Informacje

DMS
  January 29, 2013

  DMS as a Contents Partner during a seminar on renewable energy in the French Chamber of Commerce and Industry in Poland
 

On January 30, 2013, a seminar entitled "Renewable Energy: Development of wind and photovoltaic energy projects in light of the new act (RES Act)” will be held in Warsaw.
The meeting will be dedicated to important issues related to the investment process, starting from the process of support through designing, financing, connecting to the grid and streamlining of the project through legal and tax aspects of the development of photovoltaic projects.
DMS is a Contents Partner of the seminar. Dr Christian Schnell will give a lecture on the new RES act and spatial development, building permit and the legal title to the real estate.
For more information, click here.


  Year 2012 sets a record for new installed wind turbine generators, but 2013 does not look promising
 

In 2012 720 MW new capacity of wind turbine generators has been installed, the largest amount ever in Poland. At the end of 2012 a total capacity of 2.5 GW wind turbine generators has been installed providing an electricity production of 4 TWh, which is a major part of 6.3 TWh Polish green energy production in 2012 (not including co-firing). Leading is the west Pomerania voivodship (Szczecin) with 726 MW installed capacity, followed by the Pomerania voivodship (Gdansk) with 272 MW installed capacity, then the Wielkopolski voivodship (Poznan) with 254 MW installed capacity, the Kujawsko-Pomerania voivodship (Torun/Bydgoszcz) with 231 MW installed capacity and the Lodz voivodship with 216 MW installed capacity. The smallest amount of wind turbine generators is installed in Malopolska voivodship (Cracow) with 3 MW installed capacity and Lublin voivodship with 2 MW installed capacity. According to the National Action Plan 2010 onshore wind has to increase yearly by at least 500 MW installed capacity to fulfill the targets. Due to a non-existing project finance market for the last few months it is unlikely that in 2013 the target will be met. This was recently confirmed by the National Fund for Protection of the Environment, whereas none of the 65 promissory credit approvals has been realized.


  Termination of CPA agreements at a breakdown on the Polish Power Exchange
 

Quoting standard contractual provisions whereby “If provisions of law or the actual situation change to such an extent that performance of an agreement by one or both parties becomes impossible or contrary to law, the parties shall renegotiate the agreement in good faith”, the energy trading companies/offtakers controlled by the State Treasury are recently requesting the producers of electricity from renewable energy sources to renegotiate the CPA agreements (on purchase of property rights – so called green certificates - attached to the certificates of origin). Even though generally such agreements do not provide for the possibility of termination in the event of a drop in prices of certificates, in this case the grounds to apply a general “rebus sic stantibus” clause may occur pursuant to Article 357.1 of the Civil Code. The economic basis existing at the execution of long-term agreements may disappear in case of drastic decrease of prices without an actual possibility of stabilization in the foreseeable future. Therefore, the risk exists that the agreement will be terminated in its entirety. Also the risk may exist that although the agreement is not terminated in its entirety, the so-called market risk associated with a drastic decrease of prices of certificates will be passed on to the producers of electricity from renewable energy sources. When loans granted to finance the investment in production of electricity from renewable energy are no longer secured, the banks will be forced to terminate the loan agreements without sufficient coverage (also taking into account the stricter supervision of the Polish Financial Supervision Authority), while management boards of energy trading companies will be forced to declare their bankruptcy immediately upon reaching the status of insolvency. With the current situation in mind, one can even imagine that some market players may lead to a drastic decrease in prices of certificates or to a situation when property rights will no longer be traded on the Polish Power Exchange in order to provoke a case of application of the “rebus sic stantibus” clause. In our view, even in this case generally no bases for application of this clause exist, but it should be verified on a case by case basis.


