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Friday, January 22, 2016

The Reality of Coal's Future in Europe

No comment...................

Source: EuroStat.

Note: China just announced closure of coal mines and layoff of one million miners. The decision is a direct result of the shift to other energy technologies in China.

Wednesday, January 20, 2016

Energy Storage Will Reduce Grid Modernization Cost in Germany

Investment in the transmission of energy is one of the most expensive items facing utilities. It is also a long and involved process of permitting and approvals. By increasing distributed energy, the theory was that less energy would have to be transmitted over power lines, since more could be produced and used at the point of generation.

Now a new study in Germany predicts very significant savings on grid modernization by virtue of the growing use of energy storage batteries. This will also, of course, reduce variability in the availability of electricity, allowing production and storage combined to meet the demand as necessary.

Since about 40% of generation capacity in Germany, as in Poland, is normally sitting there idle except for some peak periods, the savings to the cost of maintaining the national power system will also be major. Studies have already demonstrated that energy storage is more cost-effective than "peaker plants."

The next generation of utility will combine distributed energy and storage to reduce the scope of transmission improvements and to optimize the ability to meet the energy demand curve at lower costs.

It seems to be happening in almost every advanced industrialized country....except Poland.

Tuesday, January 19, 2016

Cost of Renewable Energy Starts to Near Parity

Bloomberg in October 2015 posted some numbers on the levelized cost of energy production by technology from calendar year 2015. These numbers refute the myth that folks cannot afford renewable energy. The LCOE for onshore wind is now 83 USD/MWhr and coal in Europe is 105USD/MWhr. The European Commission figures for 2014 were 80 Eur/MWhr for onshore wind, coal at 75 Euro/MWhr, and nuclear energy at 90 Euro/MWhr. Natural gas was 100 Euro/MWhr in the EC data. See Gramwzielony, January 18, 2016.

The cost of renewable energy continues to significantly fall. Increased environmental concerns are mostly raising the price of traditional energy at the same time. 

Another point missed by just looking at LCOE figures is that renewable energy is dispersed, often closer to the end-user and generally carries lower cost of transmission (which is about 40%  of the end-users cost).

You do not need to be an environmentalist or global warming advocate to believe that the future is in renewable energy. It is a matter of technology and economics more than anything else.

Monday, January 18, 2016

What Will the European Commission Decisions on Green Certificates and the New Polish RES System Mean?

On March 16, 2016, a conference on the meaning of the European Commission's new decision on Polish green certificates as state aid and the prospects for its decision on the new RES law will be held in Warsaw. Readers of this blog already know the issues and the possible consequences.

The conference will feature the leaders in the RES sector, the complainant in the case before the Commission, the Polish Government (invited), and the major utilities in Poland (invited).

An In-Depth Seminar on the Legal and Practical Problems

Facing Polish Energy

March 16, 2016  
Hilton Hotel Warsaw

The lack of notification and approval of the existing Green Certificate program has caused the European Commission to investigate its lawfulness and compatibility with the EU Treaty. See Case SA 37244. Major parts of the support system (co-firing of biomass and coal and old hydro plants) are being challenged in the Commission proceeding.  While the Commission has told the Polish Government that the old law is state aid, a published decision detailing the Commission’s findings is expected by March. This will require a new RES law to meet the objections and retroactively change the Green Certificate program in line with an earlier opinion of UOKiK and EC rules. Experts expect that certificates values will have to be adjusted by a coefficient that reflects the varying cost of production by technology. The European Commission is also reviewing the new RES law as state aid and important changes may be made. 

Seating will be limited and you can reserve a space by contacting randymott (at) Sponsorship is available for a modest amount. Admission is 400 PLN via advanced purchase. 

 The decision of the Polish Government to start and continue the Green Certificate program without notification and approval of the Commission as required by the European Treaty has created a complex situation.  Since the Commission legally enjoys sole competence to make the determination of compatibility of state aid with the competition rules of the European Community, the new decision will have immediate and direct consequences. The legality of the whole system from 2005 to date will be the subject of the decision. 

These developments will likely change the whole fabric of the renewable energy support system in Poland as well as the means for electricity providers to meet their RES quota under the Polish Energy Law. This conference is the only one scheduled that will involve the principals of the case before the Commission.

Are New State Aid Rules in the EU Hitting RES Investment?

I have argued strongly that the move by the DG Competition in Brussels to push support for renewable energy into auctions will have very negative effects on the amount of investment in new technologies. Auctions create uncertainty over support, award support to many projects that will never be built, and crowd out some technologies that cannot compete head-to-head (although they may have substantial benefits other than a low price per MWhr).

The data from 2015 in Europe tend to show that my fears have been realized. Just as the EU raises its RES targets for 2030 with many Member States having very ambitious targets, the total investment in Europe is declining. Some of this is the lower price of PV solar per MWhr, but most of it is lower investment. Bloomberg New Energy Finance reports a decline in German RES investments year-to-year of 42% and a French decline of 53%. This is hardly good news if you were expecting RES to meet the bold policy announcements out of Brussels and national capitals.

