CEZ to Cut Coal From Energy Mix on Tougher Standards, CFO Says

By Douglas Lytle

Dec. 5 (Bloomberg) -- CEZ AS, the Czech Republic’s biggest power producer, will seek to eliminate so-called black coal from its energy mix by 2020 as European Union emission standards tighten, the utility’s chief financial officer said.

CEZ will expand use of natural gas and renewable resources to generate energy from cleaner sources to help make up for a decline in earnings if the EU makes producers pay for their emissions credits starting in 2013, Martin Novak said in an interview yesterday.

The European Commission wants European power plants, which now get the grants largely for free, to pay for emissions permits as of 2013. Countries in central Europe have resisted the change, saying it will lead to increased electricity prices and hamper economic growth.

“If they go for an aggressive limitation, which means there is an auction starting in January of 2013, and if we do nothing, then there will be a decrease in our earnings -- in Ebitda,” Novak said at his office in Prague. Ebitda is earnings before interest, taxes, depreciation and amortization.

CEZ seeks to cut reliance on so-called black coal by increasing production from lignite-fired plants, wind and gas, he said. The company plans to boost output from its Czech nuclear power plants at Temelin and Dukovany by increasing efficiency.

Acquisitions

It would continue to acquire companies outside the EU where emission standards are not as stringent, Novak, 37, said, noting that all of CEZ’s investments would still be necessary just to renew its portfolio of generators in the next decade.

“We are taking measures to be as least affected, or as little as we can,” said Novak, who took up his position in January. “So that there is only a little slide” in Ebitda “in 2013 versus 2012 but starting in 2014 and further we should be getting back on a growth trend.”

The global financial crisis has prompted some countries to question whether the tougher laws should be implemented so quickly, he said.

“The first six months of this year everybody believed there would be a strict CO2 emission-reduction scheme, which means 100% auctioning,” he said. “These days there’s a lot of discussion about a gradual one.”

France has proposed a compromise that would allow a three- year exemption until 2016 from full auctioning of permits for power plants in coal-dependent nations like Poland.

Polish Doubts

Poland, which gets 95 percent of its electricity from coal, insists on its own proposal under which the number of free allowances to utilities would be based on efficiency standards, or “benchmarks,” with innovative power plants being entitled to more than higher-polluting competitors.

CEZ, which is the seventh-largest European power producer by market capitalization, has already started making investments outside the EU in countries such as Turkey and Albania. More than 8.5 megawatts of its installed capacity of 14.29 megawatts is now generated from black or brown coal or lignite.

Investments in wind parks and other renewable power sources will also help support CEZ’s earnings, he said. CEZ bought the 600 megawatt Fantanele & Cogealac wind farm in Romania this year and expects the project to begin delivering power in 2011.

To contact the reporter on this story: Douglas Lytle in Prague at dlytle@bloomberg.net.