• Czech Coal Group
• Czech Coal a.s.
• Vršanská uhelná a.s.
• Litvínovská uhelná a.s.
• Dceřiné společnosti

1.3 Electricity Trade in Czech Coal a.s.

The main focuses of Czech Coal a.s. include the sale of the brown coal extracted in the area of Most, the purchase and sale of electricity, investment in the traditional and renewable electricity resources and the provision of related services. Czech Coal a.s. is one of the largest energy commodity traders in the Czech Republic.

Czech Coal a.s. began trading in electricity in 2002, as early as was legally possible after the opening of the electricity market in the Czech Republic.

Czech Coal a.s., as a part of a major energy Group, possesses a very strong pool of knowledge and capital to support its own electricity sales. At first, Czech Coal a.s. primarily focused on electricity wholesaling. Large volumes of electricity were sold mainly on international markets during 2002-2004. As the market is gradually opening also for end customers, the Company has also focused on this market segment. At present it is one of the major independent electricity suppliers in the wholesale part of the market.

1.3.1 Electricity Trade in the Czech Republic

The development of the Czech electricity market was very dynamic in 2008. The prices of electricity traded on the Prague Energy Exchange (PXE) showed unprecedented volatility. Fluctuations of up to EUR 45/MWh were recorded during the year. This unexpected situation led to a substantial change in the approach to, and method of, wholesale electricity purchasing. For many electricity consumers, this change in electricity trading has given an entirely new aspect to the organisation of electricity purchasing.

Through the PXE, the products being offered can be bought or sold for a price which is affected by market fluctuations in much the same way as, for example, the prices of shares. Speculative capital is a significant factor that influenced the volatility of electricity price in 2008.

PXE reached a high liquidity, exceeding that of other organised trading platforms, and by the end of 2008 it sold more than 32 TWh of electricity, worth EUR 2,241 million, to the traders. Comparison of the changes in electricity prices on various liquid markets in Europe shows that electricity price in the Czech Republic follows the European trend. The EEX exchange in Leipzig, Germany, is the key price-setting market. ČEZ, the dominant Czech electricity supplier, modifies its prices according to the EEX price pattern.

1.3.2 Czech Coal’s Trading on the PXE Exchange in 2008

Czech Coal a.s. coped very successfully with the changes through which the PXE passed in 2008. Czech Coal a.s. became one of the successful major players on the energy exchange, where it used with advantage its previous experience and knowledge of the energy market. Transactions covering a significant portion of the electricity demand of Czech Coal’s end customers for the years 2009 and 2010 were made through the PXE in 2008. The remaining part was purchased by Czech Coal a.s. on other relevant markets or through bilateral deals. The purchases on the PXE were well-timed to eliminate many of the issues that normally arise from the volatility of prices. For Czech Coal’s business partners, electricity was purchased at good prices and a significant portion of the supply transactions were concluded for the year 2009. On the whole, about 550 GWh of electricity was purchased on the PXE in 2008 and as much as 1,748 GWh was traded.
The base load prices for the individual years (prices for 2008 to 2012) developed as shown in the graph below.

1.3.3 Electricity Pricing

Energy prices for the end customers are formed on the market. The price varies by supplier and the services offered by him. The end customer can influence this part of the price by selecting a supplier offering good services and agreeing on supply conditions with the supplier. It is important for the customer that he may also choose the length of the agreement, which ranges from one to three years. Energy price varies during the year as well as during the day:

• During the year there are seasonal differences between winter and summer
• During the day there are differences between the peak and off-peak periods
• Variations depending on the date of electricity purchase by the trader
• Variations depending on the date on which the end customer signs a supply agreement

Traders are not responsible for the growth of energy prices on the Czech market over the recent period: this growth is due to the rapidly increasing prices required by generators on the wholesale market. For example, in 2003 the price of the supply of energy at a constant wattage of 1 MW for the entire year (the yearly base load) was about CZK 735 /MWh, whereas the maximum price that has already been reached on the PXE in 2009 is about 200% higher: CZK 2,500/MWh. In addition, there are a number of other factors that also contribute to the growth of prices, including, for example, emission allowances, environmental tax, regulated prices at which energy must be purchased from generators that use renewable resources. In the following five years the price of energy will undoubtedly continue to grow due to the newly prepared EU legislation concerning, for example, renewable resources, or due to the fact that the existing emission allowance allocation system will be replaced by auctions. The growth of the regulated prices indicated below for the individual distributors – ČEZ, E.ON and PRE – is another significant factor behind the increases in the price for the end consumer. The regulated prices of electricity cannot be changed by negotiation in the given year, as they are set by the independent regulator (Energy Regulatory Office, ERÚ). The prices are valid throughout the year in the area served by the given distributor in the Czech Republic.

