A guide to support for Polish renewable energy sources following the 2018 amendments

At the European Union level Poland has a binding target of 15 per cent final energy consumption from renewable sources by 2020. The Act of February 20, 2015 on Renewable Energy Sources (the RES Act) provides for the gradual switch from a green certificates system to an auction system. According to the Energy Regulatory Authority (the ERO), as of June 30, 2018, 8.5 GW of renewable energy sources installations (the RES Installations) were connected to the grid in Poland, including

• 126 MW of solar projects.
• 5.87 GW of wind projects.
• 979 MW of hydro projects.

Poland is currently only around 75 per cent towards meeting its EU target1. This briefing considers the support scheme, established under the RES Act, which is intended to deliver the Polish target¹.

The RES Act was significantly modified under the Act of June 7, 2018 which entered into force on July 14, 2018 (the RES Amendment Act). The main changes made by the RES Amendment Act include

• Modification of auction mechanism.
• Extension of the validity of the building permits for the wind farms which do not meet conditions of so-called Distance Act.
• Decrease of the basis for calculation of the land tax applicable to wind farms since January 1, 2018.

Chapter 4 of the RES Act, which fundamentally changed the support system for generators of electricity from renewable sources, entered into force on July 1, 2016 and introduced an “auction mechanism”. The RES Act maintains the green certificate system for existing renewable energy installations which began generating electricity before July 1, 2016 (the Existing Installations), albeit with some changes to the current rules. For new RES Installations, i.e. those that started generating electricity on or after July 1, 2016 (the New Installations), the RES Act introduced new support regimes

• A guaranteed price of electricity in the form of either feed-in tariffs (the FiT) for small-scale and micro-scale biogas and hydro installations (with a capacity lower than 500 kW) or a right to recover any negative balance in the form of feed-in premium tariffs (the FiP) for mid-scale biogas and hydro installations (with a capacity higher than 500 kW but lower than 1 MW)².
• Contracts for Differences (the CfD) for the RES Installations with a capacity of at least 500 kW.

The Existing Installations will continue to be eligible for green certificates but the period of support is restricted to 15 years from the date the installation first exported electricity to the grid.

Conversely, the previous RES Act did not have a limited duration for eligibility for green certificates. Similar to the previous RES legislation, the RES Act provided that entities supplying electricity to end users and certain other types of entities are obliged to surrender green certificates to the ERO which are then redeemed by the ERO, or pay a substitution fee. The substitution fee per MWh amounts to 125 per cent of the average annual price of a green certificate, but it may not exceed PLN 300,03.

Modified auction baskets

The RES Amendment Act introduced a modified structure of the technology auction baskets and limited their number from seven to five

• Basket 1: biogas installations and biomass sewage treatment plants
• Basket 2: hydro installations, geothermal installations, bio liquid fuel installations and offshore wind farms
• Basket 3: agricultural biogas installations
• Basket 5: hybrid RES Installations

Each of the above baskets are additionally subdivided into the sub-baskets for (i) the Existing Installations (i.e. operating before July 1, 2016) and the (ii) the New Installations (i.e. operating as a result of the auctions).

The RES Act states that for the above baskets separate auctions will be organised for the RES Installations with the total capacity (i) lower or equal than 1 MW and (ii) higher than 1 MW.

Auction pre-qualification criteria for the new RES Installations

A New Installation can participate in the auction if it first completes the pre-qualification procedure conducted by the President of the ERO which is completed by issuance of a certificate valid for 12 months.

The following documents (valid for at least six months) are required for the pre-qualification procedure

• Grid connection conditions or grid connection agreement.
• Final and non-appealable (prawomocne) building permit (except for the offshore wind farms).Final and non-appealable (prawomocne) environmental decision.Final and non-appealable (prawomocne) permit to build and operate artificial islands (only in the case of the offshore wind farms)³.
• Project implementation timetable.
• Plan for the RES Installation setting out proposed location of this installation, grid connection points and metering system.

Contracts for Difference

As stated above, New Installations are no longer eligible for green certificates. The New Installations with total installed capacity lower than 500 kW using biogas and hydro power to generate electricity may apply for a FiT, and New Installations with total installed capacity of 500 kW or more may apply for FiP (if using biogas and hydro power to generate electricity and if the total installed capacity is lower than 1 MW) or a CfD for large-scale generation. It is therefore important to understand the key terms of the CfD.

