Electricity law and regulation in the Czech Republic

1.1.1 The Czech electricity market has been unbundled and split in accordance with EU energy regulations into generation, transmission, distribution and supply to end-consumers segments. Accordingly, sales to end-consumers have been liberalised whilst access to transmission and distribution grids remains regulated.

1.1.2 Following its accession to the European Union on 1 May 2004, the Czech Republic is required to comply with EU energy legislation, which is continuously developing in order to establish and maintain a competitive, secure and environmentally sustainable electricity market.

1.2.1 The Czech electricity market is part of the larger Central European market as a result of extensive cross-border transmission capacities between the Czech Republic and neighbouring countries.

1.2.2 There is complete legal separation between the generation and transmission segments. However, a large part of the generation, distribution and supply segments are integrated businesses owned by ČEZ, a.s. (CEZ) and its subsidiaries (CEZ Group).

1.2.3 Until 1990 the Czech electricity transmission and distribution network was owned by the state company CEZ. In 1990 regional distribution companies were separated from the state company and in 1994 were transformed into joint stock companies (REAS). A subsequent privatisation in 1995 offered the REAS to the public, together with local electricity generators that were subsequently partially privatised. The Czech Republic has however retained a controlling shareholding of approximately 48% of each of the REAS through the National Property Fund.

1.2.4 CEZ 1 As at 30 June 2014, CEZ had a registered share capital of CZK 53,798,975,900 and was 69.8% owned by the Czech Republic (represented by the Ministry of Finance and the Ministry of Labour and Social Affairs). Chase Nominee Limited also held a 5.24% share in CEZ. No other shareholder held more than a 5% shareholding. CEZ’s shares are listed on the Prague and Warsaw Stock Exchanges. The planned privatisation of the Czech Republic’s shareholding in CEZ was cancelled in 2002 and there are no current plans to privatise CEZ. , established as a joint stock company under Czech law in 1992, was initially 100% state owned. However, as part of the privatisation, a minority stake in CEZ was also offered to the public. By 2003, CEZ transferred the entire Czech transmission grid to ČEPS a.s. (CEPS), a company established as a subsidiary of CEZ in 1998.

1.3.1 The following participants are active in the Czech electricity market:

• generators;
• the transmission grid operator;
• distribution grid operators;
• the market operator;
• electricity traders; and
• end-consumers (e.g. households or enterprises).

1.3.2 Following implementation of EU legislation into Czech law, the current business structures of the participants are as follows:

• CEZ is the dominant electricity generator, providing approximately 67,7 % of the electricity used in the Czech Republic in 2014 (a slight decrease from 71,6 % in 2013);
• CEPS is the sole owner and operator of the transmission grid, which is fully owned by the Czech state. Ownership unbundling has been implemented in relation to the transmission system;
• the distribution system is predominantly owned and operated by three successors of the REAS: ČEZ Distribuce a.s., E.ON Distribuce a.s. and PREdistribuce a.s. (DSOs). Unbundling of the management, accounting and legal functions of the DSOs has been implemented. Relevant market participants must be provided with full access to the Czech transmission and distribution networks, including the ability to transmit or distribute electricity throughout the networks to the extent technically practicable;
• OTE is the Czech electricity market operator. OTE is a joint stock company owned by the Czech Republic which administers and reports on the electricity markets and, in cooperation with CEPS, the electricity transmission system owner and operator (TSO), performs an accounting function in respect of the energy balancing market;
• trading on the electricity spot market is organised by OTE and Power Exchange Central Europe (PXE). PXE also trades on the electricity futures market and offers power trading of standardised products for the Czech, Slovak and Hungarian markets on an anonymous basis with a form of secured settlement; and
• the electricity supply market has been liberalised since 1 January 2006, allowing end-consumers to freely choose their electricity provider based on current market conditions. Previously end-consumers were classified as ‘protected customers’ and the price of electricity was determined by the Energy Regulatory Office (ERO).

