Sev.en Energy, the second largest energy company in Czechia, has been closely analyzing the situation in which two fundamental changes to the European energy industry have intersected. Initially, the Green Deal agreement on a low-carbon future ruled that coal has to be phased out more swiftly. This amplified the role of natural gas as an alternative fossil fuel to complement and balance out the downsides of renewables. Natural gas prices skyrocketed in the fall of last year, and we can only guess what role Russia's clandestine preparations for war with Ukraine played in this increase. And then the war came along.
Sev.en Energy has a large team tasked with the strategic analysis of the current, as well as long-term, energy situation. Its most prominent and well-known member is Pavel Farkač, analyst and development and transformation project manager at Sev.en Energy.
To what extent is the EU, particularly Czechia, dependent on Russian gas?
The dependence between the European Union and Russia concerning natural gas trade (let's not forget oil as well) is mutual. It is a relationship that cannot be disrupted for at least the upcoming two years without causing considerable damage to both parties. Both sides are connected via gas and oil pipelines, for which the upfront investments have long been paid off. That is why these pipelines represent the cheapest, as well as the most technically reliable, form of transporting these fuels. Until recently, this was reflected in the price, which was by far the lowest on the market. It resulted in an almost paradoxical situation where some countries underestimated the basic tenet that energy sources should be diversified, and so have the three fundamental components: security, accessibility, and a low environmental impact. Look at Germany for instance, it is currently unable to deal with its dependence on Russian gas right away. What's more, Russian gas was supposed to be the pivotal, so-called transitive pillar leading to the general decarbonization of the energy industry.
As for Czechia, things are a bit more complicated because gas plays a minuscule role when it comes to producing electricity. The key sources of electric power here are nuclear power plants and coal. But then we have heating where the situation is entirely different. We assumed that gas would be the dominant fuel for the foreseeable future, there were even subsidies from the government for families to swap out their old coal-fired boilers for new gas ones. The Czech heating network also has one specific aspect, the so-called central heat sources, which usually supply big blocks of tenement buildings. Coal is the predominant source of fuel for these heating facilities. Under the general pressure of decarbonization coming from all sides, the vast majority of them were supposed to switch to gas by 2030. And then, we have heating for businesses or factories where they use it for production, such as glassmaking. There is no readily available alternative there. The owner of our group, Pavel Tykač, recently said in an interview that an immediate halting of gas import would be fatal to Czechia and could result in social unrest. And I have to concur. After all, even now, when we have available gas, just at higher and higher prices, many Czech households are already struggling to cope economically.
What are Czechia's options then, what could replace gas?
Speaking about gas, we must secure the necessary transportation capacity from other countries outside of Russia. If it were gas from the Netherlands or Norway, we could work with the pipelines currently in place. But these countries are at the limit of their exporting capacity and are likely to have even less going forward, particularly in the case of the Netherlands. Then there is liquefied gas – LNG – be it from the USA, Qatar, Africa, or central Asia. However, the north of Europe has very limited capacity when it comes to port storage facilities for liquefied gas. On top of that, we also need sufficient capacity in the pipelines. It will take several years to build up these capacities. And even then, the price will be much higher than for gas supplied in pipelines straight from the deposit sites.
Besides gas, we are looking at renewables, nuclear, and coal, which we have decided to abandon as part of the Green Deal. Let me start at the end – I am certain that the formerly unthinkable ideas about reinstating, or at least extending the duration of, the use of coal are something we have to put back on the table. The war in Ukraine has shown unequivocally that coal and coal-fired power plants are absolutely indispensable for Czechia right now. Coal makes up for 40% of power production and we really have no way of replacing it for at least the next 10 years. I am not saying this because Sev.en Energy extracts coal and uses it to produce energy. I am saying this because there seems to be no way to ensure energy security for our country in the foreseeable future unless we want to build gas-fired power plants and in so doing increase our dependence on gas supplied from other countries.
You mentioned nuclear, how about that for a solution?
We have just initiated a tender for an additional block at the Dukovany nuclear plant, construction should start in 2029. Looking at past experience with nuclear plant construction in France, Britain, or Finland, it is clear that even if things went off without a hitch, the new nuclear blocks will start producing energy in roughly the year 2040. That is a solution for the future, not the present. Besides that, it is a solution that simply phases out the current nuclear sources in need of replacement, not one that adds new output.
And renewables, meaning wind and solar plants?
Czechia will certainly develop these sources and I am expecting a rapid growth in their share of total power production, which is a good thing. But we have certain natural limits when it comes to the mass deployment of renewables. First, unlike Great Britain, Germany, or the Netherlands, Czechia does not have the benefit of installing wind farms in the sea. The wind just does not blow as much here, there are very few windy areas. The solar situation is similar. We are no Spain or southern Italy, far be it Algeria or Morocco. The sunlight we get is sporadic. Second, the way renewables produce power is unstable. When the wind does not blow and the sun does not shine, they produce nothing at all. While they do put out a surplus in the summer, their production lacks in the winter and there need to be alternatives, the so-called controllable sources, powered predominantly by fossil fuels. Personally, I like to call this “two-tone energy.”
