Commission Report (2002): Czech Republic

• Progress since the last Regular Report
• Overall assessment
• Conclusion

Chapter 14: Energy

Progress since the last Regular Report

Since last year`s Regular Report, which concluded that considerable progress had been made in preparing for the internal energy market, further progress has been made, in particular as regards the adoption of implementing legislation in the area of the internal energy market.

Concerning security of supply, and with a view to complying with the acquis, the Czech Republic has further increased oil stocks to 80 days of average annual consumption.

With regard to competitiveness and the internal energy market, good progress was made in the reporting period. The Ministry of Industry and Trade and the Energy Regulatory Office have issued a considerable amount of implementing legislation with the aim to implement the Energy Act. The Decrees regulate inter alia the organisation of the electricity market, both for eligible and captive customers, the construction of and access to the electricity and gas network infrastructure, the cost and revenue calculation for utilities, licensing rules, provisions for emergency states and co-generation. In January 2002 the gradual liberalisation of energy markets started -- as foreseen under the Energy Act -- when the market was liberalised for entities consuming over 40GWh of electricity annually. This led to a reduction in electricity prices by approximately 5% during the first quarter of 2002 for this market segment, which has 65 eligible customers representing approximately 30% of the Czech market. At the same time, electricity prices for households were raised by 9.9% on average on 1 January 2002, thereby broadly reaching cost recovery levels. Gas prices have also moved towards cost recovery: they were first increased again by 4.5% on average in January 2002, but then reduced by 9% on average in April 2002, reflecting lower international gas purchase prices.

Since the last Regular Report, the Energy Regulatory Office has received additional State resources worth EUR 2m, bringing its 2002 budget up to EUR 3.8m. This has allowed the Office to recruit additional staff, bringing the total to 75. Over the past year, the Regulator has taken some important decisions concerning market rules, prices in captive market segments and electricity trade, and has issued a substantial amount of the above-mentioned implementing legislation. In addition, the Regulator has arbitrated in several conflicts between companies active on Czech energy markets. It has also licensed enterprises active on the Czech energy market.

With the beginning of the electricity market liberalisation, the Electricity Market Operator became operational in January 2002. In the first months the Operator, equipped with a 2002 budget of EUR 6.6m and 22 staff, handled some 2%-3% of the whole market volume. In May the Government decided to gradually increase the market capitalisation of the Operator in order to take account of its increasing business scope and to prepare the ground for its potential future partial privatisation.

The State Energy Inspectorate, whose task is to enforce provisions of the Energy Act and Act on Energy Management, including prices, carried out almost 1000 inspections in 2001 and levied 150 fines worth CZK 6m (EUR 200,000). Staff levels have remained unchanged at 180 employees, since the planned recruitment of up to 50 new staff members has been postponed again to 2003-2004 due to budgetary constraints.

Since the last Regular Report, progress has been made as regards the restructuring of energy markets and privatisation. In December 2001 the Government decided to sell the Czech monopoly gas importer and owner of the transit network, together with shares giving majority stakes in seven out of eight regional gas monopoly distributors. The new company is therefore largely integrated both vertically and horizontally. The privatisation was concluded in May 2002 after the Competition Office cleared the takeover subject to conditions that were accepted by the buyer.

The privatisation of the Czech electricity industry was postponed by the Government in January 2002 after none of the foreign bidders met the Government conditions, namely the minimum price asked. Subsequently, the Government adopted a new strategy and in June the State-owned dominant generator CEZ acquired shares from the National Property Fund, giving it majority control over five regional electricity distributors and blocking minorities in the remaining three. In return, CEZ sold its majority in the electricity transmission system operator, keeping a blocking minority. The Government has thus sought to ensure the existence of CEZ as an integrated electricity generation and distribution company and regional player in an integrating European electricity market. Meanwhile, the Office for the Protection of Competition is conducting an analysis of this restructuring.

Concerning solid fuels, little progress can be reported with regard to the restructuring of the coal sector, which is closely connected to the restructuring and privatisation of the electricity industry. In 2001 demand for brown and hard coal remained stable at 50m tonnes and 11m tonnes respectively, after a one-year increase in 2000 following a longterm decline in activity during the 1990s. In June the Government decided again to extend uranium mining at the last remaining mine in Dolni Rozinka by two years to the end of 2005. This decision follows a previous extension of two years until December 2003.

