After nearly four years of legislative work on new regulations concerning renewable energy sources (“RES”), the government approved its Bill on renewable energy sources (as published on April 4, 2014) on April 8, 2014 (hereinafter: “OZE Bill”). The OZE Bill, in the wording approved by the Council of Ministers, will now be submitted to the lower chamber of the Polish parliament for approval (Sejm). Once it passes the lower chamber, the Bill shall be put before the upper chamber, the Senate, which may propose amendments, reject or accept it. In the event of its amendment or rejection by the Senate, the OZE Bill will be returned to the lower house for reconsideration; Sejm may uphold or reject the Senate’s recommendations, but once it does so, it will send the Bill to the President for his signature and hence enactment. The European Commission will also have to be notified about this piece of legislation because it introduces state aid measures into the RES support system.
The solutions proposed in the OZE Bill coincide in many respects with its previous version. In particular, the auction mechanism has been kept and the possibility to choose between the auction system and the system of certificates of origin for existing installations.
The fundamental rules of the OZE Bill are briefly described below. At the same time, it needs to be noted that at the stage of legislative work, the OZE Bill may be substantially revised. Consequently, we cannot rule out that the final version of the OZE Act will materially differ from the wording of the OZE Bill approved by the Council of Ministers.
- General rules of the OZE Bill support system
The OZE Bill provides the two concurrent mechanisms:
- for RES installations where electricity was produced for the first time before the effective date of the new support system and also the RES installations that have been modernised after the effective date of the new system (“Existing Installations”), the former support system applies (“Certificate System”) with the concurrent possibility to move to the new support system in form of auctions dedicated to the Existing Installations;
- to the OZE installations where electricity was produced for the first time after the effective date of the new support system (“New installations”) the auction system applies (“Auction System”).
The total duration of support to RES power producers, including the purchase of energy obligations, for the Certificate System and the Auction System is projected to be a maximum of 15 years from the commencement date of production, but no longer than to 31 December of 2035. Producers of energy from modernized RES installations after the new support system enters into force are entitle to certificates of origin only for a period of six months from the date of entry into force of the new system.
- The Certificate System rules
The Certificate System basically follows the system currently in effect under the Energy Law, provided that the OZE Act will introduce the following modifications:
Substitution fee – notwithstanding suggestions made by RES industry representatives, the Council of Ministers has decided against deleting from the OZE Bill a clause stipulating that the substitution fee will not be adjusted for inflation. In consequence, the substitution fee will be frozen at the 2014 level, which is 300.03 PLN/MWh.
The purchase obligation set by the certificate’s rate – the obligation to purchase certificates of origin has been fixed at 20%, but it may be decreased by the Minister of Economy in executive acts entrusted to his discretion. Notably, the OZE Bill does not empower the Minister of Economy to increase the level of mandatory purchases (e.g. after it has been reduced in the meantime). Additionally, the Minister of Economy has the power to reduce the quantities to be purchased in subsequent calendar years by 31st of October. In our estimation, the fact that the Minister of Economy has been granted the right to reduce these levels at such short notice may lead to considerable uncertainty on the market, both among producers and entities obligated to purchase certificates of origin.
Optimization of the amount of the entitled certificate of origin – in principle RES power producers will have the right to obtain certificates of origin in amounts corresponding to the volume of RES-produced power, with the following exceptions:
- hydroelectricity plants with total installed capacity exceeding 5MW will be excluded from the support system;
- the level of support for multi-fuel plants (co-firing) will be limited, by extending support only to electricity generated in multi-fuel systems to the level of the average amount of electricity generated in the period 2011 - 2013 and the reduction of the amount of the certificates of origin by an adjustment ratio of 0.5 /MWh (a new adjustment ratio to apply after 2020 will be set by the Council of Ministers).
Substitution fee – if the price of a certificate of origin on the Polish Power Exchange (Towarowa Giełda Energii) will be lower than 75% of the price of the substitution fee for at least 3 consecutive months, the possibility of the purchasing obligation set by the certificates of origin will be the limitation of the substitution fee.
Upholding purchase obligation of the RES energy – purchase obligation arises from the first day of the inducing energy to the distribution or transmission grid and is projected to be a maximum of 15 years, but no longer than to 31 December of 2035. The purchase is made by the obliged seller (sprzedawca zobowiązany) for the price equivalent to the average price of sale of electricity on a competitive market, as published by the President of ERO.
- The Auction System rules
Scope – In accordance with the OZE Bill justification the support system based on the Auction System will be used by the New Installations excluding:
- multi-fuel firing combustion plants, but not dedicated multi-fuel firing combustion plants;
- hydroelectric plants with a total installed power generating capacity of over 5 MW;
- RES plants with a total installed power generating capacity of over 50 MW which use biomass to produce electricity, excluding RES plants which use biomass burned in highly effective cogeneration facilities with power generating capacity of up to 150 MWt.
This principle is not, however, expressed in the Project without any interpretational doubts.