  Oversupply of green certificates and possible solutions
 


Co-Firing variable factor leading to oversupply of green certificates

Co-firing constitutes the greatest variable factor in the production of energy from RES. In 2011, 5.9 TWh of power from RES were generated thanks to co-firing, with 6.5 TWh in 2012. Technical production capacity of co-firing, which relies on the existing installations amounts to approx. 12.5 TWh annually. The cost-effectiveness of co-firing is based, in the first place, on the price of solid biomass. The most expensive production takes place in heat power plants, while the cheapest in the power plants burning brown coal. However, a power plant that fires brown coal issues on average one third more CO2 than a power plant firing hard coal. The profitability may therefore change to the benefit of power plants using hard coal when the price of CO2 certificates materially increases following the legislative actions at the EU level. The profitability limit of co-firing will most probably be reached when the price per CO2 amounts to approx. PLN 100. Approx. 80 percent of co-firing production capacity is in the hands of the State Treasury, and it corresponds to approx. 10 TWh annually of technical production capacity.

Market stagnation without any legislative intervention

In the recent weeks it has been more and more visible that investments in the RES installations have been suspended. Investors have temporarily lost trust in quick adoption of the RES Act and stabilization of the certificates market. If the oversupply reaches the above-mentioned level, from the beginning of April the instability of the system will be visible for all market players and without a perspective that the legislator will react to the increasing oversupply of green certificates in the nearest future, the market players – mainly companies controlled by the State Treasury – may lead to a drastic drop of certificates’ prices at any moment. All holders of the banked green certificates will be forced to make write-offs. According to stock exchange reports, PGE and Tauron have already made significant write offs as at December 31, 2012. Moreover, even the profitability of co-firing is on a constant decrease and the volume of the same is diminishing. This phenomenon is already visible now. The drop in co-firing in 2013 may arrive at 2 TWh, i.e., approx. 4.5 TWh in comparison to the last year’s 6.5 TWh. As a result of this crisis, the Energy Regulation Office is forced to inform the balance market about oversupply in a more transparent way, which will surely happen because everybody will justify the oversupply with the lack of information from the Office. Decision makers have a closer look at this balance, then as it is shown in the attached scenarios, given the approx. 5 TWh of banked certificates, the market will “clean” itself by 2016-2017, depending on how thoroughly the owners of co-firing installations will track and react to the current data concerning the demand for green certificates, and what regulatory limitations will be introduced with respect to biomass firing and co-firing at a European level, and whether Poland consequently transposes EU law. Increasing the quantity obligation, unless significantly (e.g. 16% instead of 13% in 2014) will not speed up anything without regulatory limitation. Nevertheless, one can imagine such “self-cleaning” without intervention of the government, without losses on the part of companies controlled by the State Treasury. However, then the settlement of the oversupply will be prolonged by up to 3-4 years. Ironically Polish energy policy hampering the development of green energy leads to further energy dependence on coal and biomass imports – 75 percent of which comes from Russia.

Oligopolistic behavior of national champions

This may be a preferred option for the four utilities controlled by the State Treasury. On the other hand, the owners of the debt-financed wind farms – so far 16 bln Zloty has been spent - will be in trouble by the time the market regulates itself and the price of green certificates increases to the level of PLN 220-250. Obviously, it does not solve the problem of the deficit of green certificates after 2017, which is when even if the co-firing is kept on the present level or increases to 8 TWh, it will not suffice to cover the deficit. Therefore, the chances to meet the EU target of 19% of RES energy in 2020 are unfeasible since surely there will be no investments in new technological capacities. Getting rid of the oversupply without modification of the support system and limitation of co-firing will lead to an actual breakdown of investments in RES installations, while new RES installations are what the EU expects and what seems to constitute the basis of the social agreement on which the introduction of the support of RES has been based. It will irreparably kill the chances of Poland to satisfy the criteria of EU environmental policy in 2020 and in the meantime consume the funds from the EU budget for the years 2014-2020.

The question is why Polish citizens should pay extra bills for electricity if they get nothing more than co-firing in used coal-firing boilers in exchange? So how to clean up the certificate system for further stabilization? Which options are recently discussed?