The Temelin and Dukovany nuclear tender

1.4.1 CEZ intended to extend the Temelin nuclear generating station by constructing two new reactors with a total of 2,000MW power in addition to the two existing 1,000MW reactors.
The tender should have been the biggest in Czech history, totalling around CZK 250b (EUR 10b). CEZ commenced the public procurement process in 2009 and three qualifying bidders (a Westinghouse consortium, AREVA NP and a consortium of ŠKODA JS/Atomexport/OKB Gidropress) submitted binding offers in 2012. CEZ subsequently excluded AREVA NP from further evaluation as AREVA NP failed to meet the minimum statutory requirements for the tender.

1.4.2 As a result of risks associated with the project including political (e.g. parliamentary elections), market (e.g. a decrease in the demand for electricity, a decrease in the price of electricity, decrease in price of emission allowances) and regulatory developments (e.g. the requirement of EC consent for any promotional schemes introduced, e.g. contract for difference) the Czech Government decided that although they support the development of nuclear energy production, the state will not cover such support by any state guarantee. As a follow up to this decision, on 10 April 2014 CEZ decided to stop the public tender and informed the qualified bidders of its decision. In the current energy market situation, the construction of the two new reactors without such state guarantees would not be sustainable.

1.4.3 In June 2015, the Czech government adopted a new National action plan for the development of nuclear energy in the Czech Republic which provides for the construction of two new reactors for both Temelin and Dukovany nuclear generating stations. The specific timeline of the constructions is currently unknown, however it seems that the expansion of Dukovany will be prioritized over Temelin. A public tender for Dukovany expansion may be announced by the end of 2016. There are various options concerning the financing for the extensions of both power plants.

The European Commission’s investigation into CEZ

1.4.4 In March 2013, CEZ and the EC ended an investigation, ongoing since 2009, into the alleged abuse by CEZ of its dominant market position. A settlement agreement was reached under which CEZ agreed to sell one of its coal generating stations in the Czech Republic. Following the sale of this coal generating station, CEZ will still remain the dominant electricity generator in the Czech Republic. Please see paragraph 2.1.3 below for more detail.
The European Commission‘s decision on the Czech renewable energy scheme

1.4.5 In June 2014 the EC approved the Czech scheme supporting renewable energy. The EC has assessed the Czech Promoted Energy Sources Act which has been in force since 2013 with EU state aid rules and has come to the conclusion that it is in line with EU objectives without unduly distorting competition. This decision only concerns installations commissioned since 1 January 2013. The Czech scheme supporting renewable energy concerning installations commissioned prior to 1 January 2013 is still under EC assessment.
Investments in the Czech transmission system

1.4.6 Significant developments in the Czech transmission system are planned. Drivers of these developments include the proposed development of nuclear energy production, measures relating to the threat of an energy blackout due to excessive power flows from northern Germany and the expansion of unstable renewable electricity sources in new generating locations.

1.4.7 The most urgent issue is the threat to the Czech transmission system caused by excessive power flows from northern Germany across the Czech Republic and into southern Europe. These flows are unplanned and exceed the levels at which the transmission system can operate safely. Accordingly, CEPS plans to install a phase shifting transformer (PST) on the Czech and German border. According to the most recent information published by CEPS, the PST should be installed by 2016. German participation in the financing of this project is presently unclear.

Changes in the calculation of transmission and distribution use of system charges

1.4.8 The ERO announced that, from the fourth regulatory period beginning 1 January 2016 (the third regulatory period has been prolonged until the end of 2015), changes will be introduced regarding the calculation of the electricity transmission and distribution use of system charges. The changes will result in the re-evaluation of depreciation of transmission and distribution assets no longer being considered an acceptable method for calculating charges. Substantial investment into the improvement of the Czech transmission grid will be required. It is hoped that these changes will lead to a decrease in the amount of regulatory charges and a reduction in the payments made by end-consumers.
Changes in the support of renewable energy sources

