Partial equilibrium model of Czech energy sector – scenarios of future development

What is the optimal strategy for the Czech energy sector: Stay by brown coal dominance, build new nuclear power reactors or increase the share of natural gas and renewables? Will it be profitable to build two new nuclear reactors and to open new brown mines with parallel investments into current and new brown coal power and CHP plants at the same time? We try to find the answer to these highly topical questions. A public tender process for contractors to build two new nuclear reactors was cancelled in its final stage in April 2014. But there is a plan to open new tender in 2016. At the same time, public and political discussion about opening new brown coal mines is back in the game. This is all occurring in a situation when power market prices are at their long term minimum. Monthly average baseload power prices are in a downward trend since 2012 August and since the second quarter of 2013 they have been fluctuating slightly above the level of 30 €/MW. Neither increasingly important role of renewables in the power mixes of many European countries nor the low carbon prices bring incentives for significant rise of the power price in the near future. In the Central and Eastern Europe and in the Czech Republic as well, only a few partial equilibrium or CGE models with special focus on energy sector have been applied so far (Rečka & Ščasný, 2013, Ščasný, et al., 2009), therefore we construct partial equilibrium, Czech energy model in TIMES model generator (Filar & Haurie, 2010) taking into account externalities from emitting classical air pollutants and CO2 during heat and power generation. We quantify the externalities using so called ExternE method (see for instance Weinzettel et al., 2012) and incorporate their monetary values into the model objective function. We assess several policy and market development scenarios to bring more light into the strategic decision making about new energy sources in the Czech Republic. We use TIMES model generator (Filar & Haurie, 2010) to construct partial equilibrium model of Czech energy sector with detail technological structure. We quantify the externalities from emitting classical air pollutants and CO2 during heat and power generation using the so called ExternE method (see for instance Weinzettel et al., 2012) and incorporate them into the model objective function. This approach allows us to internalise the externalities from heat and power generation. The model includes the interconnection with and the import and export of electricity is an endogenous variable depending on power spot market price. In our scenarios, we focus on remaining brown coal reserves in currently operating mines and brown coal reserves available only after opening new coalmines that has been prohibited by a government resolution since 1991. Allowing or not allowing construction of two new nuclear reactors is second important dimension for our scenarios (It is more or less political decision because the government owns the majority in the largest power company in the Czech Republic that is supposed to build the new nuclear reactors.). We take into account the new 2030 framework for climate and energy policies agreed on 23 October 2014 by the EU leaders. Last set of important scenario parameters includes subsidy for renewable energy sources, fuels and carbon prices development. We compare our baseline scenario assuming current and ongoing environmental regulation and no restriction on new nuclear power plants with scenarios assuming introduction of proposed environmental regulation; relaxing the prohibition of opening new brown coalmines; and continuation of new renewable energy sources subsidizing. A special scenario reacts on a possible threat of the natural gas deliveries from Russia via Ukraine. We provide a sensitivity analysis on European power, fuels and carbon prices for all scenarios.The preliminary results show that: 1) The price of CO2 allowances is the main factor for decision about installation of new nuclear power plant. From €20 per ton of CO2 it is reasonable to build new nuclear power plant 2) It is not necessary to open new brown coal mines to satisfy the Czech’s power demand even without the construction of new nuclear reactors. However, it will be highly recommended to introduce regulatory measures on the usage of the brown coal from the operating brown coal mines to avoid destabilization of district heating sector if no new coal mines open; 3) Future advanced renewable technologies (mainly wind and biomass) will be competitive without any submissions. The final results will provide projection of emissions and optimal fuel mix and technology portfolio under the assumptions defined in each scenario. Based on these results and sensitivity analysis, we will provide a policy recommendation for optimal energy policy of the Czech Republic.