June 26, 2019

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Draft Amendments to the Renewable Energy Sources Act in Poland announced on Governmental Legislation Center

Under Pressure 

On 5 June, the draft amendments to the Renewable Energy Sources Act (RES Act) were posted on the Governmental Legislation Center website. It is no secret that Poland will not meet the RES energy production level targets imposed by EU Directives, regardless of the means undertaken. Despite this, one positive is that the government is at least trying to make the investors’ lives (and project performance) easier, save some of the ready-to-go projects and make the gap as small as it can be. Many of the draft amendments are rational and desirable to the industry. As a result, the volumes for the upcoming 2019 auctions have already been increased significantly.The amendments can be divided into several categories, which should please:

  • Investors

  • Contractors

  • Equipment suppliers

  • Small entrepreneurs wishing to participate in the Polish energy “transformation” and produce energy for their own purposes

  • International traders

The draft amendments to the RES Act and its statement of reasons spans 60 pages – however, we will do our best to present the most important issues below.

Settling the Final Balance Surplus and Lifting the Profit Cap on RES Electricity Sales

Under current legislation, the installation owner must return to the Settlements Manager the positive balance between the value of electricity sold during the support period and the total price for the electricity generation presented in the auction offer. However, the Settlements Manager, being a commercial company, pointed out that this regulation might – under certain circumstances – be deemed “illegal public assistance” and, as such, questioned by the European Commission. Therefore, the amendment imposes the obligation to return only the amounts of up to the disbursed negative balance. Having fulfilled the obligation to sell the amount of energy specified in the offer, the installation owner may then be free to sell energy on the Power Exchange without any limitations.

The amendment will certainly render RES investments in Poland more attractive, opening up avenues for additional income on the part of energy producers.

Accepting Auction Bids From Installations Already Generating Energy Prior to Auction Results Date

Under the draft amendment, installations which have already started generating electricity before the auction closing date will be able to participate in the bidding on equal footing with new installations, provided that they agree to sell the entirety of the generated energy at the price not exceeding the weighted average price for that date announced by the Power Exchange. The other condition is filing a statement to the effect that the entirety of the generated energy will be sold at the above-mentioned price. Such statement ought to be filed with the President of the Energy Regulatory Office within 14 days preceding energy generation commencement.

Fine-tuning the Definition of Energy Price as Provided for in the RES Act

The amendment will introduce the principle of using net prices, i.e. exclusive of VAT. Thus, after the RES Act amendment, the risk of future fluctuations due to VAT rates will be eliminated.

Increasing the Volume of Wind Farm Energy During the 2019 Auction

The standard legislative practice is to statutorily determine the amount and value of electricity to be purchased by way of bidding. Compared with the February 2019 version, the current draft amendment has raised the amount by 25%.

On that basis, it might be inferred that the government is serious about the risk of failing to meet the 15% share of RES energy in the energy mix and has chosen to increase the incentive for investors.

The suggested energy volumes and amounts for the 2019 auctions are:

– For installations of up to 1 MW (in principle, the basket is dominated by PV installations) – The government is contemplating to purchase on auction 11,445,000 MWh at a price not exceeding approx. €987 million

– For installations of more than 1 MW (the basket is dominated by onshore wind turbines) – The government is contemplating to purchase on auction 113,970,000 MWh at a price not exceeding approx. €7.6 billion

Coupled with circulating opinions of possible liberalization of the so-called “10H principle”, whereby a wind turbine location may not be closer than the 10-fold windmill mast height, this decision suggests that the government intends to make long-term changes to the RES industry.

Extending the Period for Building RES Installations and Commencing Energy Sales for Investors, As Well As Extending the Maximum Installation Age

Further, the period during which the investor must commence selling electricity will be extended from 24 to 33 months for onshore wind turbines, and from 18 to 21 months for photovoltaic installations.

This will undoubtedly save many PV projects, which simply would not be completed within 18 months. Such voices have also been heard from the sector itself.

