Introduction
1. The Polish Wind Energy Association positively judges the Ministry of Economy declarations announced on 17 September 2013, showing determination to develop the final draft of the RES Act. The presented proposals rightly refer to the targets laid down in the National Renewable Energy Action Plan, which provides for substantial wind energy development. Nonetheless, certain assumptions cannot be accepted. The reservations pertain to the specific solutions that violate accrued rights, the principle of protection of right ongoing interests and, in certain cases, discriminate the wind energy sector towards other RES. At the same time we see the possibility to refine many detailed assumptions to the presented proposal by way of true public consultations.
2. We also hope that the achievements of almost 3 years of discussions on the new RES Act will not be squandered and some of the best solutions, developed with the participation of PWEA, will apply to the newly proposed scheme. In particular it is necessary to comply with the fundamental requests concerning the protection of accrued rights, the urgent improvement of the certificates of origin scheme and the stability and profitability of RES investments.
3. In our opinion wind energy is capable of building even more than 3500 MW of sustainable capacity (i.e. producing energy also after the expiry of the support scheme) by 2020, at a cost competitive towards other RES technologies. Such an approach matches the Ministry’s of Economy assumption concerning the need to optimise renewable energy support costs.
4. The PWEA position is based on three main pillars:
– actual rather than apparent respect for accrued rights and right ongoing interests
– non-discrimination of the independent power producers (IPP) sector, whose activity resulted in completion of more than 80% of investments in the wind energy sector,
– non-discrimination of renewable energy sources creating sustainable capacity, of which the majority is delivered by the wind energy sector.
Basic assumptions
5. The introduction of the new support scheme shall be preceded by an immediate improvement of the existing system. Prolonged works on the new scheme (as could be assumed on the basis of experiences from the 2010 – 2013 period) shall not constitute an excuse for the abandonment of remedial action concerning the current certificates of origin scheme.
6. The new scheme shall clearly define a Transitory Period, construed as the period for transition from the existing green certificates scheme to a feed-in premium tariff scheme (the feed-in premium tariff scheme assumes that when the energy price is lower than the feed-in tariff an investment project will receive a subsidy amounting to the difference between the market price and the feed-in tariff) (as defined in Item 17 and further).
7. The assumptions to the new support scheme shall include relevant provisions concerning:
– the protection of accrued rights of existing RES, and
– the protection of right ongoing interests of RES in development that will be completed during the Transitory Period.
Each new investment commissioned under the current support scheme or to be commissioned during the Transitory Period shall have the guarantee of an actual 15-year support period.
8. The existing green certificates scheme proved an effective tool enabling renewable energy development, in particular due to its simplicity and the lack of discretionary nature. Furthermore, the new scheme also shall to the maximum possible extent be based on simple principles and minimisation of discretionary nature, whereas the solutions concerning accrued rights and the Transitory Period shall interfere with the principle of equal support for all RES technologies only to a minimum and substantiated extent.
9. PWEA is afraid that the assumptions to the new support scheme presented by Ministry of Economy are excessively based on discretionary actions of the state administration at the expense of objective criteria and rules. Such an approach creates further risks, which may result in the non-fulfilment of the assumed purposes of the new scheme, i.e. the failure to lauch investments resulting in the achievement of the energy mix assumed in the NREAP. The fears are confirmed, for instance, by the procedure for the issuance of the so-called RES Regulation , lasting several months, or the lack of any corrective action by the governmental administration (despite verbal announcements) in reply to the collapse on the green certificates market that occurred in February 2013.
Improvement of the existing scheme
10. Irrespectively of the time perspective for the operation of the existing certificates of origin scheme, it is necessary to introduce mechanisms eliminating the scheme’s dysfunctions that became apparent in 2012 – 2013 and are manifesting in the collapse of the proprietary interest market.
11. The existing certificates of origin scheme shall function either:
– until the end of the Transitory Period (the approach used in Italy), or
– for a period of 15 subsequent years from the end of the Transitory Period (the approach used in the United Kingdom, where the system will function for 20 years after the end of the Transitory Period).
Reference to Italy and the UK is made because these are the only two EU Member States that planned a transition from the green certificates scheme to a feed-in premium scheme as assumed by the new support scheme presented by Ministry of Economy. In Italy the transition started in 2012 and is positively judged both by investors and the banking sector. In the United Kingdom the Transitory Period starts in 2014 and ends in 2017.
