1. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks RES-E MARKET IN THE CZECH REP. Doc. Ing. Jaroslav Knápek,CSc. Czech Technical University in Prague Fac. of Electrical Engineering June, 2012 page 1

2. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks RES MARKET IN THE CZECH REPUBLIC CONTENT: Current statistics Details on wind, PV, biogas, biomass, SH Players on RES-E market Barriers for RES-E projects page 2

3. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks CURRENT STATISTICS ON RES SHARES page 3 Key role of biomass, biomass for households estimated Source: MPO statistics 2009 total: 103,5 PJ

4. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks POWER GENERATION FROM RES page 4 year 2009: 4.67 TWh, 2010: RES-E: 5.89 TWh power consumption 72 TWh in 2008, 68,8 TWh in 2009, 70,9 Twh in 2010 indicate target 2010: 8% REACHED ! (originally unexpected !)

5. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks STRUCTURE OF POWER GENERATION - 2 page 5 2011: 7196 GWh

6. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks POWER GENERATION FROM BIOMASS page 6

7. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks INVESTORS INTEREST ON RES-E PROJ. PV projects were in centre of investors interests at the moment Support seems to be attractive Stable investors conditions „Easiest projects“ page 7

8. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks WIND PROJECTS page 8 Beg. of 2009: Total installed capacity app. 150 MW Original outlook to 2013: up to 1600 MW (considered proj.) – highly unprobable

9. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks WIND PROJECTS - 2 page 9 Start of F.T. system since 2006 is obvious Wind: 0.335 TWh in 2010

10. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks PV PROJECTS Original rules: No limit for total installed capacity Big projects under investors’ interest –Largest installed capacity: 30-40 MW projects –Since 2011: Only projects < 30 kW are supported, but since Feb. 2010 no project can get grid connection up to now –End. of 2007:app. 3,4 MW Boom of PV in 2008-9 (combination of factors) page 10

11. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks PV PROJECTS - 2 Highest interest of investors in Southern Moravia –Annual solar radiation MJ/m2 page 11

12. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks PV PROJECTS - 3 page 12 Paradise for PV project in 2008-2010 2010: 0.615 TWh, 2011 estimate: app. 2 TWh, since February 2010 no permission to the grid connection issued

13. MSc Program – Renewable Energy in Central and Eastern Europe „ PARADISE“ FOR PV PROJECT to remind: the end of 2008: app. 23 MW in PV COMBINATION OF SEVERAL FACTORS:  unexpected fall of investment cost (learning curve effect)  limitation of FIT reduction to 5%/year only (for new plants)  political crisis – fall of CZ government in spring 2009, waiting for the elections 1,5 year  financial and then economic crisis in the world – investors search for safe and profitable projects  extremely high lobbyism  underevaluation of situation by distributors – missing information about sum of permission for the connection Module 7 – General Legal and Economical Frameworks Doc. Ing. Jaroslav Knápek, CSc. page 13

14. MSc Program – Renewable Energy in Central and Eastern Europe  Totally chaotic growth of PV projects  Fight for locations and for the grid permissions  Situation in February 2010: app. 4500 MW in projects with valid permission  Grid operators stopped permissions for new application after February 2010  Extremely high return for PV investors (FITs were higher by 30-40% that were their adequate values)  extreme return creates positions for „extreme things“  Blocked access to the grid for many of other RES-E projects CONSEQUENCES OF PV PARADISE Module 7 – General Legal and Economical Frameworks Doc. Ing. Jaroslav Knápek, CSc. page 14

15. MSc Program – Renewable Energy in Central and Eastern Europe RES FEE DEVELOPMENT Note: VAT 20% not included Source: ERU Fee includes RES, cogeneration and non-traditional sources support RES share: more than 90% Doc. Ing. Jaroslav Knápek, CSc. Module – General Legal and Economical page 15

16. MSc Program – Renewable Energy in Central and Eastern Europe RES FEE DEVELOPMENT Doc. Ing. Jaroslav Knápek, CSc. Module – General Legal and Economical page 16 If no „solar brake“ – electricity prices would rise by 11,4% for households and by 14,5% for industrial consumers (with solar brake: 4,6%, 5,2%) in 2011 Politically and economically unacceptable

17. MSc Program – Renewable Energy in Central and Eastern Europe RES SUPPORT COST STARTED TO BE THE REAL PROBLEM Doc. Ing. Jaroslav Knápek, CSc. Module – General Legal and Economical page 17

18. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module – General Legal and Economical Frameworks in the Czech Republic HISTORY OF LEGISLATIVE ACTION Mid. of 2009: proposals for Act 180/2005 changes no reaction, results of political situation and strong lobbyism March 2010: Limitation of FIT reduction is not effective if payback time is less than 11 years September 2010: Support only for PV on roofs and facades and P i less than 30 kW (since 1.3.2011) Support for „island“ installation expired during one year (2011), if installation is not connected to the grid page 18

19. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module – General Legal and Economical Frameworks in the Czech Republic page 19 HISTORY OF LEGISLATIVE ACTION 2 November 2010: changes of „tax“ act income tax holidays cancelled for all RES applications (including already running, last applicable for tax period 2010) changes in depreciation periods for PV: –current situation: PV panels are 55-60% investment cost, but depreciation period is only 5 years –since 2011: depr. period is defined as 240 months (similarly for financial leasing, its length should be also 240 month) – valid also for already running projects, not depreciated part is allocated to 240 months minus number of month of depreciation

20. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module – General Legal and Economical Frameworks in the Czech Republic page 20 Cost of Support Scheme – SOLAR BRAKE Reduction of impact to the consumers needs other sources of financing no action scenario: total extra cost from RES-E support in 2011 would be app. 28 bil. CZK (full transfer to the consumers) – app. 20 bil. CZk thanks to PV action scenario (solar brake): 16 bil. CZK transferred to consumers, 12 bil CZK money transfer from state budget since 1.3.2011 only < 30 kW on roofs and facades But where to find money when state budget is in deep deficit? Selection of least bad solution – UNIQUE and DEBATABLE solutions

21. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module – General Legal and Economical Frameworks in the Czech Republic page 21 Cost of support scheme – SOLAR BRAKE December 2010: changes of „RES“ act 180/2005. 12 bil. CZK collection (2011): Tax imposed on gross revenues (!) – monthly basis: 26% of FIT revenues (currently valid for 3 years) – 4,2 bil. CZK/year (not applicable for small < 30 kW PV) Gift tax imposed on emission allowances distributed free of charge 32% (for power generation companies) periods of 2011 and 2012 – 4,8 bil. CZK/year State budget – 1 bil. CZK Dramatic increase of agriculture land utilization of fee – 1.7 bil. CZK/year No emission allowances free of charge for energy sector since 2013 (EU exemption – derogation – is not used)

22. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks SMALL HYDRO SH < 1 MW app. 135 MW SH from 1 to 10 MW app. 149 MW LHydro: 753 MW Power generation in 2010: 1239 GWh, LHydro 1551 GWh in 2010 Long tradition in SH construction Reconstruction in 90’s and beg. of this decade (support from Czech Energy Ag.) –Limited possibilities for new SH plants page 22

23. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks SMALL HYDRO - 2 page 23 2010: Small hydro: 1.24 TWh, Large hydro: 1.55 TWh

24. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks LANDFILL AND SEWAGE GAS Fast development at the beginning of support Landfill gas plants (2009) –62 locations, 23.18 MW, –Sewage gas plants (2009) –160 locations, 85 MW Majority of suitable locations used page 24

25. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks LANDFILL GAS - 2 page 25

26. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks BIOGAS APPLICATIONS Supported as the tool for diversification of activities in agriculture –Supported within Rural development plan At least 1 bil. CZK of inv. support already assigned –Can help to reduce dependency to agr. market –Can help to solve problem with grass from permanent grass lands page 26

27. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks BIOGAS AND SEWAGE GAS APPL. page 27 2011: Biogas total: 0.871 TWh

28. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks BIOMASS APPLICATIONS FOR POWER Biomass differentiation –1. Planted, 2. residual biomass from agriculture and forestry, 3. wooden chips and wooden residuals from wood processing industry –Co-firing (biomass/coal mixture) originally assumed as the major contribution in period to 2010 But significantly limited by shortage of suitable biomass and absence of long term contracts page 28

29. MSc Program – Renewable Energy in Central and Eastern Europe „NAP RES“ - 2010 Biomass Started to Be Taken as the New Threat Only biogas stations (assuming current values for biogas FIT and price of power) means additional app. 6 bil. CZK/year Module 7 – General Legal and Economical Frameworks Doc. Ing. Jaroslav Knápek, CSc. page 29

30. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks PLAYERS ON RES-E MARKET Big investors and power producers –Interest in this field started since 2006 –Interest focused on prepared projects –ČEZ, a.s. has „big“ plans for RES-E, but …. SME and private investors –Long preparation of projects (esp. wind) –Good knowledge of conditions in given location Financial investors page 30

31. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks BARRIERS FOR RES-E PROJECTS Subjective barriers on side of investors Orientation to „core“ business in energy branch (changed after 2006) Too high expectation on rate of return –CZ support scheme significantly reduces business risk Reflected in discount rate used for F.T. calculation page 31

32. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks BARRIERS FOR RES-E PROJECTS - 2 Access to capital Majority of highly active companies is from SME group – undercapitalised companies Till 2006: no long term bank loans –Business in RES-E taken as not assured After 2006 preparation of special offers –But unclear situation for RES-E since 2013 (new Act) Possible advantage for RES-heat projects ?? page 32

33. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks BARRIERS FOR RES-E PROJECTS - 3 Lack of suitable locations Some locations are excluded due to land and environmental protection (e.g. wind power in border mountains) Competition for good locations – problem of „new investors“ who enter market with delay page 33

34. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks BARRIERS FOR RES-E PROJECTS - 4 Legal barriers Very complicated approval procedure –Example of wind projects Approval of municipality EIA procedure, Act 100/2001 –Authorised persons –Scenery evaluation –Ornithological evaluation, etc. –Can take about 2 years page 34

35. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks BARRIERS FOR RES-E PROJECTS - 5 Legal barriers - continuation Connection – to obtain promise from distribution or transmission company Change of area plan (in some regions EIA should be completed before) Area approval (related to change of area plan and can take 0,5-2 years) Construction permission procedure (up to 0,5 year) Together 2-3 years at least page 35

36. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks BARRIERS FOR RES-E PROJECTS - 6 Negative attitude of some municipalities and regions –Some (esp. wind, but also PV) projects blocked by disagreement of municipalities Arguments: noise, scenery, icing and fall of ice, etc. –Negative policy of region can block obtaining necessary permissions In three of 14 regions no wind projects so far Last decade wind: 1347 MW in planned projects, successfull EIA only for 470 MW, realised projects 100 MW (2003-07) page 36

37. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks BARRIERS FOR RES-E PROJECTS - 7 Biomass is special case Taken as decisive source in long run, but: –Still missing consistent strategy for support of intentionally planted biomass (SRC plantations, energy crop) –Sources of residual biomass utilised to major extent –„Cannibal“ effect – biomass is assumed to substitute coal on heat plants and in househ. page 37

38. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks BARRIERS FOR RES-E PROJECTS - 8 Co-firing is the most effective way of „green“ power generation, but: –can completely distort market (happened in problems with long term contracts –problems in utilization of potential of forest res. –marginal price of int. grown biomass: app. 150- 160 CZK/GJ page 38

39. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks BARRIERS FOR RES-E PROJECTS - 9 Intentionally grown biomass, problem of: conservatism of farmers lack of experience problem of land ownership: –several millions of agriculture land owners ! –farming on hired land blocks long-term contracts e.g. for energy biomass plantations page 39

40. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks BIOMASS AS THE DECISIVE RES TYPE NAP RES – Target 2020 page 40

41. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks BIOMASS LONG TERM HORIZON NAP RES, as well as „Paces commission“ report (going up to 2050) conclude that intentionally planted biomass will play the key role. page 41

42. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks BIOMASS POTENTIALS Ca 2 millions ha needed for ensuring food security! page 42 Source: Proposal of NAP – Biomass update, 9/2011, MZe

43. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks BIOMASS PRODUCTION ON LAND Current and proposed structure of agricultural land for energy biomass production including food security page 43 Source: Proposal of NAP – Biomass update, 9/2011, MZe

44. MSc Program – Renewable Energy in Central and Eastern Europe Doc. Ing. Jaroslav Knápek, CSc. Module 7 – General Legal and Economical Frameworks BIOMASS BARRIERS  Ownership of agricultural land  85 – 90 % of cultivated agricultural land is rented  there are ca 2 million of land owners  Rented land means orientation towards short term business  Frozen market with agricultural land  Dependent on the German market  Lack of experience of farmers  All projects so far more experimental  Lack of trust, conservatism of farmers  Environmental protection page 44