CZECH RESTRUCTURING- Privatization moves: which way forward?

Figure 1. Foreign companies obtained majority shares in Prague Energy and other Czech municipalities
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In the early 1990s, when people experienced the euphoria of freedom and free enterprise, the Czech minister of industry tabled his first privatization proposal. Instead of offering the state-owned power monopoly, CEZ a.s., for privatization, the minister proposed separating the regional distribution enterprises from the system and making them joint-stock companies. But these companies – known as REAS – did not possess much in the way of energy resources of their own and so were totally dependent on power supplies from CEZ. In addition, the price of power was to be set by the Ministry of Industry itself. The power transmission system of 220 kV and 400 kV remained in the hands of CEZ, and heat engineering activities were taken away from CEZ.

With the separation, foreign investors looking for new investments quickly found their way into the distribution companies. One of the power stations made itself independent from the original integral power system of the Czech Republic and quickly fell into the arms of a foreign investor. This kind of restructuring has put pressure on CEZ.

Today, CEZ operates a nuclear power station, ten coal fired units and also 13 hydroelectric plants, with a total capacity of 10 151 MW. In 1999, CEZ produced 45 722 GWh – almost 75 per cent of the electricity produced in the Czech Republic. In that year, the country produced 64 308 GWh of electricity from an installed base of 15 267 MW.

Since 1993, the generating capacity of the REAS and the heat and power stations, whose electricity REAS buys, has increased by almost 1000 MW even though electricity demand has experienced a period of strong decline. In 1990, electricity demand was 53 037 GWh, but in 1993 it reached only 47 765 GWh. In 1996 it rose to 54 146 GWh and then fell again to 51 000 GWh. The Czech Republic was hit by an economic crisis and yet the installed capacity rose. Their endeavour for independence brought the REAS excess capacity – supply now exceeds demand.

Figure 2. Several major investments in combined cycle technology have been made in the Czech Republic
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Export sales of electricity from the Czech Republic have therefore risen considerably. In 1999 CEZ exported 5.7 TWh of power, and it is estimated that this could rise to 8 TWh. After putting the Temelin nuclear power station into service, another 2 x 1000 MW of capacity will be available.

Hasty schemes

The minister of industry dictated transfer prices to both CEZ and the REAS, and obstinately resisted any change in the organization of the power sector. The minister also defended cross subsidies for power and heat prices in households. This, together with an absence of rules governing the energy engineering business, led to tense relations between CEZ and the REAS, and ultimately to the involvement of foreign companies in the power sector. Germany’s RWE and Bayernwerk, Sweden’s Vattenfall and several others entered the market.

In a hasty voucher privatization scheme, shares of some REAS companies, now named after the eight former Czech regions, were handed over to municipalities. Though the state retained a considerable majority in most REAS by means of the National Property Fund (FNM), foreign companies began to buy shares in the municipalities.

To buy voting rights from municipalities, foreign firms have paid about CZK50 billion ($2.1 billion) in the last three years. Thus the municipalities are one of the few governmental organizations in the Czech Republic that have a surplus budget. The incumbent social democratic government attempted to stop the process by acquiring, through FNM and CEZ, free shares. Despite this effort, foreign companies got majority shares in three regional companies: South Bohemian Energy, South Moravian Energy and Prague Energy.

There was a particularly interesting situation surrounding South Bohemian Energy, into which all REAS companies had transferred the assets of the previously jointly established telecommunications company Aliatel.

The municipalities, which owned the controlling stock in South Bohemian Energy, sold their interests to Bayernwerk in spite of the fact that the government offered them CZK500 per share more. They did it because Bayernwerk promised to sign a contract saying that the municipalities would not have to return the money for untransferable voting rights if the state blocked their negotiability. Thus Bayernwerk relieved the municipalities of one of the biggest fears of privatization. It also means that Bayernwerk, as owner of South Bohemian Energy, is able to do business in the Czech telecommunications market.

Delayed synergies

Another chapter is the privatization of Transgas and the gas distribution companies. The privatization of Transgas is virtually blocked by the presence of long term take-or-pay contracts with Russia, to which Transgas sold 9.4 billion cubic meters of gas in 1999. In spite of this, foreign companies entered into regional gas distribution companies. South Bohemian Gas Company is in the hands of Bayernwerk and Ober

In many cases, foreign companies invested in new energy sources which resulted in the 1000 MW capacity increase among the REAS. Some old CEZ generating capacity was retired – about 230 MW – after new environmental protection laws were introduced and under the programme by which old capacity will be replaced by the Temelin nuclear power plant.

Environmental protection

Between 1993 and 1996, CEZ made investments of CZK35 billion in desulphurization and denitrification projects. The parliament of the former Czechoslovak Federation, approved strict limits on pollution emissions, similar to the standards of the EU. The deadline for implementing the act – 1999 – gave little time for realising targets that EU countries had been implementing for years.