The state aid guidelines were a serious compromise of the demands of the DG Energy and DG Environment that played heavily on the concerns expressed by EurElectric. Much of the final text was a concession to the big utilities. They historically benefit the most from auctions at the expense of small and medium-size businesses. Auctions promote market concentration and along with restrictions on operating support for energy storage, have been now used to manipulate the system to favor the established ig players.

In doing so, the European Commission may be sabotaging the policies approved by the European Parliament and Council of Ministers. We already can see the impact and it will only gorw more pronounced without changes.

Thursday, December 31, 2015

Renewable Energy Production in Europe is Driving Prices to End-users Down, Not Up

The Poles often get caught saying that Poland cannot afford renewable energy development like our rich neighbors. Like so many things in Poland, this is a sentiment locked in a time warp. The days of 30-50 Euro cent subsidies for renewable energy in Europe are over. In recent years, the actual cost of renewable energy has dropped dramatically and in some places it is already cheaper than conventional energy. See "Analyzing the True Cost of Renewable Energy,"  Mott's Blog, October 20, 2014.  That post details comparative costs of RES with other technologies, but is virtually outdated as are all published figures since the changes are happening so fast.

Now a new Bloomberg report notes that electricity and energy prices are falling in Europe in 2015-2016 due a a major part to wind and PV energy. German electricity indeed threatens Poland's producers as it is frequently cheaper and the cross-border connections are expanding.[1]

But to listen to Polish politicians, you would think the exact opposite is the case. We anxiously await the day when reality sets in on the Polish energy debate.

                          Photo: @EnergyforArawak

[1] The other frequent criticism is that renewable energy is intermittent. This is, of course, true. However, the PV production curve fairly closely follows the demand curve and is a major factor in smoothing the RES impact in Germany. Energy storage and "capacity markets" have both been used now to compensate for the variable RES impact. The proof is still in the prices: if the end-user is getting a good price, then the system seems to be working.

Wednesday, December 30, 2015

New Year: SOS?

The year is ending with the new Polish Government trying to re-arrange the deck chairs on the Titanic which is Polish energy policy. The Law and Justice party seems confused between its election campaign rhetoric and the realities of the situation it now faces. As the deck is vanishing under the encroaching sea, the politicians gather on the fantail making speeches about the ship's seaworthiness.

Almost all elements of the proposed path to energy security are fraught with bogus assumptions, bad information and a special kind of Polish naiivity.

Shale gas- when there is a major rise in  oil and gas prices worldwide and the government gets out of the way, this might be possible. Until then, it is a dead-end street in Poland. The type of policies it would take to really jump start shale gas here (where it is in deep formations and quite expensive to develop) seem implausible in the context of Polish politics. Now more than ever.....  This day, if it ever comes, also depends on global events that no government really controls. My personal bet is that the only shale-derived gas on the Polish market in ten years will be from the United States.

Nuclear plants - the schedule keeps slipping, the costs keep going up, and the publicly-owned companies being forced to consider the investment seem less and less likely to have the financial muscle to pull it off. An adverse decision on the Hinkley Point case before the European Court will kill the project in its tracks: the Austria Government and others challenge the idea of using inflated electricity tariffs to promote nuclear energy which is not entitled to any preference under EU law. Even without this decision, this large and complex project seems beyond the competence of the Polish institutions promoting it.

New coal power blocks - these are proceeding, albeit with difficulties in the financing suggesting that all is not well. Many of the private and government sources of debt funding have been foreclosed. The major ones listed by Polenergia for their Polnoc plant (the EBRD and the EIB) no longer fund coal projects. Relatively low electricity prices and rising CO2 emission fees have generally doomed coal-fired power plants in Europe. The UBS study last year showed about 70 GW of fossil fuel plants closed in the last five years (some of them quite modern). Nearly half of the 260 GW in operating plants are losing money. Id. My own theory is that existing cal-fired plants in Poland have mainly been profitable in recent years due to their subversion of the RES support system and receipt of an undue number of Green Certificates for co-firing of biomass with coal. Reduce their profits by this ten billion PLN or so and they look pretty damn anaemic.  New coal-fired blocks will increasing have to burn foreign coal and will be less profitable every year. By 2025, not only onshore wind but PV solar is likely to provide cheaper electricity, so the prospects will go from bad to worse.

Declining Polish Coal Production, Coal Age magazine Jan 2014

Renewable energy- Law and Justice (PiS) has a naive and ideological position on renewable energy. They claim to like small producers but do not like high levels of support. This is the first basic problem: the smaller the RES producer, the higher the cost of production. PiS hates large wind farms, but thinks it is okay to have a wind mill in every back yard. If the effects of wind mills are undesirable, how does dispersing them cure the problem? It only raises the cost of necessary support to a level which the government will not agree to. PiS talks about micro-biogas production of electricity and it is hard to see where on earth their information could come from. Micro-biogas is used in Asia to produce methane for cooking, not electricity production. It is hardly a model that does anything for Poland. Newer technology for micro-biogas electricity production is inefficient and generally uses a huge percent of the energy produced for internal operation of the system. Hopefully, new officials will get educated on the facts and start dealing with the RES sector as it really is, not as they imagine it.