1.4.9 The Czech Renewable Energy Act’s support of solar generating stations resulted in an increase in electricity prices for end-consumers. As a result, in 2010 the Czech Parliament approved significant changes, effective from 2011, to the rules on the support of new solar generating stations (e.g. solar facilities exceeding 30kW not located on roofs were no longer supported) and existing solar generating stations (e.g. the introduction of a solar levy). The new Czech Promoted Energy Sources Act, effective from 1 January 2013, further limits the support for renewable energy sources. As of 1 January 2014, the Czech Promoted Energy Sources Act ceases the support provided for new renewable facilities, changes the solar levy amount and changes the financing system of the support mechanism. The main goal of these changes is to decrease the high level of support for renewable energy sources, thus contributing to a decrease in electricity prices paid by Czech businesses and households. For more details please see paragraph 3.4 below. The new Energy Act, effective from 1 January 2016, changes the levy on renewable energy sources paid by end-consumers which will now be calculated by the capacity of a circuit breaker and not by actual consumption.

Structure of the generation sector

2.1.1 In the Czech Republic, CEZ is the dominant electricity generator. As of 31 December 2014 CEZ owns and operates:

• ten coal-fired generating stations with a total installed capacity of 5,252MW;
• two nuclear generating stations with a total installed capacity of 4,290MW;
• 35 hydroelectric generating stations with a total installed capacity of 1,960MW;
• 12 solar (photovoltaic) generating stations with a total installed capacity of 125.2MW;
• two wind generating stations with a total installed capacity of 8.2MW; and
• one bio-gas generating station with a total installed capacity of 0.5MW.

2.1.2 The electricity generation market was liberalised in 2002 to allow competition. Currently, there are approximately 26,000 independent licensed generators, which are primarily small installations with an installed capacity of less than 1MW. Several producers including EP Energy, Sokolovská uhelná, Litvínovská uhledná, Alpiq, and Dalkia, also own and operate coal-fired generating stations in the Czech Republic with a total installed capacity exceeding 300MW. A list of entities holding electricity generation licences is available on the ERO’s website 2
Source .

2.1.3 The settlement agreement between CEZ and the EC (see paragraph 1.4.3 above) represents a major step towards ending the EC’s investigation into the abuse by CEZ of its dominant market position through reserving electricity capacity in the Czech transmission network to prevent competitors from entering the generation market. CEZ offered to sell one of its generating stations in either Počerady, Chvaletice, Dětmarovice, or Tisová together with Mělník 3. On 19 March 2013, CEZ sold the Chvaletice generating station to Litvínovská uhelná a. s. for CZK 4.12b (EUR 165m).

Energy mix

2.1.4 The energy mix of the Czech Republic is dominated by coal-fired generating stations (generating more than half of the total electricity produced), nuclear generating stations (producing nearly one fifth), hydro-electric generating stations (producing around 10% of the total electricity produced) and solar generating stations (producing around 10% of the total electricity produced). Recent years have seen an increase in the amount of electricity produced by renewables, in particular solar.

In 2014 the production of electricity in the Czech Republic was as set out in Table 1:

Table 1: electricity generation by fuel type (2014)

As of 31 December 2014, the total installed capacity of generating stations in the Czech Republic amounted to 21,079MW, a breakdown of which is as set out in Table 2:

Storage technology

2.1.5 Czech scientists are involved in the development of a new concept of storing electricity called “hydrogen storage”, whereby surplus electricity is stored through hydrogen reaction. This may be a viable solution to fluctuations in the generation of electricity from renewable resources. However, there are many technical impediments which currently prevent the project from being economically viable.

Structure of the transmission sector

2.2.1 CEPS performs its electricity transmission function in accordance with an exclusive electricity transmission licence to operate the transmission network for the Czech Republic, which was granted in 2001 and is valid until 2026. In 2003, CEZ transferred its majority shareholding (66%) in CEPS to the Czech state and sold its remaining shareholding (34%) to the Czech state in 2004.

