UPDATE ON POLISH ACT ON RENEWABLE ENERGY SOURCES (AS PER 13 MARCH 2015)

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1 UPDATE ON POLISH ACT ON RENEWABLE ENERGY SOURCES (AS PER 13 MARCH 2015) Introduction Polish energy policy has just reached a crucial point in establishing the direction of its further development in the up-coming years. Poland is always associated with its vast coal reserves, so in many circles it is thought that the National Energy System should be based on this fuel. However, Poland has been introducing new solutions which implement climate directives and aims set by the European Union, to which Poland belongs since In the recent years there has been a noticeable increase in the total maximum installed power from renewable energy sources. Now, after almost 4 years and an countless number of published drafts (literally), on 11 March 2015 the Act on Renewable Energy Sources (Act on RES) finally has been signed by the President of Poland and it is a matter of weeks before it comes into force. Its key elements concern changes in the whole renewable energy support system. ACT ON RES Provisions of the Polish law define renewable energy sources as renewable, non-fossil energy sources which include wind energy, sun radiation energy, aerothermal energy, geothermal energy, hydrothermal energy, hydropower, energy of waves, currents and sea tides, energy obtained from biomass, biogas, agricultural biogas and biofluids. In 2015 it is estimated that most of the installed power stems from wind power plants, biomass power plants and water power plants. As it has already been noted above, Poland is now in the transition period between the old support system, i.e. the system of certificates of origin, and the new auction system. Support in the present system According to the Act on RES, the system of certificates of origin will remain binding until 31 December This means that it may be used for installations which start to produce energy until 31 December Support provided by certificates of origin, which are subject to trade in the Polish Power Exchange (Towarowej Giełdzie Energii - TGE S.A.), will remain valid for no longer than 15 years from the date of commencement of production, but no longer than until 31 December Any entities, whose installations have been launched before the new support system has comes into force, will be able to voluntarily resign from the support in the form of certificates of origin and choose the auction system. 1

2 New support system The new system stipulated in the Act on RES is based on contracts of differences; it is the so-called auction model. This system will be obligatory for installations launched after 1 January The main element of this support system consists in auctions announced and conducted by the President of the Energy Regulatory Office. Such auctions are to be held at least once a year, separately for installations with the total installed power up to 1 MW and above 1 MW. Separate auctions would also be held for installations launched before 1 January 2016 which choose to adopt the new system. It is important that at least 25% of the amount of electricity covered with auction system should be produced in small installations i.e. installations with the power up to 1 MW. Auctions will be conducted in electronic form via an internet auction platform. The auction criterion will be the price for 1 MWh of electricity produced in 15 years. The winner is selected in a simple way: the lowest offered price wins. The obligation of production of electricity in the declared amount will be settled once every three years. The sanction for failure to observe this obligation will be a cash penalty. One of the controversial issues is the maximum price ( reference price ), which can be offered by entities taking part in an auction, while there is no minimum price. The reference price is the maximum price of 1 MWh of energy sold in an auction, announced by the Minister relevant for matters of economy at least 60 days before the given auction. The reference price will be established on the basis of the prices of certificates of origin between 2011 and 2013 (PLN per 1 MWh) and an average sale price of electrical energy in a competitive market, for installations launched before 1 January The sale price specified in the participants offers will be subject to indexation with inflation rate each year. A different reference price shall be established and announced by the Minister for installations launched after the day of auction closure. It shall be established separately for various groups of installations mentioned in the Act on RES. In such a case, the reference price shall be determined for each group on the basis of the following conditions: - significant technical and economical parameters of the functioning of the installations, - capital expenditures incurred during preparation process, including construction of the project and its technical infrastructure; - assumptions concerning technical work conditions of RES installation; 2

