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Turbulent Waters in the Czech Energy Market

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It may be quite clear to people from the energy community, but it is worth repeating: the Czech energy market is not isolated from global trends, and those who understand the trends can better anticipate what will comes next. This applies to business people as well as to lawyers and other advisors. We can see the impact of global trends on almost all energy-related deals in the Czech Republic and indeed the wider CEE market. What are the key trends which affect the Czech and wider CEE energy markets?

First is the phenomenon of global warming. Irrespective of whether global warming is scientifically proven or not, some regulators across the globe have reacted with legislation supporting the reduction of carbon dioxide emissions. The EU regulator has been in the forefront, adopting the famous 20:20:20 target: the ambition to reduce carbon dioxide emissions by 20%, to increase renewables to 20% of the energy mix, and to decrease energy consumption by 20% – all by 2020. EU states have expressed a clear interest to carry on with further measures with another target date of 2050. The impact on the CEE energy market has been tangible. The generous support of renewable energy has led to the creation of a sufficient number of installations and to the achievement of the EU renewables target. It has also created disincentives for investing in conventional power generation. For example, no new conventional power plant has been commissioned in the Czech Republic in the last decade.

The second key trend is the Fukushima Daiichi nuclear accident. In Europe, this has helped a number of states – including Germany and Italy – to express a clear “no” against keeping nuclear sources in their energy mix. Importantly, the German nuclear phase-out has led to increased M&A activity in the CEE energy market, with large German incumbents leaving the market. RWE’s sale of NET4GAS, the Czech transmission system operator, could be a primary example of this. Another side effect of the Fukushima Daiichi nuclear accident is increased pressure on nuclear safety, resulting in increased costs for commissioning and operating nuclear power plants. An example of this could be the ever increasing costs of the commissioning of Unit 3 and 4 at Mochovce in Slovakia.

The third key trend is environmental protection. Increasingly strict EU rules on emissions of, among others, SO2, NOX, and dust will lead to higher costs for the operation of conventional (coal) power plants post-2016. In recent years, most of the operators of conventional power plants in the EU have been facing the dilemma of whether to commit to large investments in the refurbishment of power plants or to close them. Again, this has led to increased M&A and construction activity on the Czech energy market. Due to the stigma of conventional power, some operators have even been leaving the conventional power segment completely. A recent possible example is the contemplated sale of conventional assets by the Vattenfall group on the Czech, German, and Polish borders. 

The fourth trend is linked to specific EU liberalization rules and rules on protecting the free market economy. The third EU energy package, combined with antitrust rules and rules against state aid, has created a relatively hostile environment for incumbents, with great incentives for new entrants. Again, this has had a material impact on the Czech energy market. An example of this is the unbundling of the RWE group, the gas incumbent, in the Czech Republic. CCEZ’s failed tender for the construction of a new nuclear power plant could be another example – due to strict EU state aid rules restricting the use of guaranteed off-take prices, the commissioning of new nuclear and other power plants is proving to be a challenging area. 

Last but not least, the slowdown of the global economy in recent years has led to a drop in commodity prices and the major restructuring of regional energy groups. It has also almost halted investment in new capacity in the EU. This has clearly stimulated M&A activity in the CEE market, creating interesting opportunities for new entrants. Examples of this are the acquisition by EPH of SPP, the Slovak transmission system operator, from GDF and E.ON, and the potential sale by Enel of a 66% shareholding in Slovenske elektrarne, the Slovak power incumbent. 

In sum, global trends are making the waters of the Czech and wider CEE energy markets considerably more muddy and turbulent. The regulatory and political framework has become complex, and commercial decision making has become more difficult. This obviously creates challenges, but also opportunities – and it is great to be able to look out for these.

By Alex Cook, Partner and Petr Zakoucky, Senior Lawyer, Clifford Chance Prague LLP

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.