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Analysts question Czech energy policy to 2040

08 Aug 2012 12:51:53 | edem

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The Czech industry and trade ministry announced last week that it has completed its update of its national energy policy, aiming to attract investors for the medium term. As yet, few details are known of what it entails beyond its over-reaching theme of "establishing the face of Czech power up until 2040".

However, six analysts that ICIS spoke to were sceptical of a national policy reaching to 2040.

"All the issues that urgently need to be addressed are on an EU level, not a country level," said one analyst. "They include the troubles with CO2 emissions, the trading system, and renewable strategies. These are international issues. I'm doubtful that the Czech policy can remedy these issues."

Nuclear doubts

In a statement last week, Czech industry and trade minister Martin Cuba announced plans to increase the country's emphasis on nuclear generation to increase grid security, with an additional three units at Czech utility ČEZ's Temelín and Dukovany plants.

The government has been keen on nuclear as a greater part of the country's energy mix for some time (see EDEM 13 February 2012).

However, several analysts were dismayed at the plan, saying that they failed to see the commercial benefits of adopting such projects.

"There is no need whatsoever to build new capacity because we are already oversubscribed," said one analyst. "It is tricky because Czech does not want to be dependent on imports, but there is so much capacity being added from Germany."

Analysts questioned increasing nuclear capacity as a strategy, since nuclear plants are expensive and take about a decade to build.

One analyst noted that, in a fully liberalised energy market with no set minimum price for power, it was unlikely that a new nuclear plant could command a tariff to rationalise its existence.

"The Czech government focuses on nuclear and the return on investment for nuclear is worrying," said one analyst. "They are long-term projects with unclear outcomes that are not without their problems. Politics is also a big factor - just look at what happened in Germany."

Raising funds for new projects could also prove problematic, several sources said, reasoning that investor confidence was low because of the country's recent about-turn over its approach to solar power.

"The Czech Republic have created a bad reputation for themselves by retrospectively penalising solar generation. It has set a bad precedent present - a risk for new investment," said one source. "It was a strange move and the market is confused."

Dirty lignite has bright future

The ministry aims to reduce the extent of coal power by 2025, according to its statement. The plan intends to reduce coal-fired power generation to around one-third of its current level, with no new coal plants planned and progressive closure of outdated generation. The role of natural gas in electricity generation is also expected to grow.

However, carbon emission prices are now at an all-time low: the average price of carbon for July was €7.54/tonne of CO2 equivalent (tCO2e), compared with €12.72/tCO2e for July last year, according to ICIS data. The Czech Republic is far from reducing its reliance on lignite as its fuel of choice.

"The CO2 price is way too low. So right now it makes sense to use the dirtiest fuel - lignite," said one analyst. "If [prices] remain this low, it makes no sense to install new capacity. Just look at the gas-fired [power] stations in the EU, they're all loss-making."

Another analyst added that by his calculations, lignite will still be profitable for several years, despite the planned reductions in emissions allowances.

"Yes, lignite will be slightly less profitable from 2013. However, ČEZ will still get substantial free CO2 allocations from the Czech government, and the cost to cover its small CO2 emissions allowance shortage has significantly reduced with the collapse of CO2 prices," said a third source.

Given the EU's economic situation, analysts also raised doubts that the policy would contain substantial near-term goals.

They were also sceptical that the long-term goals outlined in the statement could carry any validity.

"There is no use in a long-term strategy - everything depends on Germany and commodity prices," said one analyst. "The government does not seem to understand that the Czech Republic is no longer an island market. Plus, CO2 is an essential part of the economics; there is no other way forward than waiting to see what the EU does about carbon prices."

The sun sets on solar?

The new policy envisages further development of renewable resources, although the statement specified that further state support would be directed at simplifying planning, and permitting and ensuring the grid could cope with additional intermittent generation.

Last month, the government backed calls from the regulator to cut renewable subsidies from 2014, concerned about the cost of the programme to end-users (see EDEM 24 July 2012).

But Cuba added the caveat that more renewables would only be developed where it is "economically sustainable".

Given the recent backlash on solar power, it is doubtful that it will be supported by the policy.

"Can the Czech Republic afford solar? This is yet to be resolved," said one analyst. "In my opinion, we will see taxes on solar plants extended as it is clear that politicians will be under pressure to prevent escalating electricity prices."

Questioning whether the Czech Republic would be autonomous in its renewable energy policy, several analysts argued that the country will have to follow directions from Brussels, mitigating any requirement for a self-led strategy.

"The government does not know what is going to happen," said one source. "There is no other way than waiting to see what the EU does." KM

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