Caspian Energy (CE): What risks are affecting the Czech economy today?
Karel Havlíček, Deputy Prime Minister, Minister of Industry, Trade and Transport of the Czech Republic: The forecasts for our economy are at this time positive. We expect that the growth of Czech real GDP will be more than 3.2 % for the year 2021 and more than 4 % for the year 2022. Of course, the base effect stemming from production shutdowns in spring 2020 also played a role.
The main negative factor for the Czech Republic and other economies is the epidemic situation. One problem could be closing factories and the other could be a negative impact on global supply chains (this will be probably just temporary). But we expect that (due to ongoing vaccination of the population against COVID-19 and the high number of people who have contracted the disease) COVID-19 won´t be a big problem with macroeconomic consequences.
There were structural imbalances in the labor market before COVID-19. There was a relatively big mismatch between demand and supply of jobs. And the first available data after COVID-19 show us a similar picture.
The next risk is an overvaluation of residential property prices. But at this time, we don´t observe a major increase in the volume of non-performing loans.
The automotive industry is crucial for the Czech economy, its procyclicality could be a risk. The other risks are structural changes (emission standards are gradually tightened or the transition to alternative propulsion will require huge investments). But I am optimistic and I am thinking about it mainly like about opportunities.
CE: Which sectors of the economy have retained their investment attractiveness after the pandemic?
Karel Havlíček: Investment attractiveness remains in construction, especially in investment flats and houses. It doesn’t make me happy. I think that (and this is also the view by the central bank of the Czech Republic) there are discrepancies between market and “real” price and we should be circumspect about it (adopting more strict conditions for mortgages, the rise of interest rates, and most importantly, the rise of construction of new flats).
The European Union (and some other countries) wants to be a leader in pure energy sources. I am speaking about plans or initiatives like a Green deal or „carbon neutrality target“.
I believe that especially countries like the Czech Republic where the industry and automotive is vital should be active in this topic. For us, the change must be gradual on one hand, and on the other hand, we should invest in these “green” technologies. In our Ministry, the terms like “hydrogen” or decarbonization are big topics and for example, the government of the Czech Republic approved The Czech Republic´s Hydrogen Strategy in July 2021.
I am sure that COVID-19 showed us how important digitalization is. People were scared and it was a big advantage that some services or contacts (with doctors or local authorities/revenue authority) could be online.
Another advantage of digitalization was selling goods/services online. Of course, selling some products online could be problematic or nearly impossible, but for much more products it could be (a partial) way. For example, for companies that distribute foods the “COVID-19 period” was a “golden age”.
If I should say something concrete in digitalization it will be blockchain. It is really surprising how technology for “nearly anonymous payments” (I am talking about its use in Bitcoin) could be used for cheaper maritime transport, sharing digital keys of cars or cybernetic security in the energy sector and many others use.
CE: How did high gas prices impact the Czech industry? What kind of “safety cushion” does the EU have in case of high energy prices and low inventory levels in storage facilities?
Karel Havlíček: The gas market in the Czech Republic has been fully liberalized since 2007, and most large industrial customers choose their supplier for a year or more. If they had a fixed price, the current high market gas prices would not have an immediate impact on them. Unless they have a fixed price, and if, for example, their prices are linked to some important energy exchanges instead, this can have a negative impact on their costs. In general, however, greater problems may arise for industrial customers, if the current high levels of gas prices last for a longer period of time. In spite of that, I believe that the gas market will soon be normally working and prices will stabilize. However, as a state, we see a problem especially in current high energy prices for households, which are usually not fixed for a long time. That is why we are preparing certain measures to prevent a significant proportion of households from falling into the energy poverty.
When it comes to high energy prices within the European Union, trading in electricity, gas and other commodities takes place at the market level and interfering with a functioning market would be relatively difficult. Nevertheless, if this situation lasts for a long time, I can imagine certain possible solutions, whether by reducing energy taxes or finding suitable tools of social support. Currently, possible measures have also started to be discussed at the European level.
As for a possible gas shortage, I believe that this situation will not be a real threat. However, should it occur, the European Union have procedures to put in place under the Regulation 2017/1938 on ensuring security of gas supply. The Czech Republic has described these procedures for possible crisis situation in the gas industry in even more detail in its legislation, however, it has never had to use them during its existence. I believe that this will also be the case in the future. The flexibility of the gas transmission system, enabling the supply from various sources, and a sufficient storage capacity of gas storage facilities help us in this. Storage tanks located on the territory of the Czech Republic, which have a capacity of more than 40% of the total annual domestic gas consumption, are currently, i.e. before the start of the heating season, filled more than from ¾.
CE: Is it possible to completely abandon the use of fossil fuels?
