New Polish energy law good for renewable energy projects

Apr 30, 2004 02:00 AM

A series of amendments to Poland's energy law relating to the further promotion of renewables, will result in four major changes to the current environment for renewable energy projects.
The main effects of the changes, which are set to be approved ahead of Poland's accession to the EU in May, include:
1. Generators who sell directly to end-users will be obliged to supply a percentage from green energy sources.
2. Multiple trading, where distributors and traders buy and sell on green energy in order to meet their obligations, will not be allowed.
3. The tariff for all renewable energy will have to be approved by the regulator, not just the larger projects.
4. Renewable energy projects will benefit from priority dispatch.

Green energy developers looking at opportunities in Poland will be encouraged to hear that a series of amendments to the country's Energy Law, aimed at further promoting renewables, are set to be approved ahead of its accession to the EU in May. A draft bill submitted by the government to parliament at the end of February was approved by the lower house of the Sejm on 2 April and has now been passed to the upper house for ratification.
The amendments, which aim to fully transpose the EU Directive 2001/77/EC on the promotion of electricity produced from renewable energy in the internal electricity market, will not only boost Poland's need for new green energy capacity but also enhance the ability of developers to see projects through to completion. The new legislation will result in four major changes to the current environment for renewables that it is hoped will eliminate existing market failings and in the process promote new project development, according to Tomasz Minkiewicz and Marek Durski, lawyers at the Warsaw office of the UK law firm, CMS Cameron McKenna.

Firstly, in addition to licensed suppliers, all generators who sell directly to end-users, including both large system and CHP plants, will be obliged under the new law to supply a percentage oftheir total sales from green-generated energy sources in accordance with thresholds set by the ministry of the economy.
Such generators will either have to go into the market to buy green energy or produce it themselves by converting existing coal-fired capacity to burn biomass and/or waste or develop new renewable sources.

Secondly, under the new law, the issue of so-called multiple trading, which has to date stifled new renewable energy development, will be a thing of the past. Until now, it has been widespread practice for distributors and traders to circumvent existing legislation by buying green energy and then selling it on to other counterparts enabling a number of suppliers to fulfil their required thresholds all with the same energy, Durski told.
To end this practice, the new law prefigures the introduction of certificates of origin. Certificates will be issued by the URE, the Polish energy regulatory office, to renewable generators, who will transfer certificates to offtakers, allowing the regulator to verify that a supplier has fulfilled his purchase obligations. Indeed, until now it has been impossible to check the origin of the power sold by suppliers as green energy.

The third significant change will be that tariffs for all renewable energy projects of whatever capacity will henceforth have to be approved by the regulator.
At present, only projects above 5 MW have tariffs fixed by the regulator for a one year period, which as Durski pointed out has unfairly discriminated against developers of small schemes, representing a fair share of potential new projects, making their pricing negotiations harder.

Lastly, renewable energy projects will benefit from priority dispatch though the details remain for now unclear pending the issuing of secondary legislation by the ministry of economy.
The law includes a provision allowing the ministry to issue secondary legislation that will specify the details, said Durski, adding that it will also most probably require changes to the grid codes.

Rising obligations for suppliers?
Following the enactment of these amendments, detailed rules regarding suppliers and generators' purchase obligations will be specified by the ministry of economy in new secondary legislation. According to some sources at the ministry, this may involve slight increases to the current thresholds set for suppliers and generators to meet in terms of the percentage of green energy of total sales. This year, the threshold stands at 2.85 % and, according to current legislation, foresees small increments up to 2008 by when suppliers and generators will have to supply 5 % of total sales from renewable energy sources, rising to 6 % in 2009 and 7.5 % in 2010.
According to the most recent figures published by URE, for 2002, only ten suppliers fulfilled their purchase obligations that year: seven regional distributors, three trading companies and PSE, the national grid operator. The remaining 179 licensed suppliers/traders actively engaged in supply (including 26 distributors and ten biggest traders), subject to the obligation, failed to purchase the required volumes of green energy.