The regulated prices include in particular the following:

• The charge for distribution, i.e. the use of networks/the grid
• The charge for the booked capacity (monthly, annual)
• The charge for system services
• Premium on the price for electricity from renewable resources

Prices of Electricity from Conventional and Renewable Resources

Comparison of the prices of electricity generated from conventional resources, which are determined by the market, with the prices of electricity generated from renewable resources, which are fixed at a level at which the distributor must purchase electricity from the generators that use renewable resources.

The prices of energy from renewable resources are subsequently reflected in regulated prices. For 2009, this premium is CZK 52.18/MWh for each end customer. (In 2008 it was CZK 40.75/MWh. Renewable resources led to a 28% increase in the premium year on year). Renewable resources are expected to continue being supported even more and, consequently, this premium to be paid by end customers will grow significantly in the future.

1.3.4 Governmental Authorities’ Supervision over Electricity Trade and Distribution

Electricity trade and distribution, including pricing, is strictly supervised by governmental authorities. These authorities protect the interests of end customers, create rules and supervise compliance with those rules
by all market players, particularly by distributors. Governmental authorities overseeing the electricity market and their major activities from the viewpoint of the end customer:

Energy Regulatory Office (ERÚ) – www.eru.cz

• Sets regulated prices for electricity transmission and distribution and the related services
• Sets other regulated prices and charges (e.g., for co-generation, renewable resources, reactive power, fee to the electricity market operator, etc.)
• Sets out and amends the rules governing the electricity market
• Provides for equal conditions for end customers irrespective of the part of the country where they are connected

State Energy Inspection (ČR – SEI) – www.cr-sei.cz

• Supervises compliance with laws and regulations in the electricity industry
• Resolves disputes between distributors and customers.
• Imposes fines based on its own findings. The outcomes of ČR-SEI’s supervisory activities take the form of penalising measures taken against entities that breach laws and regulations. However, in the first place these outcomes enable governmental authorities to analyse objectively the behaviour of all players in the areas of generation, distribution and energy consumption and, being agencies of the State, to take effective measures

Electricity market operator – www.ote-cr.cz

• Identifies the actual values of electricity supply and consumption for the electricity market players
• Evaluates the differences (imbalances) between (on the one hand) the contracted electricity supplies by entities subject to clearing or by registered market participants and (on the other hand) the actually metered electricity supplies and takes for the registered market participants
• Ensures the clearing and settlement of the imbalances between the entities that are subject to clearing

1.3.5 The Position of the End Customer on the Liberalised Electricity Market

1. The end customer has the right to enter into an electricity supply contract with any supplier in the Czech Republic.
2. Electricity distribution and transmission is a government-regulated activity. The transmission and distribution price is regulated and is the same for all entities in the Czech Republic at each voltage level. As required by law, electricity supply to the end customer is provided by the distributor serving the respective area. The distributor is obliged to transport electricity to the customer from any supplier under the same conditions. By law, the distributor is not allowed to prefer or discriminate against any supplier or customer. In other words, the conditions of electricity transmission and distribution and the fees for these services must always be the same for the customer, regardless of who supplies the electricity to him.
3. Traders purchase electricity either straight from independent generators or through the electricity exchange. Only accredited traders have access to the electricity exchange. The Exchange plays a key role as a price-setting platform in the Czech Republic. Transborder supply is another source. A trader who is able to optimise electricity purchasing on the domestic and foreign markets during the course of time enjoys an advantage.
4. No power plant supplies electricity straight to the end customers. Electricity is always supplied through traders. There is no need for an electricity supplier to own a power plant, just as there is no need for a fuel filling station operator to own an oil well.

