whether these alone will be enough to curb inflation”, he added.

One for the reasons for this uncertainty, Oeschger said, is that “the energy crisis and the high prices of some agricultural commodities, such as wheat, are a result of the Ukraine war. These prices are more difficult to influence with key interest rate increases”.

In its inflation forecast, the SNB predicted the inflation will drop to 2.4 percent in 2023.

But “considering that the SNB has continuously revised its inflation forecasts upward since December 2021, it is quite conceivable that inflation in Switzerland will continue to rise or at least remain high”, Oeschger pointed out.

READ MORE: EXPLAINED: The groups most affected by inflation in Switzerland

Will the Swiss consumers benefit (or not) from the higher interest rates?

It depends on what you are looking to buy.

If you are planning to buy big-ticket items that are usually purchased with credit — like homes — then you may have to dig deeper into your pockets.

If you already have a fixed-rate mortgage, then you are safe from rate increases for the term of your mortgage.

But for new buyers or those with variable-rate mortagages, things may be more problematic.

“It is not excluded that mortgage interest rates will reach 3 to 4 percent next year”, from the current 2.6 to 3.1 percent, according to Donato Scognamiglio, director of real estate platform Iazi.

What about rents?

Tenants may not be better off than homeowners.

Many have already received notices of higher rents to compensate for increased costs of energy.

Now another charge could be added as well, though probably not immediately.

“Rents will go up, but only when the reference interest rate itself is raised”, Scognamiglio said.

The benchmark interest rate is the average of all mortgage interest rates. If the reference rate increases by 0.25%, tenants will have to pay 3 percent more rent. “I expect this to happen next year”, he said.

But it is not all bad news; higher interest rates will yield some benefits as well.

For instance, if you have certain types of investments, you may see more money coming in.

“I expect yields on fixed-income financial products such as bonds to continue to rise”,  Oeschger said.

“In the case of medium-term notes issued by Swiss banks, we have already seen significant increases since the beginning of the year”, he added.

As for savings accounts, however, “the banks have so far been very hesitant to raise interest rates, but if monetary policy tightens further, we can expect interest rates to rise slightly here as well”.

Generally speaking, what will become cheaper and more expensive for consumers?

The bad news here is that everything that has to do with energy, even indirectly, will become more expensive.

This includes “heating, transport costs, electricity and also food”, another Moneyland expert, Ralf Beyeler told The Local.

READ MORE: Pasta up by 13 percent: How food and energy prices in Switzerland are rising