The heat is on

After becoming the third-largest developer of solar energy in Europe, the Czech Republic suddenly finds itself on the verge of a national disaster. James Swift investigates

The Czech Republic is suffering from too much of a good thing. In 2009, following its ­commitment to obtain 8 per cent of its electricity from ­renewable energy sources, the country became one of the top three developers of photovoltaic energy in Europe, finishing behind ­Germany and Italy.

And with a population of little more than 10 million, the Czech Republic now has triple the solar capacity per person than California, the leading solar state in the US.
But it is too much. Incentives created to entice investors into the renewable energy sector have caused the market to overheat, threatening the security of the country’s national grid and, conversely, potentially landing taxpayers with a massive hike in their ­electricity bills.

The scare has left the Czech government ­scrambling to change the law to prevent a national disaster. And now that investors know that the generous incentives will soon end, there is a race among photovoltaic developers to get connected to the grid in 2010.

This rush, combined with the legal ­wrangling by the government to change the laws surrounding the incentives and the ­bubbling threat of litigation from investors that lose out, has meant it has never been a busier time for energy lawyers.

“We see an increasing interest in our clients in the Czech solar market as investors are rushing to finalise their projects before the year-end to secure the current favourable feed-in tariff,” says Václav ­Valvoda, a partner in Allen & Overy’s Prague office. “And the deals have become more ­sophisticated, with larger projects often requiring syndicated financing.”

“I have one or two people a week now coming to me asking if I can do a quick project financing or a due diligence,” adds Kamil Blazek, a partner in Kinstellar’s Prague office.

The Czech Republic is not alone in its problems with green energy; there has been a similar story across Eastern Europe. One of Slovakia’s three transmission grid ­operators has stated that it will not issue any more certificates of energy compliance now that the country has reached its limit of 120MW, and on 7 April the Bulgarian ­government proposed a ban on building solar and wind power farms on farmland amid fears that the unchecked investment boom would lead to blackouts.

Too hot to handle

But nowhere has the rush of investment and, consequently, the potential for crisis been more acute than in the Czech ­Republic. But then, nowhere have the ­incentives for investment into solar energy been so great.

“The situation in Slovakia isn’t like it is in the Czech Republic,” explains CMS Cameron McKenna Bratislava partner Ian Parker. “The feed-in tariff in the Czech Republic is exceptionally good in 2010; if you have a renewable energy source and you can get connected to the grid then you’ll receive a very favourable rate.”

Favourable is not the word. The feed-in tariff – that is, how much solar energy ­producers are paid for producing ­electricity – is one of the world’s most generous. First launched in 2005 it now stands at around e0.49 (£0.43) per kilowatt hour and is ­guaranteed for 20 years once a producer is locked in to supplying any of the country’s three main energy distributors, which are obliged under the scheme to purchase all the energy produced for the feed-in tariff.

The generous tariffs, combined with cheap land and a drop in the price of solar panels, mean solar projects have become a dream come true for investors, who see the sector as the means to a high-yield return free from debt.

Since the investment rush the Czech Republic has witnessed a massive rise in the capacity of registered photovoltaic plants; from 3MW in 2007 to 490MW in March 2010. And once this year’s rush is through, officials have estimated that as much as 2,000MW could be installed.

“Because the conditions for renewable energy projects are so good, we have a lot of photovoltaic and wind plants,” says ­Schoenherr Prague partner Martin ­Nedelka. “But with these renewable energy sources, particularly photovoltaic, you’re not able to regulate them properly because you never know when the wind will blow or the sun will shine.”

Never knowing when you will have a huge surge or crippling dearth of power is a ­frightening prospect for grid operators. The technology to adjust to the fluctuations of solar energy through smart grids is decades away and officials from Czech electricity ­company CEPS have said that, if ­investments into the sector carry on the way they are now, the grid may overload as soon as 2011.

Too many hands

But in light of the recent legislation ­enacted by the Czech Republic, how to reduce the amount of solar energy projects is ­presenting law makers with problems.
“There are two issues” says Nedelka. “The first is whether there’s a way to reduce the priority of renewable sources; meaning, is the grid operator obliged by law to connect every single renewable energy power source or is there a possibility to limit it?

“The second is whether a ­transmission operator will switch off the photovoltaic power plants if they start to produce a huge amount of energy while there there’s not enough consumption. There are provisions in the new Czech energy act ­dealing with this; however, investors aren’t very happy because the new act might reduce the ­number of new projects and might slow down the return on their investments.”

To solve the problem, the Lower Chamber of the Czech parliament in November 2009 passed legislation which, at the time of ­writing, is still to be advanced to the Senate, to the effect that from 2011 the rule ­preventing the energy regulator from decreasing the feed-in tariffs for new ­projects by more than 5 per cent each year will not apply to projects if the return of investment is less than 11 years.

The specifics of the amendment do not have to be released until November, but the drop is expected to be between 27 and 32 per cent, despite the Czech Photovoltaic Association warning that more than a 15 per cent reduction could cripple the market.

A case in the sun

On top of this, since February, all three Czech power distribution companies (CEZ, E.ON and PRE) have stopped connecting new photovoltaic plants to their grids, which, according to one lawyer “they were probably not allowed to do by law”. Those with approved grid applications can no longer transfer the connection guarantee, which has precipitated a mini-boom in share deals as a convoluted way round this prohibition.

But once this year’s flurry of deals is ­complete, Czech lawyers are facing a ­subdued market – though even that may not mean the end of the legal work.
“I don’t want to describe the situation in solar energy as tragic, but we’ll see a ­slowdown in activity,” says Wolf Theiss ­partner Jakub Adam. “We’ll see activity in terms of how the law will develop because I’m not sure if the change of legislation will be enforced as it’s been proposed by the Lower Chamber because a lot of people want [the law] to stay the same as it is.”

There is also a distant threat of litigation by developers against the amendments.

“It depends what the decision on pricing is,” says Helen Rodwell, a partner in Camerons’ Prague office. “It depends on how much they fiddle with it. The biggest threat is if they try to do something ­retrospectively. If they just move the tariff down 30 per cent the market is more or less expecting it, but if they try to change the tariff retrospectively, then there could be litigation.”

And so, despite the gravy train looking to have dried up for potential investors in solar energy in the Czech Republic, for lawyers the work has only really begun to heat up.
“This will be a very fruitful field for ­discussion,” agrees White & Case Prague partner Jan Matejcek, “but no one can say how this will turn out.”