2.2.2 CEPS has various functions, including:

• balancing the supply and demand of electricity on a minute-by-minute basis;
• operating, maintaining and developing the Czech transmission system (an interconnected complex of 110kW, 220kW and 400kW power lines and facilities);
• ensuring the transmission of electricity between generators and distributors;
• assisting in the allocation of available transmission capacities to interconnectors through auctions;
• cooperating with other TSOs throughout Europe in accordance with binding UCTE rules 3 The “Union for the Co-ordination of Transmission of Electricity” (UCTE) is the association of transmission system operators in continental Europe, providing a reliable market base by efficient and secure electric “power highways”. ; and
• contributing to the development of the Czech and European electricity markets.

2.2.3 Based on transmission service agreements, CEPS transfers electricity and controls power flows across the transmission systems in the Czech Republic, operates electricity exchange schedules agreed with neighbouring TSOs and cooperates with Czech DSOs.

2.2.4 The ERO uses an incentive-based revenue cap method to calculate the average electricity transmission charges. This method will continue to be applied throughout the fourth regulatory period (i.e. from 1 January 2015 to 31 December 2017). The key principles of the regulation have been preserved for the whole regulatory period, whilst yearly changes in the fees for the regulated items reflect external factors such as the rate of inflation, demand, investment in the electricity networks and the development of electricity generation from supported energy sources.

Cross-border

2.2.5 The Czech electricity transmission network is part of the most interconnected electricity network in Europe and provides a transit system for the five neighbouring transmission systems including SEPS (Slovakia), PSE (Poland), APG (Austria), and VET and E.ON (Germany).

2.2.6 Cross-border transmission capacity for the import, export and transit of electricity is allocated through auctions based on bilateral agreements between TSOs. The auctions are conducted in accordance with established auction rules and occur on a daily, monthly or yearly basis.

2.2.7 On 11 September 2012, market coupling was launched to coordinate the daily allocation of cross-border electricity and transmission capacities between the Czech, Slovak and Hungarian markets. This mechanism allows trading of the Czech-Slovak and Slovak-Hungarian daily capacities one day in advance.

2.2.8 However, the most efficient method of easing pressure on the Czech transmission system is through building new power lines connecting northern and southern Germany. As mentioned above, CEPS plans to install a PST on the Czech and German border, which CEPS discussed in the Czech Transmission System Development Plan for 2013 – 2022. A PST construction project has already been commenced by CEPS, but it is both technologically and financially demanding, as well as time-consuming and construction is due to complete in 2016.
The threat of an energy blackout in the Czech Republic

2.2.9 The Czech transmission system was close to a blackout in the winter of 2011/2012. The main causes of this threat included a significant increase in the amount of electricity generated by wind farms in northern Germany, combined with insufficient intra-German transmission capacities. The planned closure of the first wave of nuclear generating stations in northern and southern Germany (totalling more than 8,000MW) will further exacerbate this problem.
Investments in the Czech transmission system

2.2.10 In response to this issue, CEE transmission networks must be urgently reinforced. CEPS has prepared a 10 year plan which details the general scope of investments in the Czech transmission system under the Czech Energy Act. The plan has been modelled to ensure the development and modernisation of Czech energy infrastructure whilst also contributing to the Czech Republic’s integration with European energy markets. The plan, which includes an investment plan, is prepared by CEPS annually in conjunction with the ERO.

2.2.11 In 2011, CEPS announced plans to invest over CZK 60b (EUR 2.4b) before 2025 to strengthen and upgrade the Czech transmission system (See figure 3 in paragraph 4 below). CEPS’ investments will include the reconstruction and upgrading of the substations, upgrading the transmission lines and constructing parallel lines to existing transmission lines.

Structure of the distribution sector

2.3.1 The Czech distribution system comprises a mutually interconnected complex of power lines and facilities at the 0.4kV to 110kV voltage levels (with the exception of selected 110kV lines and facilities that form part of the transmission system), which are used for electricity supply to end customers within a specified region of the Czech Republic.

2.3.2 It is predominantly owned and operated by the DSOs. Unbundling of the management, accounting and legal functions of the DSOs has been implemented. A large number of operators also operate local distribution systems. There are currently approximately 300 licensed distributors in the Czech market.

