Was the support of renewables in the Czech Republic failure?

The energy policy of EU, especially its continuing support of renewables, has been rather hot topic in the past few years, with the chief reason being its impact on the electricity prices not only in the Czech Republic but other member states as well. One of the main factors that contributed towards the current situation was the implementation of the 20-20-20 goals that marked out the obligation to reduce emission of greenhouse gases by 20 % compared to 1990, to increase the share of renewables in energy consumption to 20 % and to increase energy efficiency by 20 % by the year 2020. Every member state had to set up its own goal based on its capabilities and starting position. The Czech Republic agreed on 13 % share of renewables in energy consumption (though its stated goal in National action plan was 13.5 %).

In order to accomplish the goal, Czechs chose following tools: exemption from several taxes, various types of subsidy programs and most importantly article 180/2005 that guaranteed revenue for a unit of electricity produced from renewables for duration of 15 years and limited the decrease of prices to max 5 % a year. However, this guarantee would soon prove to be ill chosen. When the prices of photovoltaic technologies significantly decreased due to the influx of Chinese panels, the construction costs of photovoltaic power stations dropped substantially. Because the investors had guaranteed revenues, the potential profitability of the photovoltaics led to sudden boom of new photovoltaic power stations. That is easily observable in the following graph.

Graph 1 – Electricity production from renewables and its share in total household consumption

Source: ERU 2013a; own modification

Unfortunately, even though the increase of the share of renewables was the goal of this scheme, the sudden boom produced negative side effects. The necessary funds for the guaranteed revenues had to found somewhere. In the Czech Republic, the final electricity prices are comprised of two parts, regulated and unregulated. The regulated part consists of several components. One of them is the contribution covering the expenses from guaranteed purchases of electricity from renewables. Since the share of renewables in total production of electricity increased exponentially, so did the necessary expenses. That led to increased electricity prices.

Graph 2 – Contributions covering the expenses of electricity production from renewables

Source: ERÚ 2013b; own modification

As is observable from the graph above, the burden for electricity consumers increased significantly since 2010. While part of the contribution is covered by subsidies from government budget, the costs for households and businesses are still substantial. In 2012 and 2013 the subsidy covered 11.7 billion CZK from the overall contributions. For the year 2014 the subsidy was chosen to be 14.7 billion CZK. Over the past few years the overall size of contributions increased exponentially. While between 2005 and 2011the cumulated sum was only 55.2 billion CZK, in 2012 it was already 38.4 billion CZK for that year alone and in 2013 it was 44.4 billion CZK.

Given that such a huge burden made Czech firms less competitive and that households lost significant part of their budgets, Czech government was forced to act towards amending the situation. Firstly, they imposed solar tax for the electricity producers from renewables in 2010; however that soon proved to be insufficient. So in September 2013 Czech government passed amendment that stopped support for all renewable power stations built since 1/1/2014, set renewables contributions ceiling to 495 CZK/MWh and decreased the solar tax from 26% to 10%.

The Czech Republic is only one of the examples among member states where the poorly chosen policies led to undesirable impacts. Nevertheless, the support for renewables in EU continues. European parliament recently passed new energy targets for 2030 – 40% reduction of greenhouse gases, 30% share of renewables in consumption and 40% increase in energy efficiency (Harvey 2014). This decision comes at a time when Europe continually loses competitiveness. On average EU medium sized businesses pay for electricity by 20% more than those in China, by 65% more than those in India and twice more than those in USA and Russia (European Commission 2014). Since the current situation on European energy market is a result of poorly designed market distortions, we should ask ourselves whether strengthening of the targets is a step in the right direction.

Jonas Rais