Monday, September 01, 2014

Reality Bites

The last meeting of the Polish Parliamentary Energy Committee several days ago  may represent a turning point on the law. For the first time in four years, there was a real discussion of the implications of state aid requirements in the European Treaty. Don't expect to Google this and find a sophisticated discussion of the past Commission decisions or the ECJ decision in the Dutch NOx case, but there was a glimmer of realization.

Hey, we need to actually have a RES support system that meets the European Commission rules on state aid. That seems to require that the Commission approve of what support system is implemented.  The critical step of figuring out what is actually required to meet the state aid rules is still seemingly beyond the scope of legislative discussion... but there seems to be a new awareness that something important is involved.

This is ironic in many ways. The Polish Government had a competition specialist heading the Office of Competition and Consumer Protection, who was writing for the last two years on the subject, with apparently no effect except to make the Prime Minister nervous.

Ms. Tomkiel, former head of UOKiK, advised the Ministry of Economy that the certificates were state aid and that they had to be notified and approved in Brussels , which has never happened. She told them that unapproved aid was unlawful and would have to be returned. She advised them that support from certificates would have to be levelized across technologies, which gave rise to the idea of proposed correction coefficients in 2012-2013.

After a year long divorce from reality, some folks are now apparently aware that there is a problem here. No one in government has yet proposed the only possible solution, immediate enactment of a levelized green certificate program as almost was done in 2013, but it is likely that even politicians with no stomach for details will realize the need for this remedy. The plan for delaying all of this until after the Parliamentary elections probably seemed like a plausible idea, assuming that Poland controlled the schedule for the corrective surgery,  but that assumption is largely an illusion and one that is now rapidly fading. Without the enactment and notification of a revised green certificate law, the certificates issued since 2005 will be declared unlawful, null and void.

This has sounded far-fetched to the relatively unsophisticated folks who write Polish laws, but their own in-house expert on the subject has told them the same thing. Some MPs are now suggesting that maybe Poland will have no approved support system without  urgent action. Soon they will likely realize that it is not just about future support, but everything that has been done since 2005. The work has been done on the legislative fix and only needs to be dusted off and quickly enacted and notified to DG Competition in Brussels. The only issue left is how much blood will be left on the floor by the negligence of the government. State-owned utilities have the most to lose and should be leading the charge to get this fixed, but a rational response has yet to emerge from that quarter.

Friday, August 29, 2014

US Renewable Energy Grows to 14% with Little Impact on End-user Prices

"According to the U.S. Energy Information Administration (EIA)'s latest "Electric Power Monthly" report, with data for the first six months of 2014, renewable energy sources (i.e., biomass, geothermal, hydropower, solar, wind) provided 14.3 percent of net U.S. electrical generation. Conventional hydropower accounted for 7.0 percent, while non-hydro renewables provided an even larger share at 7.3 percent. Overall, electrical generation from non-hydro renewable energy sources (i.e., biomass, geothermal, solar, wind) expanded by 10.4 percent compared to the first half of 2013, according to the EIA. "  Renewable Energy World.

This growth in US renewable energy largely occurs in state markets that use the residential portfolio system or green electricity quotas. These are implemented by green certificates as used in Poland, Sweden and the UK. The remarkable part about the growth is that it occurs during a period of uncertainly over the federal tax credit as well as in a market with much lower priced traditionally generated electricity than Europe. 

Monday, August 25, 2014

OCCP Continues View that RES Tax Exemptions Are State AId in New Draft Law

The Office of Competition and Consumer Protection (UOKiK) continues the view expressed by the previous Director that the tax exemptions in the draft RES law are state aid.

The correspondence dated May 23, 2014 discussing Article 177 of the July 2014 version of the law clearly agrees with the earlier assessment that tax exemptions are state aid. This "is state aid within the meaning of Article 107 of the TFEU [Treaty for the Functioning of the European Union]." They also note that the GBER or block exemption rule that the Government is relying upon to avoid notification does not cover the tax exemptions.

