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Reforming Poland’s renewable industry


Ian Wood and Rob Broom

How will recent changes to Poland’s Renewable Energy Sources Act impact the country’s energy landscape? Ian Wood and Rob Broom from King & Wood Mallesons investigate.

Reforms to incentivise investment in renewable energy in Poland are crucial due to a plethora of factors. One such example is Poland’s legal obligation under the EU Renewable Energy Directive 2009/28EC, to achieve a target of 15% from renewable energy sources (‘RES’) in gross final consumption of energy by 2020 or buy the rights for the amount of their missing quota or pay a penalty(1). Additionally, there is a need to adhere to the EU Large Combustion Plants and Integrated Pollution Prevention and Control Directives (now combined under the EU Industrial Emissions Directive 2010/75 the ‘IED’), as well as the EU Emissions Trading Scheme Directive 2003/87 (‘EU ETS'), which all require a reduction in carbon emissions (2).  Furthermore, Poland's combustion plants will by July 2020 need to implement stricter EU emission limits for power plants and other industrial installations under the IED when the extension encompassed in its Transitional National Plan (‘TNP’) expires (3).  The TNP, which was approved by the EU in February 2014 (4), gave Poland an additional four years - from 2016 to 2020 - before it will have to comply with IED targets (5).

Reforms introduced by the  Renewable  Energy Sources  Act  2015 (the ‘RES Act’), which came into force 1 July 2016 marked a significant step forward, however, subsequent amendments to the RES Act have illustrated how the Polish government is in a difficult position of striking a balance between developing RES for energy diversification and rescuing its coal industry. It is estimated that around 80% of Polish coals mines (mainly concentrated in the south-west region of Silesia) are unprofitable and the sector employs around 104,000 people, with another 208,000 people on miners’ pensions (6). Poland has Europe's largest hard coal reserves and last year thermal coal and lignite accounted for 84% of the country's electricity generation (7). Despite government subsidies, Poland’s coal mining industry debts totaled more than EUR 3 billion at the end of October 2015 (8).  

The RES Act, (which is the implementation of the provisions of Directive 2009/28/EC into Polish law), sets a new regulatory and economic framework for investments in renewable projects in Poland (9). The RES Act is based on two mechanisms: (i) awarding contracts for difference (‘CFDs’) for installations successful in internet based auctions (the ‘Auction System’) announced, organised and run by the President of the Energy Regulatory Office (‘ERO’), and (ii) feed-in tariffs (‘FITs’) for microgeneration with a capacity up to 10kW. The RES Act (as described in Chapter IV therein) forms two separate schemes for RES installations, contingent on when the particular installation started generating electricity. RES installations that commenced generating electricity on or before 31 December 2015, were meant to obtain and sell Green Certificates. RES installations that started generating electricity on or after 1 January 2016 were to compete for CFDs, with a fixed, indexed Strike Price for 15 years (10)  in an Auction System.  

The Auction System (which is won by the bidder who offers electricity at the lowest price) replaces the previous renewable energy investment incentive system, under which installations were required to obtain tradable/transferable certificates of origin from RES (‘Green Certificates’) issued by the President of the ERO and to sell property rights arising from those Green Certificates (the ‘Green Certificate System’). The property rights arise once the Green Certificates are registered on a register of certificates operated by the Polish Power Exchange ‘Towarowa Gielda Energii S.A.’ (‘TGE’), a subsidiary of the Warsaw Stock Exchange. The Green Certificates can be traded on a regulated market, such as, the TGE, or within the over-the-counter (‘OTC’) market, but all transactions must be registered with the TGE. The value of Green Certificates is set by the market (11). Green Certificates (like securities) have no material form, the proof is merely an electronic record of the registration in the registration system. They are indefinite instrument, subject to redemption at the request of its holder (12). Electricity producers must attain a minimum level of share of renewable energy from RES (for 2015 this was 14%), and if they don’t, they must fulfil the obligation by either making up the difference by purchasing Green Certificates on the market, or pay a ‘compensation fee’ determined by the President of the ERO. This, for 2015, stood at PLN300.03/MWh (ca. EUR 75). 

