FEELING THE BURN: RENEWABLES TARGETS AND SOLAR

C O N F I D E N T I A L SECTION 01 OF 03 PRAGUE 000115

SIPDIS

E.O. 12958: DECL: 02/23/2020
TAGS: TRGY ENRG BTIO PREL TNGD BEXP EZ
SUBJECT: FEELING THE BURN: RENEWABLES TARGETS AND SOLAR
INCENTIVES

Classified By: CDA Mary Thompson-Jones for reasons 1.4 (b) and (d)


1. (C) Summary: The Czech government's response to EU-set
targets for increased use of renewable energy sources (RES)
to meet electricity needs has been lackluster and expensive.
Renewables' share in electricity consumption increased last
year mainly due to a recession-driven decrease in total
electricity consumption, and RES still only account for a
small portion of total electricity consumed. A sudden
reduction in the cost of solar equipment has led to an
exponential growth in solar energy generation, rendering the
current subsidy system unsustainable. Solar plants continue
to increase in number, despite being the least financially
efficient energy source in the Czech Republic. Both national
and local authorities remain suspicious of renewables. The
Czech Republic is unlikely to meet its EU-mandated RES
targets without a change in public attitude and significant
reworking of its RES subsidy policy. End Summary.

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Mostly Coal, but Renewables are on the Rise
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2. (SBU) Coal accounts for roughly 50 percent of the total
Czech energy supply and around 60 percent of electricity
generation. The remaining portion of electricity comes
primarily from nuclear power (about 32 percent) with RES
composing just over 5 percent (as of the end of 2008).
Within the realm of RES, hydroelectric power plants dominate
production (54 percent of RES, 2.4 percent of total
electricity production),followed by biomass (1.4 percent of
total electricity),then biogas and wind power (about 0.3
percent of total electricity each),and finally photovoltaic
or solar energy, composing a mere 0.02 percent of electricity
generation in 2008. Past proposals to change the Czech
energy and electricity composition have been aimed primarily
at energy modernization and security, namely increased
reliance on nuclear energy, reduced reliance on coal, and
increased access to non-Russian natural gas sources.


3. (SBU) Increased investment in RES in the Czech Republic
(CR) has come largely in response to EU directives intended
to lower greenhouse gas emissions and promote RES. The CR
faces EU-set mandatory targets of 8 percent reliance on RES
for gross electricity consumption by 2010 and 13 percent by

2020. While an official Czech Industry and Trade Ministry
report called the 2010 target "overly ambitious," some
officials still believe it to be feasible. The share of
renewable energy in electricity consumption has risen
steadily (albeit modestly) over the past five years from 4.0
percent in 2004 to 5.2 percent in 2008.

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Incentives for RES Producers
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4. (SBU) In 2005, the CR instituted a series of incentives
(which are still in place) to encourage investment in RES
technology and production of energy from RES. In addition to
the guarantee that the relevant regional distribution company
purchase energy produced from RES, the law stipulates that
ancillary costs of RES energy production be passed on to the
consumer via higher energy prices, rather than reduce RES
company profit margins. Even more significant, producers can
choose between receiving green bonuses (an amount paid to the
supplier above the market price of electricity) or feed-in
tariffs (fixed minimum purchase prices for energy supplied).
The central Energy Regulatory Office sets the latter, and the
law guarantees that the fixed minimum price not drop more
than five percent year-on-year. According to Industry and
Trade Ministry Renewable Energy Department Head Ondrej
Tomsej, the feed-in tariffs are significantly more popular
among investors. Since 2005, producers have also been
eligible for additional, specific subsidies offered through
different programs by the Ministry of Industry and Trade, the
Environment Ministry, and EU structural funds.


5. (SBU) Incentives succeeded in stimulating construction and
expansion of facilities harnessing biomass, photovoltaics,
biogas, and wind capacity. The share of gross electricity
consumption derived from RES increased from 4.74 percent in
2007 to 5.18 percent in 2008. Unofficial Industry and Trade
Ministry estimates put RES share of electricity at 6.8
percent in 2009, though according to Tomsej, most of the
increase is attributable to a drop in energy consumption
caused by the economic recession. In 2009 the Czech economy
contracted 4.2 percent and energy consumption fell about 4.8
percent. Among the RES, photovoltaic electricity production
showed the most dramatic rise (514 percent),but still only
accounted for about 0.02 percent of gross electricity

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consumption in 2008 and an estimated 0.13 percent in 2009.


6. (C) According to energy expert Bretislav Dancak, the Czech
energy mix is largely unaffected by these developments, and
is unlikely to change significantly in the future. Dancak
dismissed RES incentives as a government effort to "look
busy" for the EU; furthermore the renewables industry will
not flourish in the CR because CEZ, the semi-state owned
electricity company with a notoriously heavy hand in Czech
politics, has no vested interest in its success. Michal
Janecek, owner of one of the largest solar plants in the
Czech Republic and Chairman of the Czech Wind Energy
Association, echoed Dancak's skepticism of the government's
commitment. He added that the CSSD-led government passed
legislation in 2005 intended to support growth in the
renewables sector. When the ODS government took over in
2006, however, momentum for renewable energy growth decreased
considerably and the support on the books did not translate
into support in practice, but rather hostility towards
renewables. The Fisher-led, interim government of the past
ten months, according to Janecek, provided a neutral space
for the solar industry to "boom" unhindered.

