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DMS
  February 19, 2014

  DMS News. Industry Association Lewiatan organizes a business breakfast about RES Act draft
 

A leading Polish Industry Association “Konfederacja Lewiatan” organizes a business breakfast in English on how to interpret the recent RES Act draft in the context of the EU state aid law in Warsaw, on March 5, 2013 in the premises of Konfederacja Lewiatan at 3, Cybulskiego street in Mokotow from 9 am to 12 pm. Lewiatan’s RES Council was strongly involved in the recent legislation proceedings. DMS Partner Christian Schnell is one of the speakers. The workshop will provide an overview of the expected energy market development for the upcoming years. To register please click here or contact Daria Kulczycka at dkulczycka@konfederacjalewiatan.pl. For non-members Lewiatan charges an attendance fee of PLN 200 net. The amount of participants is limited.


  New RES Act will reshuffle the market
 

The new draft of the RES Act (Version 6.2 was accepted by the Permanent Committee of the Council of Ministers on Thursday, February 6, 2014 and is now being reviewed by the Legal Commission) will soon enter the Parliament. In the upcoming years, it will reshuffle the RES market. Many market participants are still not aware of the changes to come.

The RES Act draft implements a contracts for difference support system to be distributed via a non-technology based auction system for RES installations with more than 1 MW capacity as attached. According to this support scheme the electric energy produced by RES installations permitted in an auction is sold at the wholesale market, whereas RES producers are refunded with the difference between the strike price and the arithmetic average daily price for electric energy at the power exchange (i.e. index IRDN24). For installations of up to 1 MW, a feed-in tariff via a non-technology based auction system is implemented and the obliged suppliers have to purchase electricity produced by these RES installations.

The RES Act will enter into force 12 months after a positive decision of the EU Commission is issued. RES installations can therefore connect under the green certificate system during a transition period with recent attractive price level – an average price for green certificates in 2014 amounts to PLN 225 y and to PLN 197 in the for Q4 of 2013. After the new auction system enters into force, the connected projects may bid for an auction for the existing projects with attractive reference (maximum) price (approx. PLN 420 per MWh - 10 Eurocent per kWh) and CPI-indexation to secure a stable cash-flow gaining stable support for 15 years. The competition at these auctions will be relatively low. (Smaller) Projects financed with EU funds will rather not bid at auctions not to risk the continuity of the project. For most of the (larger) projects where project finance is based on long term CPAs with the agreed floors, the reference price level is not attractive enough to switch to the auction system. Larger biomass and hydropower plants are not permitted to bid at auctions, while smaller biomass plants are reluctant to take a 15-year-price risk for biomass. Therefore, only a few hundred MW of wind farms should compete at auctions for connected installations. Hence, construction and connection of a project within the transition period looks quite attractive. Nevertheless, projects currently face difficulties related to the entry into the construction phase. Banks are rather not keen on taking the risk that the transition period will last longer than until the end of 2015. Logistics to order and construct facilities (i.e. wind turbine generators) are often underestimated by developers. And project finance without long term CPAs – which are currently not concluded anymore - is a tough undertaking especially for larger projects exceeding 20MW. Thus, only well prepared smaller projects and professional developers should be able to perform.

The auction system for new projects will set new rules based on the principle “Survival of the fittest” – mainly for wind farm projects. To bring the bidding price down is a combination of low CAPEX and OPEX costs and high performance. An important part of the CAPEX costs constitute grid connection costs. Therefore, projects to be connected to the transmission system with relatively high grid connection costs (exceeding EUR 50.000/MW) will be under pressure –6.5 GW of onshore wind farms and 2.25 GW of offshore wind farms hold grid connection conditions to be connected to the transmission system, but many of these projects will find it difficult to be competitive due to high infrastructure costs. Furthermore, O&M agreements which in case of wind farms have thus far been dominated by full service agreements concluded with turbine suppliers will show more flexibility. Finally, competitive turbine suppliers will gain a higher market share (as long as they are bankable and with guaranteed maintenance). On the other hand, performance of the wind farm is of utmost importance. Projects below 180 meters tip height and p90-production below 2.500 h/a might be under trouble at auctions. Additionally, capacity limits for grids (mainly PSE transmission grid and Energa and Enea distribution grid) are likely, which increases competition between projects to be connected to these grids. As a consequence, developers should be prepared to share the risk at auctions with end- investors. Under new circumstances, a building permit will not be enough to finally sell a project to the end-investor. Hence, the development market will soon face a consolidation.