Likewise, electricity distributors are legally obliged to acquire a minimum amount of renewable energy (for the 2015 year this was 14%), and any shortfall can be addressed through the purchase of Green Certificates. Green Certificate trading is a means by which industry players can generate additional profit by producing electricity from RES. Electricity distributors could also redeem the certificate of origin to claim exemption from excise tax (which amounts to PLN 20/MWh), as electricity generated from RES is exempt from excise tax when sold to end consumers.

The Green Certificate System had worked well mainly during 2000–2010, due to the development of ‘co-firing’, whereby biomass was burned together with coal in a coal-fired plant. The coal plant could then claim Green Certificates for co-firing as biomass is a renewable energy fuel (13). However, the rapid increase in biomass co-firing created an enormous oversupply of Green Certificates )14_; in September 2014, this had reached 12,103 GWh, i.e. approximately 80% of the expected 2014 Green Certificate demand (15). In March 2016, the oversupply was over 20 TWh (16). The oversupply of  Green Certificates caused their value to drop significantly (from around  PLN 280/MWh in early 2012 to less than PLN 100/MWh by February 2013 (17)). The outcome was a reduction of profitability of co-firing projects. The RES Act cut subsidies for co-firing with biomass by a half (by virtue that it would receive half of a Green Certificate per MWh of electricity), which considering the low green certificate prices climate made co-firing unprofitable (18).  The RES Act also excluded support for hydro plants above 5MW.

The conservative Law and Justice party government (‘PiS’), adopted the RES Amendment Act in December 2015, postponing the entrance of Chapter IV of the RES Act by 6 months, its entrance came into force on 1 July 2016, the Green Certificate System therefore ran up until 30 June 2016.  Installations that produced electricity between 1 January 2016 and 30 June 2016 are eligible for the Green Certificate System, but can change to the Auction System. A further amendment to the RES Act was signed on 28 June 2016, (the ‘Second RES Amendment Act'), under which neither onshore wind nor solar PV farms are allocated separate baskets under the Auction System. This suggests that the PiS government favours stable technologies such as co-firing with biomass over wind or PV farms which generate power intermittently (19).  In addition, by virtue of secondary legislation, the energy minister can decide which renewable technologies are preferred in each new calendar year by determining how much electricity is allocated between the various baskets (20). 

Furthermore, subsidies for co-firing are re-instated as the reduction in support under the RES Act shall not apply to "dedicated biomass co-firing installations" where the share of electricity or heat produced from biomass, bio liquids, biogas or agricultural biogas is higher than 20% of the total amount of electricity or heat produced." (21). The Second Amendment Act therefore allows the coal industry to capitalise on co-firing, whilst also promoting certain renewables.  

Poland has also severely limited growth in wind generation by passing a bill, signed on 22 June 2016 by President Andrzej Duda, specifically aimed at restricting wind power development. The bill makes it illegal to build turbines within 2km of other buildings or forests, which rules out 99 % of land. In addition, the bill quadruples the rate of tax payable on existing turbines, making them unprofitable (22). 

According to the credit rating agency Moody’s, Poland's ability to generate 15% of its electricity from RES will very much depend on the pace of development of alternative technologies, such as biomass and biogas that appear to be promoted by the government (23). By limiting the growth of wind generation, this task will be more challenging. It remains to be seen if this target will be met particularly as Poland plans to construct a capacity of 11 300 megawatts of coal power by 2020 (24) with new coal plants planned in Kozienice, Opole and Jaworzno, with a further two being considered in Ostroleka and Pulawy (25).  


ABOUT THE AUTHORS
 

Ian Wood (Partner) and Rob Broom work with Energy and Infrastructure at King & Wood Mallesons.
 

