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Home Archive July 2010 Issue Issue Content Lessons from Prague: How the Czech Republic Has Enhanced Its Energy Security

Lessons from Prague: How the Czech Republic Has Enhanced Its Energy Security

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With regard to energy security in the European Union, it has become common knowledge that there are still two Europes.  The security of energy is dividing the continent broadly along what used to be the Iron Curtain. The Western part has both effective and poorly functioning energy markets, but generally a fairly well balanced energy mix.  In contrast, the Eastern part is almost the opposite; the region has accumulated and continues to confront many challenges.  While Europe still has a rather fragmented energy market, the situation is much worse in the Eastern EU because it lacks both the technical preconditions (the interconnectors) as well as institutional capacity to create a functional market (lack of robust regulation for nurturing, not stifling the market).  Nonetheless, the real predicament of Eastern-Central Europe is the asymmetric dependence on the imports of primary energy sources.  Consequently, importing natural gas is relatively more expensive for Eastern-Central Europe customers in comparison to their West European neighbors, especially Germany.

Despite these divisions, there exists in Eastern-Central Europe a country that has made a giant leap forward and has broken away from its former Soviet legacy.  That particular country was equally dependent on a single source for energy imports for all of its imported uranium, oil and gas in the early transition period, yet has since managed to successfully diversify its energy imports.  This prodigal country, the Czech Republic, has been the only landlocked country of Central and Eastern Europe to establish an effectively functioning energy market.  The choices made in the early transition period by the Czech government have provided the country with higher energy security, which in return has enabled the government to exercise greater political and economic liberty in its policies as compared to some of its neighbors.

Energy security is important because it is a necessary condition for state sovereignty, without which the independence of statehood is void of its meaning.  It is also a necessary precondition (necessary, but not an entirely sufficient condition) for sustainable economic growth, the inflow of foreign direct investment, economic stability and international competitiveness, which are conditions sine qua non for the welfare of its citizens.

The Czech government has benefited from allowing itself the liberty to choose its alliances and alignment policies freely, but it could have engaged in more radical political and economic transformation and transition of its society and economy.  As a result, Czech industry has enjoyed relatively lower prices for natural gas than industries in comparable neighboring countries.  For example, between 1997-2006, neighboring countries imported natural gas at prices cheaper than in the Czech Republic only three times on an annual basis (2001-2003 Slovakia and in 2003 Hungary). The extent to which the Czech Republic has enjoyed higher inflows of foreign direct investment (FDI) cannot be directly attributed to higher energy security.  However, in light of the January 2009 gas crisis and the disproportional impact of the crisis on regional economies and industries, especially in the Slovak Republic, it is possible to hypothesize that energy security did have some positive effect.

It is important to understand the landscape of energy security in Central Europe, specifically in the context of how the Czech Republic operates, to understand why it is considered a model for success.  The first aspect is a question of fuel mix, which is the predictable access to desired types of energy sources in desired quantities.  The legacy of fuel mix within the region, despite small changes mostly due to energy efficiency and transformation of economies, has been persistent as is illustrated by the Gross Inland Consumption Charts.

 

What is clearly visible from these charts, besides a high level of persistent Soviet legacy in the fuel mix, is a division of countries in the region into two groups. The two largest nominal consumers in the region, the Czech Republic and Poland, use mostly solid fuels (coal).  In contrast,  Hungary uses mostly imported gas, and Slovakia uses a combination of imported gas, coal and a relatively high share of nuclear power generation.

The final aspect of energy security is predictable, transparent and affordable prices.  Since gas is thought to be a fuel without a real competitive market largely due to its link to fixed infrastructure, especially in this region, we use the measure of the price for gas to illustrate the point.  As the charts illustrate, industrial customers in the Czech Republic have enjoyed the lowest price for gas in the region for most of the period under measurement.

 

Finally, since there are indices of energy security and energy policy that collapse many dimensions into a single measurement, we may wish to present these as well.  Although these indices are widely questioned (and we subscribe to many of these critical points), they do illustrate a simplified picture of energy security.  Despite the problems inherent in any type of simplification, it is a good tool to grasp complex issues as long as there is a touch with reality and no major omissions are made.  We present two measures, Le Coq and Paltseva’s Risky External Energy Supply (REES) Index of Energy (in)security, which, besides being a variation of Herfindahl–Hirschman methodology, offers disaggregated measure for different fuels.