In the future, Polish state-owned utilities will most probably no longer play such a dominant role as the end-investors. In Poland as in the other EU member states, state- owned utilities will be under pressure if the inner market opens up and provides for further pressure on wholesale prices. Only technologies permitted to gain state aid shifting investment costs beyond the wholesale prices, e.g., distribution grid tariffs, will have a chance to compete, i.e. RES, and probably nuclear power and low-emission CHP (biomass and maybe gas). In a low carbon economy coal and lignite power plants should rather not count on acceptance by EU commission for the national state aid measures. State- owned utilities such as PGE and Tauron are forced by politics to construct coal power plants in the nearest future, but only the implementation of a capacity market can help coal power plants to survive the merit order principle – the EU Commission will keep a jealous watch over these attempts. Additionally, the first notification ever of the current RES support system may provide to additional risk, as 24 co-firing coal power plants and one hydropower plant exceed the 125MW threshold for individual notification obligation and should have been notified since 2008 (but have not been notified for good reasons as the current support system contributes to overcompensation for these RES installations). Institutional investors and large corporates should enter the market to purchase RES installations with a 15-yearguaranteed price (as contracts for difference, where according to the current draft of the RES act a larger RES producer takes “only” the risk between the average intraday market price at the power exchange and the individual sale price at the wholesale market). For smaller installations up to 1MW corporates will most probably play an even more important role as end-investors.


  Actual RES market overview and possible impact of notification procedure
 

The production of electric energy in 2013 amounted to 162.5 TWh, which is an increase by 1.66% in comparison to 2012. The gross energy consumption increased only by 0.62% to 157.9 TWh. The net energy consumption which is the basis for the calculation of the RES quotation obligation has not been published yet, but generally it amounts to 76.5% of the gross consumption, i.e., 120.8 TWh. The quotation obligation in 2013 is 12% and corresponds to 14.5 TWh production. The most dynamic production increase with fossil fuels has been observed with lignite power plants amounting to 2.46%, followed by coal power plants with an increase amounting to 0.09% and a decrease with gas power plants of 29.8%. This picture reflects the merit order principle and is also observed in other EU member states, such as for instance Germany. Onshore wind increased by 47.2% and provided to a total of 5.8 TWh RES production. Hydropower provided to a RES production of 2.76 TWh compared to 2.27 TWh in 2012, but this is not caused by new investments but just natural environment. Other RES installations, beside biomass and co-firing, provided to 70 GWh RES production. Still unknown are the figures for co-firing and solid biomass firing. Most likely the 2012 production of 9.5 TWh will remain at the same level, but there will be a significant shift from co-firing (production in 2012 amounted to 7.3 TWh, expectation for 2013 is 4.5 TWh) to dedicated biomass (2012 production amounted to 2.2 TWh, 2013 production to 5 TWh). Most of the solid biomass which has been fired constitutes a mix of forest and agricultural biomass. Due to the fact that the definition of rounded wood changed at the end of 2012 there are massive delays with the issue of certificates of origin of ERO. According to our research, an amount of up to 7 TWh of green certificates for 2013 has not been issued yet and most probably will not be issued before the end of the 2013 settlement period by March 31, 2014. By 31 March 2013 the “official” oversupply of green certificates amounted to 5 TWh (excluding approximately 2 TWh RES production concerning not issued certificates of origin for forest biomass). The overproduction in 2013 amounted to approximately 3.5 TWh, which provides for a total oversupply of 10.5 TWh if all certificates for forest biomass would be issued by the end of March 2014. Although certificates of origin for up to 7 TWh 2013 biomass production have not been issued yet, most likely a part of it will be issued by the end of March 2014. This will contribute to an official oversupply of green certificates by March 31, 2014, somehow comparable to 2013 official oversupply, most probably with no larger impact on the certificate price (average price for green certificates in 2014 amounts to PLN 225 and for Q4 2013 amounted to PLN 197 per MWh). If the notification of the RES Act with the EU Commission, GD competition will be initiated, the GD Competition will most likely concentrate on historical oversupport for larger RES installations of more than 125 MW capacity, e.g. Wloclawek hydropower plant and 24 co-firing power plants. No wind farm exceeds the 125 MW threshold. The Wloclawek hydropower plant was depreciated when it entered the support scheme in 2005 and did not make any investments in the next years. Co-firing installations invested little money in IRR rates between 3 months and 3 years and until the end of 2012 it had operative margins at a level of up to 30-40%. As installations above the 125 MW threshold are subject to individual notification, European state aid law, i.e. article 108 sec. 3 of the EU treaty implements a standstill obligation during the notification proceeding, i.e. for large hydropower and co-firing no green certificates should be issued at that time. The quotation obligation for 2015 and 2016 will still increase by 1% of net energy consumption per year as no changes to the quotation obligation before 2017 seem to be realistic.

The average wholesale price for electric energy for the year 2013 – guaranteed for RES installations (except co-firing), the so called ERO-price, according to the arithmetic average of the quarterly average prices, should amount to approximately PLN 195 which is 3% less than the previous ERO-price. The ERO-price is usually published on March of the following year. Due to the already concluded forwards for the electric energy, it is likely that this trend will continue. The current negative trend will not reverse in a short term which has an impact on the ERO-price for 2016.

 
dr Christian Schnell
coordination/transactions/
venture agreements
cschnell@dms.net.pl

 

Awards and recommendations 

Legal 500 2013: energy and natural resources

IFLR 2012, 2013 and 2014: project finance

Corporate Intl Magazine 2012 and 2013: renewable energy and project finance

 

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