WHY POLAND URGENTLY NEEDS A NEW GREEN CERTIFICATE LAW. Randy Mott, chairman CEERES Sp. z o.o.

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1 1 WHY POLAND URGENTLY NEEDS A NEW GREEN CERTIFICATE LAW Randy Mott, chairman CEERES Sp. z o.o. The discussion about the new law on renewable energy has largely missed the biggest single issue that affects the entire energy sector: the existing system is unlawful under European law in ways that could have draconian effects. Poland never notified the European Commission on the Green Certificate program despite European Treaty requirements that it do so. Under EU law, state aid that is not notified is unlawful. Since unlawful aid must be recovered from the recipient, the implications in Poland are huge. The cure for lack of notification is to notify after-the-fact and obtain Commission approval of the state aid scheme. The dilemma for Poland is that elements of the existing system are inconsistent with the EU state aid rules and could not be approved. The solution is to revise the existing program to comply with state aid rules, much as was proposed by the Ministry of Economy last year, and notify the Commission as soon as possible. Failure to act will jeopardize everyone in the energy sector that has earned, sold or is holding a Green Certificate. Once this is done, and only then, should the Polish Government continue the complex and time-consuming deliberations about other major changes in the system. The details of this dilemma and the way to repair the damage are discussed below in detail and references. The matter assumes more urgency because there is at least one complaint before the European Commission raising the Polish non-compliance. Article 107 of the Treaty on the Functioning of the European Union provides that any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market. Article 108(3) provides further that Member States must provide advance notification to the Commission before state aid can be effective: The Commission shall be informed, in sufficient time to enable it to submit its comments, of any plans to grant or alter aid. If it considers that any such plan is not compatible with the internal market having regard to Article 107, it shall without delay initiate the procedure provided for in paragraph 2. The Member State concerned shall not put its proposed measures into effect until this procedure has resulted in a final decision. The Green Certificates are awarded by the Energy Regulatory Agency to producers of renewable energy defined by the national law. Producers receive a guaranteed price to feed into the electricity grid but they also obtain these certificates, which are a property right, and can be freely traded and sold. See Polish Energy Law of 1977, Article 9e(6), Journal of Laws of the Republic of Poland, 2005, no 121, item The Polish Government decides who receives such certificates, verifies their issuance, supports the market system to sell them in auctions, and counts them toward the achievement of green electricity quotas by electricity providers. Prior to the registration of the certificate (its final use), it may be traded or sold as a property right. Organized trading occurs in the Towarowa Giełda Energii S.A. (POLPX), the Polish Power Exchange, LINK. The Power Exchange is licensed and organized under the authority of the Ministry of the Treasury. See Article 9e(9). Producers can sell their green certificates 1 See Polish Journal of Laws of 2003, No. 153, Item 1504, No. 203, Item 1966, of 2004, No. 29, Item 257, No. 34, Item 293, No. 91, Item 875, No. 96, Item 959, No. 173, Item 1808, of 2005 No. 62, Item 552.