A somewhat different measure is offered by Röller, Delgado, and Friederiszick, who instead focus on different aspects of energy policy.  With regard to Security of Supply, their index combines two aspects that are weighted equally: (1) a rather primitive measure of energy dependence (energy net imports divided by gross energy consumption, which leaves the index completely insensitive to distribution and sources of market power), and (2) the adequacy of power generation.  This uncritically emphasizes the presence of (presently cheap) thermal coal generation as a source of energy security, assuming these capacities are here to stay without major new investments.  Nonetheless, there is an implicit assumption made that there will be no carbon trading or complying with the EU accession requirements, which exhibits itself in the case of Poland, which is presented as the country with highest security of supply in Europe due to an (unrealistic) high share of adequate generation across the whole index.

Regardless of the technical questions surrounding the indices, it is clear that currently the Czech Republic is an unrivaled front-runner of energy security in Central Eastern Europe. What further supports this view is geography.  The fact that the Czech Republic is a landlocked country (unlike Poland), and thus has limited and expensive choices, further illustrates that even the difficult and expensive choices can be made and implemented under the right circumstances.  What has allowed the Czech Republic, against all odds, to diversify its energy sources and increase its energy security?

How the Czechs did it?
The Czech Republic, similar to its neighbors, used to import most of its energy from the east.  As a former member of COMECON (The Council for Mutual Economic Assistance), they also faced the predicament of having unidirectional east-to-west supply corridors, similar to the legacy systems of its neighbors.  This insulated the country from the energy crises in the 1970s but lead to a much higher energy intensity compared to their Western competitors. The need for political realignment, which emerged in the early 1990s, came with  the political and economic disarray in Russia, the largest energy supplier to the region.   A dire predicament of asymmetric energy dependence on the Russian Federation was left to countries across Central and Eastern Europe. 

The concern of Czech politicians over this predicament was well known, yet reflection of this concern from the public’s standpoint had not been measured early on.  Today a clear measure of public concern over Russia as an energy threat is visible from the PEW survey (below), which illustrates the perception of Russia as threat in the spring of 2007 (before the gas crisis) and in the fall of 2009 (after the last and most severe gas row between Russia and Ukraine).   What is worth mentioning is the relatively higher perception of a threat stemming from energy dependency on Russia in Czech Republic before the crisis, in comparison to its neighbors (except for Poland).

Perceptions of Russia as a Threat 2007

This picture somewhat changed after the gas crisis in 2009, when at least Hungarian respondents became more concerned about the gas dependency of their country on Russia.  Slovakia was one of the worst hit countries by the gas stoppage, and they were caught up with same concerns as the Czechs.  All other neighbors, including Bulgaria, the country most severely hit by the crisis in 2009, increased their concern over Russia only marginally.

Perceptiions of Russia as a Threat 2009 

 

The heightened concern over energy dependency is certainly one of the main reasons why the Czech government was able to invest into diversifying away from its single Cold War era supplier.  The longstanding desire to lessen the risk stemming from high dependency on imports of Russian oil and natural gas was also complimentary with other, broader goals of the Czech foreign policy after the fall of Communism.  The entry of the Czech Republic into NATO (1999) and the EU (2004) was perceived as a guarantee of the Czech’s geopolitical inclination to the West.  However, Czech membership in NATO and the EU (until recently) has had only an indirect effect on energy security. It was the Czech government and companies that made strategic decisions to diversify the structure of suppliers and to increase its domestic power generating capacity, including building the IKL pipeline, contracting supplies of Norwegian gas and the completion of the Temelin nuclear power plant, to name but a few examples.  The consistent implementation of the government’s strategy was surely helped by the fact that the state was the majority owner of all key energy companies at that time. 

The first strategic decision was related to oil imports. Since 1962, Czechoslovakia (and then the Czech Republic) was entirely dependent on Russian oil flowing through the Druzba pipeline with the capacity of 10 million tons per year.  To overcome this transit dependency, the Czech government decided to build an approximately 350 km long pipeline from Vohburg an der Donau (town close to the Bavarian city of Ingolstadt) in Germany to the oil supply depot in Nelahozeves for CZK 12 billion (USD 400 million).   In Vohgburg, the pipeline is connected to the Trans-Alpian Pipeline that runs from the Italian oil terminal in Trieste. The capacity of the IKL pipeline, which was finished in 1996, is approximately the same as Druzba’s, but the actual utilization had been around 30% until 2008 when the Czech Republic experienced an important and unexpected disruption of its Russian oil supplies. 

