By Igor Muszynski

A new renewable energy law will transform the market in Poland by changing the support scheme for renewable energy projects.

The Polish parliament adopted the new law after more than three years of debate. The new support rules will not take effect until January 1, 2016, but renewable energy companies developing projects in Poland must soon take certain steps to prepare for this date.

Auctions

Renewable power in Poland will be supported under a new scheme of revenue guarantees starting January 1.

The guarantees will be provided by a newly-created state-owned entity called the Renewable Energy Settlement Operator (Polish abbreviation “OREO”) for a period no longer than 15 years from the date of the first delivery of power to the grid from a qualifying project.

OREO will be financed by a special fee added to every electricity bill issued to the final customer. The right to receive a guarantee will be granted in auctions, which will be carried out by the Energy Regulatory Authority. The Polish government will define, by the end of October each year, the number of megawatt hours to be covered by the guarantees to be issued in the upcoming auctions and the total value. The Minister of Economy will set the maximum price to be offered in the bids, called the reference prices, for each renewable power technology eligible for bidding, at least 60 days before the auction. The reference prices for the 2016 auction will be announced by May 31, 2015. This procedure will be repeated by the end of each year. The first auction will be open in the second quarter of 2016. The last one in 2021.

Except for a very few cases, all major renewable energy technologies will be eligible to bid into the auctions, provided that they meet formal criteria for auction entry set out in the new law.

The new law allows for participation only of ready-to-build power plants that have valid and binding construction permits and that have secured interconnection rights.

Bidders should bid the number of megawatt hours of energy to be supplied to the grid each year and the price. The bid price will be adjusted annually by the domestic inflation rate. Every bid must be supported with a deposit of PLN30 (US$7.80) for each kilowatt of capacity of the proposed power plant in the form of a cash deposit or bank guarantee. Bids can be submitted only by projects that have been pre-approved by the Energy Regulatory Authority.

Sponsors wishing to take part in 2016 auctions can apply for pre-approvals for their projects starting on May 1, 2015. The first auction will open no later than March 31, 2016 and, pursuant to the new law, will be done separately for projects above or below one megawatt in size.

Projects with capacities of at least 0.5 megawatts are expected to sell their electricity into the market. Sponsors will be solely responsible for entering into power delivery agreements.

If the price actually collected by a project is below the level offered in the auction, then OREO will pay the shortfall to the sponsor. However, OREO will not cover any shortfall below the weighted average price available at the power exchange for the particular day of power delivery. The power exchange is required to publish the weighted average price for each day.

Under the new law, the designated major power purchaser must enter into the power purchase agreement on the same terms concerning price, volume and duration as in the bid that won the auction. Any shortfall payments by OREO will be distributed on a monthly basis. In order to qualify for shortfall payments, the renewable energy project must maintain a production level of at least 85% of the volume of total power production declared in the bid for three consecutive years. Failure to reach this level will subject the project to a penalty to be imposed by the Energy Regulatory Authority in the amount of 50% of the missing production volume multiplied by the bid price.

The new law carves out two renewable energy submarkets.

The first one is a micro installation market. The new law introduced a separate feed-in tariff system for small-scale power generating facilities up to three kilowatts and between three and 10 kilowatts of capacity. The law sets limits of, respectively, 300 megawatts and 500 megawatts of capacity in each of the bands that can be covered with this feed-in tariff sub-scheme. The intention is to encourage micro-power generation by individuals, who will be producing for themselves and selling any surplus power to the grid at the guaranteed price. This sub-market will be filled on a first-come-first-served basis. Most of the capacity is expected to be taken up by photovoltaic panels. This creates an opportunity for photovoltaic panel vendors to sell into the Polish market, where PV facilities, even very small ones, are very rare today.

The second sub-market is for new renewable energy projects up to 0.5 megawatts in size. They will be given power purchase agreements for the accepted bid price and volume of power with a designated major power purchaser. The new law requires that 25% of power covered by the price guarantees must be produced by renewable power generating facilities with capacities of one megawatt or less. This is expected to lead to a significant new market for companies looking to develop projects on a scale of one megawatt or less, as it will be easier for such small projects to meet the formal requirements for entry into auctions (for instance, to secure connection rights and provide deposits) and the slice of market reserved for them is viewed as quite large.

