CEZ held a conference on the virtual power plant auction (400MW; i.e. 3% of total CEZ's capacity), confirmed the expectation for electricity price growth in the CEE region. Based on indications from the recent strengthening of electricity prices in Germany (EUR56/MWh) and the result of electricity auctions in Slovakia and Hungary showing a 16% y/y growth to EUR42.5/MWh and EUR47.5MWh respectively, we believe that the result of the virtual power plant auction should show electricity price increase in the higher end of expected 10-15% y/y range. The virtual power plant result, to be announced on August 2, is a good indication for the auction of the base load wholesale price for 2007 held shortly afterwards (towards the end of August).
Our view:
The indications suggests that our assumption of a gradual increase of domestic electricity prices to EUR45/MWh by 2010 may prove to be rather conservative and we now see the convergence to EUR50/MWh by 2010 at latest as more probably with steeper growth rates in 2007 with more gradual growth in the following years. The impact on our valuation is certainly positive partially offset by the higher interest rate environment. To determine to exact impact on the valuation, we will wait until the official electricity price is announced. We believe that the growth rate of electricity price in 2007 could exceed some the market's expectation taking the mid point of the expected range of 12.5% y/y (10-15% y/y) triggering more upgrades.