Draft law on Renewable Energy Sources - Update January 2014

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1 Draft law on Renewable Energy Sources - Update January 2014 On 3 January 2014 another draft of new law on Renewable Energy Sources ( RES ) was published by the Polish Ministry of Economy ( MoE ). Additionally, in the second half of January, the amended version has been published, which subsequently has been adopted by the Permanent Committee of the Ministers Counsel in February 2014 (the Draft ). It means therefore that the Draft can be submitted to the Polish Parliament soon (the MoE plans to do so in IQ 2014). Although, there is still a risk that the Draft can be additionally amended before submission to the Parliament, the recent Draft introduced some significant changes to the previous proposal published on 3 January 2014 and in November We would therefore like to summarise the most significant regulations relating to the planned RES support scheme in Poland: I. Existing RES installations (including wind farms) grandfathering rules: as with the previous draft RES law, the support system in its current form will be grandfathered, i.e. existing installations will benefit from both the fixed off-take price (established by the Regulator on an annual basis as under current law) and green certificates for a period of 15 years from the date of the first energy off-take (with some exceptions and limitations), however not after 31 December The green certificate price will be linked with a fixed substitution fee which the draft new RES law sets at PLN per 1 MWh. No indexation is envisaged. The MoE abandoned its previous controversial proposals, pursuant to which no green certificates would be granted if the price of electricity sold from an RES source exceeds 105% of the guaranteed fixed off-take price, as well as from provisions preventing the combination of the support scheme under the RES law and other public aid. Instead, the new draft RES law provides that the combined public aid (both under the RES law and from any other sources) may not exceed the difference between: the product of the value of electric energy produced by a RES source and the cap (reference) price to be published annually ahead of the tendering process by the MoE; and the product of the value of the electric energy produced by a RES source and the average price of electric energy published annually by the Regulator.

2 If exceeded, the public support (including the value of the green certificates) will be reduced accordingly. The draft new RES law lacks regulation in this respect. In the current draft RES law, the MoE did not include an obligation on certain market participants to trade green certificates on commodity exchanges or other regulated markets. As in the previous draft, one of the mechanisms aiming at preventing the oversupply of the green certificates and their subsequent price slump will be the obligation to redeem the green certificates without the alternative option to pay a substitution fee if the average certificate price drops below 75% of the substitution fee for (i.e. an obliged entity will not be entitled to pay the substitution fees). The new proposal changes the relevant period from one month to three months. However, the drafting of the new RES law fails to provide clear regulation in this respect. As with the previous draft, existing RES installations will be entitled to choose, whether they wish to remain under the current green certificate scheme, or to switch to a new tendering scheme (which will be similar to the tendering scheme for new installations). Existing wind farms will then be able to participate in the tendering scheme, but according to the new RES law, the overall period of the support cannot be longer than fifteen years under both the old and new schemes (but no longer than until end of 2035). II. New RES installations auction: as envisaged by the Government in September 2013, the new RES law, if enacted, will introduce a complete overhaul of the present support system based on a green certificate scheme. Newly commissioned wind farms will no longer follow the green certificate system, which will be replaced by a tendering mechanism for renewable energy with price caps. As a general rule, the tenders will be organised by the Regulator once each year for an annual established volume of RES energy. The new RES law envisages a pre-qualification procedure to participate in a tender, which amongst other prerequisites, establishes: having zoning planning/decision; grid connection decisions; final building permits; financial standing certificates from banks; and the payment of a PLN 30 per 1kW deposit of the planned generation capacity. Ahead of each annual auction, the MoE will publish the cap (reference) price below which the tender participants should submit their bids. The lowest bid will win. The new scheme will be serviced by so called obliged sellers who will be under a duty to buy the RES energy at the price established in a tender (from RES installation below 1 MW). Any deficit suffered by such entities, will be compensated by the so called RES charge to be imposed on the end users. The obligation to buy the RES energy will apply for a period of 15 years from the date of the first energy off-take (with some exceptions and limitations), however not after 31 December 2035 (or 31 December 2040 in the case of offshore wind farms). III. Feed-in Premium for RES installations with an output > 1 MW 1. The Government has decided to differentiate its support for RES installations in the new tendering scheme based on their capacity: RES installations with an output lower than or equal to 1 MW will enjoy the same level of support as mentioned in point II above, such as with the

