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Regulation of Electricity Distribution in the Czech Republic

Having joined the European Union in 2004, the Czech Republic is a prosperous and stable economy with a
GDP per capita of roughly $26,300. Most of the country’s economy has beenprivatized, including banks and
telecommunications. With respect to its energy market, the country produces more electricity than it
actually consumes, leading to an electricity export of roughly 10 TWh per year. The main source of
electricity stems from solid fuels (about 55%). In order to reduce dependence on low-grade brown coal as
the major source of energy, nuclear power is one of the main alternatives for the energy production,
accounting for about 30% of total power needs.

The Czech Energy Regulatory office (ERO) was founded in January 2001. It is responsible for regulations in
energy market in the Czech Republic. Regarding the regulation of distribution of electricity it started to
regulate this market in January 2002. Since then, there has been three regulatory period. The first one
lasted three years with following two other each lasting five years. ERO is using revenue-cap
method as its regulation method of electricity distribution market.

Revenue cap regulation includes rewards and penalties to induce operators to achieve desired
goals. The method is to regulate the maximum allowable revenue that a company can earn. This
aims to provide the company an incentive to maximize its profits by minimizing the costs. Revenue
cap regulationallows the company to keep the cost savings achieved during the regulatory lag.
Revenue cap regulation gives incentives for efficiency improvements and technological
innovations and it can reduce the incentives for over-capitalization. In some cases it may
discourage the development of quality and limit the powerful incentive to increase the sales and
competition. It is typical for electricity distribution business.

The Czech market is been criticised by the OECD for being too concentrated and lacking
competition. The effects of this can be seen in the difference of energy prices pre- and post-tax
between Czech and its neighbouring countries. The main culprits are the national company CEZ
which controls most of the market. The company has been accused of corruption, and of being
anti-competetive, but has yet to be punished for anything.

Iva Tyburcová #1671
Petri Lehtonen #1736
Sebastian Peek #1702
Markus Eyting #1722

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Author: studentnovasbe

Master student in Nova Sbe

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