2.3.3 The main issue concerning the distribution of electricity in the Czech Republic is the price paid for electricity by end-consumers. Electricity prices include a regulated component which consists of the transport and distribution charges and which forms 34% of the total price of electricity; this is higher than in neighbouring states.

2.3.4 The ERO uses an incentive-based revenue cap method to calculate the average electricity distribution charges. This method will continue to be applied throughout the fourth regulatory period (i.e. from 1 January 2015 to 31 December 2017). The key principles of the regulation have been preserved for the whole regulatory period, whilst yearly changes in the fees for the regulated items reflect external factors such as the rate of inflation, demand, investment in the electricity networks and the development of electricity generation from supported energy sources.
Smart grids

2.3.5 CEZ has recently launched its smart grid project in Vrchlabí which implements new technologies into the distribution network and tests the operation of smart metering technology and IT control of the distribution network. This high tech grid concept is an attempt to better manage the fluctuations between electricity generation and demand.

Structure of the supply sector

2.4.1 The electricity supply market has been liberalised since 1 January 2006, allowing end-consumers to freely choose their electricity provider based on current market conditions. Previously, end-consumers were classified as ‘protected customers’ and the price of electricity was determined by the ERO. As a result of this liberalisation, approximately 8% of households (approximately half a million customers) changed electricity supplier in 2013.

2.4.2 There are currently approximately 400 licensed electricity suppliers in the Czech market. In 2014, the 3 largest Czech electricity suppliers were ČEZ Prodej s.r.o. (supplying around 40% of the market), E.ON Energie a.s. (supplying around 20% of the market) and Pražská energetika a.s. (supplying around 11% of the market). Further noteworthy electricity suppliers include RWE Energie a.s., CENTROPOL ENERGY a.s. and BOHEMIA ENERGY entity s.r.o. Retail licence holders also include companies engaged in the engineering, metal, mining and heating industries.

Key issues

2.4.3 The final price of electricity consists of two components: a non-regulated price; (i.e. the market price of electricity as a commodity, that is freely negotiable between the end-consumer and supplier) and a regulated price (which is calculated according to applicable legislation and the ERO’s pricing regulations).

2.4.4 The regulated price consists of the following elements as set by the ERO:

• the transport and distribution of electricity;
• system services;
• the costs of generating energy from renewable sources and the co-generation of heat and electricity;
• a contribution for decentralised generation; and
• the costs of the operation of the OTE and the ERO.

2.4.5 The ERO bases the price for the transport and distribution of electricity on an allowed revenues fixed tariff, relating to the electricity reserve capacity and an allowed losses variable distribution tariff, relating to the distributed volume of electricity. The allowed revenues are calculated as the total sum of the following components:

• operating expenses (reflecting inflation, the index price of market services and the sector efficiency factor using historical data);
• depreciation; and
• the allowed profit, which is a product of the weighted average cost of capital (WACC) and the regulatory assets base. The WACC is updated annually and is based on the risk-free rate, the cost of debt, the market risk premium for the Czech Republic and the tax rate.

2.4.6 Subsequent to the liberalisation of the Czech electricity supply market, there has been a marked increase in competition amongst electricity traders in the retail market, which at times results in the unfair treatment of end-consumers (e.g. households), in particular regarding the contractual arrangements between the suppliers and end-consumers. Nevertheless, the level of consumer protection in the Czech Republic is considered to be satisfactory and the ERO offers end-consumers advice on communicating with their supplier, for example by adjusting their contractual terms and assisting in any negotiations with the suppliers. One of the ERO’s goals is to raise awareness of the liberalisation of the market, as many end-consumers continue to remain unaware of the ability to change supplier.

