The Czech Republic’s energy crisis: It will have to subsidize the source that it has displaced until now

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Public support mechanisms for coal-fired power plants are being rapidly prepared in the Czech Republic today. It is worth recalling what preceded it.

19 years ago, the European Union started implementing regulations that push coal resources out of the market. The emission allowances market was launched with the aim of reducing greenhouse gas emissions. After the recent crisis, the Czech government burdened energy companies with an extraordinary windfall tax. And with the owners of coal-fired power plants announcing that they will soon fall into losses and close, the cabinet is looking for a way to keep them on the market with public support.

Reagan could not have found a better example for his famous statement.

As Seznam Zprávy has already described, the coalition of five is discussing the rapid introduction of legislation to keep coal-fired power plants alive until we can do without them.

Coal blocks will stop paying companies sooner than politicians expected. “Lignite power plants can greatly limit or even cease operation long before the years 2033 or 2038, where the political decisions are headed,” said ČEZ chief analyst Pavel Řežábek recently at the government committee for sustainable energy.

The number two in electricity production Sev.en Energy Pavel Tykač is considering closing the Počerada and Chvaletice power plants in a year.

The main reason for the faster end of coal is the increase in the price of emission allowances, which was started by the reform four years ago. The European regulator began to withdraw part of the allowances from the market in order to raise the price and strengthen their influence.

However, the vision of reliable growth attracted financial investors, who started buying allowances due to speculation. Then the energy crisis and the associated panic swept through the market. The price of the permit went up faster than expected, it briefly attacked 100 euros, today it is around 70 euros. But further gradual growth is expected.

For energy producers, it is not important how much the permit costs. The key is the difference between its price and the price of electricity on the market. From it, the power plants cover additional costs for coal, wages and maintenance. After the crisis, electricity becomes cheaper faster than allowances, which narrows the necessary margin. Permits have finally begun to work as they were supposed to: They are pushing fossil resources out of the market.

In the Czech Republic, it first caught up with the Sev.en group, whose power plants are among the biggest polluters, so they need more permits and large investments. Počerady and Chvaletice are also not significant suppliers of heat with which they could improve their economy.

“For us to be profitable, we would need the difference between the price of the permit and the price of a megawatt-hour of electricity to reach at least 30 euros. This year, however, the difference is only 20 euros, for the year 2025 it comes to eight euros and for the year 2026 already to minus five euros,” says Michal Skalka, manager of the Powertica group, which covers the business activities of Tykač’s empire.

The competitiveness of coal-fired power plants is also worsened by the growing share of renewable energy on the market. If it’s “shining and blowing”, cheap solar and wind electricity is being sold, and there is no interest in coal.

“The logical expectation was that electricity prices would be zero or negative in the summer, extremely high in the winter, averaged out to the customer, and coal resources would live off the high winter prices. But another factor comes into play – gas,” said Skalka. “Production in gas power plants consumes fewer allowances, gas is becoming cheaper in Europe. In the winter, when you expect to catch up on the economy on high prices, you will be cut short by the competition of cheap gas.”

Lignite in the Czech Republic provided 35% of electricity consumption and most of the heat last year. If the power plants end, mining will also end, because the quarries will not support themselves on the remaining customers. The state company ČEPS, responsible for the operation of the transmission system, is now calculating whether the country can do without coal. “For us, it is essential that the shift away from coal be managed so that there is no spontaneous shutdown of coal-fired power plants in a short period of time,” ČEPS head Martin Durčák told Hospodářské novinám.

Experts generally agree that the shutdown of the Tykač power plants can be solved. They produce around ten terawatt hours (TWh) of electricity per year, which roughly corresponds to the export of Czech electricity. However, in the energy industry, not only the total production, but also the ability to deliver when needed, must be taken into account. Electricity cannot be stored for a long period of time, and the supply to the grid must correspond to consumption at any given time. The bottleneck is therefore the production capacity for electricity to smooth out fluctuations, for so-called support services.

In this, you can only rely on resources whose performance can be controlled as needed. We have enough of them for now. “There are 18 gigawatts (GW) of controllable capacity in the Czech Republic, peak consumption reaches around 12 GW,” says Řežábek. However, most of it is provided by coal.

The lack of regulatory electricity can partially replace imports. Thanks to the growing production of renewable sources, electricity in Germany is starting to be cheaper than in our country, imports are cheaper in certain periods. But you can’t fully rely on him. In times without sun and wind, imported electricity will be expensive, and the capacity of transmission lines also limits imports. And you need to have a reserve for situations where, for example, domestic sources or lines go out due to accidents.

