Tuesday, January 25, 2022

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Lost decade and chances in the Czech energy sector

With the year 2021 coming to its end, as always, human nature is inclined to look back and assess the past. Our energy systems have left two stressful years behind them. In 2020, we were faced with the uncertainty of a global pandemic and global economic slowdown. In most European countries, the economic life almost stopped, yet the energy system prevailed. This year, on the other hand, started with optimism for the energy sector as life started to come back from virtual reality. Yet, a different shock took the reins: rising energy prices became the hottest topic only unrivalled by the ongoing pandemics. First, the rising emission allowances pushed the electricity price to the levels expected for the second half of the decade. Then, gas took over, pushing everything out of the chart for everyone and reshaping how we see energy markets performing.

Despite such great swings in demand and prices, the European energy system was able to withstand such shocks due to its robustness and good architecture. One additional benefit was a clear price signal, possibly the easiest but also the hardest adjustment mechanism of all. Last year coal prices fell as it was easier to trade the electricity from somewhere else, this year rising gas prices generated the biggest driver for renewables we’ve seen so far in our Central European region. This price signal is there with us for the future.

One may say that future looks bright, however, at a close look, this argument does not stand, at least in the CEE region. I believe that we are much better at coping with unexpected crises, as it was in 2020 and 2021 than with the ongoing transformation. The reason for this is deeply grounded within our society. The last decade says more about our future capabilities than the survived crises.

Let us turn the clock back ten years, after the Fukushima accident when electricity started its long downward trend from around 60 euros/megawatt-hour (MWh) on EEX to its lowest, around 30 euros/MWh. Almost everyone began to believe that we were able to live in an energy-cheap world despite history telling us otherwise. What was the reaction of CEE energy and political debate? We decided to push the climate agenda down the drain for some time, accepting marginal changes by new coal power plants and never really looking beyond at the then-costly gas, marking it only as an option. We believed that 30-40 years was enough time for change and slowed down the nuclear debate. The situation was the same for Czechia and Poland, two European coal countries. We sneered at Germany for implementing unreasonably costly and technically unproven, unmanageable solar and wind capacity. We decided to look elsewhere or fight our existing capacity.

Certainly, these decisions were also economical ones. At that time, nobody believed that prices could have risen above 100 euros/MWh. We put online a lot of coal capacity and believed that we would have enough time to reconsider. Less than ten years later, we already knew our mistake. Stopping nuclear projects lost international credibility and gave us an even longer lead time than at the beginning of the previous decade. If Czechia was able to complete the nuclear tender, we could have started a single or twin nuclear unit during a much steeper energy world which we were able to imagine only a couple of years back. Similarly, we stopped and tried to eradicate any progress in renewables. Fighting the movement with persecution, regulation and mockery. This crippled the industry for needed growth in our region and investors decided to take their money elsewhere. One example may be the biggest Czech developer building solar in Chile. Now the needed safety provided by local renewables and its security is nowhere to be seen. We will be starting the industry with the biggest shortage of workers, materials and stability in years. We can also look at the regulation – missing developed flexibility market, inability to recognise batteries as a lawful network part, the regulation hindering renewables development and so on.

We come unprepared for the situation which has been discussed at the European level for the last 15 years. It is not a coincidence that we are fighting the transformation once more. It’s the only survival instinct we’ve been able to develop so far, ignoring all the changes that have already happened and are yet to come. I have mentioned that we missed the opportunity to advance nuclear and renewables – both emission-free sources contributing significantly to decarbonisation. In Czechia alone, we could have had two new nuclear units, more than 10 gigawatts (GW) of solar and probably 2 GW of wind maybe in 2025 and definitely by 2030. Now only solar seems available which will be a big struggle with industry capacity.

We are one of the most dependent coal countries in Europe, in many ways, second behind Poland. The Government which left the power last week could only imagine the coal phase-out by 2038 and that date was already an issue of dispute. Now we know that the economic reality, financing industry and the political pressure will shift the final deadline before 2030 but we are still not prepared. Our partners will be telling us that they have been warning us all along.

I am concluding with this pessimistic view about our ability to cope with changing energy world with the idea of how to assess the change. If the investors and regulators were e able to put into economic models current energy prices 5 years ago, would they make different choices? Economic theory says that yes, some investments would be seen as unprofitable, some as profitable and others as promising. So the correct approach to oncoming transformation is to expand our imagination, extend our investment modelling one step further into stress-testing and diversify our risks more towards the change than to the present. If we had done that, the shock from the existing energy crisis might have been smaller, we would have been more prepared for things yet to come and we might have been already helping those struggling in the energy race, typically the poorest and less capable.

We have to give up the scepticism and a Luddite perspective, otherwise we may see the second lost decade in the energy industry of the CEE region.

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