Introduction
Existing projects
Future projects

State aid issues


Introduction

The government has been working on a proposed reform of the support system for renewables since 2011. After three years and several different proposals, on July 8 2014 the government finally submitted to Parliament a draft law on renewable energy sources (RES). The support system for renewables would be governed by Chapter 4 of the act. The draft act envisages a switch from the current green certificate system to a combination of feed-in tariffs (FiTs) for small RES installations and feed-in premiums (FiPs) for larger RES installations, with both FiTs and FiPs awarded by auction.

On July 22 2014 the first reading of the act took place and the draft was then sent to the extraordinary committee for further revision. The chairman of the committee said recently that he hopes the parliamentary process will be completed by November 2014.

In its current form, the draft act envisages that Chapter 4 would come into force on January 1 2016. However, some stakeholders – in particular, wind energy industry representatives – have proposed that this date be pushed back to January 1 2017, to allow for a longer transition period.

Existing projects

The regime applicable to existing projects would be as follows:

  • Projects which start generating electricity before Chapter 4 comes into force will be eligible for green certificates – that is, the current support system will be maintained. However, the period for which such support will be available will be restricted to 15 years from the date on which the project feeds electricity to the grid for the first time (currently there is no time limit for obtaining green certificates).
  • The mandatory purchase of electricity for existing projects will also be maintained. This obligation will apply to 'obliged suppliers': those suppliers which in the previous year had the biggest electricity sales by volume within the area serviced by the relevant distribution system operator . In the current market, this means that the local incumbent suppliers which act as suppliers of last resort will be obliged suppliers under the new system. The obligation to purchase electricity from an existing RES installation will last for 15 years, calculated from the time that the installation feeds electricity to the grid for the first time. The mandatory purchase price will be the average wholesale market price from the previous calendar year, as announced by the president of the Energy Regulatory Office (ERO).
  • Existing hydro-projects with a capacity exceeding 5 megawatts (MW) will not be supported by either green certificates or the mandatory purchase of electricity.
  • Support for the co-firing of biomass will be reduced. Until the end of 2020, co-firing of biomass will receive 0.5 of a certificate per megawatt hour of electricity from co-firing. After 2020, the correction coefficient will be set through secondary legislation.
  • Certain types of entity will be obliged to obtain and furnish to the president of the ERO green certificates or make a substitute payment.
  • The act sets out a 20% quota for green certificates. However, the minister of economy will have the right to set a lower quota through secondary regulation for one or more years. Together with one of the most recent versions of the draft act, a draft regulation was published which proposes a quota of 13% for 2014 and 14% for 2015 – the same figures as apply for 2014 and 2015 under the current binding RES support regulation.
  • The substitution fee will be set at the current level of PLN300.03. However, under the act, unlike under the current system, there will be no further indexation of the substitution fee, so this will remain PLN300.03 for the reminder of the green certificate scheme.
  • Electricity suppliers that are obliged to redeem certificates will not be allowed to comply with this obligation by paying the substitution fee if the average power exchange price of green certificates is below 75% of the substitution fee for more than three months.

Future projects

Projects which do not start electricity production before the entry into force of Chapter 4 will no longer be eligible for green certificates, but may be eligible to apply for the award of FiTs or FiPs through auction, depending on their size. Projects in the green certificate system will also be allowed to switch to FiTs or FiPs and participate in auctions – however, these will be organised separately from the auctions for new projects.

Auction eligibility
In general, the auction mechanism will be available for:

  • new projects which will use equipment that is not more than four years old;
  • existing generation units which undergo modernisation after Chapter 4 comes into force; and
  • existing projects in operation before Chapter 4 comes into force, provided that the operators submit relevant declarations confirming that they are willing to enter into the new support system (ie, participate in the auctions) instead of the old green certificate system.

An existing installation which elects to participate in auctions will lose the right to obtain green certificates. However, this will happen only once the installation wins the auction.

The Council of Ministers will set annually (by October 31) the maximum volume and value of electricity which can be auctioned in the next calendar year, including the maximum volume of energy to be generated through sources with capacity of less than 4,000 megawatt hours (MWh) a year. These figures will be set separately for existing projects which elect to participate in auctions and for new projects.

Entities developing new projects which are interested in participating in the auction will be subject to a pre-qualification procedure conducted by the president of the ERO. The eligibility criteria for new projects are as follows:

  • confirmation that the project is allowed under the local zoning plan or planning permit;
  • the issue of grid connection conditions or execution of a grid connection agreement;
  • the issue of a final construction permit, if required under the Construction Law; or for offshore wind power plants, a final environmental permit; and
  • an investment timetable.

The minister of economy will set reference prices – the maximum prices that projects can bid in auctions – on an annual basis. For existing projects, the reference price will be set "taking into account the average market electricity price published by the President of ERO and average green certificate prices in the years 2011 - 2013, both from transactions at commodity exchanges and outside of them".

The reference prices for new installations will be set separately for the following categories:

  • installations with a total installed electrical capacity of up to 1MW which use agricultural biogas;
  • installations with a total installed electrical capacity in excess of 1MW which use agricultural biogas;
  • installations which use landfill gas;
  • installations which use gas from sewage treatment plants;
  • installations which use different biogas from that listed above;
  • installations with a total installed electrical capacity of up to 50MW which use biomass fired in a dedicated biomass firing installation or in hybrid systems;
  • installations with a total installed electrical capacity of up to 50MW which use biomass fired in a dedicated biomass firing installation or in hybrid systems in high-efficiency cogeneration;
  • installations with a total installed electrical capacity in excess of 50MW or a total installed thermal capacity of up to 150 thermal megawatts (MWth) which use biomass fired in a dedicated biomass firing installation or in hybrid systems in high-efficiency cogeneration;
  • installations with a total installed electrical capacity in excess of 50MW or a total installed thermal capacity of up to 150MWth which use biodegradable parts of industrial and municipal waste, including water treatment waste and sewage treatment waste, in waste incineration plant;
  • installations which use bioliquids;
  • installations with a total installed electrical capacity of up to one 1MW which use onshore wind energy;
  • installations with a total installed electrical capacity in excess of 1 MW which use onshore wind energy;
  • installations with a total installed electrical capacity of up to 1MW which use hydropower;
  • installations with a total installed electrical capacity in excess of 1MW which use hydropower;
  • installations which use geothermal energy;
  • installations with a total installed electrical capacity of up to 1MW which use solar energy;
  • installations with a total installed electrical capacity in excess of 1MW which use solar energy; and
  • installations which use offshore wind energy.


