We can produce electricity, it will be worse with gas, says Ladislav Sladký

We know that energy prices rose before the war, but there is still speculation about the causes. There was talk of a surge in demand for economic recovery. But the economy is slowing down, definitely Czech. Gas and oil are flowing, although doubts and fears are in place. So what is the deciding factor now?

In my opinion, prices are most affected by the situation in Ukraine or the Russian invasion, the least filled natural gas storage facilities in Europe, the uncertainty of gas supplies from Russia, the lack of infrastructure sufficient for the gas supply of other regions and the prices of other energy products. The energy market is jittery, any negative news will drive up its prices.

Last year there was a lot of talk about the surprisingly rapid recovery…

I don’t think it’s related to such a significant price increase. Of course, there has been a recovery, but in addition to the growth in consumption, there is an effort to green it, which is linked to the end of a number of non-environmental resources that cannot be replaced as quickly as we would like.

In addition, last year, when I say it, it did not blow so much. Gas-fired power plants, which partly used gas that could be injected, were to replace wind farms. Gazprom did not fill its leased tanks in Europe and instead filled tanks in Russia. At that time, it was clear that there could be a shortage of gas in the winter and that prices increased enormously.

Fortunately, the winter was not so cold, so the storage tanks were not completely exhausted, and the gas supply from Russia to Europe has not yet been interrupted. But the nervousness of a possible termination has sharply increased the prices of gas and electricity. The allowances have also influenced electricity prices to some extent, but the gas supply issues are, in my opinion, the most important.

Does the current situation teach us anything? Something we could reflect on our behavior relatively soon? Whether as a State, company or individual?

Europe has understood the need to get rid of the dependence on the energy resources of politically unstable countries and, if possible, to become self-sufficient. However, this will take several years, until then strong price fluctuations are to be expected. I assume that the current high energy prices will encourage companies and individuals to save, which should be supported by an appropriate subsidy policy.

At home, I can lower my temperature or cook more efficiently. And finally, move on to solar panels. But what about companies and institutions?

Energy will become increasingly important in budgets. Thus, even measures that might have seemed unprofitable will begin to bear fruit. We will certainly see an effort on the part of the industry to put in place more economical methods of production. Households will be called upon more and more to consume as little as possible for heating, that is to say, to reduce heat loss, to insulate even more, to replace more windows, to have more people to install recovery and to use a heat pump, etc In the countryside, I expect people to go back to burning wood.

If it will be tolerated.

Europe wants to be a leader in green behavior. However, countries as wealthy as Germany can afford it. But if electricity and gas in the Czech Republic and Germany cost about the same, then of course energy prices are a bigger issue for us on low incomes.

In this context, what is the point of installing a gas boiler when gas is now scarce? Specifically, there are enough gas reserves in the world. But the problem is with its transport to Europe, the necessary infrastructure is lacking, so now we are not sure of a stable supply.

You talked about comparable prices. But it has to do with the common market. As if electricity from Bohemia, Moravia and Silesia went on the stock exchange and thus became more expensive.

Of course, the market may lead some producers to higher margins. But we are indeed in a situation where the rise in input prices is at the origin of the rise in prices. The price of a single CO2 quota is no longer five euros, but eighty and was already over ninety euros, and this price is reflected in the price of electricity.

By the way, the Covid has shown us how dependent we are on imports from Asia, whether it’s crisps, medicines or many other goods or semi-finished products. Today, Russia is showing us how dependent we are on Russian imports of gas and energy. In short, more and more inputs are not local and have global value.

You trade in electricity and gas. The situation is more tense with gas. Do you see it that way in the future?

We are able to generate electricity in sufficient quantities in the Czech Republic and there are more possibilities to generate electricity. However, we mainly import natural gas and it is difficult to replace short-term natural gas supplies, which largely go to Europe from Russia, so the situation is and will be more tense for gas. It will take some time to replace the natural gas used to produce heat and electricity with another energy, or to restore a stable supply.

What do you say to the request from the EU and the Czech Republic that traders significantly increase gas reserves for the next season?