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Why Solar?
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7. (SBU) The number of solar power plants grew more than
tenfold in the CR over the last two years. As of November 1,
2009, there are 3,136 solar power plants in the CR with a
total output, according to the Ecological Alternatives
League, of over 133 megawatts. Experts attribute the
precipitous increase in solar plant construction and
investment to the confluence of high, fixed solar power rates
and a large drop in the cost of photovoltaic panels. A
change in Spain's solar energy policy in 2008, for instance,
led to the availability of solar panels at "dumping" prices,
according to Janecek. Daniel Kunz, CEO of leading renewable
energy company Energy 21, told press that the payback period
for solar power plants has shortened to 8-10 years, now that
technology costs have fallen 40 percent since 2007, and there
has been no commensurate purchase price adjustment. The
result has been a rush of investors from the wind sector to
the solar sector, as well as hundreds of new investors from
other industries.


8. (SBU) Other major RES each face unique obstacles to
growth. The CR has already harnessed the majority of its
hydroelectric potential, leaving little room for growth
regardless of the incentives. Electricity produced from
biomass saw a 20 percent increase in 2008. However, most
energy produced by biomass is harnessed for heat rather than
electricity. In addition, while policy-makers believe that
biomass holds the greatest potential for expansion in the CR,
development of biomass capacity is still not economically
attractive even with the current incentives.


9. (C) Wind energy production has increased as a result of
the government incentives, however experts believe its
continued growth potential to be limited. Regional
governments also often object to the construction of wind
turbines in their districts, citing their visual and noise
implications. In addition, Industry and Trade Ministry
officers have claimed that there is "insufficient" wind.
Critics of wind energy also explain that managing the spikes
and dips of energy generated by wind power is both difficult
and expensive for grid operation.


10. (C) Wind farm operator KV Venti's CEO, David Jozevsky,
calls these claims "nonsense." Mr. Jozevsky, whose company
operates three wind facilities in the Czech Republic and a
handful abroad, told us that the central government is
attempting to avoid confrontation with regional governments
on this topic, and do not themselves want wind turbines
erected near their out-of-Prague, pastoral summerhomes.
Janecek told us that local government "obstructionism" led to
a five to six year period between conception and operation of
wind plants (as opposed to the twelve to eighteen month
period for solar plants). Janecek partly attributes the
wind-to-solar brain drain of the last two years to this undue
bureaucracy.

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Sustainable Energy Policy "Unsustainable"
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11. (U) On November 30, Roman Polak of the Energy Regulatory
Office (ERU) told the press that photovoltaics is one of the
least effective electricity sources, but receives some 40
percent of the support designated for all RES. However, with

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the ostensible money-back-guarantee on solar plant
investment, facilities continue to crop up around the CR,
with little effect on overall energy supply. Critics of
solar power note that the price paid for solar energy is 14
times the price of energy from coal and nuclear and 4.5 times
the cost of wind power. Industry and Trade Minister Vladimir
Tolovsky announced that the enormous rise in subsidized
energy production, particularly solar energy, could drive up
the residential price of electricity 19 percent by 2012. He
warned that industrial energy cost could rise 50 percent and
repel potential foreign investment.


12. (C) Politicians, analysts, and journalists are demanding
renewables policy reform, calling the current system
financially unsustainable. The leading national economic
newspaper's energy reporter told us that even the main Czech
photovoltaic trade association accepts that reform is
necessary, though the details will require further
discussion. On February 8, the Czech Cabinet released a list
of short-term priorities, including passage of reform
legislation during the first half of 2010 to reduce solar
subsidies. Mr. Tomsej also told us that the Industry and
Trade Ministry submitted a legislative proposal to the
government to allow the fixed minimum price to drop by more
than 5 percent, and expects that the Chamber of Deputies will
give this proposal a second reading this spring.


13. (C) Technical concerns exist as well. The Czech
electricity grid operator (CEPS) warned in early February
that the additional grid connections required to service the
thousands of low-yield plants have exceeded the number
consistent with the safe and reliable operation of the power
grid. On February 16, Czech electricity distribution
companies stopped accepting new applications to join the
grid. Janecek told us that government warnings of blackouts
due to an overloaded grid are nothing more than
fear-mongering and an attempt to avoid the appearance of
welching on its commitment to subsidize clean energy.
According to Janecek, the government announced last year that
the grid could accommodate 2000 megawatts of new connections;
now, only 600 megawatts later, the grid is allegedly full.

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Paying More for the Same Pie
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14. (C) Comment: Czech efforts to increase reliance on RES
for electricity consumption (whether sincere or not) have
produced only modest changes to the national energy mix, but
could cause dramatic increases to energy cost. While
investors in solar would likely perceive a sudden drop in
fixed purchase prices as a betrayal, the government, the
consumer, and the investment climate cannot afford the
alternative: a dramatic rise in energy prices for everyone.
Alleged grid problems will help to justify discontinuation of
new licenses, though, for legal reasons, the current
incentives will probably have to be grandfathered for
existing producers. However, if the Czech Republic is
serious about increasing its reliance on renewable energy, it
will need to develop a new structure that encourages
investment in more promising technologies such as biomass.
End Comment.
Thompson-Jones