Informacje

DMS
  December 21, 2012

 
 

With the holiday season upon us, we wanted to share with you our thoughts and hopes as to what we would like to see in the Polish Energy Market in 2013, but more importantly, take a moment to wish all a wonderful Christmas season and a prosperous 2013! Take a moment to enjoy the season, reflect on life, and we look forward to being in contact with all of you in January with the new vigor that a brief respite offers.



  Outlook for Polish Renewable Energy market 2013
 

After a tumultuous year in the renewable energy sector in Poland, this year’s Renewable Energy Newsletter concludes with an outlook for the Polish Renewable Energy market. In 2012 all investors awaited the RES Act, but the legislative process has been stuck in the Council of Ministers since October this year, which lead to uncertainty. Additionally, the Parliament with the support from the government, started to work on an amendment to the Energy Law to avoid further consequences of delayed implementation of the 28/2009 EU-Directive without changing the royalty system at all. The first reading of the amended law was finished at the end of last week, so at the beginning of 2013, the Parliamentary subcommittee for energy will deal with this amendment. Due to oversupply, the certificate price on the spot market has been decreasing since spring this year, which was forecast as early as in autumn 2011 by the think-tank Institute of Renewable Energy IEO. At the very moment the price on the spot market amounts to PLN 210, i.e., 75 percent of the compensation fee. Finally, the electricity prices seem to have stabilized for the time being after an increase of 4 percent in 2011, and some experts predict that the electricity prices will be stable in the forthcoming years due to merit orders.

To start with a general statement: the Polish government seems to have no strategic planning for its energy mix for the next two decades. Shale gas exploration now seems to be less attractive due to economic and ecological reasons. Poland moved forward resolutely with this topic, but most other EU countries have been less affirmative, for some good reasons: the negotiation power of Gazprom is weakening as US gas is getting cheaper, in addition the import of liquid gas from third countries is threatening Gazprom’s negotiating position, and Polish shale gas deposits are much more difficult to reach than it was originally predicted on the basis of the original imprecise geological information resulting in an increase of costs . Furthermore environmental constraints are serious in areas with a relatively dense population.

What about the Polish nuclear power plants? Polish nuclear power plants seem not to be a serious undertaking thus far, as the government has postponed its final investment decision until 2015, i.e., after the next Parliamentarian elections. The Polish state-owned utilities have already claimed that they do not have financial resources to develop shale gas extraction and nuclear power plants at the same time. Furthermore, Russia is moving ahead with the construction of its Baltic nuclear power plant involving approx. 2.3 GW to be located in the Kaliningrad district with an anticipated grid connection in 2017/2018. As 49 percent of the shares will be offered to foreign investors, a power export outside of the Kaliningrad district is very likely, which may question the economics of the planned nuclear power plant in Northern Poland. Consequently, Polish TSO PSE Operator has already started to negotiate the connection terms with Russia to transmit power to the Polish transmission grid.

For the time being coal and lignite firing are still ruling with a 90 percent share of the Polish energy mix. While nuclear power is questioned in general and gas prices outside of the US are still high, coal is experiencing a worldwide renaissance, as the International Energy Agency recently stated. The share of coal in the worldwide energy mix is increasing again - with unpredictable consequences for climate change. The traditional Polish energy sector is delighted about this development, as it seems to favor Polish coal mines. But this is not the whole truth. Approximately 25 percent of energy coal is already imported to Poland, mostly from Eastern Europe. Polish coal mines, although subsidized, are and will be hardly able to compete with the major coal exporters such as Russia, Ukraine or South Africa. With shrinking coal imports to the US due to the US shale gas revolution, these countries will export cheap energy coal to other markets. Therefore, the future of Polish coal mines remains as far from bright, as it is for German or UK coal mines.

So actually the Polish strategy seems to favor the import of Russian gas, Russian coal (including Russian biomass) and Russian nuclear power? Rather not, although the recent development has substantial consequences for Polish trade balance, not to talk about the political impact of energy independence.

So generally renewable energy is a way to provide more energy independence and should be welcomed. And it could create new jobs. In Germany the renewable energy sector offers more than 300,000 jobs. For the sake of comparison, in Poland it offers less than 30,000 – with half of the population of Germany. There is a good reason for this unfavorable relation.

The Polish state-owned energy sector still favors its special way of going green: co-firing of biomass in depreciated coal firing power plants. The technical solution is neither innovative, nor does it create new jobs and biomass shipping of actually more than 2 million tons per year from more than 50 countries worldwide does not provide an acceptable carbon footprint. But as long as the European Union is not able to decide on a reasonable solution as to how to improve sustainability and to restrict the worldwide biomass transportation, the lobbying power of the Polish state-owned utilities seems to be strong enough. Due to the lack of compromise between the Ministry of Economy and the Ministry of Treasury about carving out of co-firing, the current RES Act draft is stuck in the Council of Ministers. But for how long?

