In many countries, solar energy is enjoying great success – photovoltaic modules are increasingly affordable and available to those interested in producing their own electricity. In the Czech Republic, however, those investing in and building solar power stations must constantly resist efforts by the government to destabilise the business environment, as Martin Sedlák explains.

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Czech politicians against modern energy sources

Support for renewables in the Czech Republic emerged from a law to support renewable energy sources adopted in 2005. The legislation was based on the German model. Those interested in investing in environmentally-friendly energy sources could choose whether to use the support in the form of purchase prices or a green bonus. In the initial years, the greatest interest was in wind and biomass power stations. Advances in the production of silicon photovoltaic panels, however, brought about a surge in interest in 2009 and especially 2010 in installing photovoltaic power stations. Today, installed photovoltaic output has climbed to 2126 MW.

Thanks to the support for the development of solar energy, among other measures, the Czech Republic met its obligation to achieve at least an 8% share of renewables in gross energy consumption by 2010, and is on its way to meeting the (not particularly ambitious) obligation to achieve a 13.5% share of renewables in gross final energy consumption in the Czech Republic.

The rapid growth of photovoltaics provoked hysteria among Czech politicians, however. The increased share of renewables was undoubtedly reflected in electricity prices. On the other hand, the price of electricity for Czech households rose between 2001 and 2009 by as much as 80%, mainly due to liberalisation, power company margins and other regulated components in the price of electricity.

If we take, for example, Czech households’ expenditures on electricity with average consumption in 2013, then support for solar power stations represents a 7% share of households’ annual expenditures on electricity (support for all renewables together represents 14%), but for the delivery of electricity (regulated distribution fees) a family will pay up to 40% of its total annual expenditures on electricity.

Despite this, solar energy is designated in the Czech Republic as the only “nefarious” energy source. We are evidently the only country in the EU where the now former prime minister refers to solar power station owners as “solar barons, which are an immensely aggressive group who literally do not look left or right…” (quoted from a discussion programme on Czech Television, April 2013). Verbal attacks are a matter of political maturity, with respect to which the Czech Republic – understandably due to 40 years of totalitarian rule – still has a lot of catching up to do. Far more brutal, however, are repeated retroactive interventions into the business affairs of solar investors, which sweep away guaranteed terms of support and thus also endanger further stability in the development of renewables in the Czech Republic.

The first jolt to legal stability

Understandably, growth in the share of renewables provoked a reaction on the part of the hitherto dominant power companies. A media campaign by the company CEZ based on the unsubstantiated (and subsequently unconfirmed, even by the Ministry of Industry and Trade) menace of electricity price hikes of as much as 26% due to the proliferation of solar power stations significantly undermined the mood in society. In the light of this negative public sentiment concerning solar energy, the government of then Prime Minister Petr Necas pushed a “solution” through the Chamber of Deputies in the form of a 26% retrospective withholding tax (the so-called “solar tax”) on power stations over 30 kW valid for the years 2011-2013. This measure was subsequently upheld by the Constitutional Court despite the fact that one of the documents upon which it was based was an erroneous calculation by the Energy Regulatory Office of economic impacts on model examples of photovoltaic power stations. At the same time, the government also cancelled the originally guaranteed tax holiday for a project’s first five years, extended the depreciation period for solar power stations from 5 to 20 years, and introduced a requirement to invest in dispatch systems.

With these steps, the government shattered the guaranteed terms written into the law and regulations with which it called in investors in renewable energy projects in 2005. Each of the entities based their investment decision on valid laws and guaranteed purchase prices. The state undertook by law to ensure a return on investment within 15 years and support income in the case of solar power stations for a period of 20 years with a reasonable profit.

The second jolt to legal stability

In 2012, the Czech Photovoltaic Industry Association commissioned economists to elaborate an expert opinion, which demonstrated unambiguously that after three years’ application of the 26% solar withholding tax, cancellation of the tax holiday and other retroactive measures applied to the sector, the return on investment for photovoltaic power station projects would be significantly longer than the 15-year period guaranteed by law.

Any further consideration of extending the solar withholding tax should thus be impermissible under valid legislation. This changed, however, with the collapse of the Necas government and the arrival of Jirí Rusnok’s technocratic cabinet. During an extraordinary deliberation without the necessary documents or full knowledge of the matter, the new cabinet proposed an extension of the 2010 solar withholding tax for photovoltaic power stations for the duration of their lifetimes (i.e. for 20 years) at the level of 10%.