2 2 directly to third parties or auction them on the power exchange. Failure to use the required quota for renewable energy or to make up the deficiency with Green Certificates results in a penalty being assessed. Energy companies can pay a substitution fee if they do not have sufficient green energy or green certificates on hand. Without the action by the state imposing the quotas there would be no market for the green certificates. 2 Anyone can buy a Green Certificate and resell for a profit so that the beneficiaries of the aid may not necessarily be the producers or distributors of electricity. Similarly, the failure to meet the quota with either actual electricity production or Green Certificates leads to payment of a substitution fee or penalty fee. Both of the later are given to the National Environmental Protection Fund that uses the funds to support yet another set of beneficiaries. See Polish Energy Law Article 9a(1)and(5), Article 56(1a)and (3). The fees and penalties are clearly state resources used to support other projects and hence state aid is involved under the Commission s prior decisions. 3 The Polish Government attempted to justify their lack of notification in their 2012 comments on proposed modifications to the Community Guidelines. They try to pass off the Commission s decisions to treat green certificate programs as state aid decisions made after the Polish system was enacted in See Government of Poland, Discussion Paper - State aid for environmental protection - a questionnaire for stakeholders (Dokument do dyskusji pomoc państwa na ochronę środowiska- Kwestionariusz dla zaintereso-wanych podmiotów), Citing the Belgian green certificate decision, N 550/2000, they argued that the Commission did not consider the green certificates as state aid, ignoring the fact that the Commission has considered the fines and substitution fees to be subsequently implemented in Belgium to be state aid. See Hancher, EU STATE AIDS (4 th ed.) 2012, p In 2001, four years before Poland adopted green certificates, this was clear in the UK case. DG Competition, C(2001) 3267final, State aid No N 504/2000 United Kingdom Renewables Obligation and Capital Grants for Renewable Technologies, November 28, In 2001, four years before the Polish system was enacted, the Commission reviewed the certificate system in the United Kingdom and determined that it involved state aid. DG Competition, C(2001)3267final, State aid No N 504/2000 United Kingdom Renewables Obligation and Capital Grants for Renewable Technologies, November 28, The key fact the Commission relied upon was that when suppliers 2 This situation is indistinguishable from the ECJ s analysis of the Dutch NOx trading scheme: the tradability of those emission allowances, must be regarded as an economic advantage which the recipient undertaking could not have obtained under normal market conditions. European Commission v Kingdom of the Netherlands (C-279/08 P) September 8, 2011 (NOx), par. 91 (finding state aid existed). 3 The constant practice of the Commission is to consider that the proceeds of such levies are state resources. This practice is line with the Court s case law, according to which the proceeds of levies imposed by the State, transferred to funds designated by the State and used for the purpose of advantaging certain companies, are deemed to be state resources. Commission Decision, of 24 April 2007, on the State aid scheme implemented by Slovenia in the framework of its legislation on qualified energy producers Case No C 7/2005, par 69, (emphasis added) citing Case N 161/04 Portugal (OJ C 250, ,p. 9); Judgment of July 2,1974 in case C 173/73, Italy v Commission; Judgment of March 22,1997 in case C-78/79, Steinike v Federal Republic of Germany. if other instances occur and the State sets up a separate funding system to support green electricity, financed through the fines some suppliers have to pay in case they do not have the amount of certificates needed, the second kind of system may contain State resources because of such separate funding systems, thus have to be regarded as state aid should all other criteria of Article 87(1) EC be fulfilled. State aid No N 608/04 Belgium Combined Head and Power certificates, citing State aid N 504/2000 UK, Renewabeles Obligation and Capital Grants for Renewable Technologies, OJ C 30, , p.15; State Aid N 789/2002 Sweden- Green certificates, OJ C 120, , p.8. The Dutch NOx case ended the need to only rely upon the substitution fees and penalties as the state aid element. See above.