New Installations seeking support under a CfD are required to participate in an auction mechanism, which are announced by the President of the ERO at least 30 days in advance. Pursuant to the RES Act, the period of support for the winners of auctions is 15 years from the date of the first sale of electricity, but shall not be later than December 31, 2035 in any event.

The Existing Installations may switch from green certificates to the CfD and participate in auctions. Such auctions are organised separately from the auctions for New Installations and the project operators must submit relevant declarations confirming that they wish to enter into the new subsidy system and participate in auctions. However, an Existing Installation that elects to participate in auction will lose the right to obtain green certificates if and when the Existing Installation wins an auction and first sells electricity following the auction.

If successful in a CfD auction, a RES Installation project with a total installed capacity of 500 kW or more will be entitled to receive the “negative balance”, being monthly payments equivalent to the difference between the auction price offered by that project and the market electricity price, subject to the maximum volume bid in the auction. The negative balance will be paid by Zarządca Rozliczeń S.A., a company wholly-owned by the government, acting as a settlements manager. If however the market price exceeds the auction price, such positive balance shall be settled (set-off) by the owner of the RES Installation to Zarządca Rozliczeń S.A. against the next negative balance. Any positive balance as at the end of 15-year support shall be paid to Zarządca Rozliczeń S.A. in six equal installments. If that installation produces electricity in excess of the volumes bid in the auction, it will not receive the difference payment for this excess electricity (but it will receive the market price applicable). Throughout the support period, the guaranteed auction price awarded to a RES Installation will be indexed annually by the Polish CPI.

By the end of October of each year, the Polish Council of Ministers (Rada Ministrów) will set the maximum volume and value of electricity that can be purchased in each of the above mentioned (separate) auctions, with the exception for auctions organised in 2018 as these data are set out directly in the RES Amendment Act (see below).

In accordance with the RES Act, the relevant minister (currently the Minister of Energy) is obliged to set a maximum bid price (reference price) which bidders cannot exceed when bidding at auction, with the exception for auctions organised in 2018 as these data are set also out directly in the RES Amendment Act.

The RES Installation is required to produce and sell at least 85% of the electricity declared in the auction, which is tested in three year intervals with the first testing date taking place after three full years of the support in the form of the CfD. Failure to meet this threshold is subject to fine for the owner of the RES Installation.

Maximum level of acceptable prices

For the purpose of 2018 auctions the Polish government proposes support in the amount of PLN 15,750,000 (ca. €4 billion) for wind and solar RES Installations with a capacity of at least 1 MW. The maximum bid price (a so-called reference price) which may be proposed by a bidder in an auction in 2018 for such RES Installations amounts to PLN 350 per 1MWh (ca. €80) for wind projects and PLN 400 per 1MWh (ca. €93) for solar projects, in each case, with a capacity at least 1 MW.

The RES Amendment Act has also introduced a requirement that the volume of electricity which may be successful in a given auction cannot exceed 80 per cent. of the total volume offered in that auction. This mechanism is expected to increase competition among the bidders as 20 per cent. of the bids (the most expensive) will not be ccepted.

Grid connection

By law, grid connection agreement authorises distribution transmission system operator or distribution system operator to terminate this agreement if electricity is not delivered to the grid within 48 months from the date of the grid connection agreement. The RES Amendment Act provides however for the extension of the deadline for the delivery of the electricity to the grid for the auction winners by the periods for the construction of the RES Installation and first sale of electricity after winning an auction set out below.

State aid issues

The RES Amendment Act modifies the rules for the inclusion of the state aid in the price proposed in the auction. Currently, the bidders should propose in the auction price for the electricity without taking into account the value of the state aid awarded to the RES Installation (for example awarded by grant or tax incentive). If the operator of a given RES Installation wins an auction it shall reduce the winning price by the amount of awarded state aid. Such approach shall provide equal treatment for the operators of the RES Installations and prevents some operators of the RES Installations awarded with the state aid from proposing lower prices for the electricity.

