Renewable Energy in the Czech Republic – a Step Back at the Expense of Investors?

The Czech Republic is the third largest electricity exporter in the European Union and has one of the lowest energy import dependencies. Traditionally electricity is produced from coal, with the second largest source of energy being nuclear power.

When preparing to enter the European Union, the Czech legislative body developed a comprehensive framework to change the local energy industry. Particular attention was given to the promotion of electricity produced from renewable sources. In March 2005, eleven months after the Czech Republic entered the European Union, the Czech Parliament passed an act to support such production from renewable energy sources. This law promised significant benefits for investors and created a stable framework for investment decisions in this field. As a result, the investments in the sector, in particular into photovoltaic energy, increased substantially.

In the last months however, the Czech Republic suddenly changed its approach and passed a series of acts that have restricted and limited the promotion of renewable energy. On 1 January the last change entered into force. The outcome of this is a significant impairment for renewable energy sector investors. Foreign investors, who, as a result of the law changes, are now experiencing a negative impact on their legitimate expectations, are evaluating their position against the Czech state.

2005 – Act on the promotion of electricity production from renewable energy sources

The act on the promotion of electricity production from renewable energy sources entered into force on 1 August 2005. It was celebrated by many as the dawn of a new energy industry era. The available incentives were significant and the act promised that there would be a fifteen year period for returns on investments for renewable energy power plants. This was to be achieved through regulations in two areas. First, connection to the Czech grid was to be guaranteed to investors in the renewable energy field. Second, the regulated feed-in tariff was set at a very favorable rate. Producers without connection to the grid (mainly non-commercial energy production for households) were guaranteed financial support in the form of a ‘green bonus’.

2006 until 2010 – The incentives’ results on the renewable energy sector

The promised incentives were enthusiastically adopted by investors – particularly in the photovoltaic sector. Between 2005 and 2009 growth of installed solar power stations connected to the grid system increased from under one MW to more than 460 MW. In 2010 the photovoltaic capacity reached 1.400 MW. This compares to roughly three quarters of the capacity of the Czech nuclear power plant Temelín. At the end of this year, there were over 12,000 operators of solar energy plants in the Czech Republic (versus nine in 2005). Most of these operators are small and medium sized enterprises.

Year 2010 – The Czech Republic’s u-turn

As a result of the significant level of local and foreign investment in the sector, the Czech Republic started to suffer from higher than planned expenditures to cover for the regulated incentives. Moreover, the autonomous renewable energy producers increasingly became ‘real’ competitors to traditional energy producers. After a massive media campaign against the increase of renewable energy, the Czech Republic now also tries to break the trend via legislative changes. The number of recipients for state funding was significantly restricted and both the feed-in tariffs and the green bonus were reduced. Tax incentives were cancelled. These changes do not only affect new investors in the field, but also photovoltaic investors who started operation in 2009 and 2010. They are now obliged to pay a special levy of 26-28% between 2011 and 2013.

The future – The potential liability of the Czech state

As a result of these unpredictable legislative measures, many investors feel deceived and are evaluating options to take direct actions against the Czech state. For foreign investors the more than 80 available bilateral investment treaties between the Czech Republic and other states provide a possible legal foundation for claims. Austria, for example, concluded a bilateral investment treaty with the former Czechoslovakia in 1993 which provides for the enforcement of investors’ rights through an international arbitral tribunal. Other possibilities for legal action are to be found in multilateral state contracts in the energy industry (e.g. the Energy Charter Treaty). The EU directive for the promotion of energy production from renewable sources specifically targets the advancement of investors’ confidence in this field (in particular to protect the interest of small and medium sized enterprises and independent power producers). The new legislative measures in the Czech Republic can hardly be seen as compatible with these guidelines.