FURTHER INFORMATION
 

King & Wood Mallesons, http://www.kwm.com 

 

 

References

  1. Adam Easton. ‘Poland 'will miss 2020 RES Target'’. Platts Power in Europe. 14 March 2016
  2.   Poland - Q2 2015 - Market Overview. BMI Power Report. 1 April 2015
  3.   Platts. Poland defers emissions restrictions to 2020 from 2016. 28 Dec 2012, available at http://www.platts.com/latest-news/electric-power/warsaw/poland-defers-emissions-restrictions-to-2020-6960922, accessed 10 August 2016.
  4.   Health and Environment Alliance, Information release: EU decision to allow greater pollution of Polish power plants puts health of citizens at risk, available at http://www.env-health.org/resources/press-releases/article/information-release-eu-decision-to , accessed 10 August 2016.
  5.   ibid.
  6.   EUoberver, ‘Poland's love affair with coal won't end soon’, available at https://euobserver.com/regions/130319, accessed 9 August 2016
  7.   Adam Easton. ' Poland 'will miss 2020 RES Target'’. Platts Power in Europe. 14 March 2016
  8.   Kathiann M. Kowalski. Midwest Energy News.In Poland, efforts to rescue coal industry will likely come up short. 7.12.16 available at: http://midwestenergynews.com/2016/07/12/in-poland-efforts-to-rescue-coal-industry-will-likely-come-up-short/, accessed 10 August 2016
  9.   Report : Renevable Investments in Poland 2016 - Onshore Wind & Photovoltaic, available at http://wysokienapiecie.pl/energy-poland/1229-report-renevable-investments-in-poland-2016-onshore-wind-photovoltaic, accessed 29.06.16
  10.   BiznesPolska.pl. Optimization of Wind Farm projects for the CfD auction system available at http://biznespolska.pl/bizlists/wind-article/225307/OPTIMIZATION-OF-WIND-FARM-PROJECTS-FOR-THE-CfD-AUCTION-SYSTEM.html, accessed 11 August 2016 & Wojciech P.Cetnarksi – President of the Board of Polish Wind Energy Association. Doing business in Poland April 2015, available at http://www.tureb.com.tr/files/iwpc/sunumlar/1nisan/cetnarski.pdf, accessed 11 August 2016. 
  11.   Adam Easton. RES law ?game changer': PGE. Platts Power In Europe. 11 May 2015
  12.   Green Energy Poland SA’s website, available at http://gepsa.pl/en/322-2/, accessed 12 August 2016.
  13.   Michal Bacia. Poland’s Renewable Energy Story (Warning: It Sucks) . Clean Technica. 2 May 2014, available at http://cleantechnica.com/2014/05/02/renewable-energy-legislation-poland-april-2014-proven-methods-killing-renewable-energy/, accessed 11 August 2016.
  14.   Karolina Zagrodna. Traders concerned by Poland's new green subsidies plans. European Daily Electricity Markets. 12 May 2015.
  15.   The Polish Wind Energy Association website, avialable at http://psew.pl/en/aktualnosci/568-oversupply-of-green-certificates, accessed 11 August 2016
  16.   Association of Energy Trading Report, "status on 31 March, 2016", available at http://webcache.googleusercontent.com/search?q=cache:tIqKJfjKZ8EJ:www.toe.pl/pl/wybrane-dokumenty/rok-2016%3Fdownload%3D1462:electricity-and-gas-market-in-poland-status-on-31-march-2016-toe-report+&cd=1&hl=en&ct=clnk&gl=uk, accessed 11 August 2016. 
  17.   Argus Media. Polish renewable subsidy crash hits biomass, available at http://www.argusmedia.com/pages/NewsBody.aspx?id=836517&menu=yes, accessed 11 August 2016.
  18.   Adam Easton. RES amendments favor co-firing.23 May 2016 
  19.   ibid 
  20.   Adam Easton. Polish lower house OK's RES law changes. Platts European Power Daily. 13 June 2016
  21.   ibid
  22.   Henry Foy in Warsaw and Pilita Clark in London. ‘Proposed energy bill threatens Poland's thriving wind industry; Renewables’. Financial Times (London, England). 18 April 2016
  23.   Moody’s investors service – Announcement  - Moody's: Poland's law on wind farms will hinder growth in renewable energy generation. 29 June 2016, available at https://www.moodys.com/research/Moodys-Polands-law-on-wind-farms-will-hinder-growth-in--PR_351411, accessed 11 August 2016. 
  24.   Bankwatch.org. Coal-fired power plants in Poland available at http://bankwatch.org/our-work/projects/coal-fired-power-plants-poland, accessed 11 August 2016.
  25.  Adam Easton. '  More new coal planned for Poland’. Platts Power In Europe.23 November 2015

 

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