Typical Asian Home Biogas Digester for Methane Use in  Heating

So we roll into 2016 looking at the same impasse that has existed for the last five years under the old government. There is no significant political party in Poland advocating a realistic energy policy that recognized the need to create a smooth transition from coal and lignite to the next generation of electricity production. The process is mired further by the temptation of appointing hundreds of politically connected cronies to the state-owned energy companies, which remain predominantly coal-based while they often only privately acknowledge that something else has to happen.

The two major factors mitigating this gloomy picture are the European ?Commission actions and the major electricity outages just now starting. The Commission will be weighing in on the RES program in the next couple of months and the effects should be far-reaching, as I have written here. The outages occurred last summer and are expected to get more serious. This has been interpreted by the politicians as a signal to hurry up and build more coal plants (but that approach is unlikely to have sufficient impact to alleviate the situation).

Maybe 2016 will be different?

Monday, December 21, 2015

Merry Chrtistmas

Merry Christmas to my readers throughout the world.

Special note: The European Commission decision will be in late January or early February on Polish green certificates. The Commission made a communication to Poland in December that signaled their intentions. So the New Year will be merry and busy for renewable energy in Poland!

Tuesday, December 15, 2015

Re-Writing the Polish RES Law

It will be necessary to re-write the Polish Renewable Energy Law that was adopted in April 2015 to meet the objections of the European Commission. Major provisions that will have to be changed to meet the Commission's consistent position in approving other certificate schemes include the following:

1. Prevention of Over-Accumulation:  This will require that certificates be used in a fixed time period. This could theoretically wipe out almost all of the accumulated certificates now being held. Note: the old hydro certificates will be null and void in any event under the depreciation rule. The co-firing certificates will otherwise likely be valued at 50% or less, even if they are allowed to accumulate.

2. Correction coefficients: The value of the certificates will have to be adjusted by the cost of production of electricity for each technology. The adjustment must assure that there is no over-compensation of technologies such as co-firing. Arguably, only the technologies in the National Action Plan will need to be covered. There should also be no under-compensation for the same legal reasons.

3. Retroactivity: The changes will have to cover the period from October 1, 2005 to date. This means several things that will make it more complex. The changes in production cost over time will have to be roughly included, i.e. PV and onshore wind support in 2005 will have a different cost of production than 2015. The value of certificates being held by various parties will be affected in that if they are older than the accumulation period, they will end up void. If they have a value more than or less than the base certificate value (substitution fee for that year), they will have to be adjusted.

4. Effective dates:  Since there is no RES support system in place now, I recommend that the new Green Certificate law run at least through 2018. A provision to start having auctions on large projects like wind farms earlier could be included, but experience has shown that these auctions should probably be technology-specific and incremental. Do them a few in a row to obtain the experience and refine the procedures. There should be no auctions for projects under 2 MW.

5. Compensation:  It might be possible to use the excess amounts of support awarded (like to old hydro) to pay off the under-compensated producers, like biogas and PV. The incompatible aid received by the old hydro producers and co-firers must be recovered under EU rules. That fund could be used to compensate the producers with higher costs of production who received discounted certificates from the distorted market. Otherwise, those parties can claim against the Government of Poland for unfair competition.

This will be as mess to work out. It is unlikely that any one in the government will have a handle on these issues and be able to address the Commission's concerns in any reasonable time-frame. But while the process is pending, there will be no support for renewable energy and no ability to use green certificates for compliance with the quotas.

My recommendation is to form a group in the renewable energy sector to put together a proposal and then obtain agreement on the package with PKEE (the big guys). I am happy to be involved and to use the experience and information that I have gained over the last several years on these issues. Interested parties should contact me to discuss the logistics and funding. randymott (at)

If this process takes years or even six months, the results will be financially devastating to both green energy and conventional energy in Poland.

Saturday, December 12, 2015

European Commission Readies to Hit Poland Hard on Green Certificates and Market Distortion

The European Commission's Directorate General for Competition is about to announce a decision on the Polish Green Certificate matter, SA.37224 (2013/CP). The complaint to the Commission alleged that the certificates were state aid and had to be notified and approved as such under the European Treaty, Articles 107 and 108. This same viewpoint was internally expressed to the Minister of Economy in 2013 by the head of the Office of Competition and Consumer Protection in Poland. The Commission has apparently told UOKiK that it contends that the certificates are state aid. [An obvious point since every certificate program since 2001 has been classified as state aid by the Commission]. See references in "Why Poland Urgently Needs a New Green Certificate Law," [PL]. [English version]. The Commission has the authority to declare state aid unlawful and is required to do so if it is not notified. The failure to notify means that the certificates are null and void since their inception in 2005. The consequences will be devastating without a retroactive legislative fix that is approved by the Commission:

1. All of the state support would have to be returned or recovered. The most logic route would be for the recipients to provide the money to the URE which would refund the customers who have been paying for the green energy premium since 2005. When the French wind tariffs were on the road to being held to be state aid that was also unnotified, claims immediately rose from electricity users in France for the "illegal charges" on their bills.

