Energy congress – part 3: The role of the state in Czech energy

In the first and second parts of our summary of the energy congress, held in Prague on 18 April, we reported on conference participants’ views on the bureaucratic burden associated with building new electricity generation sources and on the outlook for the need for new energy sources, particularly under the Decarbonisation Scenario developed by ČEPS. It showed that, as a result of renewable energy source (RES) build-out and coal phase-out, Czechia will need up to 2800 MW of new dispatchable capacity by the end of this decade. Investment plans for new sources are already emerging – but will they be enough, and what role should the state play? Let us look at the views of the conference participants.

The speakers at the conference included, in particular, Czech energy giant ČEZ. Representatives of Sev.en and EPH, whose views of the market are often very different and whose exchanges of opinion are quite entertaining to watch, did not speak at the conference. The market perspective described below therefore primarily reflects that of ČEZ.

When will coal end and what will replace it?

ČEZ is focusing on developments in the energy market in the coming years, specifically falling electricity prices and rising emissions allowance prices. To illustrate the situation, as of 14 April this year, the price of baseload electricity for Czechia was 146 EUR/MWh for 2024, 127 EUR/MWh for 2025 and 113 EUR/MWh for 2026. The price of an emissions allowance, by contrast, is rising: 98 EUR/tCO2 in 2024, 103 EUR/tCO2 in 2025 and 107 EUR/tCO2 in 2026.

To generate 1 MWh of electricity in lignite-fired power plants, one emissions allowance must be surrendered, very roughly speaking. The figures therefore show that the spread between the electricity price and the cost of emissions allowances for lignite-fired power plants is narrowing significantly.

The spread does not include fuel costs, repair and maintenance costs, personnel costs and others. According to Pavel Řežábek, ČEZ’s chief economist, lignite-fired power plants are therefore likely to be shut down long before 2033 or 2038, the dates targeted by political decisions, based on the economic situation.

According to ČEZ, the capacity phased out can only be replaced by RES or gas by the end of this decade, while gas entails significant geopolitical risks. ČEZ’s view regarding the date of coal plant closures would probably be disputed by representatives of EPH or Sev.en (editor’s note: the economics of coal-fired power plants are also affected, for example, by heat sales, the provision of balancing services and other factors).

How fast will RES development and decarbonisation proceed?

Different entities may have very different assumptions about the pace of RES development and decarbonisation. In Czechia, this mainly concerns the development of biomass-burning sources (although these face limits in the availability of sustainable supplies of, for example, wood chips), photovoltaics (PV) and wind power plants.

It is likely that the coming years in Czechia will primarily see the development of large ground-mounted PV plants. However, these deliver most of their output during the summer months, while electricity consumption is highest in winter. With the growing electrification of heating, winter consumption will increase further.

Wind power is substantially better suited to meeting electricity demand in winter, although permitting processes for construction often take 5 years or more.

What should the role of the state be in energy?

Pavel Řežábek further used an illustrative example to show the impact of renewable sources on electricity prices. He demonstrated this using spot prices from 15 January this year, when conditions for wind generation were favourable. In Germany, prices were around 9 EUR/MWh, while in Czechia they were ten times higher, at 90 EUR/MWh. He put the competitiveness of Czech industry in this context, arguing that there is no alternative but to install RES if the competitiveness of Czech industry is to be maintained.

According to him, conditions for RES construction are suitable in Czechia. More here. At first sight, however, there is a catch: is it attractive for investors to invest in capital-intensive technologies that subsequently sell their product, electricity, at low prices?

According to ČEZ’s chief economist, the role of the state is to ensure energy security. The market and market conditions alone will not guarantee Czechia’s energy security. Investment and operating subsidies are therefore needed – these will ensure the economics of new projects (capacity mechanisms similarly ensure project economics). RES will help increase energy security and preserve the competitiveness of Czech industry.

However, the Czech Republic fell culpably behind in supporting renewable sources as a result of the poorly legislated solar boom of 2009-2010. The option of auctions for RES support has now been introduced, but, for example, the first auction for wind power ended in fiasco, as its conditions did not fully reflect market conditions. Following an adjustment to the conditions, some entities applied in the second auction.

State involvement in energy should therefore increase further, as the state is responsible for ensuring energy security. The trend of recent years has been nationalisation and the creation of state champions, as demonstrated, for example, by Germany’s Uniper and France’s EDF. This enables the state to ensure oversight of major strategic projects, such as the construction of nuclear power plants.

Czechia is preparing an update of its energy strategy, which is due to be completed by the end of this year. It should take into account market developments in recent years and provide an outlook for energy sector development over the next 30 years. The state has fallen considerably behind in introducing RES support auctions and capacity mechanisms, which have been operating routinely abroad for several years. The same applies to community energy. Will the updated strategy be of sufficient quality, and will the state succeed in ensuring energy security? The coming months and years will show.