3 3 do not have a sufficient amount of green electricity certificates, they have to pay the buyout price, practically a fine, to a fund. Id. p. 12. Thus, the Commission concluded: The Commission considers that State resources are involved and also all other criteria of State aid in the meaning of Article 87(1) are fulfilled. The measure would insofar constitute State aid within the meaning of Article 87(1) of the EC Treaty. Id. p. 13(2001)(emphasis added). See DG Competition, C(2010)2211, State aid No N 65/ United Kingdom Amendments to the Renewables Obligation Certificates (ROCs) scheme, March 30, The Polish system also requires that the electricity provider have the quota of green electricity or sufficient green certificates to make up the difference or they also must pay a fine (the substitution fee). Specifically, the Polish system is indistinguishable from the Romanian Green Certificate program in every relevant aspect. See DG Competition, State aid SA /N RO, Green certificates for promoting electricity from renewable sources, C (2011) 4938, July 13, The Commission noted in the Romanian case, as here: the Commission also observes that by giving green certificates for free to producers of electricity from renewable sources, the State is actually providing them, for free, intangible assets. In fact, the green certificates can be traded on a specific market and by selling them the producers of electricity from renewable resources obtain revenues. The Commission has already found this to constitute aid in the case of emission permits). Id. p. 13, para. 53. Finally, the Commission notes in this context that if the obligated parties do not demonstrate that they have acquired the required number of green certificates, they must pay a penalty. Id. p. 13, para. 52. Thus, the Commission concluded that the State provides certain undertakings with an asset, which has a monetary value, and that asset originates with the State which has created it. Id. p. 13, para. 53 (as in Poland, these Romanian green certificates are traded as a commodity). Finding that green certificates had all the attributes of state aid, the Commission, however, also found that the system met the compatibility criteria for state aid in that case. Id. The issue was decisively resolved by the European Court of Justice in European Commission v Kingdom of the Netherlands (C-279/08 P) September 8, 2011 (NOx). The Court of Justice held that, in the first place, it was not necessary to establish in every case that there had been a transfer of State resources for the advantage granted to be capable of being regarded as a State aid. Secondly, the tradability of NOx allowances could lead to the avoidance of the payment of fines, and the creation of emission rights without consideration paid to the State meant that it has forgone income which could have been made from their sale or auction. Sauter & Vedder, State Aid and Selectivity in the Context of Emissions Trading: Comment on the NOx Case, 37 European Law Review 327, 333 (2012). The NOx case cannot be distinguished from Polish Green Certificates on this issue.

4 4 The Polish Government started the Green Certificate program in 2005, amending the Polish Energy Law of 1997, Journal of Laws of the Republic of Poland, 2005, no 121, item No notification to the European Commission was provided then or subsequently on this program. Lacking any notification of state aid under the Treaty provisions, Poland has circumvented the procedure for review of such aid to determine if it meets the criteria required by the Treaty. Article 108(3) clearly states: The Commission shall be informed, in sufficient time to enable it to submit its comments, of any plans to grant or alter aid. State aid that is done without notification is unlawful and must be recovered from the recipients. See CELF case (C-199/06) February 12, In cases where Member States do not notify the Commission of its plans to grant or alter aid prior to such aid being put into effect, the aid is unlawful in relation to Community law from the time that it is granted. Notice From The Commission, Towards an effective implementation of Commission decisions ordering Member States to recover unlawful and incompatible State aid, (2007/C 272/05), par. 8. The current use of Green Certificates is null and void until the system is approved by the Commission as compatible with the treaty.4 The cure for a failure to notify can simply be to notify after-the-fact. In the instance of state aid simply found unlawful due to the notification failure, the remedy can be simply curing the notification problem. even non-notified aid can in case for example it has been brought to the attention of the Commission by a complaint still be authorized ex post, so that aid already paid need not be recovered. 5 This solution will not be effective in this case unless Poland also modifies the Green Certificate program to satisfy the state aid rules. Two problems exist in the current Green Certificate program as far as state aid rules are concerned. Together they affect about 70% of the certificates awarded and the seriousness of the situation cannot be overstated. First, the support for co-firing coal with biomass at the full value of the support scheme provides disproportionate economic gain to the co-firers and has distorted competition. A single technology cannot receive wildly more favorable treatment under the competition rules. Second, the old hydro plants have received green certificates when their facilities have already been fully depreciated in violation of explicit EU rules. Under the Energy Law, all forms of renewable energy covered by its provisions receive the same support, i.e. one Green Certificate per MWhr. 6 While this is seemingly neutral on its face, the fact is that all other forms of renewable energy, except co-firing, involve construction of electrical production 4 This result does not affect the obligation of electricity providers to have a quota of renewable energy under the Energy Law nor does it affect the penalty for failure to achieve the quota in a reporting period. The substitute fee may also be considered state aid and was also not notified by Poland. See UK decision, C(2001)3267, p Becker, Buttner and Held, The Legal Help Desk: Understanding State aid in European law, 6 Minister for Economy Regulation of 14 August 2008 on the detailed scope of the obligation to acquire and present certificates of origin for cancellation, pay the substitution fee, purchase electricity and heat produced from renewable energy sources and the obligation to confirm the data concerning the amount of electricity produced from a renewable energy source(pl version); Minister for Economy Regulation of 23 February 2010 amending the Regulation on the detailed scope of the obligation to acquire and present certificates of origin for cancellation, pay the substitution fee, purchase electricity and heat produced from renewable energy sources and the obligation to confirm the data concerning the amount of electricity produced from a renewable energy source (PL version).

