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    Czech Republic Energy & Utilities Infrastructure Forecast


    July 29, 2022 - Fitch Solutions Sector Intelligence

     

      THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.

      Czech Republic Energy & Utilities Infrastructure Forecast

      • 15 Jul 2022
      • Czech Republic
      • Infrastructure

      Key View: After weak expected growth of the energy and utilities infrastructure sector over the first half of the forecast period, we forecast a strong acceleration of growth in the second half, notably due to a large-scale nuclear power projects set to begin construction in 2029. We also note increasing upside risks to the sector from renewables power projects, as legislative changes in 2021, soaring oil and gas prices and the phasing out of coal-fired thermal power should boost demand for new renewables capacity. Our current forecast sees good annual growth of 3.9% in real terms from 2022 to 2031, with a strong acceleration to annual average growth of 5.7% over the 2027-2031 period.

      Latest Developments
      • In early 2022, Elektrárna Dukovany II, a wholly-owned subsidiary of CEZ Group, launched a tender for the construction of a new nuclear power plant in Dukovany, Czech Republic. The Ministry of Industry and Trade of Czech Republic conducted safety assessments and approved three bidders for the project: Westinghouse, EDF and KHNP, to participate in the tender process. The deadline to submit final bids is by the end of November 2022. The contracts are due to be finalised in 2024 with testing operation likely to begin in 2036. The project will boost the Czech Republic's energy and utilities infrastructure sub-sector growth over the second half of the forecast period.
      • Our Power team notes that the current conflict involving Russia and Ukraine, as well as EU plans to reduce dependence on Russian hydrocarbons, reinforce the likelihood of the nuclear project materialising over the forecast period.
      • We also note strong upside risk to renewables projects over the forecast period. Legislative changes in 2021 should create a more attractive investment environment while the phasing out of coal-fired thermal power should boost demand for new renewables capacity. In January 2021, the Czech government announced a CZK150bn (USD7bn) modernisation fund to reduce its emissions and reduce its reliance on coal-fired power. In addition, in September 2021 the Czech parliament approved the Low Carbon Act, setting out the framework for support for new renewables development and establishing a rate of return for existing solar facilities which it hopes will reassure potential investors in the sector.
      • The European Investment Bank has sanctioned an CZK8.0bn (USD336.3mn) loan to support water management services in the Czech Republic. The initiative will provide flood protection to 47,000 people, increase wastewater collection and treatment, and create an additional 2mn cu m of storm water storage capacity. Works to be financed include the construction of a 1.6km-long water line, one well drill and a reservoir with a capacity of 40cu m.
      Energy And Utilities Infrastructure Data (Czech Republic 2021-2031)
      Indicator 2021e 2022f 2023f 2024f 2025f 2026f 2027f 2028f 2029f 2030f 2031f
      Energy and utilities infrastructure industry value real growth, % y-o-y 3.0 3.1 1.7 1.4 2.2 1.6 3.0 4.3 5.7 7.1 8.5
      Power plants and transmission grids infrastructure industry value real growth, % y-o-y 2.0 3.0 1.5 2.0 2.5 3.0 4.5 6.0 7.5 9.0 10.5
      Oil and gas pipelines infrastructure industry value real growth, % y-o-y 2.9 0.9 1.8 0.6 2.1 1.3 1.5 1.7 1.9 2.1 2.3
      Water infrastructure industry value real growth, % y-o-y 3.8 3.4 1.8 1.1 1.9 0.5 1.9 3.3 4.7 6.1 7.5
      e/f = Fitch Solutions estimate/forecast. Source: Czech Statistical Office, Fitch Solutions
      Structural Trends

      We hold a moderate outlook for the Czech energy and utilities infrastructure sector, with sector growth annual average of 3.9% over the 2022-2031 forecast period. While sector growth will remain average at a 2.0% yearly growth rate over 2022-2026 owing to a limited amount of significant large-scale projects in the pipeline over the medium term, we expect an acceleration in growth over the second half of the forecast period, averaging 5.7% over the 2027-2031 period.