In general, I think energy security is the responsibility of the state, not the traders. The EU has decided which energy sources are preferred and, in addition to renewables, has prioritized gas for electricity generation over other fuels without guaranteeing its safe and sufficient supply.

German politicians decided to shut down nuclear power plants and replace them with renewable energy and gas, pushed for the construction of Nord Stream 2 and warned against dependence on Russian gas, and it turns out that these decisions were incorrect to say the least.

I agree that the storage tanks need to be replenished before the next heating season, but here I see the role of the EU and the state in ensuring that, and if traders want them to take care of that, they should compensate them.

Shortly after the outbreak of war, voices emerged that meant the end of the Green Deal in its current form. But the Union, and especially Germany, do not want to hear about it. What is your opinion?

Germany is economically very strong, there is political support for the Green Deal, so it will continue to promote it in a modified form. It will be difficult for the Czech Republic to fulfill its obligations if nuclear resources are not included in ecological resources.

Do you see a future in greater participation in renewal?

Yes, the development of new technologies and political support will lead to a greater share of renewable energy. At the same time, however, it is necessary to address the storage and transfer of energy from a place conducive to production to places of consumption. A higher share of renewables will also put more pressure on energy consumption and storage management. Here I see room for hydrogen and e-mobility in the future.

Renewables are definitely the right way to go, as long as they work both environmentally and economically. But has anyone said enough to say that it will be about rebalancing the networks? That it’s not just about rooftop solar panels, but also about energy storage, and that many of these needs don’t yet have a widely applicable solution?

We are now witnessing a boom in small solar power plants for households in the Czech Republic, the effort of households to be as independent as possible from other suppliers and to eliminate fluctuations in energy prices. The path towards this decentralization will be a major challenge for distribution network operators, and in particular transmission network operators, who ensure the balance between production and consumption.

In my opinion, the distribution costs will be adjusted, where the fixed component will have a higher share for the possibility of taking electricity. There will also be greater management of consumption and production on the retail side, as well as the construction and operation of large batteries that will be used to maintain balance.

Are distributors ready for this?

The installation of photovoltaic power plants on houses is certainly a step in the right direction. But it will lead to the aforementioned reassessment of the pricing policy of distribution tariffs. Because the distributor must reserve and maintain capacities for these customers with their own resources, which will draw less on the network for a large part of the year. But the grid capacity for them will still need to be maintained so that they can draw power from the grid at a time when there is a lack of sunlight. The change in distribution tariffs was in play years ago, but for populist reasons it did not pass.

And when it comes to balancing the grid and storing electricity?

Of course, the accumulation must be solved. In the Czech Republic, for example, it works in water tanks and something in heating plants, where part of the heat can be placed in storage tanks. Batteries are evolving and few are still installed. From my point of view, it will be interesting to see sufficiently developed electromobility and people to be able to store energy in electric batteries.

What do you think the energy mix will look like in terms of resources in a few, maybe five, ten, twenty years?

This will be a mix of stable emission-free sources such as nuclear power plants, whether in the form of large power plants or small modular reactors, as well as renewables and storage. Hydrogen, which will be used for the storage of energy from renewable sources, mobility and the production of heat and electricity, will be of great importance. In the future, hydrogen will completely replace natural gas in the production of electricity and heat.

What does the current situation mean for you as a trader?

For energy suppliers, such high prices are incredibly expensive. Because in times when energy and gas cost five times more than before, you have completely different purchase costs. We also perceive the risk that our customers will be able to pay for the energy.

So insolvency?

Yes. We are concerned that if these prices last for a long time, the number of unpaid claims will increase. Therefore, it is certainly necessary for the state to take care of the situation of the poorest. I am not for zone support, but for targeted yes.

Ladislav Sladki

Ladislav Sladký is a board member of EP ENERGY TRADING in the position of Business Development. In the past he worked, for example, at J&T Investment Advisors or Jihomoravská energetika. He graduated from the Faculty of Electrical Engineering at Brno University of Technology.

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