Karel Havlíček: A complete abandonment of the use of fossil fuels, i.e. the decarbonization, is a long-term process, which is demanding both in technological and economic terms. Due to the very wide use of fossil fuels in all areas, including the energy, industry, transport, agriculture or local heating, the gradual shift towards other fuels and energies will be very difficult and costly while the ability to completely replace fossil fuels with some alternative will largely depend also on the progress in research and development of new technologies.
In energy, the solution is a technologically and economically balanced combination of stable emission-free, for example, nuclear sources together with decentralized renewable sources. In transport, it is a transition to electromobility and non-fossil fuels, such as hydrogen or synthetic fuels.
In order to move away from the use of fossil fuels, it is necessary to work on the use of new technologies such as small modular reactors, new technologies in battery storage and, in general, new technologies for energy storage and a wider use of the hydrogen.
CE: How effective is the operation of the railway transport as an environmentally friendly, convenient and safe means of transportation for the Czech Republic? Can it be called environmentally friendly according to the European standards? Is it planned to have it expanded in a multi-vector manner toward the European ports?
Karel Havlíček: The Czech Republic is one of the countries with the highest density of railway lines in the world, the railway has its irreplaceable place in our history. Thanks to that, I consider it safe. We are investing significantly in its security and not only in the reconstruction of railway crossings (between 2020 and 2022 another 500 crossings will be secured), but we are also implementing the ETCS system, which will safely watch over the driver. The plan for the implementation of ETCS on all lines in the Czech Republic was passed by the government in September. The Czech Republic will invest 47 billion crowns in it in the next 10 years and ETCS system will be operated on 4,800 km of lines.
The rail transport is the fastest growing segment of passenger transport, mostly thanks to the modernization of railway corridors, and thus has the best prospects of becoming an emission-free mode of transport. The advantage of the Czech Republic is that our citizens are used to using public transport. In the case of urban transport, the Czech Republic is a European leader in this field. Public transport needs to have both sufficient quality and capacity. That is why we are now actively preparing the construction of high-speed lines in the Czech Republic.
In the case of freight transport, we support the renewal and development of railway sidings and the development of combined transport terminals via calls from European financial programs.
CE: What do you see as a threat to the European economy in climate change? Do you think the measures taken are adequate?
Karel Havlíček: The transition to the green energy in response to the climate change will be challenging both in technological and economic terms, and it is therefore necessary to find a combination of financial resources and tools for its implementation. An insufficient financial security or the risk of spreading and deepening the energy poverty could be a threat. Various funds are being prepared both at the European and the national level, and the use of various financial instruments and support schemes is being discussed so that companies and citizens can cope with this transition.
The second potential threat is the issue of technology unavailability or unpreparedness for new technologies. At the same time, however, new technologies and practices related to the climate protection and responding to the climate change are a major challenge for the industry, science and research.
Decentralization, aggregation, smart grids, energy storage, new types of energy sources and new types of fuels and propulsion - these are the challenges facing both the European and our economy. It is necessary to work intensively on this issue and make the most of its potential.
CE: When will we be able to declare about the Czech Republic that we are not only an assembly plant, but primarily innovators?
Karel Havlíček: The Czech Republic is clearly gradually becoming an innovator. One tool to achieve the transition from assembly plants to promoting quality investment is, for example, a system of investment incentives. The support is already focused on projects with a higher added value, not assembly plants. Moreover, a proposal to introduce into the system of investment incentives a link with the National Research and Innovation Strategy for Smart Specialization of the Czech Republic (National RIS3 Strategy), which will lead to targeting projects that have high potential for creating a long-term competitive advantage of the Czech Republic based on knowledge and innovation use is currently being prepared.
We see investments as absolutely crucial in the effort to shift the Czech economy to an economy based on the production of goods and services with a higher added value. Therefore, even during the global pandemic, capital expenditures in the state budget grew significantly. Their year-on-year increase in 2020 was 24.1 %, the planned year-on-year growth for 2021 is almost 9 %, while, given the size of the state budget deficit, the expected growth for 2022 will be less than 1 %.
CE: Does the Czech Republic plan to use Caspian gas?
Karel Havlíček: The Czech Republic, as a state, does not buy any gas. The gas market is fully liberalized here and there are more than 70 traders, which buy gas so that they are competitive in the market, where the customer can choose any supplier. If the gas from the Caspian region fits into their portfolio appropriately, they will certainly be happy to use it. So far, however, this is only possible in the form of swap operations, but I assume that in the future, after the completion of all planned branches of the Southern Gas Corridor, it will be possible to physically transport it to the gas market in the Czech Republic.
Thank you for the interview