3 obligation on certain market players to purchase energy produced for a fixed price established during the tendering process (Feed-in Tariff); RES installations with an output higher than 1 MW will no longer have their energy off-take guaranteed. The RES installations are now obliged to apply to Operator Rozliczeń Energii Odnawialnej S.A. (the state agent, which will further be referred to as OREO ) to reimburse the negative difference between the market energy prices (for which the green electricity was sold) and the energy price established by the winning offer during the auction (the tender price); (Feed-in Premium). Unfortunately, the amendment and wording of the new provision in the Draft is very ambiguous and may raise concerns as to how exactly the new support scheme for the larger installation will work. For example, the Draft still contains the previous provisions regarding the procedure to execute the PPA by the RES installation which won the auction with the obliged seller (the last resort supplier). This now does not seem to be applicable to the RES > 1MW. 2. Additionally in cases of RES installations mentioned in point above, the new Draft proposes that if the total value of the energy sold during a given month is higher than the value of the energy calculated pursuant to the tender price (the Positive Balance ), such Positive Balance must be settled during the next periods as follows: it will be set-off towards any future negative balances for the following periods (thus the RES installation will not be entitled to demand the Premium for such months); the RES installation will have to pay back to OREO any amount of the unsettled Positive Balance within six months from the end of the support period (i.e. 15 years from the first energy off-take). IV. State aid 1. The draft RES law provides additional restrictions regarding state aid (which has been developed in the new Draft). According to the new provisions, the combined state aid (both under the RES law and from any other sources) may not exceed during the support period (15 years) the difference between: the product of the volume of electricity produced by an RES and the cap (reference) price to be published annually ahead of the tendering process by the MoE; and the product of the volume of the electricity produced by an RES and the average price of electrical energy published annually by the Regulator (jointly, State Aid Limit ). The RES installation which exceeds the State aid Limit will not be entitled to participate in the auction. 2. In comparison to the prior draft, the State Aid Limit will only apply to installations participating in the new tendering scheme. Existing RES installations (i.e. those that

4 have produced energy before the entry into force of the new RES law), which choose to remain within the current green certificate scheme, will not be bound by the State Aid Limit. 3. Additionally, the Draft states that the state aid within the meaning of the new RES will also include the following elements (in additional to the above; please note that the detailed method to calculate the state aid for the purpose of the Draft will be determined in the secondary regulations): (iii) (iv) (v) revenues from green certificates, co-generation certificates and energy efficiency certificates, as well as the value of these certificates which are owned by the RES source. In order to calculate the value of the certificates, the average market price between should be taken in account; revenues from exemptions and credits in taxes and other payments which are directly related to the production of RES energy (very ambiguous wording); and other revenues directly related to the construction or modernisation of RES and the production of RES energy (very ambiguous wording). After the RES law enters into force, MoE shall issue a supplementary regulation which will provide for a detailed calculation of the state aid value pursuant to the above premises. 4. Before an RES installation is allowed to participate in the tendering scheme, a statement needs to be submitted certifying that the State Aid Limit will not be exceeded as of the date when the offer is made at an auction. The President of URE may verify the authenticity of such a statement and is able to deny the RES installation the right to take part in the auction if it finds that the State Aid Limit will be exceeded. 5. Furthermore, together with an offer at the auction, another statement needs to be submitted under the penalty of perjury with a declaration: detailing the combined level of state aid (described in points 3 (iii)-(v) above), which the RES installation has received in the past, calculated in PLN/MWh, adjusted for the expected level of energy production as described in the offer and the 15-year support period; and stating that the purchase price for the energy set in the offer, adjusted for the state aid described in point above does not exceed the reference (cap) price applicable upon the submission of an offer. 6. The President of URE will have the right to verify the accuracy of the above statement and may rule that some part of the energy produced may not be qualified as green energy from RES (and thus such energy will be disqualified from the support, i.e. excluded from calculation of the Negative Balance). V. Excise tax on renewable energy According to the Draft, the RES will not be excluded from excise tax on the generated electricity. Thus, the Draft abandons exemption from excise duty on electricity produced in

5 RES installation and purchased within the new auction scheme. VI. Other considerations While the Government intends for the new law to enter into force by the beginning of 2015, the provisions regarding the new RES support scheme (chapter 4 of the draft) will only enter in force 12 months after these are approved by the European Commission. Additionally, more hydropower plants will be entitled benefit from the support scheme as the limit has been increased from 1 MW to 5 MW. Should you have any questions or would like to obtain more information, please contact us or any of your other contacts at Linklaters. Linklaters Warsaw Energy Team