IEA Commends Czech Market Reform and Emission Reductions but Urges Greater Energy Efficiency and Improved Competitive Markets

(Prague) — 8 September 2005

“The Czech energy sector has undergone an impressive transformation in the last 15 years with improved environmental performance and an increasing use of competitive markets,” said Claude Mandil, Executive Director of the International Energy Agency (IEA), today in Prague at the launch of “Energy Policies of IEA Countries – The Czech Republic, 2005 Review”. He added: “Areas for improvement include a closer look at the cost of achieving national targets, a more pro-active climate change strategy, greater energy efficiency and further pursuit of competitive gas and electricity markets.”

State Energy Policy
The State Energy Policy (SEP) released in 2004 provides an effective blue-print for the country’s energy sector to 2030 and is consistent with the three E’s of successful energy policy: Energy Security, Environmental Protection and Economic Efficiency. However, some of the targets in the SEP may be overly ambitious and overly expensive. For example, the SEP calls for reducing liquid fuel consumption by 2030 and increasing renewable energy’s share of electricity generation to 8% by 2010. The feasibility and cost of achieving such targets should be further examined.

Climate Change Strategies
CO2 emissions from fuel combustion have fallen substantially in the Czech Republic, decreasing by 24% from 1990 to 2003. The country is expected to easily meet both its commitment under the Kyoto Protocol to reduce greenhouse gas (GHG) emissions by 8% from 1990 levels by 2008-2012 and a more stringent internal target of 20% below 1990 levels by 2005. As a result, the government has not actively designed or implemented an emissions control strategy. However, Czech emissions per unit of GDP remain the highest in the IEA and there is substantial potential to reduce emissions at relatively low cost. The absence of a comprehensive GHG strategy decreases the benefits to be realised by transferring emission rights to other countries, notably through the EU Emission Trading Scheme. The government is encouraged to develop a strengthened climate change strategy with plans to transfer emission rights abroad and prepare for future climate change frameworks.

Potential for Greater Energy Efficiency
The State Energy Policy rightly makes energy efficiency the primary focus of the new energy strategy. Even though progress has been made in this area, this improvement lags that of neighbouring countries. While energy intensity has fallen by 17% in the Czech Republic from 1990 to 2002, it has fallen by 23% in Hungary, 27% in Slovakia and 39% in Poland. This suggests that there is still substantial potential to improve Czech energy efficiency. Energy efficiency increases national competitiveness, reduces emissions and enhances energy security. The government is encouraged to follow up its work in the SEP with concrete policies and measures to improve efficiency, especially in the transport and building sector. The fall of government funding for energy efficiency in recent years is not consistent with the ambitious targets for energy efficiency improvement. The budget allocation between energy efficiency and renewable energy should be reviewed based on cost-effectiveness criteria.
Market Reform in the Gas and Electricity Sectors

The framework for reform in the gas and electricity sectors is sound. There is a timetable for gradual market opening, non-discriminatory open access to all networks, elimination of subsidies for different customer classes and the establishment of an energy regulator. The government is to be commended for this work and is encouraged to continue with the process.

A number of challenges remain. The largest impediment to successful competition may be the market power of the incumbent utilities. On the gas side, one company (RWE Transgas) dominates the wholesale market, owns and operates the transportation pipeline network and controls distribution companies with a combined 83% share of the retail market. On the electricity side, one company (CEZ) has a 70% wholesale market share and controls companies with a combined 66% share of the retail market. The government is encouraged to analyse how such market concentration could impede competition and which policies can best overcome this. Cross-border energy trade provides an effective check to market power and the government should ensure that any impediments to trade (regulation, infrastructure, etc.) are minimised.

Another challenge for the government is to strengthen the institutions required in a competitive market. In the Czech Republic, these are primarily the regulator (the Energy Regulatory Office) and the competition authority (the Office for the Protection of Competition). The government should more explicitly establish the independence and authority of these two groups.

A third challenge is to ensure protection of newly contestable consumers. Customers that are given the right of supplier choice will no longer have recourse to a regulated tariff. While this may not be a problem for larger customers, smaller customers will generally lack the expertise and motivation to seek alternative suppliers and thus accept the terms offered by the incumbent. Given the initial state of concentration in the gas and electricity markets, the government should ensure that newly contestable customers have access to a regulated transitional tariff until a mature competitive market develops.


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