Existing Installations – the OZE Bill stipulates that operators of the Existing Installations will be able to submit a declaration to the President of ERO whereby they will join auctions. The auctions will be organized separately for them. In this case, the reference price will be set as the sum of (1) the average price of sale of electricity on a competitive market in the directly preceding year, as published by the President of ERO, and (2) the weighted average price of rights in rem under the certificates of origin in 2011-2013 (the price of certificates at the power exchange will be taken into account). An operator of an Existing Installation, once it wins an auction, will automatically lose the right to receive certificates of origin. The operators of the Existing Installations are not subject to prequalification (see below) but must provide adequate security bonds (see below)
Auctions – they will be organized at least once a year by the President of ERO. They will be organized separately for power generating installations of up to 1 MW and for those of over 1 MW, assuming that at least 25% of the electricity from new sources (also modernized) sold by auction should come from sources of up to 1 MW capacity. An auction is to be won by the producer who offers electricity at the lowest price.
The auction’s subject – the auction’s subject will be the amount of produced electricity determined by the President of ERO in a period of time not exceeding 15 years from the date of commencement of power production at the RES installation. The production of electricity at the auction-winning plant should start within 4 years of the auction; this excludes offshore wind farms at which production should begin within 6 years, and solar energy plants which should go into production within 2 years.
Auction participants – an auction will be open to entrepreneurs offering new installations who use devices not older than 4 years. Moreover, entrepreneurs offering modernized RES plants or plants that acquired that status by way of modernization will be invited to bid at auction on the following grounds:
- as a result of the modernization the installed capacity has increased;
- financial outlays on the RES plant’s modernization were at least 30% of the initial price;
- the modernized RES plant will not be used to produce electricity from biomass, bio liquids, biogas, agricultural biogas in the multi-fuel firing combustion plants that are different to dedicated multi-fuel firing combustion plants.
In these circumstances only, modernized RES plants will be able to obtain support (proportionally to the increase in the plant’s generating capacity).
Prequalification – projects applying for participation in an auction will be subject to pre-qualification, to enable starting an investment immediately after winning the auction. Investors will be able to join the prequalification process on a continuous basis. The President of ERO will be responsible for the prequalification process and appeal procedures, who will issue a certificate confirming that the prequalification criteria are met. This certificate will be valid for a period of 12 months, but not longer than until the expiry date of any of the documents required.
The rejection of an application will be issued by way of decision which may be appealed against at the District Court in Warsaw.
Security – to become eligible to take part in an auction, each producer must provide security in the form of a bank guarantee or pay a security deposit of PLN 30 per 1 kW of the installed capacity of the installations.
Reference prices – reference prices for renewable energy technologies will be introduced. Reference prices will be calculated at technologically reasonable intervals of installed electricity capacity, separately for each RES technology and will be announced one month before the first auction in the calendar year. Tenders submitted at an auction with a price higher than the reference price will be rejected.
Criteria of Auction – the basic criterion for an auction shall be the price. Price determined as a result of the auction will be adjusted annually for inflation.
The effect of choice of offer – in case of winning an auction organized for RES installations with an installed capacity of up to 1 MW, the selected entity must sell all the energy offered in the auction to a seller of last resort at a price determined in the auction. In the case of other entities, they shall be entitled to obtain from OREO (see below) the negative difference between the price at which the electricity is could be sold on the power exchange and the price at which they won the auction.
Operator Rozliczeń Energii Odnawialnej S.A. (“OREO”) (Renewable Energy Settlement Operator) – a special purpose company of the State Treasury will be established and, dedicated to settlement operations concerning electricity generated by installations under Auction System.
Settlement of negative balance – OREO will settle negative balances representing the difference between the value of electricity calculated on the basis of power exchange transactions and the price determined in the auction:
- at which the seller of last resort is obliged to buy energy from the producer with an installed capacity of up to1 MW, which won the auction; and
- offered by the producer with an installed capacity of over1 MW.
As a result of the settlement of a negative balance, the proper amount is transferred by OREO to a nominated producer of electricity or seller of last resort. The transferred amount should not increase the taxable income of the energy seller of last resort or the RES energy producer.
RES Fee – the RES fee will be charged to the consumers, by the electricity transmission system operator or distribution system operator and transferred to OREO. It will depend on the rate of consumption of the electric energy. The RES fee will cover the negative balance.
Limitation of the support – the total value of state aid for producers of electric energy by RES installations provided by the Auction System, may not exceed the difference between the value of the electricity generated by these sources multiplied by the reference price and the value of the equivalent quantity of electricity generated by a plant powered by renewable energy sources multiplied by the average sale price for electricity on the competitive market as announced by the President of ERO under the Energy Law as applicable on the day of the offer.
- The effective date of the new regulations
The OZE Bill will be enacted 30 days after its announcement, except for the provisions of chapter 4 concerning mechanisms and instruments supporting the production of electricity from renewable energy sources and the production of agricultural biogas in plants.
The above regulations will come into force on the first day of the month commencing after the lapse of 12 months (instead of the first month envisaged in the previous bill) following the issuance of a positive decision of the European Commission on the compliance of the state aid envisaged in the OZE Bill with the common market principles. Bearing in mind the new transitional regulations the effective date of the provisions of Chapter 4 of the OZE Bill may hardly be expected before January 1, 2016.Therefore, the period for completion of the construction process by investors with projects at advanced stages of completion has been extended; hence these investors will gain an opportunity to choose between the Auction System and the Certificate System.