2. Green certificates can no longer be used for compliance with the green energy quotas in the Polish law. The quotas would still be effective (they are not state aid) but the certificates now used to cover about half of the obligation on utilities would be void for that purpose. PGE and others would immediately have a short-fall in their green portfolio and have to start paying substitution fees or penalties. So they will go from making huge money on RERS via co-firing to losing a lot of money by being short on compliance. 

3. Since the decision by the Commission will rule that the certificates were void from the get go, then there is a good argument that they could never be used for compliance with the quotas from 2005. This would mean retroactive penalties on the utilities for all of the redeemed MWhr covered by green certificates from 2005. 

4. There would be no operating support for renewable energy on any kind in Poland in place. The old law will be held null and void and the new law is being reviewed by the Commission under the same rules. It will have to be approved before it can be effective. The new law has is own problems, including a small auction that violates the competition rules of the Commission.

The only way to repair the situation and avoid most of these consequences is to enact a revised green certificate law retroactively.[1] This, however, will have to be approved by the Commission under the state aid guidelines in effect from 2005 to 2017.

"The only solution is to revive the 2012 draft law with levelized certificates based on costs of production. This is required by the State Aid Guidelines and was recognized as necessary by UOKiK. It will also be necessary to enact the ban of aid to depreciated hydro and anything else fully depreciated now or in the future. Co-firing of any type will have to be justified by its costs of production." Mott's Blog.

In order to be approved under the guidelines in effect for this period, the new law will have to levelize support across technologies based on the cost of producing the energy.[2] The early version of the Polish RES law in 2012 tried to do this and the Institute for Renewable Energy did a report on the correction factors that would have to be applied to levelize support. The Prime Minister's office directly intervened and killed this proposal at the time. Now it must be dig up and should form the basis for an emergency draft law to avoid the consequences described above.

The Polish Biogas Association is leading an effort to get a draft law prepared that meets the Commission's requirements to avoid the impending disaster. Parties interested in this effort should contact PBA. There is a lot of work to do and very little time. No one has any stake is delaying this effort or in making Commission approval problematic.


[1] …even non-notified aid can – in case for example it has been brought to the attention of the Commission by a complaint – still be authorized ex post, so that aid already paid need not be recovered.” Becker, Buttner and Held, “The Legal Help Desk: Understanding State aid in European law,

[2] This was also pointed out quite clearly the Polish Government by the UOKiK in 2013. UOKiK letter to MG, November 28, 2013:  "Assessing certificate systems and subsidized tariffs, the Commission notes whether it is necessary to ensure the viability of energy production, does not provide overcompensation for the production costs' of energy (proportional size of the planned instruments is relation to actual costs) and does not dissuade producers of energy from increasing competitiveness. In order to demonstrate this, it is necessary to provide the Commission with a detailed justification of the necessity and proportionality of the envisaged measures. In particular, it is necessary to analyze the markets in which the beneficiaries operate for the planned measures, the real costs of energy production incurred by them depending on the type of RES and CHP technology in relation to the achievable rates the sale of the energy and the rate of return on investment for different types of RES and CHP technologies."  See "The Office of Competition Agreed that Notification of Brussels was Required (before the head of the office was fired)."


UPDATE: Note that the Commission in May 2015  - SA 37117 - reiterated that the Romanian green certificates were state aid and had to be notified. They also approved modifications on the values of the certificates and support based on technology cost differences. "The Commission clarified that the support granted in the form of tradable "green certificates" involves State aid. The Commission found the modifications to the system, which tighten the criteria as compared to the 2011 scheme, to be in line with EU state aid rules, in particular the applicable 2014 Energy and Environment Aid guidelines." Press Release.  Full decision in English.

Wednesday, December 09, 2015

Minister of Energy Backs Off Commitment to Force Electricity Companies to Adopt Bankrupt Mines

Now with the stock value of Polish energy companies that have government ownership plunging, the new Minister of Energy says that the plans to force electricity companies to buy or invest in mining companies are still not firm.

Eventually almost everything that Law and Justice said in the election will be contradicted by the economic realities on the ground or by European Union rules and treaty obligations. So let's go to Emily Litella for a comment (click her name to hear).

Monday, December 07, 2015

New Government Continues Politicization of State Owned Firms in the Energy Sector

As new management boards are appointed in the big energy companies owned by the state in Poland, the new Law and Justice Government seems bent on accelerating the politicization of these companies.  The agenda is to continue and accelerate investment in new coal based energy plants and to use the cash flow of the electricity producers to under-write the bankrupt state-owned mines (15 billion PLN in debt with an annual rate that is growing).

The policy is to force the state-owned firms or firms where the state has the biggest block of shares to make decisions that are contrary to the economic interests of the company's shareholders and supportive of the politicians; agenda. This is, of course, highly illegal.

The immediate impact of PO and PiS manipulating the Government's ownership of energy company shares has been to destroy the value of the equity of the companies.