The still valid State Energy Concept states that the Czech Republic should not be dependent on electricity imports for more than 10% of consumption. However, according to the latest ČEPS report on resource adequacy from last spring, if the coal blocks were closed by 2030, we would have to import almost 19 TWh of electricity at the end of the decade, almost a quarter of the expected consumption. That is, if we had built nothing but the planned solar and wind turbines by then.

Some sources from the state administration believe that imports in the volume of 15 to 20 TWh per year are realistic, but on the edge of energy security. However, according to ČEPS, the end of coal by 2030 would significantly exceed another safety parameter denoted by the abbreviation LOLE. It indicates the number of hours in the year when there is a risk that domestic production with imports will not be able to cover consumption. Today, the maximum permissible LOLE in the Czech Republic is 15 hours per year, according to ČEPS, it would exceed LOLE by the end of the decade by a thousand hours per year. That’s a big risk.

True, the energy market is evolving. Solar and wind turbines are increasing throughout Europe, the Slovaks have launched new nuclear units, the Germans are preparing to build up to 25 gigawatts of gas power plants. The supply of network stabilization from large batteries, from new small cogeneration units, from aggregators combining the performance of small suppliers is slowly expanding. Companies are even purchasing diesel generator sets, capable of supplying electricity quickly, even at the cost of high emissions and noise.

But it doesn’t completely solve the situation. A safe substitute for coal will have to consist mainly of co-generation, which heating plants are counting on, biomass sources and new gas power plants. As ČEPS vice-chairman Svatopluk Vnouček told Seznam Zprávám last year, energy security will require two to two and a half thousand new megawatts in gas. That is, two or three new power plants.

ČEPS is now calculating the current outlook for the Czech energy sector without coal, so this year’s report on resource adequacy is delayed. It is certain that we cannot do without new gas plants.

The problem is that investors are not flocking to the construction. With falling electricity prices and shrinking market space, they do not have a certain return. They are waiting for a support mechanism, that is, a promise that the state will provide them with payments for building and holding reserve capacity in case of need.

ČEPS, ecological associations and investors such as Michal Šnobr have been pointing out the risks associated with the end of coal by 2030 for five years, Tykač has been warning for three years. Nevertheless, it was not until this year that a working group was created at the Ministry of Industry and Trade to prevent the sudden closure of power plants and to start the rapid construction of replacements. At the same time, a debate broke out as to whether to add a last-minute new instrument to the just-approved law called Lex OZE 3, which would give the Energy Regulatory Office the power to prohibit the closure of power plant units, which are necessary for energy security.

In such a case, the state would have to compensate the producers’ losses. It would be expensive, so the support should only cover the absolutely necessary number of blocks for a limited time. CEZ is the main candidate for possible support.

Help for Dukovany

At the same time, the Lex OZE 3 proposal introduces so-called capacity mechanisms, which will enable public support for power plants built to cover peaks. The bill for the subsidies would be paid by the consumer – either on the electricity bill or in taxes.

However, the approval of the European Commission must be obtained for public support. Poland and Germany secured the notification of these instruments already in 2018, since then the EU has tightened emission limits. Getting gas subsidies approved will be difficult now, coal hardly realistic. “The effort to support coal-fired power plants is a dead-end road that would almost certainly end in failure. It contradicts EU law and does not make sense technically or economically,” says Jiří Koželouh from the Duha Movement.

Isn’t it absurd if politicians first disadvantage fossil energy with permits, and then try to bring it back into the game with subsidies? Energy expert Hnúti Duha does not see it that way. “Each of those measures has a different purpose. Permits motivate the transition to cleaner sources, a capacity mechanism to build and operate the necessary high-end electricity sources, which cannot be paid for only from market profits. It would be absurd if we use capacity mechanisms senselessly to extend the life of coal resources, which have high emissions and are not very suitable as a peak resource,” adds Koželouh.

Among the more conservative energy experts, the opinion is spreading that emission regulation causing the need for new subsidies drives the country to such a risk that the Czech Republic should leave the European allowance system. But such a step would have consequences for the country’s position in the common market and would be difficult to reconcile with EU membership. It would be a big blow to the export economy.

Pushing in Brussels to change the allowance mechanism and discounting allowances does not stand a chance. All member states would have to agree on this. But most of them are not dependent on coal, and coal-fired Germany and Poland have solved the problem. “The Czech Republic now has to work with what it has and what is realistic. Which is not the dismantling of the allowance system,” says Koželouh.

After years of inaction, we have no choice but to run a race against time and hope to win.