Rush in 2015

The new law allows projects that deliver their first power to the grid by December 31, 2015 to be supported within the existing support system. Major power trading companies and other entities supplying final customers are required by law currently to purchase renewable power at a fixed price equal to the average market price of power produced from fossil fuels in the preceding calendar year.

This purchase obligation is combined with a duty to purchase special rights called “green certificates” that are issued to every operating renewable power producer. Power trading companies and other companies selling to final customers must purchase green certificates each year equal to a percentage of their customer loads. The price for the green certificates is subject to market conditions, so it can vary. A generator is also allowed to sell green certificates via the commodity power exchange, but this means it would take the full price risk.

The rapid expansion in renewable generating capacity led to a 40% fall in prices for green certificates during the period 2012 through 2014. Renewables industry players complained about the situation to authorities and lobbied for changes to limit volatility and the risk of low prices. The law made material modifications to the existing system, but did not go as far as the renewables industry wanted.

The new support system is limited to 15 years from the date of the first power delivery to the grid. There was no time limit on support under the old system.

The new law introduces certain tools to limit volatility in prices for green certificates. First, there will be a reduction in number of renewable power plants eligible for green certificates. Hydro power plants with capacities higher that five megawatts will no longer be entitled to receive green certificates.

Power plants using co-firing of fossil fuels with biomass, biogas or bioliquids must meet certain technical requirements concerning the fuel composition, and there are limits on the number of certificates to be issued for each megawatt hour produced. The percentage of total power sales that will carry a duty to purchase green certificates is 14% for 2015 and will increase to 15% in 2016 and 20% in 2017, but the Minister of Economy can lower this threshold if market conditions warrant.

Market Impact

The new law contains a number of features that will have a significant effect on the renewable energy market in Poland.

The new auction system has several advantages. The sponsor is guaranteed a subsidy to supplement the power price in a manner that is not available under the current green certificate system. The number of green certificates supporting existing renewable energy sources will be limited, which helps ensure a higher price for such certificates in the future. OREO will collect a special renewable energy fee from final customers in the future, thereby spreading the cost of supporting the renewable power industry across every power customer in Poland.

At the same time, the new system creates a number of challenges. Each sponsor must spend material funds to develop a project to a ready-to-build stage before the sponsor can bid. This investment has no guarantee of return, because it is subject to success in the auction. The reference price will be declared just two months before the auction, so it may turn out that the reference price is too low for some projects to remain economically feasible. The new law has guidelines for the government to take into consideration when setting the reference price. The government has been instructed to consider the reasonable actual project costs for every renewable technology. However, the language of the guidelines leaves considerable room for the government to maneuver.

The law imposes on sponsors a deadline of 48 months from the end of the auction to deliver the first electricity to the grid. Offshore wind power projects are granted 72 months for the first power delivery. At first sight, these look like challenging deadlines, but given that only ready-to-build projects can participate in the auctions, there may be enough time, provided the sponsor has also lined up financing.

The new support scheme favors investors with access to low-cost capital since they can bid the lowest prices.

A key feature of the new law is parallel systems of support. Projects that deliver power to the grid by the end of 2015 are grandfathered under the existing support scheme, but only for a period of up to 15 years from the first power delivery date. This should lead to a rush to build projects this year in order to stay in the green certificates system and have the option to stay in this system or try to win in a future auction and receive a shortfall price guarantee. Another incentive to complete projects in 2015 is the need to make first power delivery under the new support system within 48 months of winning at auction. Sponsors will have a one-time opportunity for the first three months after the new law takes effect to propose revised dates for first power delivery under existing interconnection agreements. Failure to meet the interconnection deadline will allow the system operator to terminate the interconnection agreement and claim damages from the sponsor.

The rush to commission projects in 2015 is expected to be followed by a standstill in construction of new projects in 2016 because of the timing of the new auctions. Next year will be devoted to work on bids for the first auction. The auctions will run through 2021.