Electricity prices in Czechia: What will affect them in future and why renewables can help

High electricity prices dominate the headlines. Their main drivers are gas and carbon allowances. High gas prices currently have the greater impact. However, following the COP26 climate conference in Glasgow and the announcement of the new German government's targets, carbon allowances also jumped. Renewables are certainly not to blame for high electricity prices on exchanges. It is precisely renewables that will push electricity prices down in the future.

Renewables and prices

The way wholesale markets operate makes it impossible for the exchange price of electricity to rise because of a growing share of renewable sources. The electricity price for each hour is set by one power plant: individual sources are ranked according to their offer price, and the last one still needed to meet demand determines the price for all of them. Individual sources offer electricity at their operating costs. For renewable energy sources (RES), these are close to zero, placing them ahead of all other sources. Growth in renewables therefore leads to a decline in the wholesale electricity price. In the Central European region, the price falls by one to two euros per megawatt-hour annually due to the growth of renewables in Germany (with all other conditions remaining the same).

Czechia and renewables

Unfortunately, the entire Czech debate on new energy sources is often reduced to nuclear power. The planned new nuclear unit at Dukovany will replace only half of the existing capacity at the plant. If we want to replace coal as well and retain at least partial energy independence, we cannot do without a large number of new renewable sources (especially solar power plants).

We can occasionally read that we have worse conditions for renewables than neighbouring countries and should therefore not build them. This contains a logical flaw large enough to drive a locomotive through. First, conditions for generation here and among our neighbours, for example for photovoltaics, are comparable. But it is not about how much renewables cost in neighbouring countries; it is about the options we have here in Czechia and how much the alternatives cost. Moreover, most discussions completely overlook how much renewable technologies have become cheaper – especially photovoltaics. It costs one eighth of what it did in 2008. Photovoltaics is now the cheapest new source of electricity and makes sense as an addition to the energy mix. It cannot cover 100 percent of consumption, but 10 to 20 percent quite easily.

Looking ahead to 2030

Current high electricity prices are advantageous for coal-fired power plants in the short term. But only in the short term. The forward price for 2024 (which is very close in energy terms) is over 80 euros/MWh, while a coal-fired power plant faces carbon allowance costs of around 70 EUR/MWh. This leaves 10 euros for buying coal, employees, maintenance and any investment. This is of course unsustainable in the long term, which is why coal-fired power plants will gradually close and we must replace them. In district heating, primarily with gas in the first wave; in electricity generation, mainly with photovoltaics.

Green Deal

Articles about the Green Deal in Czechia often recommend rejecting it. This is wrong both formally and substantively.

Formally, because the Green Deal itself is primarily a declaration that we want to achieve emissions neutrality by 2050. Specific requirements are only brought by legislation proposed under the Fit for 55 legislative package. Substantively, because Fit for 55 will be discussed in the European Union either with Czechia or without it. If we focus on “whether”, while others focus on “how”, we will struggle to secure arrangements for critically important details. In the end, we will only be surprised by what has landed on us.

Energy savings

The main economic risk of the Fit for 55 package for Czechia is not the issue of green electricity, but energy savings. The costs of meeting this target are enormous. The claim that “the cheapest energy is the energy not produced” is merely a marketing slogan. Energy savings also have a cost curve, ranging from effective to nonsensical. For example, insulating an old prefabricated apartment block or replacing old light bulbs with new LEDs makes sense; insulating a summer cottage or replacing older LED lights with newer and even more efficient ones does not.

Pavel Řežábek, Chief Economist at ČEZ