      The Czech energy and utilities infrastructure growth will remain weak over the first half of the forecast period, with a lack of large-scale projects planned or under development. As highlighted by our Power team, the country already generates a substantial electricity surplus, and with consumption expected to grow at a very slow rate over the next decade, there are few incentives for investment in new capacity over the coming years. Activity will mostly focus on slowly reducing dependence on coal-generation. While this will see the closures of some coal power plants, this will not be accompanied by construction of alternative power plants over the first half of the forecast period. Instead, this will translate by a decline in total net generation over the coming years, given the country had a surplus margin. Similarly, while our Power team expects a small increase in gas-fired generation, this will be mostly due to the 841MW Pocerady CCGT power plant operating on a more permanent basis, instead of being used as a back-up source as previously. This will not provide a significant boost to energy and utilities infrastructure investment over the coming years.

      The sector however will witness an acceleration over the second half of the forecast period. This is thanks to a recent change in the Czech power policy. The Czech Republic had been in long-standing opposition to EU energy policy. However, in late 2020, the government announced that it was ready to back the EU’s proposed new 2030 target to cut greenhouse gas emissions, provided EU regulation does not constrain its nuclear ambitions. In January 2022, the new coalition government led by Prime Minister Petr Fiala announced plans to phase out coal-fired thermal power by 2033. The passing of the Low Carbon Act in September 2021, coming into effect in 2022, also sets out support for the expansion of nuclear power, including provisions for the purchase of nuclear power over a 30-year time period. This increases the role likely to be played by the nuclear sector over the coming decade, and confirms the likeliness of a large nuclear power plant in the pipeline, which will boost the power and utilities infrastructure growth.

      As such, we now expect an acceleration in the Czech energy and utilities infrastructure sub-sector over the second half of the forecast period due to the new 1.2GW unit at Dukovany Nuclear Power Plant, with construction starting in the final years of the forecast period. This will help boost power plant and transmission grid infrastructure industry growth over the 2027-2031 period.

      We also note that the Czech Republic's recent alignment with the EU's central policy of decarbonisation will lead to investment diversification and increased power sector spending. By extension, we also highlight strong upside risk from the renewables energy projects sectors owing to the recent European Commission (EC) approval of the EUR10bn package for the EU's Central and Eastern European markets to support their respective energy transitions.

      Coal Usage To Decline Slightly

      The Czech Republic has a fully diversified power sector, with coal, gas, oil, nuclear, hydro and renewables all making up part of its generation mix. However, coal is the dominant fuel source, which we estimate accounted for 42% of total power generation in 2021 (amounting to 80.0% of thermal generation). For the time being, our Power team expects coal to maintain its majority share of the energy mix until the end of our forecast period in 2031. However, the team forecasts stronger growth in gas-fired generation, as it expects the 841MW Pocerady CCGT power plant to operate on a more permanent basis once some of the ageing nuclear fleet is decommissioned.

      As a result, coal-fired power's share of thermal power output will decline slightly to just above 71% by 2031, accounting for about 39% of total electricity generation. While coal will continue to remain a key component of Czech power generation over the coming years, the government intends to diversify away from coal power in an attempt to meet EU emissions targets. A new coalition government took power in December 2021 and in January 2022 Prime Minister Petr Fiala committed to plans to complete the phase-out of coal-fired thermal power by 2033. These decarbonisation efforts will be focused on building new nuclear capacity. New coal generation projects are thus unlikely to materialise over the coming years.

      Nuclear Plans To Boost Long-Term Power Infrastructure Growth

      Nuclear power plays a key role in the Czech Republic's power mix, with 34.1% of total generation estimated to have been sourced from nuclear power generation in 2021. The Czech Republic currently has six reactors (four at the Dukovany power plant, with a total capacity of 1,876MW, and two at the Temelín facility, with a combined capacity of 2,054MW). With the ageing domestic capacity scheduled to come offline over the coming two decades and EU regulations pressuring the country to lessen its dependence on coal, nuclear originally appeared to be the preferred method to fill any future power gap.