Polish state-owned energy companies are losing value much faster than the sector globally or the private concerns in Poland.

PGE is the largest company in the electricity sector and is indicative of this problem:

Tauron at number two has a similar problem:

Energa is number three in the sector and shows the same thing:

The trend has accelerated since the election of Law and Justice and the new management changes just announced will likely make the rate of decline greater or at least keep values in the cellar. 

The great irony of all of this is that the Polish politicians keep proclaiming that their actions are designed to save the Polish economy. Presumably such actions would be reflected in increased investor confidence and share values in the industry affected. That the opposite is happening strongly indicates that the policies will be an economic disaster.

UPDATE: Now the stock market analysts are commenting in the same vein as the above post. Just the threat of sticking the mines debt and operating lossess onto the electricity companies is killing their share prices:

09.12.2015r. 6:03

As reported "Dziennik Gazeta Prawna", on Tuesday continued to decline prices of energy companies on the Warsaw Stock Exchange, and WIG-energy lost 4.6 percent 
Sale is related to investors' concerns against destabilization due to planned and made ​​changes to the boards, they fear also revamped strategy to Treasury companies - wrote the newspaper. - Changes in management boards have less importance, investors were expecting them and basically they are already included in prices. The quotations are also reflected emerging ideas so far, that consolidation and to some extent connecting to the mining industry. Hence drops - says Krzysztof Kubiszewski, an analyst DM Trigon in an interview with the daily. 

Wednesday, November 25, 2015

European Commission Finally Enters the Polish RES Debate

Ninety-nine percent of the Polish Government has been lying to us or is so uninformed that they do not know the difference. Poland's state support of renewable energy from 2005 to date (old law and new law) are state aid under the European Treaty. No doubts and no qualifications. The only Polish leader who was honest and professional in their opinion on this was Malgorzata Krasnodebska-Tomkiel, head of the Office of Competition and Consumer Protection (UOKiK), for several years.[1] Before the Prime Minister fired her and replaced her with an English teacher, she also was clear that elements of the new law were also state aid. Tomkiel was fired on a Monday that followed the Friday on which the Prime Minister's office received notice of the complaint about the green certificate system from the Commission.

This does not mean that the aid under the old law or new law is wrong,, only that it has to be reviewed for consistency with state aid rules designed to minimize the distortion on competition. The review is exclusively the purview of the European Commission under the treaty. The kind of wild distortion caused by giving certificates to co-firing and old hydro is exactly what the system is intended to prevent. The complex rules in the new law that all seem to favor the big utilities are another issue that will likely arouse some negative sentiments in Brussels.

Despite the clear law, the Polish Government has carried out a charade for years that it can ignore the European treaty and relevant guidelines in its renewable energy legislation. The public and the Parliament was often deliberately misled into thinking that the Prime Minister's office that wrote the new law was the final authority on its provisions. There is wide Member State latitude on how support for RES can be structured, but it must comply with the competition rules. Such support also, of course, must meet the RES Directive requirements. This is something that co-firing support for facilities that will not even be operating in 2020 (the target date) obviously ignores altogether. Most of the delay in the new law was caused by the deliberate effort to stall the process both until after the election (since the whole support system since 2005 is unlawful and this would be clear when the Commission acted on the new law) and also - mainly - to keep co-firing support [as well as old hydro support to Energa) going as long as possible and as high as possible.    

Now the Commission will rule on the new law and certainly demand changes in parts of it - clearly the small auction violates all of the competition rules and also unduly restricts competition from small and medium size businesses. On the old law, still the major support mechanism for Polish RES that will count toward 2020 targets, the Commission must rule that it is unlawful. It is state aid and it was never notified.

A retroactive notification is possible (as the French did when they wind tariff was successfully challenged in 2014), but the legal fix must comply with the state aid guidelines in effect from 2005 to 2017. That means levelized support across technologies,[2] as Ms. Tomkiel pointed out to the Ministry of Economic two years ago. The retroactive fix will necessarily have to adjust the certificate values and recipients with huge funds moving from the over-compensated to the under-compensated.

 "Assessing certificate systems and subsidized tariffs, the Commission notes whether it is necessary to ensure the viability of energy production, does not provide overcompensation for the production costs' of energy (proportional size of the planned instruments is relation to actual costs) and does not dissuade producers of energy from increasing competitiveness. In order to demonstrate this, it is necessary to provide the Commission with a detailed justification of the necessity and proportionality of the envisaged measures. In particular, it is necessary to analyze the markets in which the beneficiaries operate for the planned measures, the real costs of energy production incurred by them depending on the type of RES and CHP technology in relation to the achievable rates the sale of the energy and the rate of return on investment for different types of RES and CHP technologies”  OCCP to Min. of Economy, June 5, 2012.

This was the rationale for the correction coefficients in the 2013 draft RES law in Poland. The one that was killed by the PM to keep co-firing and old hydro flush with certificates. All of these actions were illegal and done in bad faith. Their own experts told them it was wrong and they did it anyway.