New secondary legislation will also further refine and define what qualifies as a renewable energy source. At present this list includes hydro (both large and small though not pumped-storage), wind, biogas and biomass fired plants, geothermal heat, sun photovoltaic cells and solar cells for heat generation but is far from exhaustive and for example does not at present include power plants burning certain types of waste.
The most notable change is expected with respect to cogeneration facilities in terms of plant efficiency. At present cogenerators need to meet efficiency requirements of 65 % to qualify for obligatory offtake. In the new draft this will rise to 70 %.

In terms of waste-fuelled production, the purchase obligation relates to just biomass-fuelled sources, that is to say "substances of floral or animal origin, which are biodegradable and which come from products, waste or leftovers from agricultural production or forestry, as well as from industry processing of such products".
It does not, however, cover electricity produced as a result of thermal processing of wood waste that may contain organic halogen derivatives, heavy metals and their compounds produced as a result of wood processing with the use of preservatives and coating substances as well as wood waste from construction and/or demolition works.

Problems and risks remain
The amendments will, however, not address all the problems facing project developers in Poland, noted the two lawyers, though these issues are not specific to the Polish market. First, there is the issue of tariffs and finding an offtaker. Tariffs for all new plant are fixed in general for no more than two years on a cost-plus principle, with costs and margins reviewed and approved by the regulator in line with market prices. The problem for developers, as Minkiewicz and Durski point out, is that even if a developer's tariffrequest is approved, there is no guarantee that they will then be able to find an offtaker.
Suppliers can and do reject the approved above-market-priced green power from prospective developers, arguing that they already have sufficient power to meet their obligations, whether this is the case or not. In the latter case they can hope to negotiate a better-priced deal or wait for cheaper supply from another producer.

While the regulator can in principle fine suppliers that refuse to buy green power to meet their obligations it is hard to prove that they have intentionally failed to do so. Suppliers can simply argue that the necessary output was not available on the market.
Next up is the problem of interconnection costs, which Durski admits is "a major impediment" to project development. In some cases, developers have to look at covering up to 100 % of these costs, which "may even include some costs of modifying the local system operator's installations beyond the facility's connection point". This is not a hard and fast rule, said Durski, and developers are often able to reach a compromise with the offtaker but this is often, at least, the starting point in negotiations between the parties.

A problem specific to windpower developers everywhere and not just in Poland is the issue of unreliable supply. Polish offtakers typically require wind farm operators to cover the risk of unpredictable supply, which translates into the cost of buying energy at the balancing market.
"When you have to notify the system operator a day ahead of your planned output and subsequently fall short you have to buy replacement supply through the balancing mechanism," said Minkiewicz. "Applying those general rules to wind farms poses a major financial risk for developers," he added.

The administrative procedures' process for renewable developers in Poland is also seen as being obstructive. In a recent report by environmental NGO, WWF, Poland's plant planning process was described as "complicated" with up to 11 procedures to be passed, nothing it should be added in comparison to Hungary or Slovenia, where, respectively, up to 28 and 15 different procedures are required to be passed for project approval.
Renewable developers in Poland have to follow the same procedures as any other developer of a power or other infrastructure project in terms of construction and environmental permits, said Durski.
"There are no additional administrative hurdles exclusive to renewables." "I don't think it is an obstacle but it is obviously a problem," Durski commented, notably "for small projects the risks of obtaining the necessary permits may be quite high compared to the size of the investment." Minkiewicz highlighted issues of gaining approval from neighbouring landowners and a slow-working court system as the biggest problems, "but the risk is manageable", he added.

But on the plus side
On the plus side, renewable energy developers will continue to enjoy the benefits of exemption from an excise tax on output, which all generators are subject to pay since March 2002.
"Though there are changes to the Polish tax System to bring it in line with the EU, this is likely to be maintained," said Durski. Developers should be grateful, since this currently equates to ZL 20/MWh (about 5/MWh), a mighty hit for fossil fuelled power producers, which currently sell output at a market price of around ZL 120/MWh. Renewable energy, meanwhile, sells on average at around ZL 220/MWh, according to the lawyers.
Interested renewable energy developers can also benefit from local environmental funds to help finance their projects, according to the two lawyers with low-interest loans available from state environmental agencies as well as grants from EcoFund.

Source: Enatres discussion list
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