ČEZ and EPH dissolving or strengthening ties?

The exchange of energy assets between ČEZ and EPH is not surprising, but it is very significant for the Czech energy sector

Pavel Matocha | 04.08.2011
EPH boss Daniel Křetínský (right) established excellent relations with the ČEZ management and CEO Martin Roman (left) when he was still heading J&T bank

Czech state-controlled power major ČEZ announced last week it will take ownership of heat producer Energotrans from Energetický a Průmyslový Holding (EPH), which will acquire ČEZ’s 50-percent stake in German coal miner Mibrag, but the financial details of the deal were not disclosed. EPH, owned by PPF Group and J&T (40 percent each) and Daniel Křetínský (20 percent), already possessed half of Mibrag. EPH and ČEZ together bought Mibrag two years ago for just under Kč 11 billion.

But initially when EPH formed an alliance with ČEZ, it was supposed to take control of the ČEZ-owned 800 MW heat and power plant in Chvaletice, east Bohemia. So why did the deal that was announced to the public not take place? Does it signal a shift in relations between ČEZ and EPH?

Problem with Chvaletice

EPH boss Daniel Křetínský managed to establish especially good relations with ČEZ when he was the manager of J&T Bank. And as the top man at EPH, the deals he has sealed with ČEZ appear to be most advantageous for Křetínský’s company.

The Chvaletice deal was not about the actual coal-fired plant — which due to emissions permits has only four years of operation left — but deliveries of lignite by ČEZ to Chvaletice, which the power giant was to include in the deal. Who would buy a coal-fired heat and power plant without secured supplies when there is a shortage of coal on the market and prices are rising?         

In business circles there was talk that under the deal EPH was to receive a contract for lignite supplies from the ČEZ-owned mining company Severočeské doly not for four years, but for 15 years. However, the director of Severočeské doly, Jan Demjanovič, reportedly refused to sign such a contract unless he received a written order to do so from the mining company’s sole shareholder, ČEZ.

Could ČEZ commit to giving a long-term supply contract for its own coal when — because of a dispute with Pavel Tykač’s Czech Coal — the power producer is not assured of supplies for its own power plants beyond 2012? How would ČEZ explain it to its shareholders, all the more so if it sold its own coal to Křetínský cheaper than it pays for supplies from Czech Coal?

The decision by ČEZ to abandon the deal is logical and correct. At the same time, Křetínský is understandably dismayed. “He was very put out and considers he was double-crossed, but two reasons emerged why the deal couldn’t go ahead. First of all, we couldn’t agree on price, and secondly strong pressure grew for us not to sell coal outside the [ČEZ] group,” a ČEZ manager who chose to remain anonymous, told Czech Position.              

High political risk in Germany

When EPH and ČEZ together purchased Mibrag, they committed to provide priority purchase rights to the other partner in the event one of them decided to sell their half. Transporting lignite from the Mibrag coal field in Germany to the Czech Republic doesn’t make a lot of economic sense, thus ČEZ planned to build a power station next to the Mibrag mine in Saxony.

However, given the growing influence of the Greens in German politics — combined with the government’s plan to phase out all coal and nuclear power plants in the country — ČEZ concluded that the political risks were too high to go ahead with the Mibrag power plant project.

Two years ago, Germany’s RWE had to abandon plans to build a coal-fired power plant in Ensdorf in the Saarland, as did EnBW, which was preparing to build a coal power plant near Mannheim. In the last four years, over 10 coal-fired generator blocks in the planning have been abandoned. The last such case was in Datteln in the state of North Rhine-Westphalia, where E.ON had begun building a plant with a projected total cost of €1.2 billion. Some €900 million had already been spent on planning and building a 180-meter cooling tower, boiler rooms, and number of support buildings when environmentalists won a court injunction halting the construction.

Therefore, it is very possible that ČEZ’s plans for a coal-fired power plant in Profen next to the Mibrag mine would meet a similar fate.

Whether or not ČEZ stands to make a profit from selling its stake in Mibrag as the company claimed in the press release announcing the sale, the deal is very sensible not only because of the political circumstances in Germany: It is a clever move in terms of relations with EPH. When ČEZ withdrew from the deal to sell Chvaletice to EPH along with a long-term guaranteed supply of coal, Křetínský reportedly insisted that ČEZ sell EPH some other energy assets. The abandonment of the Mibrag project could be interpreted as an amicable “business divorce” between the two companies, which is to ČEZ’s advantage.

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