Czech Republic: A Dark Spot in a Sunny Business

This growth is surprising given the country is less than a fifth the size of California and at a latitude north of Montreal, Canada. This sharp growth is attributed to a combination of strong legislative incentives, reduction in solar equipment costs and an overall sluggish economy that lured developers with anticipated big profits from the country’s generous feed-in tariff. The Czech market ‘explosion’ has been true to its name. It has made a huge impact and has been damaging to the industry, country and region.

A perfect storm of favorable legislation, exceptionally high feed-in tariffs, lower module costs, and a struggling economy set the Czech Republic on a course of unsustainable PV growth in 2009. The 2010 Feed-in Tariff (FIT) at 12.15 CZK per kWh ($0.68 USD) is one of the highest in the world.

It is estimated that more than 50 billion CZK ($2.8 billion USD) of debt exists on the books of operating projects. A decrease in system costs allowed for an accelerated payback of 3-5 years instead of the 15-year payback timeframe that was used as a baseline when the legislation was written. This acceleration substantially increased the value of projects that were selling for 10-15mln CZK ($560k to $840k) per MW. Considering the average salary in the Czech Republic is 120,000 CZK ($7,000 USD) per year, developers were making a small fortune.

The Czech market has undergone tremendous growth in a very fragmented market. There was essentially no PV throughout the Czech Republic in early 2008.  On November 11, 2010 the Energy Regulatory Office (ERU) announced that nearly 1000 MW of solar capacity is online in the country right now -- across more than 11,000 projects.  That number is expected to grow to more than 1,600 MW.

There have been thousands of developers and more than a hundred construction companies involved in these projects.  Most of these developers own less than 3 MW but there are a few large players here and there that own a large portion of the market.  This fragmented market creates opportunity for consolidation but with consolidation comes the risk the capacity already built will be mismanaged.

Public Opinion Lost

It has been exciting to witness an entire country taking a position on solar. Unfortunately, the uncontrolled nature of development has made public opinion on solar exceptionally negative. Those that have a positive outlook are perceived as being part of the “solar problem” and are rumored to be silent investors. This strong negative opinion is rooted in accusations of impropriety and public discontent with increases in electricity prices.

The negative perception has also been led by a very public debate over the impact of solar with conjecture and hyperbole on both sides. It is clear that the solar industry lost in this case.

There are accusations of impropriety by politicians and energy distributors. They have all been accused of improperly awarding or buying projects at inflated prices.  CEZ, the partially state-owned electricity distributor, at one time was on one hand denouncing solar and on the other hand procuring solar projects.  

A significant number of project owners or “silent” investors are purported to be politicians that benefited from the uncontrolled growth they created. These assertions are particularly toxic given the huge returns that the investors are collecting from the high FIT.

As with most FITs, funding for the program is passed along to the ratepayers by an increase in electricity prices. The Czech Prime Minister, Petr Necas, is on record stating that solar subsidies will increase electricity prices by as much as 18%, forcing some small businesses into bankruptcy, a figure vehemently denied by solar industry groups who say that the increase will be very small. 

For now, it is still unclear whether electricity prices will increase at all and some say that electricity distributors may even lower tariffs. Unfortunately, the negative public opinion on the impact of solar FITs is already set.

Fiery Crash Expected

The ferocity of negative public opinion, elections and exceptionally high tariffs had led to multiple initiatives intended to kill the solar market. New legislation will be signed in the next couple of weeks that imposes a 26% tax on electricity produced from solar plants for the next three years. This is the first retroactive reduction of an existing FIT globally. 

In order to save small businesses from an exorbitant electricity increase, Prime Minister Necas has ensured the public that this legislation will not increase power prices more than of 5.5%. But the uncertainty created by the tax is enough to stall -- if not stop altogether -- investment in solar throughout the Czech Republic and the entire region.

The Czech Republic has been a shining example of development in Eastern Europe. However, this tax has cast shadows into the neighboring, burgeoning markets of Bulgaria, Slovakia, and Romania. 

There will be winners and losers across the solar industry in the Czech Republic. The winners are solar developers, equipment manufactures and developers. The growth of the Czech market led to attractive prices for module manufactures globally. There are opportunities for knowledgeable investors to participate in the secondary market.

The list of losers in the Czech market is unfortunately much longer and includes the investors, the solar industry and the entire Czech population. Investors lost a significant portion of the cash available to them for the next three years and certainty in their long-term investments. They have, more importantly, lost potential secondary investors in their projects. The solar industry lost because it has now witnessed the first clear retroactive feed-in tariff drop. This creates a precedent that darkens the industry. The Czech people lost not due to increases in electricity prices, but because they no longer have the potential for a sustainable renewable energy industry.

Is There Any Profit in the Ashes?

Solar power in the Czech Republic will leave scars on the people, industry and the region. And while there will continue to be viable attractive renewable energy investment opportunities, these projects will need to overcome the shadow of uncontrolled legislation, accusations of impropriety and high-energy prices.

The Czech market will have well over 1 GW of installed PV capacity. The mistakes of the poor legislation will now be a subsidy paid for nearly two more decades. Despite the negativity, there needs to be recognition of the accomplishments. There is 1000+ MW of PV installed in a country coming from complete solar obscurity. This investment contributed to profit for equipment suppliers, laborers and banks.  The tactics may have been misguided and uninformed; however, building renewable energy capacity is still good for the people and the planet.