3 - operating costs and other capital expenditures incurred during exploitation of installation, in the period this installation was a beneficiary of any support instruments; - anticipated prices of biomass and other fuels; - costs of energy/biogas producer s equity. Each auction shall be announced at least 30 days in advance. The announcement includes: date of auction sessions, opening and closing hours of auction sessions, maximum amount of energy to be sold in auction. Who may take part in an auction? Participation in an auction will be possible for installations which are already producing electricity in the new system (from 1 January 2016) as well as for new projects, which will have to go through the socalled pre-qualification procedure, i.e. projects which, although they have not been launched yet, are ready to produce electricity from the legal point of view. The pre-qualification procedure will be conducted by the President of the Energy Regulatory Office (URE) who is authorised to issue a certificate confirming qualification for an auction. To pass the above-mentioned procedure, the producer has to provide relevant documentation proving that the investment is consistent with the local zoning plan. In the same time, the producer must hold all administrative decisions (promise of license, building permit, environmental permit) as well as a contract for connection to the power grid, financial proof and capability proof that the investor is able to implement the project and a schedule of the project. The certificate is valid for the period of 12 months but no longer than validity of any obligatory documents. This may obviously cause a situation where the certificate is valid only a few months. Another limitation is a bank guarantee which shall be established by an investor interested in taking part in the auction. An alternative for the bank guarantee is a deposit which shall be submitted to the bank account of the Energy Regulatory Office, in the amount of PLN 30 per 1 kw of the installed generation capacity. The guarantee is returned within 60 days from the date of first generation of energy from RES. Sale price established in auctions is subject to annual adjustment by the inflation rate. OREO S.A. The Act on RES includes establishment of a special-purpose State Treasury company Operator Rozliczeo Energii Odnawialnej S.A. (eng. Renewable Energy Settlement Operator). OREO S.A. will pay out an amount constituting the negative balance between the price obtained in the power exchange and the price obtained in auction. The difference will be covered within 30 days on the basis of on application submitted by producers. The actual financial burden is on consumers who will pay a special RES fee covering financial obligation of OREO S.A. towards producers. 3

4 Profit threshold Under the Act of RES, there are two groups of RES installations in the aspect of electricity production efficiency: The Council of Ministers shall specify the maximum amount and value of electricity from renewable energy sources, including the maximum amount of electricity that may be produced in RES installations with capacity factor lower than 4000 MWh/MW/year produced by producers. The specification shall be announced by way of a regulation by 31 October each year. The above-mentioned provision is the socalled profit threshold. Repowering ban To sell energy by action, producers have to meet a certain obligation regarding devices included in their RES installations. Energy from renewable energy sources produced in a RES installation for the first time after the date of auction s termination, or in an installation modernised after 1 January 2016, may be sold by auction only if the devices producing energy included in the installation installed during construction or modernisation were manufactured not later than within 48 months (in case of offshore wind power plants - not later than 72 months) before the date of the first electricity production in this RES installation. Support for micro-installations There are some special regulations for micro-installations, i.e. installations with the capacity below 40 kw. On 20 February 2015 the Polish Parliament finally accepted fixed prices for different groups of micro-installations: a) fixed price per 1 kwh of energy produced in installations up to 3 kw: - PLN 0.75 for energy from hydro, wind and solar power plants, for the period of 15 years. b) fixed price per 1 kwh of energy produced in installations with capacity from 3 kw to 10 kw: - PLN 0.70 for energy from agricultural biogas, - PLN 0.55 for biogas from landfills, - PLN 0.45 for biogas from waste water treatment plants. - PLN 0.65 for energy from hydro, wind and solar power plants. The Act on RES does not mention fixed prices for energy produced in installations with capacity from 10 kw to 40 kw. It is possible that they will be established at auctions or announced by the Minister relevant for matters of economy. 4

5 The energy produced in micro-installations will be purchased by ex oficio suppliers ( obliged sellers ) at the above-mentioned fixed prices. The obligation remains in force for 15 successive years from the date of putting an installation into operation. All installations with higher capacity will sell the energy directly into the market. Conclusions The new regulation has been expected since 2012 and now, in 2015, it seems to be finally established. On 11 March 2015 the Act has been finally signed by the President of Poland. According to the written grounds for the Act, the proposed support system will be cheaper and should guarantee full competitiveness of all technologies which will be involved in auctions, where no distinction into technologies is made. Such a solution will stimulate development of most economically-effective technologies. From our point of view it causes a significant financial risk; investments in the advanced stage (as regards the pre-qualification process) will not win the auction, therefore, will not receive support, because they will not be able to compete with more cost-effective RES power plants. Another big unknown is the amount of energy which will be announced to be purchased in auctions. There is no minimal amount established by law. The positive point of the new regulation is a guarantee of financial stability at the same level for the period of 15 years. However, the Act on RES includes a time limitation of state aid under the new support system, i.e. until 30 June This regulation results from the time limitation of the General Block Exemption Regulation (the GBER) on state aid measures, a regulation of the European Commission. The GBER remains binding until 31 December 2020 with a possibility to apply aid programs for the following 6 months from the date of GBER s expiration date. The Act on RES shall enter into force after 30 days of the date of its promulgation. Should you have any further questions, please do not hesitate to contact our specialists: Dorota Zabłocka Prawnik / Associate dz@pnplaw.pl Direct phone Mobile Paweł Nowak Radca prawny / Senior Associate pn@pnplaw.pl Direct phone Mobile