As regards energy efficiency, the Government adopted the first Annual State Support Programme for Energy Saving and the Use of Renewable Energy Sources, based on the National Programme for Economic Energy Management and Use of Renewables. The first Annual Programme establishes aims and benchmarks for subsequent projects which are managed by various Ministries, depending on sectoral responsibility. The Czech Energy Agency manages projects on behalf of the Ministry of Trade and Industry. In 2001 it managed projects worth EUR 3.3m, less than half of the 2000 value and one-third of the 1999 figure.

Concerning nuclear energy, the Czech Republic operates two nuclear power plants at Dukovany and Temelin. At the Dukovany NPP, four units of the VVER 440/213 type are in operation. At the Temelin NPP, two units of the VVER 1000/320 type are currently in different stages of commissioning.

Test operations of the first reactor unit of the Temelin NPP were completed in June 2002 with full power operation attained. Presently the unit is undergoing trial operation, the last stage of commissioning prior to receiving a license for commercial operation. In June 2002 the self-sustaining fission reaction was initiated at the second reactor unit and test operations are ongoing in accordance with a license granted by the regulatory authorities. During these tests the reactors were powered down on a number of occasions and some technical adjustments were made, mainly to the secondary non-nuclear circuits of the plant. Since the last Regular Report one incident in February 2002 at the first unit has been classified in terms of the International Nuclear Events` Scale as INES I.

Implementation of the recommendations of the June 2001 Council Report on Nuclear Safety in the Context of Enlargement is ongoing. With regard to the specific recommendation in that Report that the Czech Republic complete the regulatory assessment of the VVER 440/213 bubbler condenser containment function under design basis accidents, the Czech Republic, together with Hungary and Slovakia, is financing a set of additional tests to support this review. The evaluation of the results is due to be presented by December 2002 to all three regulatory authorities.

Concerning nuclear safety, an amendment to the Atomic Act was approved and entered into force in July 2002. The amendment aims at aligning Czech legislation with the acquis on radiation protection, emergency preparedness, shipment of radioactive substances and waste, and contamination of food and feedingstuffs. The amended Atomic Act also covers Euratom Safeguards.

In 2001 the State Office for Nuclear Safety carried out over 1250 inspections and 86 investigations of reported extraordinary cases (not related to nuclear power plants). In addition, it monitored closely operations at the Temelin and Dukovany nuclear power plants. As regards the former, the State Office issued permits for the plant to proceed to new testing phases as appropriate. The Office has also begun to prepare reporting systems vis-à-vis the Euratom office to meet the Euratom Safeguards requirements.

In November 2001, the Heads of Government of the Czech Republic and Austria, using the good offices of the European Commission, concluded the Melk Process with an agreement on follow-up measures, in particular as regards nuclear safety issues. During the process, the Czech authorities voluntarily undertook an environmental impact assessment of the Temelin Nuclear Power Plant.

Overall assessment

As regards security of supply, the Czech Republic has reached a good level of security but needs to complete its efforts. The Administration of State Material Reserves functions well as the ``crisis` body in emergencies and seems to function in line with the acquis.

Concerning the establishment of a competitive internal energy market, partial market opening and the adoption of implementing legislation to the Energy Act have contributed to the current high level of alignment with the acquis, particularly as regards electricity. With regard to gas, implementing legislation remains to be completed in order to fully align Czech legislation with the acquis, in particular as regards market opening and market rules. The gas and electricity sectors are now generally well prepared for the competitive internal energy market through the privatisation of major players in the gas market, the restructuring of electricity utilities and the broadly cost-reflective electricity prices. Transparency and openness must be ensured during the ongoing electricity utilities restructuring and privatisation process.

Administrative capacities have been further improved. In a difficult environment, characterised by industry restructuring and privatisation as well as market liberalisation, the Energy Regulatory Office has been able to assume a relatively independent position, demonstrated by decisions on high profile cases such as the allocation of infrastructure capacity for electricity imports. However, despite improvements, a further strengthening of financial and human resources, which are currently far lower than originally planned, is urgently required to ensure adequate regulation of energy markets in line with their progressive liberalisation. The Electricity Market Operator has had a successful start in organising and operating the short-term electricity market. The Operator will need to be upgraded substantially in line with increased market liberalisation. Further financial and human resources are required to this end. The State Energy Inspectorate has not yet received additional financial and human resources, to reflect the new responsibilities transferred to it in 2001 -- 2002, thus resulting in weak enforcement capacities. Resources remain to be strengthened and existing staff need to be prepared adequately for new responsibilities. With current resources, the Inspectorate will not be in a position to adequately meet its obligations.