      However, the Czech Republic's nuclear programme has long been a topic of contention as current market dynamics - and lower wholesale electricity prices since the economic slowdown - have thrown the economic feasibility of nuclear projects into question. This argument came to the fore in 2013, when former prime minister Petr Necas and former finance minister Miroslav Kalousek had a well-publicised spat over the expansion of the Temelín nuclear facility. At the end of 2017, the Czech industry minister stated that state-owned utility CEZ would not be able to invest in new nuclear capacity on its own and would need government assistance, otherwise it would be too expensive.

      The Temelín expansion project, which has an estimated cost of more than USD10.0bn, is a clear example of the controversies that surround the country's nuclear programme. The expansion was first slated for 2004 - with an initial estimate of the project entering construction in 2013 and commissioning in 2020. The tender process was finally launched by CEZ for the construction of two new reactor units at the Temelín plant in July 2012. However, problems in the selection of a winner out of the bidding companies, disagreements with the government over power purchase agreements and widespread doubts over the profitability of such a plant derailed the project's time frame. The advancement of this project remains uncertain, and we have not factored this into our forecasts.

      However, over 2020 and 2021, movement on the EU front seems to have reversed the outlook for another nuclear power project in the Czech Republic. At the end of October 2020, the EC announced that it would not block efforts by member markets of the EU to provide state aid for new nuclear power plants. This follows the Czech government's statement that for it to support the higher targets for emission reduction by the EU, the EC needed to approve its plans for state aid to planned nuclear power plants.

      Following this announcement, in March 2021 the Czech State Office for Nuclear Safety issued a permit for the construction of a new reactor at the Dukovany nuclear power plant, enabling Elektrárna Dukovany II to open a tender for the EUR6.0bn (USD7.2bn) project. In June 2021, CEZ Group started the security screening process for the installation of a USD6bn reactor unit at the Dukovany nuclear plant. The bidders under screening include France-based EDF, US-based Westinghouse and Korea Hydro & Nuclear Power. In early 2022, Elektrárna Dukovany II launched the tender for the construction of the nuclear power plant, reinforcing the outlook for the project. The Ministry of Industry and Trade of Czech Republic conducted safety assessments and approved the three bidders - Westinghouse, EDF and KHNP - to participate in the tender process. The deadline to submit final bids is by the end of November 2022. The contracts are due to be finalised in 2024 with installation of the new unit expected to start in 2029 and testing operation likely to begin in 2036.

      We, therefore, expect this nuclear project to begin boosting the power infrastructure sector industry growth over the last years of our forecast period, rising from a forecast of 1.6% real growth in 2026 to a forecast of 8.5% in 2031.

      Strong Upside Risk From Renewables Projects

      The current regulatory uncertainty and elevated costs, as a result of a decrease in feed-in tariffs, coupled with the fact that the Czech power market is already saturated, mean that our Power team does not forecast any major increases in renewable electricity generation in the short term. The Czech Republic's renewables industry has been plagued by regulatory instability over the past few years, as the government's commitment to the renewables sector has waned. Issues when integrating the influx of renewable capacity into the grid and concerns over elevated electricity costs and the country's regional competitiveness have prompted the government to make cuts to the state subsidies for renewable energy.

      However, our Power team has recently highlighted increasing upside risk to their forecasts for the renewables sector after statements from the Czech environment minister in April 2019 that it will be necessary to reduce the country's reliance on fossil fuel power output and increasing the share of renewable sources. This was confirmed in January 2021, when the Czech government announced a CZK150bn (USD7bn) modernisation fund to reduce its emissions and reduce its reliance on coal-fired power. Renewable technologies will reportedly receive the largest share of the fund at 38.7%. In addition, in September 2021 the Czech parliament approved a law (the Low Carbon Act) setting out the framework for support for new renewables development and establishing a rate of return for existing solar facilities which it hopes will reassure potential investors in the sector.