2.5.1 The Czech electricity market is an integral part of the wider European electricity market and maintains a positive trade balance with most neighbouring countries. The PXE 4 The PXE was the first of its kind in CEE and commenced trading electricity in the Czech Republic on 17 July 2007. Its objectives are (i) equal access to the electricity market for all trade participants, (ii) the establishment of a strong and competitive trading environment, and (iii) pricing based on the supply and demand of electricity. More information is available at
www.pxe.cz  was established in 2007 as a new business exchange for trading electricity in the Czech Republic and the Slovak Republic. PXE is a subsidiary of the Prague Stock Exchange 5
www.pxe.cz and is part of the CEE Stock Exchange Group 6 The four stock exchanges of Budapest, Ljubljana, Prague and Vienna are subsidiaries of a central holding company, CEESEG AG, which is responsible for the CEE Stock Exchange Group’s strategic and financial management, as well as the administration of its subsidiaries. The business operations of the four regional markets are managed and operated by the four member exchanges independently. .

2.5.2 Due to cross-border integration and the liberalisation of power prices, the Czech and German markets are integrated. The primary market for Czech electricity prices is Germany and its European Energy Exchange in Leipzig (EEX). There has historically been a strong correlation between power prices in the Czech and German markets. Base load prices for 2013 at the EEX are specified in paragraph 4. Structure of the trading market

2.5.3 The majority of the electricity available for wholesale distribution in the Czech Republic is sold on the PXE and on the electronic OTC broker platforms. Prices in the wholesale market are set on the basis of supply and demand, through trading on the PXE and via bilateral contracts. Instruments that can be traded on the Czech Republic’s exchange range from one-year contracts down to one-day contracts. Anonymous trading on a daily basis can also be realised through the organised markets of OTE. In addition to one-day trades, the organised markets of OTE also enable intra-day trading. Unlike the PXE, the OTE requires physical delivery.

2.5.4 Electricity is traded on the PXE in the form of commodity futures and spot contracts which require ‘physical settlement’. Physical settlement involves both trading parties undertaking to deliver or pay for a certain volume of MWh at a future delivery period for a pre-agreed price.

2.5.5 Depending on the length of the delivery period for the electricity, individual contracts on the PXE are typically traded on an hourly, daily, monthly, quarterly or annual basis. Contracts are further divided into two basic groups according to whether the electricity supply should take place at all hours of all days during the distribution period (base load), or only between 8am and 8pm Monday to Friday (peak load).

2.5.6 In 2014, the volume of trade in futures on the PXE totalled 22,326,984 (a decrease from 29,670,193MWh in 2013). Trade in 2014 totalled EUR 788.26m (a decrease from EUR 1,161m in 2013).

2.5.7 The PXE has recently commenced cooperation with European Commodity Clearing (ECC). The ECC was established, and is controlled by the EEX. According to the cooperation agreement, the ECC will operate as the “Central Counterparty” for the PXE and the Czech, Slovak and Hungarian power futures listed on the PXE will be cleared and settled by the ECC. In addition, the ECC will offer an OTC clearing service for these products. The ECC will also provide margining and financial settlement for the Czech power spot market transactions offered by the PXE and OTE. Such cooperation emphasises the ECC’s desire to improve and extend its portfolio of services throughout Europe.

3.1.1 The main government authorities which supervise the Czech energy sector are the ERO, the State Energy Inspectorate (SEI), the Ministry of Industry and Trade in the Czech Republic, the Ministry of Environmental Matters of the Czech Republic and the State Office for Nuclear Safety (SONS).

The ERO

3.1.2 The new Energy Act from 1 August 2017 changes the management structure of the ERO. The ERO, which currently operates as a monocratic authority led by the ERO chairperson, will be organised on a collective basis with a Board of five members.

The ERO as the main independent authority which is entitled, inter alia, to:

• issue licences;
• establish methods for regulating the energy sector and procedures for regulating prices in the energy market;
• determine and fix regulated prices;
• adopt rules implementing Czech energy legislation;
• issue or revoke the certificates of TSOs;
• adjudicate disputes defined in the Czech Energy Act;
• supervise compliance with: the Czech Energy Act, as regards consumer protection and prices; EU regulation such as EU regulation on cross border exchanges; any applicable regulation issued in relation to the above regulations or their implementation; obligations arising out of EU Commission or Agency for the Cooperation of Energy Regulators (ACER) decisions;
• cooperate and communicate with ACER; and
• impose fines for breaches of the Czech Energy Act 7 The ERO can impose a fine of up to CZK 50m (EUR 2m) or 1% of the relevant company’s turnover or a fine of up to CZK 100m (EUR 4m) or 10% of a transmission network operator’s turnover for a breach of unbundling rules. For vertically integrated companies, a fine of up to CZK 50m (EUR 2m) or 1% of the company’s turnover may be imposed on the ‘controlling company’ for any instructions to its subsidiaries which breach the distribution unbundling legislation. The ERO may also require entities in breach to undertake specific remedial measures. .
• impose fines for breaches of the Promoted Energy Sources Act (from 1 January 2016)

