Within the framework of the discussion of the amendment to Act No. 458/2000 Coll., on the conditions of business and the exercise of state administration in the energy sectors and on the amendment of certain acts (the Energy Act), known as LEX RES III, on 22 October 2024 and 23 October 2024, the MP Mgr. Ivan Adamec[1] proposed several intersecting written amendments[2] (hereinafter collectively referred to as the “Proposal“) with an expected effective date as early as 1 January 2025. This Proposal affects the entire energy sector, but it specifically changes the status of electricity generation plants from renewable energy sources (“RES“) put into operation between 1 January 2006 and 31 December 2015, as it also contains a comprehensive proposal for changes to be made to Act No 165/2012 Coll. on Supported Energy Sources (“RES Act“).

We note that a large number of other amendments to LEX RES III were submitted during the legislative process, which target other areas, not always directly related to the sector, but we leave these aside for the moment and will deal with them in our next News Alerts.

First of all, the Proposal changes the range within which the internal rate of return (“IRR“) of investments in RES can vary. Until now, RES generators were entitled to support if the IRR of their investment was in the range of 8.4% – 10.6% for the duration of the right to support, whereas for all RES sectors this is currently 8.4% according to the government regulation[3]. However, according to the amendment, the IRR of investments for the purpose of verifying the adequacy of support for electricity from RES is to be reduced and differentiated for each RES sector within the following limits:

It is further clarified that the IRR of investments is not assessed for the duration of the aid, but for the lifetime of the electricity generation plant.

However, the most significant impacts can be expected for solar power plants (hereinafter referred to as “PV plants“) with an aggregate installed capacity of 30 kW put into operation from 1 January 2009 to 31 December 2010, as an individual “self-regulation” system is newly introduced for these PV plants. By 15 December of each year, each producer with such a PV plant will be obliged to notify the market operator “whether or not it will be entitled to receive support for the electricity produced in the reviewed plant in the immediately following calendar year“. Nevertheless, for the first time, this notification will have to be submitted by the last day of the fourth calendar month following the date of entry into force of the amendment to the RES Act, for the part of the calendar year 2025 following the date of entry into force of the amendment to the RES Act. If this report is not submitted properly and on time, the right to support electricity produced in such PV power plant in the calendar year to which the notification relates will not arise at all.

If, according to the manufacturer’s findings (of December 15^th), its IRR of investment over the lifetime of the PV plant exceeds the value set by government regulation:

1. the support for the electricity generated by the PV plant shall be reduced from the following calendar year for the remaining lifetime of the PV plant in accordance with the producer’s application, irrespective of any previous decision granting entitlement to a higher level of support; or
2. the right to electricity support will not arise at all in the following calendar year unless the producer applies for a reduction of support to such an extent that the resulting IRR of investments related to its PV plant does not exceed the IRR determined for such source (i.e. it is a kind of penalty for the producer having incorrectly determined the IRR of its investments).

The correct setting of transfer prices should also be part of this assessment of the IRR of investments. If the price agreed between related parties differs from the “market” price, the price will be adjusted by the difference found for the purposes of assessing compliance with the aid with the established IRR when calculating the IRR of the investment. In doing so, the so-called ‘transfer pricing’ rules under the provisions of the Income Tax Act shall apply mutatis mutandis. This also applies to other conditions affecting the amount of the IRR of the investment which have been negotiated between the producer under examination and its related person or imposed on them and which differ from those which would have been negotiated between independent persons.

Furthermore, the support of electricity produced during the period of negative hourly electricity price is to be newly excluded for RES put into operation before 1 January 2016. The existing exemption from the application of Section 38(2) of the RES Act[4] provided by Act No. 382/2021 Coll. for electricity generating plants put into operation before 31 December 2015 is to be abolished with effect from 1 January 2025. This information does not seem staggering, but according to statistics from recent years, the number of hours of negative electricity price increases exponentially every year (this year it was almost 50 days in total) and some RES may lose up to months of support.

 It is then a question to what extent such legislative intervention will be in compliance with the constitutional ban on retroactivity of law, since the amount of revenues from production changes substantially compared to what could have been expected on the basis of the “guarantee” in Act No.180/2005 Coll. at the time of commissioning the plant. Such a legislative change can also have a “choking effect”, which is inadmissible according to the case law of the Constitutional Court, if RES operators, especially PV plants, go bankrupt as a result of the above stated changes or their legitimately expected profit will be “expropriated”. However, it is not only legitimate expectations of the investors that are at stake. It can be assumed that such changes in the ranks of RES would have a significant impact also on banking entities that have participated through loans in investments in the development of RES and may ultimately be “aggrieved investors” worthy of protection under our Constitution as well as under relevant European regulations[5]. In addition, foreign investors, of which there are many investors in PV plants, can also invoke the protection of their investments in accordance with international agreements[6], although there has recently been a clear tendency to question their activities in the EU. However, the recent successful case of the “solar tax” arbitration suggests the opposite.

 The draft LEX RES III was discussed by the Economic Committee on 7.11.2024. According to the available information, the members of the Committee did not take a recommending or rejecting position on this proposal. Thus, there is still no certainty for the electricity producers or the banking sector.

 If approved in the third reading in the Chamber of Deputies, the proposal of LEX RES III will go to the Senate, where it may or may not undergo further amendments.

 We will, of course, keep you informed of the latest developments in the legislative process.

[1] The proposal was submitted at the instigation of the Ministry of Finance and the Ministry of Industry and Trade, given the advanced stage of the legislative process, as a parliamentary proposal.

[2] Online: https://www.psp.cz/sqw/historie.sqw?o=9&T=656

[3] Government Decree No. 300/2022 Coll. on the determination of the values of the internal rate of return on investment for individual types of renewable energy sources

[4] which provides that the entitlement to support does not arise for electricity generated at a time of negative hourly electricity price

[5] in particular Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources, as well as the Energy Charter Treaty or bilateral investment protection agreements

[6] Energy Charter Treaty or bilateral intestate agreement on investment protection.

…

This material is for general information on current topics only, it is not advice. It does not take into account any special circumstances, financial situations or special requirements of the addressees. Recipients should therefore always seek appropriate professional services for the information provided. Notwithstanding the careful compilation of this material, bpv Braun Partners, its partners, associates or co-operating solicitors and tax advisers cannot guarantee the accuracy or completeness of the information contained herein and accepts no responsibility for acting or refraining from acting on the basis of the information contained in this material.