The 2008 disruption occurred at the height of negotiations regarding the installation of a US radar base in Czech Republic unwelcomed by the Russians.  Russian officials cited “technical reasons” as the driver behind the dramatic 50 percent reduction in oil supply.  The cut-off also called into question the future strategic value of the Druzba pipeline.  The uncertain future of the Druzba pipeline highlights the importance of the IKL pipeline, as in the future it may become the dominant route of oil supplies for the Czech Republic; the owner of the IKL pipeline, MERO, has been exploring possibilities of buying a share in another pipeline as well.

The second important step in the diversification of the supply of hydrocarbons to the Czech Republic was taken in 1997 when the dominant (and then state-owned) Czech company Transgas  concluded negotiations with Norwegian producer companies Statoil, Norsk Hydro and Saga Petroleum and secured a long-time contract for deliveries of 53 bcm of the natural gas over 20 years (covering approximately one quarter of Czech imports).   As the Russian-Ukrainian gas crises in 2006 and 2009 clearly demonstrated, in the complexity of energy relations in the Central and Eastern Europe, energy security should be enhanced not only by the diversification of suppliers but also by diversification of transit routes. For this reason, RWE Transgas is currently preparing the construction of a 166 km long pipeline that will connect the Czech Republic to the planned German pipeline OPAL and ultimately to the Nord Stream pipeline. This will provide not only assurance for continuous supplies to the Czech Republic in the future event of potential rerouting of gas exports from Russia away from the existing pipeline system, but it will also assure revenue from transit fees from the northeastern part of Germany to the southwestern part of Germany via the Czech Republic.

As a landlocked country, the Czech Republic cannot take a full and immediate advantage of the recent LNG supply glut, but the planned LNG terminals in Poland (Swinoujscie) and Croatia (Adria) would be welcome sources of non-Russian gas in the near future. The plans for the so-called North-South interconnector are also supported by Poland, Hungary and Slovakia (Visegrad countries), and some of them have been promised co-financing from the EU budget.

The last important decision taken in the 1990s was to continue with construction of the Temelin nuclear power plant that began construction in 1995. The original Soviet design was upgraded by Westinghouse and the government decided that only two reactors (of four originally planned) would be built. The construction took longer than expected, final costs exceeded the original budget and the first reactor started operating in 2002 (the second one a year later). In 2009, Temelin, together with the older nuclear power plant Dukovany (both owned and operated by state owned company ČEZ), accounted for a third of electricity produced in the Czech Republic.  The importance of these large and stable sources of electricity will become more and more important as neighboring countries (Germany and Poland) will probably witness a shortage in their power generating capacity in the near-term future. In 2009, ČEZ officially announced a public tender for the construction of two additional reactors for Temelin. Among the contenders are Westinghouse (US), Areva (France) and Atomstroyexport (Russia, in consortium GIDROPRESS and Czech Skoda JS ). The result of the public tender, which should be announced in 2011, could bear profound implications for Czech energy security. Should Atomstroyexport win the tender, the Czech Republic would become heavily dependent on Russian nuclear technology and know-how (currently the Czech Republic imports all its nuclear fuel from Russia) and the longtime effort to lessen the dependence on Russian energy imports would be jeopardized.

Conclusion
There are several reasons why the Czech Republic enjoys a greater degree of energy security than other Central European states. The necessary steps for assuring the energy security of the country (diversification of suppliers and transit routes, expansion of alternative, eg. nuclear power capacity) were taken long before the Russian government realized the potency of using energy as a foreign policy tool.  Second, there has generally been a higher lack of trust towards Russia as the Republic’s most important energy (resource) provider than in other states.  Because of the both higher general perceptions of Russia as threat by the electorate as well as a lower number of politicians affiliated with the former Soviet legacy regime in government,  successive administrations anticipated problems with Russia and sought a higher degree of independence than other countries in the region (especially Slovakia or Hungary).

The willingness to invest public money into building expensive new pipelines (both oil and gas), contracting (at the time) with seemingly more expensive Norwegian gas, and accepting the budgetary burden  of new nuclear power was more acceptable in a country where public support favored decreasing dependence on Russia and where the major stakeholders (state owned companies) were under Czech government control. Also, the timing of energy infrastructure privatization (especially the gas transit network to Germany’s RWE) worked in favor of enhancing energy security. While the national natural gas transit company was privatized, electricity generation (CEZ) and the oil sector (MERO) remained under government control.  This was not the case in other countries across the region.

Contributor(s) Andrej Nosko is a Researcher on energy security at the Central European University in Hungary and Petr Lang is Program Coordinator for the Prague Security Studies Institute in the Czech Republic.

 

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