How do we get out of this predicament? Thermonuclear fusion and small modular reactors have been thrown around a lot. The so-called green hydrogen has been popular lately, it should be produced from the surplus output of renewables and then used instead of oil or gas. After all, your company is planning to invest in gigantic energy-storing batteries...
Speaking about green hydrogen, the technology currently used for its electrolytic production, which is only 33% effective, is not the breakthrough we are looking for and will likely never be here in Europe. The EU simply does not have the weather conditions to produce the kind of renewable output that would cover energy usage and also create enough hydrogen stores to be used in day- or week-long periods of no wind or sunlight. Besides, hydrogen is supposed to be the predominant decarbonization solution for freight transport, which means enormous amounts of it will be required. Thermonuclear fusion, envisioned to be a sort of “perpetuum mobile” for the energy industry, has been in the talks for decades and we still cannot say whether we will be able to contain and use it safely. Small modular reactors have still not been commercialized, despite the technology being readily available. And batteries? Yes, we are working on them in the UK, and Elon Musk's Tesla has built some of the largest battery facilities in the world in Australia and California. Despite these projects being gargantuan in size, the actual energy consumption they can make up for is currently in the order of hours, not more.
Does that mean that the European Green Deal and the decarbonization of the economy are in danger?
I do not think that at all. European governments and elites have invested so much energy and political capital into the decarbonization initiative that it cannot be halted. I simply hope that the decarbonization efforts will be a bit more rational and that more technologies labelled “transitory” will be allowed to provide constant energy and heat production until such a time as we achieve the “low-carbon economy.” Which also means admitting the indispensable role that coal currently has and postponing the decommissioning of coal-fired power plants as well as the stable nuclear ones. This could of course endanger the goal of a 55% decrease in CO2 emissions by 2030 in comparison to 1990. As I said previously, we currently have no “low-carbon” solution for the winter months in Europe, nor do we know of one. Following the Russia-Ukraine conflict, the Green Deal should primarily bring a compromise in terms of energy, meaning the admission that all existing energy sources are compatible. Europe has come up with many tools to decarbonize the energy industry already (such as emission fees). But in its frantic decarbonization efforts, it has put two dimensions of the aforementioned trilemma on the backburner, those being energy accessibility and energy security. These energy attributes will certainly come to the forefront now, which will be a good thing for the Europeans. And let's hope that the energy industry will once again start respecting the principles of physics it was built on, for a while at least.
Ultimately, a more rational version of the Green Deal could give Europeans a balanced energy system that is managed by applying reasonable amounts of pressure on decarbonization, while keeping in mind the current level of technological development and advances.
Sev.en Energy works in a wide array of energy-related areas. It has mining and refining operations producing the highest-quality brown coal in Europe, it produces electric energy and heat from coal and gas, has stakes in power plants in Great Britain and Australia, supplies coking coal to the USA, and has a successful European commodities trading desk.
The group extracts over 10 million tons of brown and coking coal in Czechia and the US per year and is able to produce 4502 GWh of power and heat in two of its Czech power plants and two heating plants. It employs over 3000 people in Czechia and has traded a total of 45.6 TWh of electricity on the European market in 2020.
As of 2019, Sev.en Energy owns a 50 percent share in InterGen N.V., an international energy producer with four gas power plants in Great Britain and two state-of-the-art coal power plants in Australia. This February, InterGen was granted official consent in Britain to build a 640 MWh battery storage project next to its Coryton combined-cycle-gas plant. It will be the largest battery storage of its kind in Great Britain, with the capacity to power 300 thousand households for an entire year. These acquisitions – including a full buyout of the US-based Blackhawk Mining, a major producer of metallurgical coal – are now being handled by the Sev.en Global Investments branch of Sev.en group.
Pavel Farkač likes to use the term "two-tone energy." What does he mean by it? "Simply put, electricity will be expensive in the winter when fossil sources need to be used, meaning gas and coal, due to higher prices of gas and emission allowances – market prices will likely hike up to €100 per megawatt-hour," he explains. "Conversely, in the summer, when surplus production from renewable sources will be readily available, prices will range in tens of euros or even go into the negative. The issue is that nobody can tell ahead of time what the ratio between these two periods will be. We have had winters during which the winds blew and there was ample sunlight but we have also had ones where solar farms were covered in fog or snow and wind turbines stood stagnant. Meanwhile, electricity today is sold based on long-term contracts, and these conditions make the prices very difficult to predict. And the current energy market is a roller-coaster, there is no reliable way to tell how much the prices of electricity can diverge between day and night or summer and wintertime."
“I am certain that the formerly unthinkable ideas about reinstating, or at least extending the duration of, the use of coal are something we have to put back on the table,” says Pavel Farkač.