12. However, the Minister’s for Economy proposal for the existing certificates of origin scheme to function until 2021 can under no circumstances be accepted. Such a position does not have substantive grounds. The design proposed by the Minister for Economy entails in the deprivation of a substantial part of projects of a rational, expected 15-year support period (proposed by Minister for Economy in subsequent drafts of the RES Act and currently considered by investors) and de facto forces the majority of them to declare transition to the auction scheme without a guarantee of acquisition of the support (this pertains to 88% of completed investments commissioned after 2006). Furthermore, the limitation of the support period until 2021 does not have a legal rationale. The Minister for Economy derives the limitation of the lifetime of the current scheme from the fact that the Minister for Economy regulation of 18 October 2012 on the detailed scope of the obligation to acquire and present certificates of origin for cancellation (…) defines the quota obligation pertaining to certificates of origin only until 2021. However, invoking the Regulation is incorrect. The calendar specified in the Regulation is only an execution of delegation of legislative powers laid down in Article 9a(9) of the Energy Law of 10 April 1997, which obligates the Minister for Economy to specify the obligation pertaining to the certificates “in the period of the next 10 years”. The delegation of legislative powers means that as of today the obligation pertaining to certificates of origin shall be specified until 2022. The previous Regulation of 2008 specified the obligation until 2017, whereas the earlier one of 2005 – until 2014. None of the dates did specify and could not specify the end of the support scheme, but was a simple fulfilment of delegation of legislative powers to specify the obligation “in the period of the next 10 years”. The issuance of subsequent Regulations confirmed the investor’s legitimate belief that the support scheme’s lifetime is indefinite. In the context of the announced drafts of the RES Act the expectation for new projects could have been decreased to 15 years. Calculation of investment profitability indices and decisions on project development and construction of new projects were made in confidence in the length of the support period.
13. If the existing certificates of origin scheme is to function only until the end of the Transitory Period, it is necessary to introduce a very strict and effective emergency scheme guaranteeing a specific minimum level of green certificate prices. In the short period until the end of the scheme it is impossible to rationally administratively manage the system to prevent decrease of green certificates value. If the scheme is to operate for 15 years from the end of the Transitory Period the value of green certificates could be maintained using administrative tools only, in particular measures affecting the demand for the certificates.
14. The proposed solution limiting co-firing and excluding depreciated hydro power plants from the support scheme is the right direction to restore the balance on the proprietary interest market
15. However, there is no sufficient rationale for the proposed limitation of validity of green certificates, for this decreases market liquidity (instead of a single product this requires introducing several products – certificates of origin/proprietary interest with different validity dates), introduces additional risk of decrease of certificate of origin/proprietary interest value near the end of their validity and furthermore halts development of forward markets, which require high liquidity of the underlying instrument.
16. A principle that fulfilment of the obligation to present certificates of origin for cancellation through the payment of the substitution fee does not result in the fulfilment of the obligation shall be introduced (with the exception of a situation when proprietary interest stemming from certificates of origin are unavailable); furthermore, the trade in proprietary interest within vertically integrated utilities shall be subject to an obligation to verify transaction prices in terms of transfer prices.
17. The OTC market contributed to a dynamic development of RES projects by enabling execution of long-term contracts, decreasing the long-term price volatility risk. When the Minister’s for Economy intention was to maintain the certificates of origin scheme as the basic support scheme tool, we saw it possible to introduce an exchange obligation at the maximum level of 20% (for new projects only). However, when the intention is to introduce an auction scheme, the implementation of an exchange obligation is illegitimate, for this would only undermine the executed long-term contracts, with hard to foresee effects for functioning projects.
18. We are of the opinion that it is necessary to increase the transparency of the certificates of origin market. This may be achieved through introduction of the solutions proposed by PWEA during the works on the so-called Small Energy Tri-Pack (Article 20f). The solutions adopted at that time, proposed by a Senate amendment, are incomplete both in terms of scope and frequency of information to be published.
Transitory Period
19. The Transitory Period defines the deadline required for the completion of RES projects, including wind farms, whose construction started before the effective date of the new RES Act, under the existing support scheme. It shall apply for two years from the effective date of the new Act (had the Act became effective until the end of 2014, the Transitory Period would have lasted until the end of 2016). The Transitory Period would be subject to extension for particular projects in the case of Legitimate Reasons for Extension. The Completion of Investment Procedures shall be construed as the acquisition of a final occupancy permit, whereas Legitimate Reasons for Extension shall be construed as, inter alia, the DSOs/TSOs failure to observe the connection deadline as well as challenging decisions such as building permit or environmental decision, resulting in the incapacity to commence construction or in suspension of construction works, if the investor is finally found not guilty.
20. If the existing green certificates scheme is to function only until the end of the Transitory Period, projects completed under the existing scheme shall receive a Guaranteed Transition Tariff (feed-in premium) (cf. Item 22). This is a solution based on the model introduced in Italy.