Auction procedure
Auctions will be conducted separately for existing and new projects. In both cases there will be separate auctions for installations up to and above 1MW. The auctions will be announced at least 30 days before their date; the announcement will also specify the maximum volume and value of electricity to be auctioned.

The sale of energy covered by the new support system will last for 15 years from the date on which the installation feeds electricity to the grid the first time, but in any case until no longer than the end of 2035. For existing projects, the 15-year period will be calculated from the date on which the installation first became entitled to a green certificate. There will be a separate long-stop date for offshore wind power plants - December 31 2040. However, the act sets June 30 2021 as the deadline for the last auction to be held. This means that the government plans for auctions to take place during a period of less than six years. As a result of these auctions, support will continue to be provided (in the manner described above) for 15 years to the winning RES operators, but until no longer than 2035 to 2040, depending on the type of RES project.

Auctions will be conducted by the president of the ERO at least once a year. Bids will need to specify the price and volume of electricity to be sold. The guaranteed price will be awarded to the lowest bidder.

The winning entity will be obliged to deliver the offered volume of electricity, settled over three-year periods. Failure to deliver will be penalised through a fine imposed by the energy regulator at the rate of 50% of the awarded guaranteed price for the undelivered electricity.

Projects of less than 500 kilowatts (kW), if successful in auction, will receive a FiT, with the relevant obliged supplier required to enter into agreement with the operator and purchase the auctioned volume of electricity at the price awarded in the auction for 15 years (if the obliged supplier changes during this time, the contract will be assigned to the new one).

Support awarded in auctions for projects with capacity of 500kW and above will take the form of a FiP for 15 years. The operator will not enter into an agreement with an obliged supplier, but rather will be free to sell electricity to the market, and will receive from a special state-owned company (Operator Rozliczen Energii Odnawialnej SA) the difference between the market price of the electricity and the guaranteed price awarded in the auction.

This premium will cover the difference between the price awarded in the auction and the daily arithmetic average of hourly electricity prices on the Polish Power Exchange from the dates on which the generator is selling electricity (market price). However, if the market price exceeds the price awarded in the auction, this excess will be offset against the premium due in the next settlement period (the following month). If, at the end of the 15-year period, some excess on the market price remains unsettled, the power generator will need to repay the excess in cash.

The total value of state aid granted over the 15-years of entitlement to FiTs or FiPs may not exceed the difference between:

  • the value of the electricity generated during this period, calculated on the basis of the reference price applicable on the date of bidding in the auction; and
  • the value of the same volume of electricity calculated at the 'ERO price' (ie, the average market price from the previous calendar year, as calculated and published by the president of the ERO) applicable on the date of bidding in the auction.

The total value of aid will consist of:

  • the difference between the value of generated electricity calculated at the price awarded at auction and the value of the same volume of electricity calculated at the ERO price;
  • revenue from sold green certificates, cogeneration certificates and energy efficiency certificates, and/or the value of certificates held by the RES power generator and not sold (this value will be calculated based on the weighted average of prices of such certificates based on transactions on the Polish Power Exchange between 2011 and 2013);
  • revenue from tax credits and exemptions related directly to the generation of electricity from RES and obtained during the 15 years of entitlement to FiTs or FiPs; and
  • any other revenue directly related to the construction or reconstruction of the RES installation and generation of electricity from RES, and obtained during the 15 years of entitlement to FiTs or FiPs.

The detailed methodology for calculating the total value of state aid will be specified in secondary legislation issued by the minister of economy.

The auction bid will need to include representations:

  • on the value of state aid, expressed in PLN/MWh (assuming the planned production of the plant over the 15 years of the FiTs or FiPs), obtained before making the bid; and
  • that the sum of the bid price and the value of state aid already obtained will not exceed the reference price applicable for the relevant auction.

State aid issues

The government's initial position was that the act must be notified to the European Commission because of the potential elements involved in the new regulations. Previous versions of the draft act envisaged that Chapter 4 would come into force 12 months after the European Commission decision clearing the new Polish RES regulations was issued. However, just before the draft act was submitted to Parliament, the government obtained an opinion from the Polish Competition Authority stating that if certain changes were made to the draft law, the measures provided for in the act would fall under the new General Block Exemption Regulation issued by the European Commission in May 2014 and therefore would not require notification. The government duly introduced the changes suggested by the Competition Authority and decided that the act was not subject to state aid notification. However, this approach has been disputed by some stakeholders (including the wind industry representative body), which claim that the proposed auction system does not meet all the criteria required to qualify for an exemption under the regulation, and that the act should be notified to the European Commission in order to ensure that the measures envisaged in the act are not subsequently found to be in breach of European law.

For further information on this topic please contact Rafal Hajduk at Norton Rose Fulbright Piotr Strawa and Partners LP by telephone (+48 22 581 4900), fax (+48 22 581 4950) or email (rafal.hajduk@nortonrosefulbright.com).