SOLIVAN’S LEGAL UPDATE: RES Act, 2020 Obligations, Energy Cooperatives and Auction Basket

SOLIVAN, law firm based in Warsaw, works with nationally qualified and internationally experienced lawyers specialising in five leading sectors: commercial real estate, infrastructure, energy & environment, new technologies and project finance. Solivan provides PEM-Analytics with its legal update, evaluating most current changes in Polish legal environment.

THE REVISED RES act passed PARLIAMENT

 The RES Act amendment drafted by the Ministry of Energy passed by Parliament on 10 June, will be passed by the Senate this week, and will be enacted and published before the end of June. However, the RES Act amendment is currently before the EU Commission, and the new auction support system will not technically enter into force without a positive notification decision. Part of the notification procedure, although generally subject to the decision of the DG Competition, will concern the issue of how Poland plans to fulfil its 2020 RES target – this is subject to justification by the DG Energy. Solivan’s recent report pointed out that by the end of 2016 Poland will be at about 10 TWh, i.e. 30% behind the 2020 RES-e target, and also way behind the green heat and green transportation target. Currently, Solivan’s report is subject to analysis by the DG Energy, so the Polish Ministry of Energy will have to present a clear path on how it plans to meet Poland’s 2020 RES target soon.

NO VISIBLE PLAN HOW TO FULFIL 2020 OBLIGATIONS 

The RES production forecast for 2016, with generally no new investments (beside micro-installations), for the foreseeable future currently amounts to 12 – 13 TWh of wind power, 4.5 to 5 TWh production by dedicated biomass installations, 2 – 2.5 TWh production by 14 dedicated co-firing installations, 1.7 to 2.3 TWh production by hydropower plants, 0.8 to 0.9 TWh production by biogas installations and 0.2 to 0.3 TWh of production by all other installations including PV, which provides with a total production of 22 to 23 TWh per year – depending on wind conditions and rain/snow falls. According to the National Action Plan, the 2020 RES electricity production should amount to 31 to 32 TWh per year. All other RES technologies, beside onshore wind and larger PV installations, due to their development stage, will provide a maximum increase in RES production of 2 TWh by 2020 (not including co-firing in lignite power plants, see below). Microinstallations which will benefit from net-metering only will also not provide to remarkable RES-e production.  So without these two politically questioned technologies Poland will clearly fail to fulfil its RES-e 2020 target.

ENERGY CLUSTERS AND ENERGY COOPERATIVES IN QUESTION 

During the notification procedure, further changes of the RES Act are likely, and the Ministry of Energy has also announced additional amendment to the RES Act in autumn. The concept of energy clusters – proposed by the Ministry of Energy – and energy cooperatives – proposed by the Ministry of Agriculture – taking part in auctions has been questioned by many market participants, such as transmission grid operator PSE, the Energy Regulatory Authority (URE), as well as State-owned utilities. Generally, these type of investments are not clearly defined, but should be preferred by separate auction baskets, and therefore investors with less preferred technologies, such as onshore wind and photovoltaic installations, may try to pre-qualify for such auction baskets. However, the URE has already declared that the software for the auction platform is not prepared for these types of investments, and further changes have not been budgeted. So, it seems too early to adapt projects to match the energy cluster or energy cooperative definition.

 

AUCTION BASKETS FOR PROJECTS WITH HIGH CAPACITY FACTOR SAFE 

The new auction baskets which have been introduced to the bill include (i) RES generators with a high capacity factor and (ii) RES generators with a high capacity factor and low CO2 emissions will rather not be subject to further changes. However, the first Polish offshore investments will not be connected to the grid before 2023. Hydropower plants are also a preferred technology, but operative support will be limited to investments with a maximum installed capacity of 20 MW. Currently, according to the Polish Association for Small Hydropower Plants, about 10 MW of projects are at last mile development stage to qualify for 2017 auction, so the impact on the 2020 target is very limited.

 In case a RES generator started with an amount of energy exceeding the above high capacity factor of over 40% (3,504 MWh/MW/year), but delivered an amount of energy below the above threshold (this refers to the 15-year support period), the received support should be paid back in total. However, according to the changes provided by the Ministry of Energy, this rule does not apply in case of force majeure (according to the FIDIC definition), and when due to grid constraints a feed-in is limited or impossible for a certain period of time. So, these changes will have a major impact on the bankability of offshore and even a few onshore wind farm projects, which can exceed the 40% capacity factor on a p99 or at least p95 basis. We do not expect any further changes to this regulation, as the investment in offshore wind is one of the strategic goals of Polish utilities. However, for onshore wind farm projects, which can match this criteria, it is of major importance that during execution planning and the construction phase all potential snagging issues are eliminated in advance to avoid any limitation in production after entering the support system by feed-in of the first kWh to the grid.

Therefore, we advise to implement BIM (building information modelling) software tools before construction and to align the TSA, BoP, project engineer, design contracts and also the contracts for operation phase, i.e. O&M, technical and commercial asset management, to eliminate all potential interface risks. We expect financing banks to follow this recommendation.

 

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