21. The selection principle applicable to existing projects for the first two years of functioning of the new scheme, proposed by Ministry of Economy, consisting in the choice between remaining in the existing scheme and transition to the new, parallel auction scheme cannot be accepted due to the following reasons:
– it means that not all existing projects will receive support for 15 years (for it is a principle of an auction that not all projects may win such an auction); 88% of new capacity in renewable sources was built after 2006, what means that only 12% would benefit from a full, 15-year support period without the need for a transition to the auction scheme;
– to maintain a 15-year support period the existing installations will be forced to enter the auction scheme, which is a joker in the pack. It is impossible to determine the support value resulting from the auction or if the project will receive any support at all from the auction.
Auctions for new projects have been implemented in support schemes in different countries; however, an auction scheme for functioning projects would have to be very different, innovative in design. Such a scheme has not been implemented anywhere, among others because it would violate the principle of protection of accrued rights.
22. The Guaranteed Transition Tariff (feed-in premium) shall be calculated as the sum of the 2012 ERO price + the average price of certificates of origin from the 2010 – 2012 period, and be subject to indexation by CPI.
The Guaranteed Transition Tariff for particular projects shall apply for 15 years from the date of receipt of the first certificate of origin (counted in months).
23. There are no grounds to base the Guaranteed Transition Tariff on the price of certificates with regard to 2013 prices. The year is non-representative for the entire system functioning period, for it exhibited abrupt decrease in certificate prices; delayed governmental administration actions and prolonging works on the new RES Act additionally contributed to the decrease. During consultations of the previous version of the RES Act PWEA presented expert reports calculating in detail at what energy and certificate prices the existing wind projects are profitable [report] . It has to be clearly stressed that wind farm projects cannot optimise costs, for they are defined upon construction of the investment. Hence, the following proposals cannot be accepted:
– exclusion of indexation by CPI (substitution fee indexation guaranteed in the currently applicable regulations),
– the concept of auctions for existing facilities,
– the assumption that wind farm projects that used public aid will be excluded from auctions (if this is to pertain also to existing projects and projects under construction).
Actions such as described above would result only in the decrease of expected revenues by applying solutions and schemes that contradict the fundamental principles underlying the current support scheme. Furthermore, a support scheme in the form of green certificates or a feed-in tariff by itself constitutes public aid. Projects that received direct subsidies cannot be discriminated for that reason. Regardless of the above, in practice it would not be possible to determine the value of granted public aid that would result in the exclusion of a facility from the auction scheme. For certainly it cannot be assumed that the aid, often constituting an insignificant part of investment costs, would constitute a specific penalty for the project and result in either unprofitability (for existing facilities) or the incapacity to complete the investment (for new projects).
Support for new projects
24. The support scheme for new projects, i.e. projects commenced after the effective date of the new RES Act, shall be based on a New Projects Tariff (feed-in premium), where the support would be specified as the difference between the feed-in tariff and the wholesale electricity price. The support shall apply for at least 15 years, in line with Minister’s for Economy declarations to date expressed in subsequent drafts of the RES Act.
25. The support in the form of the New Projects Tariff shall apply to wind energy projects complying with two criteria: minimum capacity of installed turbines shall be 1.5 MW (the lower threshold for professional, modern wind turbines) and installation of brand-new turbines. In principle, only projects using modern technologies shall be supported.
26. The support shall be allocated through an auction scheme, where the only selection criterion shall be the proposed tariff for the project. A starting point for an auction shall be a Reference Tariff, being the maximum tariff at the auction, and the maximum allowable discount (maximum 15%); this is to prevent unreasonably low prices, hence unrealistic projects blocking auction limits from bidding.
27. There shall be separate auctions for particular technologies (with different Reference Tariffs) to enable the development of the desired energy mix in the RES sector to ensure sustainable development of the sector and prevent excessive increase in technology or fuel prices following the rapid growth of one type of technology profitable in auction conditions, but liable to profitability loss when price conditions change. An example may be the rapid increase of biomass prices resulting from rapid growth of co-firing volume. The proposed technology allocation shall reflect the technologies laid down in the NREAP.