The law was adopted despite the fact that the Ministry of Industry and Trade (MPO) did not supply any documents to the Chamber of Deputies regarding compliance with the statutory terms of a return on investment for solar power stations. Thanks to the efforts of the Alliance for Energy Independence, this fact attracted attention in the Senate, and subsequently the MPO admitted that it had calculated the 10% solar withholding tax retrospectively. Senators on the Environmental Committee also determined that the hastily supplied figures contained a number of errors (for example, they did not take into consideration the fees introduced in 2012 for the future liquidation of solar panels – a further absurdity of the Czech milieu) which significantly impacted the result – compliance with the provision on guaranteed return on investment.

Is a total jolt to legal stability in the works?

It may seem that repeatedly disrupting the stability of the investment environment and of guaranteed terms would be enough for politicians and officials from the MPO, but in fact the opposite is true. While the notification process for legislation to support renewables completed in June before the European Commission (the Czech Republic prepared a new law in 2012 to support renewable and other energy sources) confirmed the legitimacy of support for renewables, MPO is unfortunately successfully ignoring the results of the notification. The amendment to the Energy Act currently in preparation contains several new provisions, the adoption of which would be in utter discord with the terms guaranteed by law, as well as outside the bounds of constitutional rules.

If the amendment to the Energy Act is adopted, it would impact all types of renewables in the Czech Republic – in addition to solar also wind, biomass and biogas. The controversial proposals are based, for example, on pressure to introduce a new mechanism for setting a maximum amount of support paid out, which would depend on terms issued by the Energy Regulatory Office. Such a move, however, would fundamentally disrupt the terms for renewable energy sources guaranteed under valid legislation. This is a clearly retroactive measure which would threaten investments worth hundreds of billions of Czech crowns and entirely destabilise the business environment in the energy sector.

In addition, the MPO now wants to impose a requirement on electricity producers to participate in the operating costs of the power distribution and transmission system. Here, they most likely drew inspiration from Slovakia, where the government introduced analogous measures last year. Yet renewables have hitherto received contributions as elements contributing to the stability of the transmission and distribution system’s operations. The MPO is proposing to terminate such support and instead to introduce a fee for using the distribution system. Once again, however, the amendment does not contain any formulation of a method for setting a price for the use of the distribution (transmission) system, and everything is left to accompanying legislation.

In the category of curiosities is a proposal containing a mechanism to impose unlimited liability for the return of support upon owners, operators and responsible persons – for companies doing business in the field of environmentally-friendly energy. In practice, this would mean de facto eliminating the legal status of limited liability companies operating in the renewables sector.

The law clearly guarantees purchase prices calculated in individual years by the Energy Regulatory Office based on technical and economic parameters and valid for the set lifetime of the project. Any retrospective changes constitute clear retroactivity, which is not permissible and is at odds with the constitution.

Our association Alliance for Energy Independence and other organisations in the renewables sector have repeatedly informed the media, politicians and officials of the clear contradictions and errors in the legislation being prepared. Nevertheless, the MPO is insisting on the amendment’s current wording despite hundreds of comments sent during the interdepartmental commenting process by a range of ministries and professional associations. The MPO has ignored their comments, and has incorporated into the legislation mainly the suggestions of the Energy Regulatory Office, which strengthen the latter’s own powers in an unfounded manner – for example, levels of support can now be changed retrospectively, and they can be exempted from disclosure requirements under the Freedom of Information Act.

Fortunately, the Government Legislative Council intervened in the amendment’s preparation at the end of August, and the MPO failed to defend its draft amendment to the Energy Act. The MPO must now rework the draft by the next session of the Government Legislative Council, which takes place on 18 September 2014.

We can speculate about what motivations lie behind the ministry’s moves. One of the possible dimensions is pressure to exclude support for renewables so that they can be replaced circa 2025 by compensation for additional nuclear reactors at Temelín. We can only hope that the Czech government will see the light and halt those measures which are at odds with the European Commission’s previously declared positions in which it admonishes states to “avoid unannounced or retroactive scheme changes. Investors’ legitimate expectations concerning the returns on existing investments must be respected.” (Memo on the Communication on “Delivering the internal electricity market. Making the most of public intervention” MEMO/13/948).

Martin Sedlák, Director, Alliance for Energy Independence.