      As a result, our Power team increased their growth forecasts for non-hydroelectric renewables capacity in the country to 1.9% y-o-y, from a previous forecast of virtually stagnant growth. There is a strong upside risk for further growth. With the government's aim of building new nuclear capacity (which is only planned for completion by 2036 at the earliest), there is scope for more non-hydropower renewables capacity to take over from the decrease in coal-fired power. In addition, efforts to divest from Russian energy imports in the context of the invasion of Ukraine in early 2022 and the support of EU funding could also expand the project pipeline.

      We also note strong upside risk to renewables projects from the EU's Just Transition Fund and the Next Generation EU recovery fund, a component of the EU European Green Deal that seeks to mitigate the disruption to regions facing the greatest challenges in the bloc’s route towards carbon neutrality. Over the lifetime of the EU multiannual financial framework for 2021 to 2027, the Czech Republic is in line to receive EUR35.7bn of EU funds, including EUR7.0bn in grants under the Recovery and Resilience Facility. The Czech Republic's recovery and resilience plan was approved by the EC in July 2021. According to the country's approved plan, 42% of its total allocation will be dedicated to measures that support climate objectives. The plan includes investments in renewable energy, the modernisation of district heating distribution networks, the replacement of coal-fired boilers and improving the energy efficiency of residential and public buildings. This provides, in addition to other domestic policy changes regarding renewables and coal, strong upside to the currently moderate forecast for growth in Czech Republic's non-hydropower renewables capacity over the next 10 years.

      Oil And Gas Pipeline To Outperform In The Long Term

      With a struggling power sector, the oil and gas pipeline infrastructure sub-sector has been performing slightly better, in line with the European strategy of improving connectivity and energy supply security. As part of the EU's Trans-European Networks for Energy and affiliated Projects of Common Interest, the Czech Republic will contribute to the North-South electricity interconnections in Central Eastern and South Eastern Europe as well as the Southern gas corridor pipeline for the transmission of gas from the Caspian Basin, Central Asia, the Middle East and the Eastern Mediterranean basin to the EU. The oil supply connections in Central-Western Europe will also include pipeline infrastructure in the Czech Republic. Given the renewed tensions in Europe regarding dependence on Russian hydrocarbons as a result of the Russian invasion of Ukraine, we expect projects such as these will continue over the forecast period.

      Czech Republic - Major Energy & Utilities Infrastructure Projects
      Project Name Sector Sub Sector Project Risk Metric Value (USDmn) Size Unit Companies Status Construction End
      Dukovany Nuclear Power Station Expansion, Vysocina Power Plants & Grids Nuclear 4.5 7,200 2,040 MW CEZ A.S.[Sponsor]{Czech Republic},

      Government of Czech Republic

      [Sponsor]{Czech Republic}
      At planning stage 2036
      Temelin Nuclear Power Plant Expansion Project, Jihocesky Power Plants & Grids Nuclear 4.5 1,000 na na CEZ A.S.[Operator]

      {Czech Republic}
      At planning stage 2035
      Vernerov - Vitkov Transmission Line, Karlovarsky Power Plants & Grids Grid Infrastructure 5.4 na 400 kV CEPS A.S.[Sponsor]

      {Czech Republic},

      European Union

      [Financier]{Belgium}
      At planning stage 2023
      Vitkov (Karlovarsky) - Prestice (Plzensky) Transmission Line Power Plants & Grids Grid Infrastructure 7.8 na 400 kV CEPS A.S.[Sponsor]

      {Czech Republic},

      European Union[Financier]{Belgium}
      Under construction 2021
      Vitkov Substation, Karlovarsky Power Plants & Grids Grid Infrastructure 5.4 na 110 kV CEPS A.S.[Sponsor]

      {Czech Republic}
      At planning stage 2023
      Note: Top five projects by value. na = not available. Project Risk Metric score out of 10; higher score = lower risk. Source: Fitch Solutions Key Projects Database
      This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings.

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