Czech Republic: The amendment to Act No. 165/2012 Legal Gazette on incentivised energy sources takes effect on 1 January 2022

published on 17th November 2021

After the Senate returned the amendment originally passed by the Chamber of Deputies with proposed changes, which were controversially discussed by both chambers of the Czech Parliament, the long-awaited amendment to Act No. 165/2012 Legal Gazette on incentivised energy sources, which was passed at the end of September 2021, will now enter into force on 1 January 2022.

The amendment not only affects the support for existing power plants, but also incentives for new projects. Since 2014, the currently applicable law has no longer offered any support for new power plants.

Now, the Ministry of Industry and Trade will be able to resume auctions aimed at granting support to renewable energy power plants. In addition to the auction scheme, smaller power plants of up to 6 MW and six wind turbines, and other energy sources of up to 1 MW, will also have the option to receive incentives in the form of an hourly green bonus.

Only after the intervention of the Senate were the PV power plants included in the amendment, provided they were not built on farmland of I. and II. quality class. Power plants constructed of components that are already more than five years old when the application for funding is submitted are not eligible for incentives. However, the new support for existing power plants must still be notified to and approved by the European Commission before it can be granted.

In addition to the reintroduction of support for renewable energies, the amendment includes another essential point: the legal framework for reviewing whether power plants, especially those commissioned between 2006 and 2010, are not overfunded. This will enable the Czech Republic to fulfil its obligations vis-à-vis the EU Commission, of which we have already informed here. The internal rate of return (IRR) of the power plant is to be used as a benchmark for assessing whether it is overfunded. The level of the target IRR, or the limit value, was a major subject of controversy in the legislative process. The Chamber of Deputies wanted to discriminate against PV power plants by introducing a target IRR of 6.3 per cent, which the Senate was able to avert thanks to its intervention. In line with the amendment, the target IRR must now be at least 8.4 per cent and may not exceed 10.6 per cent. The specific amount will be set by government regulation.

The starting point for the review process is the so-called sector review, which has already partly taken place in recent years before any legal basis was adopted. The amendment now stipulates that the selection of sectors should not be based on the location of the power plant but on its size, the technology used and the year of commissioning. Selected operators should provide financial data regarding their power plants so that the government can calculate the IRR of the power plant and derive an average from the data submitted by the power plant operators for the respective sectors. The methodology of the IRR calculation has not been stipulated in the amendment; it will be the subject of an implementing regulation yet to be issued. Although the calculation tables used so far should serve as a starting point, they do not allow drawing any conclusions as to which costs may and may not be included as they lack sufficient explanations. When communicating the preliminary sector review results for power plants commissioned between 2006 and 2008, the Ministry of Industry and Trade pointed out itself that a final result would not be known until there was clarity on the methodology. The result of the sector reviews for power plants commissioned before 2011 should be announced in the first quarter of 2022.

If the review revealed over-funding in a given sector, the incentives would be reduced based on a price decision in such a way that the IRR would not be exceeded over the entire funding period. However, the power plant operator is in principle free to apply for individual conditions for granting financial support within two months of the price decision's effective date: If the power plant operator can prove that with the original level of funding, its IRR is below the target IRR, it can apply for the incentive in the original amount. If, on the other hand, with the new funding level, the target IRR is no longer achieved , the power plant operator may apply for continuing to receive the incentive at the previous level for a certain amount of electricity. In addition, the power plant operator may voluntarily waive the financial support from the beginning of the twelfth calendar year following the year of commissioning, provided that it notifies this 30 days after publication of the price decision.

In the course of the discussion on the level of the target IRRs for photovoltaics, the Ministry of Industry and Trade proposed as a compromise to increase the existing solar tax and to reintroduce it for PV power plants commissioned in 2009. From 1 January 2022, the solar tax will therefore be increased by 10 per cent for PV power plants commissioned in 2010, and for PV power plants that have been in operation since 2009 a solar tax of 10 per cent of the feed-in tariff or of 11 per cent of the green bonus will be charged. If the IRR of the PV power plant falls below 6.3 per cent due to the tax, the power plant operator can apply for a certain share of the electricity generated to be exempted from solar tax.

A positive aspect of the amendment is that the Czech Republic has reintroduced an operating aid for renewable energies for the first time since 2014 and is thus supporting new projects; however, the increase or reintroduction of the solar tax unfortunately means that the Czech legislator has intervened again in the aid schemes for existing PV power plants. In addition, it means a potential intervention in the funding offered to other existing power plants, if the sector review reveals that certain sectors are overfunded.

The Czech solar tax has already been the subject of several court proceedings in the Czech Republic and also before international arbitration courts. It remains to be seen whether the amendment will also be subject to judicial review.