In our view, it should not take long. The Minister of Economy has already agreed that the used coal firing boilers installations can be repowered as dedicated biomass single-firing installations. In 2016/2017 approx. 5 GW of coal-firing power plants will need to be shut down due to the EU environmental obligations. Utilities, at least partly, plan to repower these power plants as single-fired biomass installations. Due to the actual wording of the RES Act draft, starting from 2015 a RES installation has to be produced no later than 36 months before commissioning, which would not enable repowering of the used coal firing boilers as single-fired biomass installations. But the Ministry of Economy has already agreed to change the wording of Par. 84 Sec. 9 so that the used coal firing boilers after repowering may count as “new” RES installation as well, thus providing the right to receive green certificates through a 15-year term. This “new” biomass-firing installations would be able to at least partly replace the actual 5 GW of co-firing, so the Ministry of Treasury has already reasonably proposed a compromise to shut down the existing co-firing installations in 2017 when the repowered coal-firing boilers will be ready for commissioning as single-firing biomass installations. The Ministry of Economy has December 17 agreed on this compromise, and finally December 20 the Committee for European Affairs at the Ministers’ Council decided to forward the so-called three-pack (including the RES Act draft) to the Steady Committee of the Ministers’ Council consisting of the relevant Vice-Ministers. According to the most recent official RES draft dated October 9, the recent correction-coefficient amounting to 1.0 was to be granted to co-firing units for 5 years – nevertheless, not from the moment the new RES act will be in force, but from the moment the given unit is licensed under the existing royalty scheme, e.g. 2008 and 2009 for most of the co-firing units. After the Ministry of Economy and the Minister of Treasury reach a compromise as to the legislative process the only larger obstacle that remains will be the feed-in-tariffs for installations of up to 75-200kW (depending on technology), which are generally questioned by the Ministry of Finance.

The question is how this will influence the market price of green certificates? By the end of 2012, a few utilities will have constructed large single-fired biomass installations, e.g. the 190 MW Polaniec power plant with GDF Suez as investor, due to a change in law which was previously to enter into force at the beginning of 2013 (actually postponed until the beginning of 2016) creating a less favorable mix of agricultural biomass and other biomasses. This will increase the number of green certificates again most probably leading to a relatively low price level, although the quotation obligation will increase to 12 percent in 2013 in comparison to 10.4 percent in 2012. An oversupply of green certificates in 2013 is therefore likely. Additionally, a few TWh of green certificates are not sold, as traders are still waiting for the development of prices of green certificates at the beginning of 2013 taking into account the increased quotation obligation. This may lead to a further destabilization of the certificate price. Quite to the contrary, the fact that large industrial consumers will be obliged to purchase green energy according to the new law constitutes a stabilizing factor. Furthermore, another stabilizing factor for the certificate price constitutes the investigation of biomass imports by the Energy Regulatory Authority, URE, which since October this year requires original invoices and legalized documentation from biomass importers, as everybody is aware that the import of agricultural biomass on such a large scale from outside of the EU does not always seem to be a fair play. Finally, round timber (PL: drewno pełnowartościowe) class S-2c cannot be used for energy production in biomass heat and power plants to achieve royalties according to the RES Act anymore. This will lead to a further significant decrease of Polish biomass available for energy production, as actually approx. 6 mln tons of biomass is produced in the country itself, but without class S-2c round timber it will be less than 5 mln. However, the need for biomass following the connection of Polaniec and other large biomass single-fired installations to the grid may increase to a level of 10 mln tons per year, thus requiring an import of 5 mln tons biomass. From todays’ perspective, the necessity to double the biomass imports in 2013 will show a tough competition between a newly built single-fired units and depreciated co-firing units, with substantial price increases for biomass. This may help to change the view of the decision makers as to the necessity of co-firing.

For the renewable energy sector the question is how long the unfavorable price development of green certificates will last? It seems reasonable that after 2013 the pricing of green certificates will most probably improve significantly, as the biomass imports will reach a natural limit, but most importantly the quotation obligation will increase again from 12 percent in 2013 to 14 percent in 2014. This tendency might be visible already in the second half of 2013, as the already issued green certificates will be held back to be sold in 2014.

But how to improve the system to avoid further uncontrolled price decrease of green certificates in the foreseeable future? In our opinion a slight redraft of the headroom solution in case of oversupply of certificates should be the easiest solution. Just to remember the existing wording: if for a period of two consecutive quarters the average price of certificates at the energy stock exchange amounts to less than 75 percent of the compensation fee, the Ministry of Economy may - but does not have to - increase the quotation, e.g. the percentage obligation to purchase green energy to an appropriate value. During the legislative process this clause originally using the word “must” has unfortunately been changed to “may” and is therefore not bankable anymore. However, a further unfavorable development of the certificate price in the first half of 2013 probably amounting below 75 percent of the compensation fee should force the legislator to improve this solution to provide a bankable headroom solution at a level of 75 percent. According to the opinion of Institute of Renewable Energy, due to the overall cost of the implementation of the 28/2009 EU-Directive, the headroom solution has nevertheless limited potential, as more RES Electric Energy provides to less cheaper RES Heat Energy in the green energy balance what will be reflected immediately in the total cost of implementing the 2010 National RES Action Plan.

Finally, one should not forget the ongoing initiatives regarding the sustainable use of biofuels and biomass at a European level. Although not discussed yet at a European level a restriction allowing for firing of biomass generated within a radius of up to 300 kilometers from the installation could be a proper solution to avoid large scale worldwide biomass transportation with a generally questionable carbon footprint.


  PV Power plants international conference March 14 and 15, 2012 in Warsaw
 

In 2013, PV Power Plants - EU, the renowned European meeting place for professional exchange and networking organized by Solarpraxis, will be hosted in Warsaw, Poland. This year, regional thematic priority will be given to increasing international markets such as Eastern Europe (with a focus on Poland and its new PV legislation). The technical focus of the presentations will lie on standardization and quality assurance, financing and insurance, as well as the grid connection of large PV projects. DeBenedetti Majewski Szczesniak is a partner of this conference, Christian Schnell is a member of the program committee. We look forward to seeing you there, and please contact Christian if you find something of importance which should be addressed at this conference.



 

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.

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