1.3.6 Rules to Choose a Good Electricity Supplier

• A good supplier has a licence for electricity trading (licences are issued by the Energy Regulatory Office to applicants if the statutory conditions are met);
• A good supplier is a helpful partner for its customers, helping them and guiding them to choose the best moment to buy electricity in the volatile price environment and also to choose the best electricity purchase system, advantageous for the end customer;
• A good supplier is able to buy electricity on both the domestic and international electricity exchanges – the exchange is a competitive environment where only financially strong companies can survive;
• A good supplier is able to diversify its electricity sources (importing electricity from abroad, trading on the exchange, running a foreign subsidiary) to optimise the purchases and supplies of electricity for end customers;
• A good supplier is strong financially, able to buy and offer large electricity volumes, and so guarantee electricity supply to a large number of customers;
• A good supplier has a reliable legal form: a public limited company (a.s.), which generally enjoys better credibility, rather than a private limited company (s.r.o.).

1.3.7 Electricity Trading – Offer to Customers

The market situation is changing rapidly, resulting in new conditions in the system and organisation of electricity purchasing. Seeking the best ways of serving its customers in this situation, Czech Coal a.s. wishes to be a good partner, offering a wide range of services rather than being just an electricity supplier.

Czech Coal a.s. offers the following:

• Tailoring the offer to the customer’s specific needs and conditions;
• A strong pool of resources and extensive experience on both domestic and international markets;
• Customer-focused culture of selling and service provision – a trader rather than a call centre is in contact with each end customer throughout the year;
• Evaluation of the customer’s load profile;
• We will propose the optimum tariff structure and assist in finding an appropriate time of electricity purchase;
• Application of novel approaches, required by the development of prices on the PXE energy exchange;
• Optimisation of costs and diversification of the risk of wrong purchase timing.

It was learned from the PXE energy exchange transactions in 2008 that most of the customers who used the approaches that had been successful in the past paid a much higher price at the end of the day than those who used other methods of purchasing.

Czech Coal a.s. is able to optimise customers’ electricity purchase patterns and tailor them to customers’ specific conditions. It offers a number of purchase options, which cover the entire range of end consumer clientele and are tailored to each consumer’s purchase volume and load profile. Czech Coal a.s. also provides the administrative side of supplier change for new customers and helps them enter into connection agreement and obtain the registered market participant number.

1.3.8 Electricity Trading Results in 2008 and Outlook for 2009

In 2008, the electricity market was primarily affected by the substantial change of conditions on the wholesale market in the Czech Republic. The extreme volatility of prices on the PXE Energy Exchange was the most important change, which transformed the previous conditions of electricity purchase and sale. The effect of these price changes was fully reflected in the campaign for 2009 and 2010.

Sale to end customers was a very significant business activity of Czech Coal a.s. in 2008. The end customer sales team was strengthened by new employees. The purchase and successful implementation of a new customer software system was a significant move towards enhancement of customer service quality. The application of new practices of electricity purchasing for end customers was the key factor that contributed to the increase in the number of Czech Coal’s end customers, and it also made it possible to offer customers more products, in addition to what had been offered in the previous years, including, for example, the spreading of the load profile into several parts, combined with good timing to purchase each of the load profile parts. The optimised purchasing, a strongly motivated sales team and a customer-focused campaign led to an extension of the Company’s customer portfolio by more than sixty Czech industrial firms.

• In financial terms, Czech Coal’s electricity sales reached a turnover of about CZK 2.133 billion (not including emission allowances and derivatives), placing Czech Coal a.s. among the top five traders on the market – next to the owners of distribution networks.
• Czech Coal a.s. has a branch in Slovakia. Its name is Czech Coal SK s.r.o. and its registered office is in Bratislava. Czech Coal SK s.r.o. was established under Czech Coal’s Central European expansion programme.

For 2009, Czech Coal a.s. plans to continue strengthening its customer-focused sales team for its existing and new clients. Electricity trading is expected to grow 10% annually. The economy is languishing and in this situation our priority is to maintain a sound financial management system in supplying electricity to end customers. We assess our customers according to their credit risk and we prefer slower growth of sales volume rather than rushing into ill-considered volume expansion. Although Czech Coal’s resources are strong, we do not want to run unnecessary risks, which have got many independent suppliers into trouble. Czech Coal a.s. relies on its competitive advantages arising from its strong financial position, professional care of its customers and flexible servicing. It helps clients save time and money.

Electricity Trading Outlook with Respect to Economic Recession and Financial Crisis

The current course of the economic recession will be critical for the further development of electricity supply to end customers. Most of the customers have reduced their electricity consumption and changed their electricity consumption structure. It is important that the trader is able to offer customers new effective ways to cut their energy costs. On the other hand, of course, customers will have to change their decision-making patterns. Using the approaches that had been successful in the past may result in buying electricity at a much higher price than when new methods of electricity purchasing are used.