28. The Reference Tariffs shall be specified by Ministry of Economy on the basis of studies carried out by an independent institution (as in the course of works on the previous version of the RES Act with respect to correction factors). In PWEA opinion the assumption for the calculation of the Reference Tariff shall be the indexation of tariffs granted as a result of the auction by inflation. PWEA proposes to assume core inflation ratio, excluding electricity and fuel prices, for the indexation. This could allow for a lower level of the Reference Tariff; therefore, New Projects Tariff would be lower at the beginning and increase in line with inflation (will be inflation-neutral), what would positively affect electricity tariffs. Furthermore, the introduction of indexation will substantially alleviate the inflation risk, constituting a substantial barrier for long-term debt financing of wind projects (a standard for the financing of wind projects in Poland is a period of 12 to 15 years). It is not the investor who controls the inflation, hence he shall not be exposed to inflation risk. Moreover, the lack of protection against inflation risk at a statutory level would also entail problems with RES bank financing (to date bank financial models included the substitution fee indexation as a statutory principle). The clearly higher base rates in Poland (compared to the rest of the EU), affecting both debt financing costs and the expected return on capital shall also be stressed.
29. The Reference Tariffs shall be announced for a period for three subsequent years, with a degression factor applied in the subsequent years to reflect the expected technological progress for particular technologies (a solution proposed in the previous version of the RES Act). In accordance with the principle laid down in Item 28 the Reference Tariff (before application of degression factor) shall be increased by inflation. For technologies exhibiting rapid technological progress the Reference Tariffs shall be announced in shorter intervals.
30. The volume of auctions (the MW limit) for each year and technology shall be planned until 2020 and announced upon implementation of the new scheme. This will ensure system transparency and enable entrepreneurs to accordingly plan their business activity. However, as a result of monitoring of the support scheme functioning it shall be possible to transfer unused MW limits to increase the MW limits for the technologies that are capable of ensuring the construction of new projects to fulfil the 2020 targets.
31. The support for offshore wind energy shall be separated from auctions for other RES. A “separate basket” with funds allocated to the development of offshore projects is required. Due to the initial phase of offshore wind energy development it is legitimate to apply the fixed feed-in premium or equity subsidies scheme to the first commercial large-scale offshore wind farm projects. The instruments in question would guarantee the development of the offshore energy sector under the auction scheme, enabling Poland to exploit one of the highest offshore wind potentials in the Baltic Sea, stemming from its coastline length and a substantial area of the territorial waters and the exclusive economic zone. Additionally, we would like to stress the very high potential of the offshore wind energy sector to create value added for the Polish economy, amounting to almost PLN 74 billion in the 2025 perspective. The sector’s development may create additional 31 thousand new jobs in Poland and allow for satisfying electricity demand after 2020 while reducing atmospheric emissions and increasing energy security of the state.
32. The Ministry’s of Economy intention to introduce factors promoting stable RES cannot be accepted due to the following reasons:
– it discriminates wind energy, for it is impossible to precisely assess wind farm impact on power system operation, including its stability (cf. the report) , hence to objectively specify such a factor.
Such an approach violates the technological neutrality principle, stressed by the European Commission ;
– it discriminates independent investors (the IPP sector), who, not being vertically integrated groups and holding only individual sources, cannot guarantee reserve capacity for the possessed wind energy facilities;
– as demonstrated by analyses of existing power systems with much higher wind penetration, its impact on the instability of these grids is limited and less than commonly thought [quotation of a report] ;
– it prefers apparently stable sources (e.g. biomass), which, although independent from natural phenomena, are equally unpredictable, for they may cease or decrease production due to reasons attributable to, for example, costs or resource availability.
The promotion of quasi-stable sources discriminates one of the few renewable energy technologies that after expiry of the support is capable of producing electricity from completed installations for a period of at least 10 subsequent years. This is a substantial difference between wind energy and many technologies, which after expiry of the support period must cease to produce energy (an example may be co-firing, which does not produce renewable energy without support – in this case the required support pertains to operating costs rather than investment costs incurred on a one-off basis and later recovered).
33. The only condition for participation in an auction shall be the compliance with three conditions (also to avoid discretionary and lengthy verification procedures):
– the possesion of a final building permit for the entire project (including grid connection and access roads);
– the possession of an interconnection agreement (or valid connection conditions) with connection date enabling the project to be connected within 36 months from the auction announcement date;
– the payment of a deposit on the account of the institution managing the auction/submission of a bank guarantee for the amount of 0.5% of investment value, i.e. approximately 30 000 PLN/MW in the case of wind projects, for a period until the commencement of the construction, construed as the payment of non-refundable advances on the supply of technological equipment. Upon payment of the non-refundable advances twice the value of the deposit, the deposit will be refunded. The deposit would substitute the Ministry’s of Economy proposal to document financing sources, what is difficult to verify and discriminates independent investors, who are incapable of presenting corporate guarantees, hence would be forced to arrange financing without certainty as to the winning of the auction and the price.