Concerning solid fuels, considerable proportions of electricity continue to be generated from coal.

Although a first Annual Programme has been developed to enhance energy efficiency and the use of renewable energy, State funds supporting concrete projects managed by the Czech Energy Agency were again reduced in 2001, reflecting the low political priority given to this issue by the Government. Efforts should therefore be stepped up.

The European Union has repeatedly emphasised the importance of a high level of nuclear safety in candidate countries. In June 2001, the Council of the European Union took note of a Report on Nuclear Safety in the Context of Enlargement. This Report contains recommendations to all candidate countries to continue their national safety improvement programmes, including the safe management of spent fuel and radioactive waste and the safety of their research reactors.

During the first half of 2002 a special Peer Review on nuclear safety assessed the progress made by candidate countries in implementing all the recommendations. This exercise, conducted under the auspices of the Council, resulted in a Status Report published in June 2002, which concludes that the Czech Republic has accepted and addressed all the recommendations contained in the Report on Nuclear Safety in the Context of Enlargement of June 2001. Most of the recommendations have been adequately addressed. With regard to one specific recommendation concerning completion of the full verification of the containment bubbler-condenser systems for the Dukovany NPP Units 1 -- 4, the Czech Republic has indicated adequate measures, but the Status Report emphasises that the Czech Republic is expected to ensure that they are implemented. Moreover, the Czech Republic should continue to devote attention to two specific recommendations concerning high energy pipe breaks and valves at the Temelin NPP.

As regards the two specific recommendations concerning high energy pipe breaks and valves at the Temelin NPP, the safety case for these two issues is to be developed during autumn 2002.

Czech legislation on nuclear energy and radiation protection has been amended with a view to bringing it into line with the acquis. Application must be ensured by the relevant Czech authorities, including the State Office for Nuclear Safety. As regards radiation protection, funds so far have not been appropriated to ensure the correct implementation of the amended Act, in particular regarding protection from radiation originating from old hospital equipment.

The Czech Republic will need to ensure compliance with Euratom requirements and procedures. In this respect, due attention will need to be given to Euratom safeguards, in particular regarding the reporting of nuclear material flows and inventories directly by the persons or structures operating nuclear installations or storing nuclear material. It should be noted that the Czech Republic has concluded a Full-Scope Safeguards Agreement with the IAEA.

Conclusion

In its 1997 Opinion the Commission concluded that provided that efforts were maintained, the Czech Republic should be in a position to comply with most of the EC energy legislation over the next few years, adding that aspects such as the adjustment of monopolies, access to networks, energy pricing, emergency preparedness (including the building up of mandatory oil stocks), state intervention in the solid fuels and uranium sectors, and the development of energy efficiency needed to be closely followed. The Commission further pointed out that, although no major difficulties were foreseen for compliance with Euratom provisions, the nuclear safety standards should be tackled appropriately in order to bring all the nuclear plants to the safety level required; and longer term solutions for waste needed to be defined.

Since the Opinion, the Czech Republic has made good progress throughout this sector, notably with regard to oil stocks, the internal energy market (electricity and gas), nuclear issues and the gradual development of administrative capacity. Overall, there is a good level of alignment, in particular as regards the establishing of a competitive electricity market, and administrative capacity is satisfactory.

Negotiations on this chapter have been provisionally closed. The Czech Republic has been granted a transitional period for the building up of oil stocks (until 31 December 2005) and one for the opening up of the gas market (until 31 December 2004). The Czech Republic is generally meeting the commitments it has made in the accession negotiations in this field.

In order to complete preparations for membership the Czech Republic`s efforts now need to focus on full and timely implementation of legislation, in particular with regard to gas, on further efforts in the field of energy efficiency and renewable energy, as well as on further strengthening of administrative capacity of the newly established bodies, in particular the energy regulator and the energy efficiency agency. The Czech Republic needs to continue its progressive building up of oil stocks.

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