Deadlines to construct the RES Installation and first sale of electricity after winning an auction

Pursuant to the RES Act, as amended by the RES Amendment Act, the generator that has won the auction can benefit from the support using a CfD based mechanism if the RES Installation has been completed and started sale of electricity within a specified period after the date of the auction, such period being

• 18 months in the case of the solar projects.
• 30 months in the case of the onshore wind projects.
• 72 months in the case of offshore wind projects.
• 36 months in the case of other projects.

Age of generating assets

The RES Amendment Act also limits the age of assets generating electricity that can participate in the auction as RES Installations. As at the date of the first generation of electricity after the date of the auction, assets must not be older than

• 18 months in the case of the solar projects.
• 24 months in the case of the onshore wind projects.
• 36 months in the case of other projects.

Mandatory obligation to sell electricity on the power exchange

Pursuant to article 72a of the RES Act, as amended by the RES Amendment Act, the electricity generator which has generated electricity from the RES Installation which is not a micro-installation or small installation⁴, shall export the electricity to the grid and sell it on the commodity exchange or the exchange market organised by entity that maintains the regulated market in Poland.

We believe that this provision meant to introduce exchange obligation (obligo giełdowe) only for newly built RES Installations which start generating electricity after the RES Amendment entered into force (i.e. after July 14, 2018), but before the auction and was intended to impose obligation to sell electricity through a power exchange as a condition for participation in the auction. As a general rule, the RES Installation may participate in the auction if it has not sold electricity before the auction. Therefore, the discussed provision allows the RES Installations that started generating electricity in the period between July 14, 2018 and auction (but not later than December 31, 2020) to participate in the auction, but on the condition that such electricity generated before the auction will sold on the power exchange.

Until the interpretation of the President of the ERO published in August 2018 which states that this exchange obligation applies only to the winners of the RES auctions, this provision could have been read as introducing exchange obligation for all generation of electricity from renewable energy sources⁵.

Secondary trading

The RES Act introduces a secondary market for the auction winners, as a winner of the auction may, upon consent of the President of the ERO, transfer its rights and obligations under the said auction to a third party which acquired the said RES Installation. This mechanism does not apply to transactions for the sale of shares in the special purpose vehicle that owns the RES Installation.

Pursuant to the previous versions of the RES Act, the existing renewable energy installations were eligible for green certificates and benefited from a mandatory purchase obligation whereby local suppliers of electricity were required to purchase electricity from RES Installations at a price set out in the RES Act. This price was payable for 15 years from the time the installation first exported electricity into the system during the commissioning period and was equivalent to the average wholesale market price from the previous calendar quarter, calculated and published by the President of the ERO. Since January 1, 2018 the mandatory purchase obligation is limited to electricity generated from RES Installations with a total installed capacity of less than 500 kW. This means that existing RES Installations with a total installed capacity of 500 kW or more are no longer entitled to demand that so-called “obliged suppliers” purchase their electricity but are now forced to sell electricity on the market (but it shouldn’t be an issue to find a willing buyer in the case of demand for electricity in Poland).

The RES Amendment Act extends (from three to five years), i.e. until July, 16 2021 the validity dates for the building permits for wind farms which could not be constructed due to non-compliance with a 10H rule introduced by so-called Distance Act (i.e. Act of May 20, 2016 on investments in relation to wind farms) whereby a wind farm cannot be constructed at distance from the residential building lower than ten times height of such a wind farm.

As a result of this amendment, the building permits which were not used by the investors to start construction of the wind farms due to said non-compliance with a 10H rule authorise construction of the wind farms on such sites provided that the RES Installation obtains an occupancy permit (pozwolenie na użytkowanie), following completion of the construction phase, by July 16, 2021.

The RES Amendment states that since January 1, 2018 only the construction elements of the wind farm (foundations and tower), but no longer technical elements thereof (wind turbine), are subject to taxation. That said, the RES Amendment Act resets (with retroactive effect to January 1, 2018) taxation rules in force in Poland at the end of 2016 and allows owners of the RES Installation to pay lower land tax.

The RES Amendment Act does not however introduce amendments to the rules for land taxation in 2017 and does not set out rules for return of the settlement of the overpaid tax (and interest accrued thereon) in 2018 between local municipalities and investors.

With these reforms we expect to see increasing interest in renewable generation in Poland.