Gus J Papamichalopoulos November 7 2011 Financing and supporting renewable energy sources KYRIAKIDES GEORGOPOULOS Law Firm | Energy & Natural Resources - Greece Gus J Papamichalopoulos Energy & Natural Resources IntroductionImmediate measuresNew fixed financing sourcesMeasures for expenses segment duty accountIntroductionOn October 13 2011 the Regulatory Authority for Energy (RAE) announced its proposals to support and finance renewable energy sources in Greece in both the short and long term. Specifically, the RAE is proposing several measures to reinforce the budget of the Electricity Market Operator (EMO),(1) such as an increase in the special renewable energy sources duty and application of the duty to ERT SA, the state radio and television company. Both these duties are imposed on consumers through their bills from the Public Power Corp.The RAE divides its proposals into two phases. The first covers 2011 and 2012, while the second addresses permanent solutions that will ensure the viability of the EMO's special fund for renewable energy sources.Immediate measuresFor the period from October 2011 to December 2012, the RAE's main goal is the gradual reduction of the deficit of the renewable energy sources special account, resulting in the elimination of the deficit by the end of 2012. This will be achieved by: from October 2011, accelerating the auction of the remaining unallocated carbon dioxide emission rights from the New Entrants Reserve for 2008-2012 (worth €40 million) and the procedure for refunding the value added tax owed to the EMO (worth €20 million); activating the option set out in Article 12(16) of Law 3851/2010 to attribute, as a resource for the special account, a percentage of the contribution paid to ERT SA by a joint decision of the minister of the environment, energy and climate change and the minister of culture (annual revenue of €300 million); establishing by legislative regulation and immediate application of the assignment to the EMO of the issue and disposition of the guarantee of origin certificates covering the total electricity produced by renewable energy sources and cogeneration plants of electricity and high efficiency heat. The sale of such certificates to producers and suppliers shall be made at a price that will cover the cost of implementing, operating, maintaining and upgrading the guarantee of origin certificates system's database and safeguarding its assurance mechanism, and a reasonable profit. This practice is compatible with that applied by guarantee of origin certificate issuing entities in Europe, including Public Power Corp in Greece, which is already selling domestic guarantee of origin certificates to Italian suppliers/exporters which are interested in covering part of their obligations in through by imported renewable energy sources; passing a legislative regulation imposing a duty on the transfer of renewable energy sources licences, the total revenue from which will be credited to the special renewable energy sources account; and from November 1 2011 to December 31 2012, reasonably increasing the special renewable energy sources duty, although at levels significantly lower than those proposed by the EMO (ie, €5.60 per megawatt hour, on average) because of the additional resources obtained for the special renewable energy sources account. The readjustment of the renewable energy sources duty could be combined with a change in the methodology applied in allocating it to the various categories of consumer, so that the charges that arise are as equitably balanced as possible between various categories of consumer (Article 155 of Law 2773/1999). Such a methodological approach could, for example, include a fixed percentage of the renewable energy sources duty charged, determined as a percentage of the total charge (in euros pe) of the transmission and distribution network for all consumer categories – indeed, no ceiling applies. New fixed financing sourcesThe RAE envisages new fixed financing sources for the special renewable energy sources account in order to ensure its mid-term viability (from 2013 to 2020), in conjunction with the restructuring of the energy market and in the context of applying the target model (in 2014 and 2015).In addition to the new sources of financing for the special account proposed in the preceding section for the current period (ie, to the end of 2013), additional resources can be raised through the following measures: As of January 1 2013, a grant will be made to the special renewable energy sources account of 50% of the total revenues accrued from the auctioning of national carbon dioxide emission rights. This course, which is clearly provided for in Directive 2003/87/EC as being at the discretion of a member state, could yield annual revenue of €500 million for the special account. In conjunction with the reduction of the need to finance the special account due to the increase in the system marginal price which will arise from incorporating the full cost of emission rights into the variable unit cost, and the concurrent application of the measures proposed above, can