Option 1 – Annual cleaning of the green certificate system

A possible regulatory action constitutes cleaning of the system from the non-redeemed (banked) green certificates as at April 1 of each year after redemption of the green certificates and payment of the compensation fee. Given the fixed oversupply – by the time of exclusion of co-firing in 2017 as proposed by the Ministry of the State Treasury – the purchase shall take place at a guaranteed price, guarantying the return on the investment at a minimum level and the possibility to receive financing for the investment. Such a solution was recently proposed by Mr Gorski, the CEO of GDF Suez Polska. Taking into consideration the level of ratios proposed in the draft of the RES Act of October 9, 2012, the guaranteed price should amount to a minimum of 85% of the replacement fee. Given an exemplary average oversupply of 5 TWh in one year, in the years 2013 – 2017 the obligation to buy would constitute a burden for the budget arriving at approx. 1.2 billion Zloty a year, provided that there will be no inflows from the replacement fee, which seems rather improbable given the oversupply of certificates. Presently, failure to redeem the green certificates results in the payment of a compensation fee to the account of the National Fund for Protection of the Environment. However, this solution is not reflected at all in the planned budget of the Fund for the years 2013 -2016. The intervention purchase of certificates, "de facto" means partial retransfer of funds to the (80 percent state-owned) utilities, which funds these very companies had transferred to the Fund in the form of the compensation fee. Therefore, it is generally an operation that is beneficial from the point of view of the state budget since it allows the budget to regain the funds "parked" in the Fund in the form of a dividend paid out by the state-owned energy companies that will take part in the program of purchase of banked green certificates.

Nevertheless the Office for Competition and Consumer Protection still needs to check whether the intervention purchase of property rights could constitute state aid and as such would require notification to the European Commission. The notification obligation is imposed on a member state. The Commission is obliged to consider the notification of the proposed aid within two months when the notification can be deemed as complete. The analysis of the notification usually ends with a decision to not raise objections or a decision on institution of a procedure in compliance with Article 88 sec. 2. The Commission institutes a procedure in compliance with Article 88 sec. 2, if it has concerns whether the notified aid measure complies with the common market principle. In such cases the Commission institutes a formal explanatory procedure. At the end of such a procedure the Commission makes final decision. It may be positive (the aid measure may be implemented), negative (the measure may not be implemented) or conditionally positive (the measure may be implemented provided that certain conditions are satisfied). The approximate maximum time of such a procedure amounts to 18 months.

Option No. 2 – Exclusion of co-firing from the green certificate system

In the draft of the RES Act and the act introducing the so-called tri-pack of October 9, 2012 the legislator proposed to exclude co-firing installations from the system five years after of the given installation received its concession as a RES installation. A significant majority of the operating co-firing installations were granted concessions in 2008 and 2009. Hence, exclusion from the system would take place shortly after the entry of the RES Act into force. Therefore, the risk associated with the oversupply of certificates due to co-firing would disappear and entities whose portfolios included a greater number of green certificates would be able to sell them in due course. At the very moment, this option – as an option that would bring about stabilization of the system for a longer period of time right after introduction - seems to not be able to win support mainly due to the intervention of the Ministry of the State Treasury protecting the national utilities, although it seems to be the cheapest solution for the consumers.

Option No. 3 – Increasing the limit of green certificates

An action that would reduce the oversupply of green certificates could come in the form of an administrative-backed increase of demand for them which can be achieved by the Ministry of the Economy issuing a new regulation increasing the limit of the green certificates which in a given year should be achieved by energy trading companies. It is however likely that the increase of this limit requires notification. The risk related to the oversupply of green certificates still remains if co-firing is not limited since technical capacities of co-firing are presently used only in 50%. Therefore, it is not a systematic solution, but a temporary rescue for the system to be used in the short-term.

Compromise scenario

Additional limitation of co-firing by a correcting coefficient of 0.7 for installations with concession granted (within the transition period until 2017) supplemented with a radical increase of the quantity obligation starting from 2014 (16%) - and at least to 13% in 2013 - can be treated as a compromise scenario. Then we would experience only one year of a slump on the market of green certificates with a clear perspective for the revitalization of the same after 2014. Nevertheless the companies controlled by the State Treasury have to start to obey the market rules (take care that the price of the green certificates is high), and the Energy Regulation Office has to inform the market better.