Figure 3. Major investments in the Czech republic have included Vresova and ECKG Kladno generating plants
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Prior to 1990, the German businessman Hàƒ¶lter, through the Saarlberg-Hàƒ¶lter-Lurgi group, had convinced the government officials to set up a joint venture to produce machinery for wet limestone washing. Czech firms were reluctant to realise the project, under which only one desulphurization block of 200 MW in Pocerady power station materialized. The contract was quickly revoked, thus losing the opportunity for a CZK45 billion investment in desulphurization.

However, with an excess supply of foreign companies selling desulphurization facilities, low parity of the US dollar to the Czech currency and a good market orientation, CEZ has chosen mainly foreign firms to realise the large-scale programme to install emission control equipment at its plants.

Investment for the future

In addition to the privatization activities, overseas companies have invested in the Czech power generation sector. One of the first projects, implemented by ABB ENS Czech Republic (now Alstom Power Czech Republic), was the construction of the Vresova combined cycle cogeneration project. The investment came in spite of slow-growing and heavily regulated electricity prices. Even though the heat prices were liberalized in 1997, the economic calculations of combined cycle and cogeneration investments in the Czech Republic must be viewed over the very long term.

Vresova, with a power output of 2 x 185 MWe, is one of the country’s largest CCGT power plants. Running on syngas, it is also the first of its kind in the Czech Republic. It belongs to Sokolovksa uhlena a.s. (Sokolov mines j.s.c.), and it produces 1350 GWh per year. With more than 50 000 hours of operation, Vresova is a good example of a new technical level reached in the Czech Republic. The start up of the gas turbine was successfully accomplished in spite of a demanding programme, and the company is now expecting to make a second investment within the next year.

ECKG Kladno: The investment of two American companies brought a new source of electric power and heat with a total output 350 MW. Kladno consist of two units, each comprising a circulating fluidized bed boiler with a steam output of 375 t/h and a VAX type condensing extraction steam turbine. The project also includes a cogeneration unit with a GT8C gas turbine with an output of 66.9 MW and a heat recovery steam generator (HRSG) with a steam output of 86.4 t/h. The cogeneration unit is used for peak load duties. ECKG Kladno has signed a 20-year long term contact with Middle Bohemia Energy for the offtake of the electric power and with another company for the heat supply. This is the biggest IPP project in the Czech Republic.

PPC Trmice: The new Trmice combined cycle power plant, with a power output of 70 MWe, has been in operation for over a year and reached 6000 hours of operation in 1999. The plan for year 2000 is to generate around 5000 MWh of electricity. The plant is connected to an existing heat and power plant to make a single unit, although they are managed as separate economic entities.

Figure 4. Over investment in the Czech Republic will lead to an excess supply of generating capacity
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Cerveny Mlyn/Red Mill combined cycle cogeneration plant: The new combined cycle heat and power plant (now owned by National Power), has an output of 95 MWe and 140 MWth and was handed over to the Czech investor in 1999. The technology is a joint project of Siemens (gas turbine) and ABB ENS (boilers and steam turbine). Kyjov: This interesting although relatively small combined cycle project uses the waste heat from one furnace of a glassworks. The electric output of the project, which is monitored and was partly financed by the World Bank, is 23 MWe. The plant features an unusual, hoof-shaped waste heat boiler designed by a small engineering company in Brno. No problems have been recorded with the gas turbine operation and a few initial shortcomings have been overcome. There are plans for extending its use for processing waste heat and supplying heat to the town and local hospital.

Oslavany combined cycle power plant: The recently commissioned Oslavany CCGT plant has been operating since April 2000 with an output 7.1 MWe. It is equipped with a Solar Taurus gas turbine, and delivers steam and hot water for industrial use in nearby towns. It also supplies hot water for residential central heating systems.

Another typical foreign investment is a new power plant built by the Skoda-Auto Company in Mlada Boleslav as a joint investment of VW, Skoda, Bayernwerk and RWE. Two atmospheric fluidized bed boilers produce 140 t/h of steam to supply technological processes in the Skoda plant, and two Siemens extraction condensing turbines (2 x 45 MWe) produce electricity.

Big expectations

Even if only the most important power generation projects are considered, there has been over-investment in the Czech Republic which will lead to an excess supply of generating capacity. When the Temelin nuclear power plant is accounted for, there is the additional 2000 MW to consider. Small industrial turbine projects, the refurbishment of small heat plants and projects involving diesel engine-based power plants have also been added to the grid. Much of this investment has come from overseas companies.

It is quite possible, therefore, that CEZ’s coal fired power plants – traditionally the main source of power in the country – will be closed down in spite of the investments made in FGD technology. This continued with the increased independence of REAS and CEZ’s falling electricity sales will only serve to reduce the value of CEZ. This will ultimately hamper the future of privatization.

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