Now we are on the verge of a lot of litigation and claims against the Polish Government for unfair competition. The poetic justice of the matter is that Law and Justice was running the government when they failed to notify the aid in 2005 and they, of course, have been complicit in the effort to keep state support going to the big guys even when it does not promote renewable energy objectives for 2020.

[1] The head of the Office of Competition and Consumer Protection (UOKiK) communicated this to the Ministry of Economy on November 28, 2013:

     "According to the OCCP, the certificate system constitutes state aid. Detailed clarification in   regard has been presented in previous correspondence [citing June 5, 2012 and August 10, 2012 correspondence from UKOK to MG]'. Moreover, similar conclusions have been expressed by the European Commission within the framework of the ongoing process notification of the restoration of the certificate system for high-efficiency co-generation.” [referring to the Commission's May 31, 2013 opinion on co-generation certificates in Poland, S.A. 36518](emphasis added).

The DG Competition that handles the state aid issue in Brussels communicated to UOKiK formally on May 31, 2013 requesting the detailed  information to determine if there was market distortion or overcompensation. This is especially relevant to the Green Certificate action by the Commission also still pending, since it asked for information about "levelized cost of production."[2] The compatibility of the aid with the competition rules only arises with the DG Competition if there is actually state aid. From this formal communication and the UOKiK letter to the Ministry is seems clear that there was also likely oral communication with the Commission on the issue as well. and possibly other less formal correspondence. At any rate, UOKiK concluded that the Commission believed the certificates (both co-generation and Green) were state aid. [This should be no surprise, since a nearly identical Romanian system of Green Certificates was determined to be state aid in 2011). No surprise here since the new law in Poland assumes that Green Certificates are state aid in calculating the permitted intensity of aid for each project. Article 39.2, RES Act of April 2015. See blog post.

[2] “As stated in point 59, 1st subparagraph, of the environmental guidelines, Member States may compensate for the difference between the production cost of renewable energy and the market price of the form of power concerned. Thus, such compen-sation can relate only to the extra production costs for environmentally friendly electricity production as compared to the production costs for energy based on conventional energy sources.” cited in Commission Decision of 24 April 2007 on the State aid scheme implemented by Slovenia in the framework of its legislation on qualified energy producers Case No C 7/2005, para. 85.  In the case of certificate systems, the Commission has been consistent in requiring proportionality to actual or reasonably expected costs of production across different technologies.  See C(2010)2211, State aid No N 65/2010 - United Kingdom Amendments to the Renewables Obligation Certificates (ROCs) scheme, March 30, 2010  (“…levelised costs matching the midpoint of the predicted revenues… will therefore prevent overcompensation in the aggregate of the different producers”). Romania used a levelized cost calculation to evenly apply the green certificates for different technologies, based upon production costs for each technology. C (2011) 4938, State aid SA. 33134 2011/N– RO, Green certificates for promoting electricity from renewable sources, July 13, 2011 p. 8-9. Various measures in addition to initially levelized costs were used to assure no over-compensation and resultant market distortion. It was critical to the Commission’s approval of the Romanian scheme that it provided a means to address over-compensation:  “ In the light of the above mentioned considerations, including the commitment of the Romanian authorities to adapt the notified measure in time in order to avoid overcompensation, the Commission finds that the notified measure is in line with the condition of absence of overcompen-sation in the aggregate.” Supra at par.70, p. 16.  (emphasis added). The approved system starts with adjusted compensation based on production costs and further allows for adjustment to avoid future over-compensation.     In the case of feed-in tariffs, the same rule on levelization of support based on technologies’ actual cost has been applied. The Commission approved Austrian feed-in tariffs that considered individual technologies and were adjusted to avoid imbalance.  C(2006) 2955, State aid NN 162/A/2003 and State aid N 317/A/2006 – Austria Support of electricity production from renewable sources under the Austrian Green Electricity Act (feed-in tariffs) (the Austrian law provided that “[p]rices shall be set in accordance with the various primary energy sources used, with due regard to technical and economic efficiency….Service life, investment cost,operating cost, adequate return on capital employed and the quantities of electricity produced per year shall be taken into account.”). The critical difference in the approved Austrian scheme and the Polish program is that the Austrian authorities have illustrated that “the support granted under the measure at stake will not exceed the extra production costs of the renewable energy sources supported by the measure.” IdSee also  C(2007) 6875, State aid N 478/07 – The Netherlands, "Stimulating renewable energy, modification and prolongation of the MEP (N 707/02) and MEP stimulating CHP (N 543/05)," December 21, 2007  (“…the various options for sustainable energy were put into distinctive categories, with a different subsidy for each category. The classification was based on the extra operating costs of the various renewable energy options…”).

Thursday, November 12, 2015

No Climate Aid Can Go to Polish Coal - the Inevitable Has Happened

Poland's politicians have kept up a myth that the EU would allow special assistance arising from the climate and emissions trading scheme to go into modernizing Polish coal-fired power. This - as well as a diversion to general revenue - was the model from the last climate deal (whereby Poland abused the EU funding in ways that were not unnoticed in Brussels).