The SEI

3.1.3 The SEI is responsible for ensuring the compliance of, and issuing sanctions for non compliance to, electricity market participants, via relevant legislation concerning:

• the energy economy;
• promoted energy sources (the responsibility transfers to the ERO as of 1 January 2016); and
• the pricing of electricity.

The Czech Ministry of Industry

3.1.4 The Czech Ministry of Industry is responsible for, inter alia:

preparing the state energy conception (a resolution of the Czech Government defining its energy goals, for example its 30 year outlook);
preparing the national action plan (latest national action plan was adopted on 18 May 2015) for renewable sources of energy and grid development plans;
granting authorisations to construct generating stations; and
cooperating with the EU Commission on energy matters.

The Czech Ministry of Environmental Matters

3.1.5 The Czech Ministry of Environmental Matters is primarily involved in matters concerning emission allowances and air pollution.

The SONS

3.1.6 SONS is primarily involved in matters concerning the generation of electricity in nuclear facilities.

3.2.1 The Czech energy sector is governed by a wide range of laws and regulations implementing European legislation. The main regulation is Act No. 458/2000 Coll., on conducting business and government supervision of the energy sector (Czech Energy Act). This provides the legal basis for conducting energy related business in the Czech Republic, including obtaining licences for the production, distribution and sale of electricity, gas and heat.

3.2.2 The Czech Energy Act incorporates various provisions to ensure compliance with EU legislation. Its main principles are:
to conduct business in the energy sector on a licence-only basis through licences issued by the ERO;
unbundling the transmission and distribution system operators;
market liberalisation through allowing competition;
establishing the ERO, an independent regulatory authority; and
protecting end-consumers.

3.2.3 Other relevant laws include, but are not limited to:

• Act No. 86/2002 Coll., on the protection of air (Czech Air Protection Act);
• Act No. 695/2004 Coll., on the conditions for trading emission allowances (Czech Emission Allowances Act);
• Act No. 18/1997 Coll., the nuclear act (Czech Nuclear Act);
• Act No. 165/2012 Coll., on promoted energy sources (Czech Promoted Energy Sources Act);
• Act No. 44/1988 Coll., on the protection and exploitation of minerals; and
• Act No. 76/2002 Coll., on integrated pollution prevention and control.

Licences

3.3.1 The Czech Energy Act requires electricity market participants to obtain a licence issued by the ERO in accordance with certain statutory criteria. In the energy sector, the ERO can issue licences for the generation, transmission, distribution and trading of electricity, as well as for market operation. Licences of other EU countries for trading electricity are also recognised, however the licence holder must establish a business or branch office in the Czech Republic.

3.3.2 Licences for the generation, transmission and distribution of electricity are issued for a maximum term of 25 years. Licences for supply market operators are issued for a set term of 25 years and licences for the trading of electricity are issued for a set term of five years. The ERO may renew or extend a licence where the requirements for a new licence are met, however this is not guaranteed. Licence holders are published in a bulletin issued by the ERO and information on licence holders is published on the ERO’s website.

3.3.3 Licences for the transmission of electricity and for the market operator are granted exclusively for the whole territory of the Czech Republic.

Permits and Consents

3.3.4 The Czech Ministry of Industry must authorise the construction of all generating stations with an installed electrical output in excess of 100kW (1MW from 1 January 2016). Whilst this power is discretionary, the Czech Ministry of Industry must take certain factors into account, such as compliance with the state energy conception, the national action plan for renewable energy sources and grid development plans.

