Czech Green-Power Plan Dimmed by Tax Battle

By SEAN CARNEY
PRAGUE—As global leaders assess the results of the United Nations summit on tackling global warming in the Mexican resort city of Cancun, which ended Friday, a political and legal mess is unfolding following the Czech Republic's efforts to reduce its carbon footprint.

From January 2011, this central European country of 10 million will subsidize zero-emission, photovoltaic electricity production at any solar installation that is connected to the country's grid by the end of this year.

The move is fully in line with the European Union's pledge to reduce greenhouse gas emissions 20% by 2020 from 1990 levels. The build-up of solar-generation capacity should also reduce Czech dependence on fossil fuels—more than 50% of the country's power is currently generated by coal. This lofty, eco-friendly goal comes, however, at a cost to Czech consumers.

To spur investment in zero-emission solar power production, which last year accounted for less than 1% of Czech electricity generation, a 2005 law created generous subsidies. These now threaten, however, to increase electricity bills by as much as 20%, a shock to consumers, especially since the market price of electricity has fallen by around 20% over the past two years.

There are also fears the price rises, which apply to all users, commercial as well as domestic, will damp Czech economic growth.

Under the subsidy regime, solar power producers are to get 12,400 koruna (€494.4) per megawatt hour on top of the market price for electricity sold to the grid. Czech prices currently are around the European average of €50 per megawatt hour. Electricity distributors are obliged for the next 20 years to purchase all power generated through photovoltaic installations at prices including the subsidy. Those distributors say they have no choice but to pass along the higher prices. The extra cost of buying in solar power will be met by electrical power consumers via "environmental surcharges" on their bills.

To limit the price shock, the government decided to create a new windfall tax of 26% on solar profits, which will be imposed for three years. Revenue from the tax will be used to ameliorate the price rises, holding them to 5% a year and giving consumers time to adjust to the increases.

But investors in solar power are outraged by the government's proposed tax, saying it is retroactive and therefore illegal. If enacted as planned on Jan. 1, the new tax would come after investments had been made, power plants built and payment terms with banks settled.

"We definitely have to take action. We'll have to provide more equity into the project, which creates a large problem; we'll have to subsidize it from our other businesses and resources," said Michal Gartner, chairman of Photon Energy AS.

Photon Energy was founded in 2008 by Czech and international investors and has since invested almost 1.3 billion koruna ($68.4 million) to build 15 megawatts of photovoltaic capacity in the country, making it a midsize player in the sector.

"We need to do everything we can to make sure we're adequately compensated," says Mr. Gartner, adding that the company, a member of the European Photovoltaic Industry Association, will probably take legal action together with others in the field.

The local Czech Photovoltaic Association is leading the legal rebuttal and said challenges will come via complaints to the Czech Constitutional Court and the European Union in Brussels, as well as via international arbitration.

"To retroactively change things is reckless and irresponsible behavior from any government," Mr. Gartner says. "It damages shareholders and it's a very, very bad signal being sent to investors of all types."

Martin Kocourek, Czech trade minister, last Wednesday played down the risk of legal challenges and said governments can set taxes as needed. If the tax bill isn't passed into law and power prices rise, both Czech companies and foreign entities operating here will lose their competitiveness, he said.

"[Politicians] should focus on keeping the Czech economy competitive" and not be overly concerned with theoretical legal issues, Mr. Kocourek said.

The Czech problem has been exacerbated by the fall in the price of new photovoltaic equipment. The size of the subsidy was based on equipment costs in 2008 but since that time they have fallen by almost 30%. The government subsidy, however, remains unchanged.

Steady subsidies coupled with lower costs have attracted much more interest than politicians had foreseen, and installed photovoltaic capacity in the Czech Republic mushroomed 15 times since the beginning of 2009 as investors rush into the segment.

The Czech subsidy is even higher than Spain's €450 per megawatt hour subsidy implemented in 2008, which at the time was the world's most generous offer. Weighed down by fiscal debt and contracting economic growth, the Spanish government has since slashed its subsidies and solar farms authorized to generate power in the fourth quarter will get a subsidy of €259 per megawatt hour.

At the start of last year, the Czech Republic had a mere 65.7 megawatts of installed photovoltaic capacity, but by the end of this year when the window for lush subsidies closes, installed capacity will be 1,600 megawatts, the Czech energy regulator said.

The solar boom contributed significantly to Czech third-quarter gross domestic product growth of 2.8%, as fixed capital investments driven by the solar build-up soared by 14.4%.

Write to Sean Carney at sean.carney@dowjones.com