34. The winner of an auction shall have 36 months to complete the investment, with regard to provisions concerning Legitimate Reasons for Extension (cf. Item 19). A delay in commissioning of the investment shall result in the decrease of the assigned New Projects Tariff by 0.5% per each month of the delay, however no more than 12%, what corresponds to additional 24 months. After that deadline the investment shall lose eligibility for support.
35. The Minister’s of Economy intention to introduce auctions for the amount of energy rather than capacity cannot be accepted due to the following reasons:
– it does not comply with provisions of Directive 2009/28/EC, violates provisions of Directive 2009/28/EC, which stipulates the need to apply averaged settlement of electricity production from wind to account for the variable nature of these sources (cf. Annex II to the Directive). Basing on the above provisions of the Directive, which promotes technological progress and RES investments as well as capacity increase, ensured only by new, sustainable capacity rather than support for current production, the Act shall take account of the nature of renewable sources rather than discriminate them with regard to this nature (cf. for instance Article 12 of the Directive);
– it substantially discriminates wind energy technology, which already incurs substantially higher balancing costs compared to other technologies (lower predictability of wind generation shall be and is reflected only in balancing costs);
– there are many tools for power system stability management that have not been implemented in Poland to date (wind forecasts only for the National Power System balancing procedures) or are at an initial implementation phase (DSM): wind energy discrimination shall not de facto constitute an alternative for the development of these tools;
– the technological basket approach to auctions proposed by PWEA (as applied both in Italy and the United Kingdom) or the specification of the maximum installed capacity ceiling for a particular technology excludes the risk of wind capacity increase above the assumed level.
36. If auctions for the amount of energy rather than capacity are to be maintained, then only provided that either a correction scheme for the declared production/offered price (a scheme applied in the Netherlands) would be implemented, or the capacity to transfer the non-produced amount of energy (and to receive support above the declared yearly production volume) shall be provided for, although the total support would be limited to declared production in a period of 15 years. There would be no limits for existing projects and projects completed during the Transitory Period; such projects would receive Guaranteed Transition Tariffs regardless of the amount of energy produced until the end of the 15-year support period. However, we would like to stress that adopting a support scheme based on auctions for the amount of energy rather than capacity, with a settlement period shorther than 15 years, will always result in higher number of less effective investments; hence more wind farms producing on the basis of the least expensive rahter than most efficient technologies will be required, depriving our country from the capcaity to participate in wind energy technological progress.
37. Auctions shall be held maximum twice per year. Bidding period shall be 30 days. Settlement of an auction shall occur within 5 working days from the deadline for submission of bids.
38. If at least 80% of capacity is not assigned during an auction, an additional auction for the remaining capacity shall be held within 185 days from the date when the results of the previous auction become final. If more than 80% is assigned, the remaining unassigned capacity would increase the capacity for the next auction.
39. The results of the auctions in subsequent years shall be monitored to enable transfer of unused capacity between technological baskets if the 2020 target would be at risk. Wind energy as an efficient technology may build more new capacity than laid down in the NREAP.
40. The results of an auction could be appealed against pursuant to the Administrative Procedure Code, what shall not suspend the assignment of tariffs to other subjects participating in an auction. However, it shall be ensured that the new RES Act includes short mandatory deadlines for the examination of appeals to administrative courts, similar to regulations laid down for example in the Public Procurement Law.
41. The SEO institution proposed by Ministry of Economy shall focus on the settlement of feed-in premium tariffs (both Guaranteed Transition Tariffs and New Projects Tariff) and provide an optional, voluntary market access service for small projects. This would directly implement provisions of Directive 2009/28 concerning the priority of access to the network for RES energy. The settlement of differences between the market price and the feed-in tariff shall be based on a market prices index, irrespectively of the actual energy prices received by particular RES projects. As regards the provision of market access service the issue related to wind farm balancing costs has to be solved. Separation of market access and balancing creates additional risks, hence potentially additional costs for wind projects. In such circumstances the SEO shall also be the subject balancing and scheduling energy supply. It is doubtful that SEO could fulfil such functions.
42. There is no rationale for the introduction of a monopolist purchasing energy from renewable sources – the SEO – for it limits market mechanisms. This would create a non-market institution on the market which eventually would offer 20% of electricity. The introduction of such a monopoly would be equivalent to termination of long-term contracts, with hard to predict consequences, in particular compensatory consequences for the state budget. Had the SEO provided market access services (cf. Item 41), energy subject to trade under this service shall be offered on the spot market in full at zero price to ensure neutrality towards market prices (energy from renewable sources has priority in purchase, and at zero offer will be fully sold at the spot price)