Now the new deal has a big coffer, but the projects must go through the Environmental Investment Bank for approval. Note: EIB gave up on generally supporting coal projects more than a year ago.

Thus, we have the situation - entirely expected - where the EIB will not allow this sizable fund to be used to continue projects that emit more than a small amount of CO2.

"...the EIB does not intend to recommend funding any projects whose emissions are greater than 550gCO2 / kWh, which in practice excludes all coal projects. [An EIB representative] added that the emission limit can only be made more stringent. ..."  CIRE.PL

This takes 100 billion PLN off the plate for modernizing the existing coal-fired infrastructure. Contrary to PiS rants, there was never any other alternative, especially after Poland abused the the first round of financial support to make a transition from coal.

 Add the write-down of the old coal plants which are falling apart, the pending European Commission crack-down on the illegal use of green certificates, the aversion of most investment funds to investing in coal, and the diminished equity fund raising potential caused by dumping the bankrupt coal mines on the electricity companies, and you wonder where the hell the money with come from for the new government's grand plans. The "dirty" secret is that there will not be enough money for any source to continue the status quo in Polish energy. 

Newly appointed government directors of the electricity companies will be replaced by another set of marginally qualified or unqualified political appointees in the near future. They will be hampered by the unrealistic promises of both the new and old governments. 

The fact is that Polish electricity prices are too low to sustain new investment in the existing coal infrastructure, but they are already higher than German prices. Something is fundamentally wrong here, as evidenced by the fact that the Polish politicians have stubbornly gone the opposite direction of the rest of Europe and the private investment community.  

Monday, October 26, 2015

Polish "Exceptionalism": Retroactive Exemption from European Energy Obligations?

The core message in the current Parliamentary elections for Law and Justice (PiS) on energy issues is to repeal Poland's commitment to participation in the European Emissions Trading Directive and other environmental requirements that limit the unfettered use of coal in Poland. Their argument is that Poland is so dependent on coal that it is unfair to require the same things of Poland that other EU Member States have not only committed to, but are doing.

The assumption of this argument is that, but for the emission charge on CO2, that coal energy would be profitable. This is a fundamental fallacy for several reasons. First, the current system grants free allowances for coal emissions and coal-fired power is still not profitable.[1] The current electricity rates make it difficult for the power companies to invest in new facilities, but simultaneously those rates are higher than Germany next door. The profitability of the coal-fired electricity sector is already very weak without any payment of carbon fees for emissions.

Second, other countries with no carbon fees are still experiencing a decline in coal supplied electricity. In the United States, while shale gas is driving down coal prices and is growing part of the production mix, renewable energy is also growing while coal is declining. The U.S. Energy Information Agency has estimated that the levelized cost of producing electricity from coal is now more expensive than onshore wind energy. In China, with no carbon charges, coal consumption in 2015 is down 40%, while the country has passed the EU in total annual investment in renewable energy. Experts predict that both wind and PV energy will be cheaper than coal in the foreseeable future in China. Virtually anywhere in the world, if you made a decision today to build a coal-fired power plant and opened it in three years (fast assumption), during much of its operational life it would be among the most expensive providers of electricity in your market.  This is the case even where there are no carbon emission fees.

There is, moreover, absolutely no economic justification for the assumption that reducing or suspending fees of carbon emissions will make burning Polish coal profitable in Poland.  Polish coal is more expensive, has higher ash content and more sulfur than the imported coal here. Every year less and less Polish coal is mined and the insolvency of the state-owned mines means that this trend will not be reversed in the future. The Polish politicians' fight to burn coal is increasingly a fight to burn foreign coal.

The economics of burning coal will, of course, get worse if the theoretical changes in the market drive the price of carbon allowances to 15-20 Euro a ton or higher - and if the free allowances ran out. However, free allowances and assistance to energy intensive industries have and will continue to blunt the impact. But if this plan works and carbon prices go up significantly, it will not be the major reason for the economic decline of coal. Nor will the effects on the general economy be as bleak as Polish politicians allege.

The heart of the issue is that Poland is somehow unique because it has a higher dependence on coal for energy. That fact is true (as shown below) but it is only a part of the story.

Germany actually is still using a lot more coal than Poland. Several countries in the EU have dramatically lowered the reliance on coal over recent years. Overall coal use has declined significantly, largely replaced by renewable energy sources.

This has come at a cost to consumers, since renewable energy has been significantly more expensive over this period. Other EU members have been incurring the cost of this transition - a cost that Poland is now trying to avoid by an exemption. The cost of Poland catching up on the shift away from coal is now significantly lower than the costs incurred by our European colleagues. Other Europeans have basically financed the development of the technology and the establishment of a mature market for RES, so that Poland can now replicate the same transition at a much lower cost. See below.

This is particularly ironic since the EU has been providing Poland will very significant financial support to transition away from coal. But much of this past support has often been used for other purposes and often has been employed to simply shore up coal mines and coal-fired power plants. "The vast majority of the estimated 12bn euros of European allowances and transfers intended to tackle climate change and diversify the energy mix between 2013-19 will – instead – be spent on coal,.."[2] The European Commission has limited some of this abuse, but Poland constantly is trying to get under the wire.