The possible age of RES installations participating in the auctions will be extended accordingly. As per the draft amendment, wind farms may not be older than 33 months (extension from 24 months) as at the first energy generation date, while PV installations may not be older than 21 months (extension from 18 months).

Lifting Unfavourable Regulations Regarding Limited Validity of Wind Farm Building Permits

As per the current regulations, the so-called “Proximity Act”, the wind farms for which the building permit has been issued prior to its effective date (i.e. prior to 16 July 2016) must obtain the operating permit five years after its effective date at the latest, i.e. by 15 July 2021. This requirement meant that many investors participating in the 2018 auctions had very little time to secure financing and build the wind farm.

The contemplated amendment lifts this requirement, introducing regulations arising from the Construction Law, whereby a building permit expires if construction work does not commence within three years following its issuance or it has been on hiatus for more than three years. In practice, many investors interrupt this course by conducting minor construction work on the site, thus avoiding the risk of the building permit expiration. This will certainly create a comfortable environment for investors in terms of joining future auctions. It will also facilitate completing the projects with the documentation stage already completed.

Lifting Unfavourable Regulations Pertaining to Limited Validity of Grid Access Agreements

As per the current legislation, grid access agreements are limited by the date of anticipated link construction. This was intended to discipline investors and prevent the blocking of grid availability. As a result of the legislative turmoil on the Polish RES market that we have seen in the recent years, many grid access agreements were not performed timely. The affected parties did not terminate the agreements (which would render the entire project impossible to complete). Nevertheless, a grid access agreement that may be at any time terminated by an energy company poses a certain risk factor for investors. The amendment eliminates the risk of terminating grid access agreements, extending their validity by specifying that the electricity generation commencement date requested by the investor may be extended to 31 May 2021.

Less Red Tape During the Auction Process and Simplified Offer Submission

The amendment is intended to lower the conditions for auction bids, among other things, by lifting the requirement to provide a particular support period and replacing it with one to provide the anticipated electricity generation commencement date.

Auction participants will also be able to make one update of the winning offer with regard to RES energy sale commencement date and the capacity of the installation (provided that the update will not entail a change of the so-called auction basket in which a given offer participated). However, such offer elements as the energy volume and the support period may not be updated. In order to make such an update, an auction participant will have to file a statement to that effect with the President of the Energy Regulatory Office within 30 days of the electricity generation commencement date. The President of the Energy Regulatory Office will notify the participant of the successful update within 21 days. As per the draft amendment of May 2019, the President of the Energy Regulatory Office will be obliged to announce the auction results within 21 days.

Preparation for International Transfers and Trading in Origin Warranties

Aware of the fact that the Polis RES sector will not have been able to meet the EU RES generation requirement by 2020, the legislator anticipates purchasing origin warranties abroad. Changes are anticipated that ensure compliance of the origin warranties with the norms in effect in EU member states, EFTA, EEC and the Swiss Confederation, or an Energy Community Member State. Further, provisions facilitating origin warranties trading on both local and international markets are to be enacted.

Outcome

During the European Economic Congress in mid-May this year, one might feel that further stalling the natural development of RES or offshore in Poland, as opposed to the processes already underway in Europe and worldwide, will have a ripple effect on the Polish society and economy. The draft RES Act amendment ought to be a confirmation of the acceptance of RES as an element of the Polish energy sector – one which is here to stay and will continue to replace the still dominant coal-fired generation.

The timeframe of the transition provisions might suggest that the amendment will be enacted in a relatively expedited fashion in a matter of several weeks.

Co-Authored by Rafat Pytko

© Copyright 2019 Squire Patton Boggs (US) LLP

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About this Author

Igor G. Hanas International Investment Lawyer Squire Patton Boggs Warsaw
Senior Associate

Igor Hanas’ practice focuses on the energy and industrial construction sectors, and infrastructure projects, including the PPP model. Igor advises foreign and domestic investors, general contractors and service providers on all aspects of turnkey projects, starting from procurement and negotiations, through financing, performance, corporate and contractual issues and cross border technology import to handover of the investment.

Igor advises clients in regulatory matters including license (concession) issues in relation energy, chemical and...

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