Response to the energy crisis? Lex RES III aims to prevent another Bohemia Energy

In addition to storage and flexibility, Lex RES III also introduces stronger customer protection in the retail market. Electricity and gas traders will be required to disclose how much electricity they have secured through long-term contracts. Customers will thus know which traders are prudent and which, conversely, are taking risks. However, this is not the only change responding to the energy crisis.

Lex RES III is undoubtedly among the most anticipated and discussed energy regulations of recent years. The legislation adds concepts such as storage and flexibility to the Energy Act. Although storage has received the most attention, it is not the only key change introduced by Lex RES III.

Major changes affecting electricity and gas traders have received relatively little attention. They face new obligations that may come as a surprise to some traders. By contrast, customers will welcome them, as their protection is being strengthened.

Secretive risk-taking à la Bohemia Energy? No longer possible

The collapse of supplier Bohemia Energy was probably the most significant event at the outset of the energy crisis. As a result of its collapse, approximately 900,000 customers ended up in the supplier of last resort regime. Overnight, all of them had to pay higher prices for electricity supplies, as Bohemia Energy was unable to secure supplies for its customers.

The reason for the collapse was a risky trading strategy. Bohemia Energy had benefited from the long-term decline in electricity prices by purchasing electricity primarily on short-term markets, where the commodity price was lower. However, when prices on short-term markets began to rise and Bohemia Energy did not have sufficient electricity secured under long-term contracts, it was unable to meet its obligations.

"Its long-term strategy was based on the fact that it paid off to buy for shorter periods. They had a much larger open position, the risk was much greater, and it paid off for years, with their customers benefiting from it. In the first years after signing a contract, they had lower prices. At the same time, there is the opposite risk: when the market reacted very quickly, they were unable to withstand it,"Michal Kulig, director of supplier Yello, told SeznamZpravy.cz.

Bohemia Energy had built its business on this practice, which allowed it to offer low prices over the long term and thereby attract new customers. They had no way of finding out how risky their supplier really was. It is precisely this situation that the Lex RES III amendment addresses.

Under the new rules, every electricity and gas trader will be required to publish the so-called trader hedging index. In simplified terms, this index indicates what share of the electricity supplies to its customers a supplier has covered by contracts for the following 36 months.

The trader hedging index [means] the percentage share of the volume of electricity or gas whose delivery is contractually secured by an electricity or gas trader at a fixed price or at a variable price which, in combination with financial settlement, ensures a fixed price level for the following 36 months for consumers and self-employed persons, in the expected volume of electricity or gas to be supplied during that period to those customers to whom the electricity or gas trader supplies electricity or gas under a contract with a fixed price for electricity or gas supplies for the agreed duration of the contractual commitment.

Put very simply, the higher the percentage stated by a supplier, the more prudent its approach to securing supplies for its customers. Customers will therefore be better able to assess whether the low price offered by a particular electricity supplier corresponds to increased risk.

Suppliers must publish the index twice a year – as of the end of March and September – on their websites. Customers will thus be able to easily check how risky it may be for them to choose a particular supplier.

However, Lex RES III contains only part of the provisions related to the trader hedging index.

The substantially more important provision is part of an amendment referred to as Lex Gas. It has already been approved by the Chamber of Deputies and is only awaiting approval by the Senate and the President's signature.

The Lex Gas proposal includes a provision under which a customer is entitled to withdraw from a fixed-price contract if the trader hedging index falls below 70 %. In addition, the contract may be terminated without penalty and with one month's notice.

Customers who have entered into a fixed-price contract therefore need not fear that their supplier will significantly change its risk profile during the term of their contract.

Once is enough

Lex RES III also substantially tightens the conditions for granting licences to trade electricity and gas. The aim is to protect customers from persons who have already demonstrated that they are not capable of conducting electricity or gas trading activities, have failed to manage them, or have harmed their customers through their activities.

Once Lex RES III takes effect, it will therefore not be possible to grant a licence to a person whose licence was revoked within the previous five years. The law specifically sets out three main obstacles to obtaining a licence:

1. A five-year ban for entities whose licence was revoked in the past due to a serious breach of obligations. This ban applies not only to the company itself, but also to members of its statutory body and to new companies in which these persons would serve.
2. The five-year restriction also applies to entities for which the supplier of last resort regime has been invoked. Again, this restriction applies both to the company itself and to persons in the management of such companies.
3. A five-year ban for entities that have undergone bankruptcy proceedings or whose insolvency proceedings were discontinued due to insufficient assets.

The Energy Regulatory Office may waive some of these obstacles if the person concerned proves that they made every effort to prevent the problems from arising and did not contribute to the company's insolvency through their actions.

Nevertheless, the purpose of the new rules is clear. They are intended to “clean up” the energy market of unreliable persons and prevent situations similar to the collapse of Bohemia Energy. And if such a situation does occur, persons associated with such negative circumstances will have to seek work in another sector next time.