Solar subsidies will end

Solar subsidies will end

Massive profits, overload of energy grid mean will limit government incentives

Grid stability weakens as ČEPS accepts an increasing number of solar panels onto the grid.

Gray skies over Prague belie a massive solar energy boom in the Czech Republic that threatens to increase electricity prices and destabilize the grid. Facing pressure from electricity companies and grid managers, Parliament has changed course and voted to slash incentives promoting new solar power plants.

On March 17, the Chamber of Deputies voted 169 to 1 to give energy regulators freedom to cut feed-in tariffs (price incentives) for solar plants that provide a return on investments in less than 11 years. The tariff cut, which will apply to all plants built after January 2011, will lead to a significant drop in foreign solar investment, but will ultimately increase grid stability and level electricity prices, according to the Energy Regulatory Office (ERÚ), and thus received sweeping support across political party lines.

“The Industry and Trade Ministry supports the change in law, because the situation regarding solar energy is very poor, especially regarding prices and grid stability,” said Matyáš Vitík, spokesman for the Industry and Trade Ministry. “Investments into solar energy in the Czech Republic have become an instrument of profit, so government support of solar energy has lost meaning.”

Feed-in tariffs were originally passed in 2005 to provide incentives for investors in the fledgling renewable energy sector and to help the Czech Republic meet the EU requirement that 20 percent of the nation’s power be produced from renewable sources before 2020. The feed-in tariffs locked in solar energy prices between 12,790 Kč ($694) and 12,890 Kč per megawatt hour until 2025, while obligating ČEPS, the Czech electricity grid manager, to purchase all solar energy produced.

While the cost of producing solar energy falls 10 percent annually, according to the ERÚ, the feed-in tariffs limited solar energy price drops to 5 percent per year.

According to Martin Šimonek, CEE solar analyst for Bloomberg New Energy Finance, Czech feed-in tariffs made solar investment so lucrative that “literally a taxi driver would apply for grid permission and then sell it, because it’s good business.”

The result was a more than 24,000 percent increase in Czech solar energy plants, from nine in 2005 to more than 2,230 by January 2010, making the Czech Republic the third-largest solar energy producer in Europe, despite the country’s relatively small size.

“The Czech Republic isn’t such a massive market, but it sets trends for other markets,” Šimonek said. “There is significant international interest in how the Czechs will solve this issue.”

The government’s original plan of spurring the solar industry backfired as international investors swept in to get a share of lucrative profits. The solar boom brought significant capital into the country, but has had potentially devastating effects on grid stability as more solar panels are built and ČEPS, required by law, accepts them onto the grid.

“The problem in the Czech Republic is mostly technical. The feed-in tariffs are unnecessarily high because investors are making profits way beyond the government’s expectations when it set the tariffs,” Šimonek said.

Because the feed-in tariffs require grid operators to purchase all solar energy produced, there is a threat that the amount of solar energy will exceed the Czech grid’s capacity, thereby leading to massive power outages. In recent months, ČEPS has consistently warned of possible grid instability and has outlined the significance of the situation in an open letter to ERÚ, ČEZ and other energy distributors.

“The increased installation of power sources is disproportionately increasing production demands for the regulation of the Czech energy system and is also threatening its safe operation. The gravity of the situation is underlined by the number of already-issued permits to access photovoltaic and wind power plants,” the letter read.

ČEPS leads the call for cutbacks in feed-in tariffs, but many other investors have joined in. ČEZ, the country’s largest energy producer, currently operates seven solar plants and plans to build at least one more in 2010, before the feed-in tariffs are cut. Despite such vested interest in the solar industry, ČEZ has been a vocal supporter of cutting feed-in tariffs, due to the solar boom’s effect on electricity prices.

“After [Parliament’s] approval of the government’s draft amendment to the law on promoting renewable energy sources, we also believe that the ERÚ will use its skills and reduce the purchase price of electricity from solar power to at least the normal levels of neighboring countries,” said ČEZ spokesman Martin Schreier.

Smaller solar investors, like Jiří Beneš of 3TS Capital Partners, welcome any slackening of competition on the solar market.

“A decrease in tariffs would certainly limit the number of new projects being launched, but this would be positive, in my opinion,” he said.

According to Beneš, potential capital that would have gone toward solar investments will decrease, but won’t dry up completely. Rather, it will be shifted toward other forms of renewable energy, which will benefit both the environment and the electricity grid.

“Given our resources, biomass and biogas energy plants make much more sense than solar energy in the Czech Republic, but the current tariffs aim to subsidize most heavily the least efficient sources,” Beneš said.

– Petr Cibulka Jr. contributed to this report.

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