Annual Czech up

The Czech Republic had to restructure its energy markets in the run-up to its EU accession one year ago. What has liberalization achieved and what further changes are in store?

Jan Baltus, Czech Republic

Countries across Europe have had to accept a new legal basis for operating their energy industries. A variety of laws and directives including an Energy Act in 2001 and directives on power generation from alternative energy sources have affected all countries.

In the Czech Republic, the prospect of these fundamental changes prompted the establishment of a market regulator (ERU) in 2000 and a market operator (OTE). These facilitated the creation of a power market on 1 January 2002 available to eligible customers with the provision of back-up services and energy trading.

Since 2004 all metered industrial and commercial consumers have had the option of choosing their energy supplier, which has resulted in a market that is around 60 per cent open. Full liberalization (extended to the residential sector), is scheduled for 1 July 2007. Alongside this market opening has been the introduction of some privatization in the Czech energy system, including the gas and water industries.

The Czech power market is divided between CEZ and E.ON with the one exception of Prague Energy
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A new and significant element of this change has been the spin-off of the country’s power transmission system from the state controlled be-hemoth CEZ. The Czech Energy Transmission System (CEPS) was established and assets transferred to this entity. Another notable development was the remerger of five (out of the eight) independent power distribution companies (REAS) and their incorporation into CEZ. Two other distribution companies, South Moravia and South Bohemia Energy were also merged and bought by Germany’s E.ON group. The remaining distribution company, Prague Energy, is owned jointly by the city of Prague and RWE. The five merged distribution companies, controlled by CEZ, have formed a new vertically integrated power energy unit that dominates the Czech market.

In its assessment of the Czech Republic’s electricity market in 2004 the European Commission (EC) stated that the progress represented only an initial phase of the liberalization process. However, the EC saved most of its criticism for the gas sector, which it said did not have a functioning market at all as the monopoly owner RWE controls both the transmission company Transgas and six out of the eight gas distribution companies. State support for the gas market has led to market distortions and current high gas prices are prompting communities to look to other fuel sources for heat generation. The gas price also affects the possible development of combined cycle power generation in the Czech Republic.

Inside the Czech Republic there are concerns over the relatively high price for electricity charged by CEZ and followed by the other privately owned power companies. The market regulator (ERU) plays a role in setting the regulated components of the power price, which are updated in the annual Price Decision process. These elements include the transmission price, locally determined distribution price, market operator, price for system services, and support for distributed generation, cogeneration and renewables.

Although power prices have risen 11 per cent over the last year, electricity in the Czech Republic is still 21 per cent cheaper than in Germany.

Capacity make-up

The Czech Republic has an installed capacity of 17.3 GW, of which CEZ is responsible for 12.1 GW, independent generators 3.4 GW and industrial power plants 1.8 GW. Power production amounted to 84.3 GWh in 2004, with CEZ responsible for 60.4 per cent. The country produces 30 per cent more electricity than it needs and CEZ exported 15 GWh in 2004 to neighbouring countries.

Coal fired power plants account for 56 per cent of generation in the country. Of this, CEZ accounts for 6.5 GW, with independent operators having 2.4 GW and industrial generators 1.8 GW of coal capacity.

CEZ owns nuclear power capacity of 3.8 GW which accounts for 31.1 per cent of its total capacity. Temelàƒ­n, close to the Austrian border, is the largest at 2000 MW and CEZ has indicated its intention to extend the operating life of its nuclear fleet out to 2025.

Cogeneration plants account for 18 per cent of power generation capacity and power is purchased from these facilities with the support of the ERU’s Price Decision. The country has a number of local and regional heat distribution networks.

Power flows between the Czech Republic and neighbouring countries
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The natural environment of the Czech Republic does not offer many possibilities for alternative energy sources with the exception of biomass. A large expansion of wind power is planned with a target of 500 MW in 2007. Such a dramatic growth would undoubtedly create challenges in terms of reserve capacity and balancing in the transmission network. Czech experts follow wind power generation development in the neighbouring Germany and Austria, if only for the reason that the output regulation and its transmission are already seriously affecting the Czech transmission system in the cross border profiles and making power trades more difficult.