3.3.5 A power generation licence and other ancillary licences and authorisations, including construction and environmental permits, are required to operate a coal-fired generating station in the Czech Republic.

3.3.6 Coal-fired generating stations must comply with several regulations under the Czech Air Protection Act. Operators are subject to the “polluter pays” principle, which requires the operator to pay emission charges to the State Environmental Fund. From 2017, the payment of emission charges will be divided as follows: 65% of the charge will be paid to the State Environmental Fund, 25% to the regional budget and 10% to the Czech state budget for certain emissions of air pollutants (e.g. particle pollutants, sulphur dioxide, mono-nitrogen oxides and volatile organic compounds).

3.3.7 Czech law requires nuclear generating station operators to obtain a licence from SONS and obtain special nuclear permits including permission from the Ministry of Environmental Matters and the Ministry of Industry. Nuclear permits can be renewed or extended where the requirements for a new permit are met, however this is not guaranteed.

3.3.8 The Czech Nuclear Act requires operators of nuclear facilities to obtain insurance covering any potential liability for damage resulting from the plant’s operation (a minimum of CZK 2b (EUR 80m)) and in connection with other activities, such as the transportation of nuclear materials (a minimum of CZK 300m (EUR 12m)).

Renewables

3.4.1 The new Czech Promoted Energy Sources Act (which replaced the Czech Renewable Energy Act and came into effect on 1 January 2013) differs from the Czech Renewable Energy Act in that only some renewable energy sources will be eligible for support. The support of new generating stations will also depend upon compliance with the Czech national action plan.

3.4.2 The Czech Promoted Energy Sources Act provides, inter alia, that subsidies paid to generating station operators will be predominantly in the form of green bonuses, and the repayment period for investments is 15 years.

3.4.3 The Czech Promoted Energy Sources Act retains some principles from the Czech Renewable Energy Act, such as that:
the ERO may not decrease fixed feed-in tariffs for the following year by more than 5% (unless the repayment period of the investment is less than 12 years); and
a solar levy (withholding tax) is imposed on operators of solar facilities which commenced operations between 1 January 2009 and 31 December 2010 for 26% of income received corresponding to the feed-in tariff, or 28% of income received corresponding to the “green bonus”, as applicable. This tax was applicable until 31 December 2013.

3.4.4 From 1 January 2014, the solar levy continues to be imposed only on solar facilities which commenced operation in 2010. The solar levy rate decreased from 26% to 10% for feed-in tariffs and from 28% to 11% for green bonuses.

In the near future, we expect the following regulatory changes:

• amendment to the Czech Nuclear Act, regarding the increase of the minimum insurance cover required for any potential liability for damage;
• amendments to construction legislation, regarding the acceleration of the authorisation procedure in respect of grid lines. Whilst the construction of power lines takes typically one or two years, the authorisation procedure is often eight to ten years long. This has led to a discrepancy between the required commissioning date of the new generating stations and the connection of the generating stations to the grid. Measures in support of accelerating the authorisation procedure to ensure it runs in parallel with the power lines construction timeframe are to be adopted in the future;
• amendments to tax legislation, regarding the introduction of a new emission tax on CO2 emissions;
• amendments to the Czech Emission Allowances Act, regarding the implementation of EU legislation.

• Annual data summary of the ERO for 2014: www.eru.cz/documents/10540/462820/Rocni_zprava_provoz_ES_2014.pdf/933fc41a-ad79-4282-8d0f-01eb25a63812
• National Report of the ERO in 2013: www.eru.cz/documents/10540/488714/NR_ERU_2013.pdf/363e4602-c886-485f-a731-245502b34ba4
• ERO: www.eru.cz
• SONS: www.sujb.cz
• Ministry of Industry and Trade: www.mpo.cz
• SEI: www.cr-sei.cz/
• The CEZ Group: www.cez.cz
• E.ON Group: www.eon.cz
• PRE Group: www.pre.cz
• CEPS: www.ceps.cz/
• OTE: www.ote-cr.cz/