to a large extent cover the mid-term financing requirements for the special account (at least for the period from 2013 to 2020). A lignite mining and use royalty will be introduced. The amount of this royalty could be determined from the difference between the cost of lignite mining and the price paid at an auction to assign the right to operate a new lignite field, which would be determined indirectly by the expected profit margin of lignite plants in the wholesale energy market. In the long term, this royalty must be determined so as to maximise the value of the lignite, taking into account both the cost of alternative fuels and the best available technology for burning solid fuel. The incorporation of this royalty in lignite production, in addition to the full cost of carbon dioxide emission rights (as of January 1 2013), shall lead to a reasonable balance between the various technologies and fuels in the wholesale market. As to retail bills, their competitive segment concerning the price of energy has been adjusted upwards to reflect the long-term combined cycle natural gas marginal unit cost. Concurrently, the revenue from the lignite mining and use royalty is used to cover the renewable energy sources duty, and potentially the public utility duty, thus considerably reducing the amount charged to end consumers of electricity. Therefore, both the renewable energy sources and the public utility duties are reduced (the latter primarily concern the high cost of producing electricity on the islands). On average, there will be no increase to the overall retail sale invoice since the competitive segment will be increased, but the public utility duty and renewable energy sources segments will be reduced. The wholesale energy market will be restructured in order to apply the target model gradually by 2014 to 2015 and in order to correlate, by mid-2013 at the latest, wholesale and retail prices. The current renewable energy sources development model (ie, guaranteed prices, priority in entering the system) must be adapted to this new model, which will include the development of four basic transaction levels (day ahead, intraday, balancing and forward) and bilateral contracts governing physical delivery between producers and suppliers. In this new model the simplest solution for renewable energy sources would be to continue the current approach, whereby renewable energy sources producers enter into bilateral contracts with the operator, which allocates by priority the electricity that it produces. However, since the target model does not provide for a mandatory pool, as applies at present, it will not be possible to calculate the marginal price. Even if such price were calculated, it would concern only those who have not entered into bilateral contracts with producers. Therefore, there will be no balancing of revenue and expenses, and the current mechanism, whereby payments to renewable energy sources (the feed-in tariff) are derived partially from the marginal price and partially from the special renewable energy sources duty account, must not be altered. One solution for the period of full application of the target model would be that the total, plus feed-in tariffs to renewable energy sources, would derive from the special account, the resources of which shall be those described above. Upon calculating the duty the RAE shall examine whether and to what extent renewable energy sources technologies must be certified by capacity certificates for their contribution in dealing with peak times. To this end, the RAE shall prepare a detailed study for calculating the related capacity credit. Measures for expenses segment duty accountMost of the measures set out above concern the revenue segment of the special renewable energy sources duty account and have a short-term timeframe. However, there must be a concurrent and immediate examination of the expenditure segment of the account (ie, the system of compensating the renewable energy sources at guaranteed prices) so that a solution that is viable in the long term is achieved alongside the optimisation of renewable energy sources. Therefore, the value of such guaranteed prices must be reviewed so that they reflect the constantly decreasing cost for installing certain renewable energy sources technologies (eg, photovoltaic panels) but also the increasing cost of money and borrowing, so that ultimately such investments are both sustainable and financially advantageous for the country. The RAE intends to publish its proposals on this issue shortly.For further information on this topic please contact Gus J Papamichalopoulos at Kyriakides Georgopoulos & Daniolos Issaias by telephone (+30 210 8171 500), fax (+30 210 6856 6578) or email ([email protected]).Endnotes(1) Under the new Energy Law, as of August 22 2011 the responsibilities of the Hellenic Transmission System Operator have been unbundled and split between two new bodies: the EMO, which is responsible for the operation of the electricity exchange market; and the Independent Transmission Operator, which owns and operates the High Voltage Transmission System.