5 5 facilities. In order to assess whether there is no overcompensation in the aggregate, the Commission needs to verify that the revenues of the generators do not exceed the costs of production and a reasonable benefit in the aggregate of the scheme i.e. over time and over technologies. C (2011) 4938 (Romania), par. 64, p. 15. Co-firing support in Poland is blatantly and completely at odds with this rule. In preparing a new law, the Polish Ministry of Economy has actually prepared a tentative levelized cost estimate. Under the proposal, co-firing starts a one-third its current level and goes down even more in a few years. The Institute for Renewable Energy, which was subsequently selected by the Ministry of Economy to verify renewable energy costs across technologies, observed that co-firing arguably requires no governmental support at all or only 13% of the full certificate value (over a short term period for amortization). 7 This translates into a correction factor of 0.13 for a five-year recovery of the full investment! So an equal playing field for various renewable energy technologies would result in cofiring receiving substantially lower support than the other technologies, based on the proportionate amount of subsidy required to induce investment in an open market. Providing several times the necessary support for co-firing clearly violates the Community Guidelines on State Aid for Environmental Protection regarding over-compensation: As stated in point 59, 1st subparagraph, of the environmental guidelines, Member States may compensate for the difference between the production cost of renewable energy and the market price of the form of power concerned. Thus, such compensation can relate only to the extra production costs for environmentally friendly electricity production as compared to the production costs for energy based on conventional energy sources. cited in Commission Decision of 24 April 2007 on the State aid scheme implemented by Slovenia in the framework of its legislation on qualified energy producers Case No C 7/2005, para. 85. The three to seven-fold over-compensation of co-firing in Poland is in sharp contrast to Green Certificate and feed-in tariff programs that have been approved by the Commission as compatible state aid. In the case of certificate systems, the Commission has been consistent in requiring proportionality to actual or reasonably expected costs of production. See C(2010)2211, State aid No N 65/ United Kingdom Amendments to the Renewables Obligation Certificates (ROCs) scheme, March 30, 2010 ( levelised costs matching the midpoint of the predicted revenues will therefore prevent overcompensation in the aggregate of the different producers ). In fact, co-firing has been specifically identified as an area that might be over-compensated without adding restrictions. The UK certificate system limited co-firing certificates: To reduce the risk of flooding the ROC market the contribution of 7 Calculations with average values, using the price of electricity in 2012, indicate that co-incineration direct implemented in a rational way with an investment period of 30 years (LCOE spread over 30 years), and in particular in power plants burning coal, not would have to be supported at all. If you must, however, for some reason have the investment amortised over a period of 5 years (until 2017), the cost would increase by LCOE Max. 15%, and the required coefficient of for correction of a certificate of origin (in the formula proposed in the draft law on RES) could be IEO, supra at p. 22.