Despite Poland's bad faith in using the EU money for other purposes, the European Community is still willing to provide hundreds of millions of Euro in the next climate deal, agreed to by the current Polish Government. Major funding from the European Bank for Reconstruction and Development and the European Investment Bank and several other huge private European funds have been and remain willing to finance the shift from coal to other energy sources in Poland.

Poland has also been given extra time in its accession treaty agreement to been the Large Combustion Source Directive, affecting emissions from coal-fired power plants. This time has been used up without a significant and pervasive shift in the energy mix of the major electricity producers in Poland that own these plants. Modest levels of RES - by European standards -  have been added but principally by subsidizing the coal-fired plants use of biomass in small quantities in the fuel mix. This is enormously profitable and has actually been the major source of net profit for many of these old coal-fired plants in Poland. Poland has been given time and resources to make the transition (while our richer neighbors pay their own way). But this opportunity has been largely squandered.

So Poland is asking to be exempt from steps that other EU countries have already been taking - largely at their own expense and at the expense of their consumers, industry and taxpayers. Poland has been and is being offered continual financial help to make this transition which comes from these same countries. This continues to be offered, even though many of the manufacturing jobs from Western Europe from been migrated east into Poland due to lower costs of production.

The circumstances hardly make the equity of the Polish demand for "exemptions" look very persuasive. But more to the point, the attempt to obtain the exemptions comes at a time when the point of doing so has been rendered largely moot. The coal that Poland wants to keep depending upon is increasingly foreign coal (not Polish coal which is dirty, deep and expensive). The cost of new coal-fired plants within the period that they can be constructed and would operate is now higher than the costs of most renewable energy sources. The energy security or independence that is the intellectual rationale for the exemption argument is undermined by not only the increasing role of imported coal in Poland, but by the insecurity and unreliability of the coal model: centralized, huge electricity sources have proven to be quite problematic in terms of system reliability and efficiency.
Energy diversity is now widely understood to be a key to energy security.

All of the above assumes that some form of exemption or retrenchment is legally and politically feasible in Brussels. It is plainly not legally possible or politically feasible as to all of the underlying obligations already made. The Council of Europe has already approved the 2030 package. The European Parliament by an overwhelming majority approved the climate package on October 8, 2015. "[T]the conservative Law and Justice party (PiS) can do little to evade Brussels’ commitment to cut emissions and deploy clean power...." [3] Any further retroactive concessions are likely to be met with a cold shoulder based on Poland's history of acting in bad faith on the deals and decisions already made. Extra time and extra money have always been subverted and used to perpetuate the problem that our European colleagues thought they were helping to eliminate. Where additional funding for the transition is coming, it will be controlled more carefully to focus on its intended purpose.

Politically clumsy and naive nationalistic appeals may well fool a lot of Polish voters, especially the less educated, but they will not go very far in Brussels. As the coal mines - whoever technically holds their shares - start closing due to bankruptcy in 2016-2017, and the coal-fired power plants continue to be unable to produce the necessary electricity on demand this winter and in the future, the Polish public's commitment to keep pursuing coal at any cost will fade into history.


[1] The expansion of the PGE Opole plant is the famous example. It simply makes no economic sense. CO2 fees and pressure from renewable energy sources add to the coal-fired plants problems, but their underlying profitability has been declining in any event. Fitch Ratings (2015).

[2] Greenpeace Energy Desk.  The latest plan in Brussels funnels the Polish investment list through the European Investment Bank to assure that the money is used for "decarbonization" not perpetuation of the dependence on coal.

[3] Alex Pashley, Climate Exchange News. Allowing any new Member State government to renegotiate a deal done by the prior government would obviously open the door for enormous gamesmanship and instability in the European Community. Poles should not expect any breakthrough on this issue under the circumstances. See Bloomberg Business [also noting that the "qualified majority" rule that starts in 2017 will even end the Polish ability to block new initiatives].

UPDATE: October 31, 2015.  The Polish experts point out that the regulatory things that matter on CO2 (the caps and allowances and fee per ton) are controlled by the European Union under a directive (not directly under an international treaty). So Poland's domestic veto of the Doha accord does nothing to undermine the regulatory scheme that is raising the price of carbon emissions. In addition, due to early votes within Europe, the EU itself will be the negotiator for Europe in Paris. The speculation is that the new hard line will, at best, be a way to negotiate other concessions (maybe).

UPDATE:  November 30, 2015,  the new governing party has reluctantly agreed that Poland cannot retroactively back out of the earlier agreements and rules that call for CO2 reduction and RES growth. The new Minister of the Environment just "toned these [previous]statements, noting that so far there is no termination of the climate package in October 2014. Because if you do not want to leave the Union, we must act in accordance with those obligations CO2 reduction of 40 percent. 2030. and increasing to 27 percent. the share of renewable energy sources in the Community and to improve energy efficiency in 2005 by 27 percent."