Sustainability criteria for biomass as a key factor

Moreover, the market of transport and import of energy biomass should be regulated. The system of biomass certification by authorized units with emphasis on ensuring its balanced nature, mainly with respect to its type, place and form of obtaining and transport, is necessary to control. At the very moment, these solutions are being discussed at the European level. As part of the biomass certification system, for instance, a number of audits and inspections at a stage of collection are performed with pellet producers and transport companies plus energy and coal balances are prepared. Such systems concerning biofuels are accepted (formally approved) by the European Commission. Therefore, the proposal is to have the biomass defined in the act and to introduce an obligation to obtain analyses of the energy quality of biomass to be issued by an independent certification unit accepted at an EU level, including the ISCC or REDCERT system.


  “Tri-Pack” shall be approved by the government in the first quarter of the year
 

The Ministry of Economy upheld that according to the schedule, the “tri-pack” shall be approved by the government in the first quarter of the year - as the Deputy Minister Tomasz Tomczykiewicz informed. The “small tri-pack” shall come into force at the end of March. “We anticipate that in the first quarter the “tri-pack” [Energy Law, Gas Law, The Renewable Energy Sources Act and implementing act] will be approved by the Council of Ministers and immediately passed on to Parliament” – said Tomczykiewicz on Thursday, January 24, 2013, thus upholding the declaration made two weeks ago. The Deputy Minister confirmed that the Committee of the Council of Ministers was working on the “tri-pack”– and moving on to the next level proves that the work is very intensive, he emphasized. The Deputy Minister also informed that the work on the “small tri-pack” (i.e., the amendment to the Energy Law) were underway in the Parliamentary Subcommittee, and he hoped that its provisions would enter into force at the end of March. The Minister of Economy, Janusz Piechocinski, confirmed this statement one day later, and additionally proposed to appoint a special commission at Governmental level to agree on outstanding issues as soon as possible.


  Poland leads the field with reasoned opinions and infringement procedures initiated by EU Commission
 

Poland hasn’t yet implemented five out of six EU Energy Directives. No other member state was that reluctant to implement Energy Directives. So far, Poland has only implemented the Eco-Design Directive 125/2009. Due to lack of transposition of the Internal Market in Electricity Directive 72/2009 as well as the Internal Market in Gas Directive 73/2009, on October/November last year, the Commission requested that the European Court of Justice impose daily penalties payment of € 84,748,24 respectively € 88,819,20 against the Republic of Poland. The daily penalties would be paid as from the date of the Court's affirmative ruling until Poland notifies the Commission that it has fully implemented the rules into national law, i.e. when the respective law enters into force. In addition, to date Poland has not yet transposed the Renewable Energy Directive 28/2009, which had to be transposed by Member States by December 5, 2010, so an infringement procedure at the European Court of Justice should be initiated shortly, the Energy Labeling Directive 30/2010, the Nuclear Safety Directive 71/2009 and the Energy Performance of Buildings Directive 31/2010.


 

For more information please contact:

 

       

dr Christian Schnell
coordination/transactions/
venture agreements
cschnell@dms.net.pl
 
C. David DeBenedetti J.D.
project finance
ddebenedetti@dms.net.pl
 
Joanna Świostek
project development/planning
and building law/commercial
jswiostek@dms.net.pl




DeBenedetti Majewski Szcześniak has been chosen
by Corporate Intl Magazine 2012 as the:

“Renewable Energy Law, Firm of the Year in Poland”

“Project Finance Law, Firm of the Year in Poland”

“Investment Funds Law, Firm of the Year in Poland”

 
 

 

 
 

The aim of this Newsletter is to provide a summary of the subject matter. No part of this Newsletter constitutes legal advice or can replace expert legal advice in specific circumstances. If you would like any further information, contact us.

Subscribe now or click here if you wish to unsubscribe from the DMS Newsletter