6 6 co-firing stations is limited to 25% of an individual supplier s obligation. This limit will be further reduced to 10% (from 1 April 2006 until 31 March 2011) and to 5% (from 1 April 2011 until 31 March 2016). Cofiring will cease to be eligible for ROCs after 31 March DG Competition, C(2005)480, Subject: State aid No N 362/2004 United Kingdom Renewables Obligation Order 2005, November 23, 2005, p Romania used a levelized cost calculation to evenly apply the green certificates for different technologies, based upon production costs for each technology. C (2011) 4938, State aid SA /N RO, Green certificates for promoting electricity from renewable sources, July 13, 2011 p Various measures in addition to initially levelized costs were used to assure no over-compensation and resultant market distortion. 8 It was critical to the Commission s approval of the Romanian scheme that it provided a means to address over-compensation, a means absent in the Polish scheme: In the light of the above mentioned considerations, including the commitment of the Romanian authorities to adapt the notified measure in time in order to avoid overcompensation, the Commission finds that the notified measure is in line with the condition of absence of overcompensation in the aggregate. Supra at par.70, p. 16. (emphasis added). The approved system starts with adjusted compensation based on production costs and further allows for adjustment to avoid future over-compensation. The Polish Green Certificate system has done neither. Second, while about 42 per cent of all Green Certificates have been given to co-firing coal power plants, another 31% have been awarded to old hydro plants that were built and fully depreciated years before the RES system was enacted. under the Guidelines operating aid may be granted in order to compensate for the difference between the cost of producing energy from renewable sources, including depreciation of extra investments for environ-mental protection, and the market price of the form of energy concerned and until the plant is depreciated according to the normal accounting rules. Becker et al. supra, citing Community Guidelines on State aid for environmental protection 2008, OJ C 82/1, par. 109(a). Fully depreciated hydro plants apparently are also outside the scope of compatible operating assistance. There is virtually no room to argue over the depreciation of old assets being ineligible for operating support in the form of Green Certificates. Taken together, the incompatible aid to co-firing and old hydro is about 70% of all of the Green Certificate support from 2005 to date. Incompatible state aid must be recovered from the recipients The Romanian authorities confirm that the production costs and revenues (market price of electricity, revenues from green certificates) will be monitored on a yearly basis and that the support levels for new beneficiaries will be adapted in case a risk for overcompensation is identified. P. 10. Note 20: In case a risk of overcompensation is identified, ANRE shall propose measures to reduce the number of green certificates to be granted to new entrants to the scheme. Such measures to be adopted by the Government will enter into force on 1 January of the following year. 40. The support in the form of green certificates can be cumulated with the investment aid. The number of green certificates will then be reduced so that reasonable profitability rates should result around the values considered. Id, p. 11

7 7 under European law. Notice From The Commission, Towards An Effective Implementation Of Commission Decisions Ordering Member States To Recover Unlawful And Incompatible State Aid, (2007/C 272/05). It is essential for the integrity of the State aid regime that these Commission decisions ordering Member States to recover unlawful State aid (hereafter recovery decisions ) are enforced in an effective and immediate manner. Id. par. 3. Article 14(3) of the Procedural Regulation states, that recovery shall be effected without delay and in accordance with the procedures under the national law of the Member State concerned, provided that they allow for the immediate an effective execution of the Commission decision. Id. par. 11, citing Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty (OJ L 83, , p. 1). At this moment, there is no basis for considering any aid to co-firing to be based upon a reasoned government decision based on its cost of production. If some correction factor fraction could be justified based on actual cost, then a new law with the correction factor might conceivably save that portion of the state aid already awarded. It might also lessen the need and incentives to go back in time to the period of incompatible aid, simply due to the vast implications of a retro-active recovery. However, without a new law based of levelized cost of production, in the form suggested by the Ministry of Economy last year, with appropriate revisions to reflect the best data on hand, all of the Green Certificates can be challenged as unlawful. That could even mean that all of the renewable energy surcharges on all of the electricity bills in Poland since 2005 might be challenged as well. The issue is massive in its implications and it is a tragedy that it has taken eight years for it to be brought to public light. Rumors about this issue have been circulating for months in the sector, but the pending review of the matter by the Commission brings new urgency to its resolution.