The Czech government currently subsidizes both power and heat generation from alternative sources, particularly from biomass, but the former high subsidies offered by means of power redemption prices are gradually diminishing. Even so, smaller communities remain interested in using biomass for heat supply thanks to new available technologies and Austrian supplied equipment.

Foreign ambitions

CEZ still dominates the Czech power market, particularly after its acquisition of the distribution companies. Attempts to sell the government’s interest in CEZ have failed, principally due to the difficulties presented by the company’s nuclear assets.

As a result CEZ has switched to a different strategy – to become a dominant energy company in Central Europe, concentrating on markets in Eastern and Southeastern Europe. It was successful in acquiring the three most lucrative distributing companies in Bulgaria as well as winning the tender for the Romanian distributing company Electrica Oltenia. CEZ has also expressed an interest in power stations in Bulgaria, Poland, Macedonia and Montenegro. It bid unsuccessfully for a Slovakian power plant privatization. Thanks to its new acquisitions in Bulgaria and Romania, CEZ sells electricity to 6.6 million customers. It is also a supplier of supporting services and is a major exporter of power.

CEZ has said that power prices will continue to rise as a result of investment in reconstruction of its coal fired power stations, most of which date back to the 1960s and 1970s. The main investment period for CEZ will fall in 2013 – 2015 when a 4500 MW reduction in installed capacity is expected because of technological obsolescence. This, combined with the anticipated increase in power consumption in the Czech Republic, is expected to eliminate the current power surplus.

Future energy production by CEZ as well as most of the independent generators will depend on the use of lignite. About 48 million tonnes of brown coal and 13.3 million tonnes of hard coal is extracted in the Czech Republic every year. However, to secure sufficient amounts of coal for the power stations over the next 30 years will require an increase in the so called ecological extraction limits. These are the limits on the use of coal reserves set by the government in the 1990s as a result of public pressure to preserve the landscape of North Bohemia. It is apparent that the Czech Republic will have to solve compelling questions of its power energy future including the future of its nuclear power programme; this energy forecast also explains the importance of the privatization of still unsold coal mines.

The CEPS spin-off from the CEZ assets appears very positive. CEPS engaged in the EU structures through its membership in UCPTE (currently UCTE) in 1995 and at present it participates in the work of many other European energy bodies, e.g. ETSO or CIGRE. CEPS not only serves the Czech power market but also plays a role in the power transmission between countries. The geographical position of the country in the middle of Europe means this is a key function.

EU regulations require that that every country should free up a minimum of ten per cent of its overall transmission capacity for international trade. The capacity available from the Czech Republic system is 20 per cent and it is fully utilized. CEPS accepted the auction system where bid prices are arranged in a descending order and the last price that still applies is used as a reference one. This price for capacity allocation is paid by all satisfied customers.

Despite this, there are certain problems with the cross border profiles due to large volumes of international trade of electric power. Nowadays, huge overpower in the Czech transmission system can be found at the Polish border, reaching as much as 1800 MW. A UCTE study confirms that if power trade between Russia and Germany could be realized, then 48 per cent of such supplied power would cross the Czech Republic. That would endanger the internal stability of the network. For this reason CEPS has decided, with the agreement of ERU, to strengthen the internal networks as well. “There is a debate in Europe on Russia joining UCTE and we must be prepared for this alternative,” commented L. Petranova, managing director of CEPS.

With this prospect in mind, CEPS has to pay permanent attention to safety and reliability of the energy power system, where for systems services alone, about CZK 8 billion/year ($333 million) is spent. In the current system the market regulator defines the permissible amount of these funds that are recoverable from customers. Due to its capacity surplus both in output and in its transmission network the Czech Republic is considered to be a country with a well managed and high quality energy system.

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