OCCP concluded in November 28, 2013:

“In this context, I wish to point out that the exemption from excise duty for RES energy in the Directive on the taxation of energy is optional, and hence the establishment of this type of release is not an obligation of a Member State, but the only element implemented by environmental policies. Bearing in mind that this exemption applies to public funds (depletes the proceeds of excise duty) is selective (only specific technologies are affected), is for the benefit of the beneficiaries (reduced costs associated with running business) and due to the competitive nature of the energy market and the EU dimension  affects competition and trade in this market,  it should be considered that it is state aid. (emphasis added) “  

There is no real doubt about the law on this issue. “State resources are also involved in cases where tax revenues are foregone and where pecuniary advantages are acquired for an undertaking (could include debts deferred), even at no loss to the state. Tax advantages may take many forms including “permanent or temporary exemptions (fiscal holidays), tax credits, reduced tax rates, reduced taxable base, accelerated depreciation, favourable rules allowing loss carry-overs, deferment or rescheduling of fiscal debt, be it unilateral or by virtue of a transaction, other payment facilities, negligence in the collection of taxes, fiscal amnesty and, more generally, the attribution to the tax administration of a discretionary power that goes beyond the simple management of tax revenue by reference to objective criteria.” Cameron May Ltd, The EC State Aid Regime: Distortive Effects of State Aid on Competition Trade, 2006, p.76  See Commission Communication of 22 November 2006 to the Council, the European Parliament and the European Economic and Social Committee: "Towards a more effective use of tax incentives in favour of R&D" [COM(2006) 728 final.  


Saint Bernard's Bluff, Brown & Bigelow

So besides the Green Certificates that the Commission has already informally indicated to Poland constitute state aid, the draft law now before the Parliamentary committee also includes state aid in the form of tax relief. 

The announced decision not to notify the Commission of the new law in violation of the treaty provisions seems increasingly like a bluff. The alternative  is too weird to contemplate.

Friday, August 22, 2014

Consequences of Failure to Notify on Green Certificate State Aid

The Great Polish Train Wreck of 2015?
At this point the Polish Government has apparently made a decision to not notify the Commission on the Green Certificate system. Since there is absolutely no doubt that it does constitute state aid and the Commission has informally signaled that to the Government, it is probably a good time to ask what will happen next. This will be such a disaster that the Government will have to back off its current stance. There is simply no alternative.

State aid that is done without notification is unlawful and must be recovered from the recipients.  See CELF case (C-199/06) European Court of Justice, February 12, 2008. .  In cases where Member States do not notify the Commission of its plans to grant or alter aid prior to such aid being put into effect, the aid is unlawful in relation to Community law from the time that it is granted.” Notice From The Commission, “Towards an effective implementation of Commission decisions ordering Member States to recover unlawful and incompatible State aid,” (2007/C 272/05), par. 8 (emphasis added).

The European Court was completely clear in the CELF decision:

In order to ensure the effectiveness of the Commission’s role in monitoring and reviewing aid in the Community interest, Article 88(3) EC imposes two unequivocal obligations on Member States when they intend to grant a new aid or alter an existing aid: a notification and a so-called ‘standstill’ obligation. The first sentence of Article 88(3) EC requires the Member States to inform the Commission of a planned aid in due time. The last sentence of Article 88(3) EC imposes an additional obligation on the Member States concerned to refrain from implementing the aid until the procedure provided in Article 88 EC has resulted in a final decision by the Commission. Thus, as the Court pointed out in Adria-Wien Pipeline and Wieterdorfer & Peggauer Zementwerke,  Article 88 EC ‘imposes on Member States specific obligations to facilitate the Commission’s task and to prevent faits accomplis for that institution.’

Member States may not grant State aid until the Commission has adopted a final decision stating that the aid in question is compatible with the common market. Failure to comply with those obligations renders the State aid unlawful. [par. 22-23](emphasis added).[2]

If anyone doubts that this means exactly what is says, look at the response of the French wind industry and French Government to the European Court of Justice case. See prior post. 

This also affects all of the substitution fees received by the National Environmental Protection Fund: everything that they handed out is illegal state aid and has to be returned. 

Bank loans granted based on the cash flow from Green Certificates will be in default. 

The Green Certificates have no legal value and are 
null and void under EU law.

While the certificates and the substitution fees are illegal, this does not affect the obligation to have a quota of renewable energy under the Polish Energy Law. So the alternatives for utilities will be to have the renewable energy requisite percent or to pay a penalty for the missing obligation. Instead of having an accumulation of certificates with value,  these companies will go to owing major penalties. If the failure to fulfill the obligation is viewed as retroactive, then they would face retroactive penalties for all the prior years' shortfall. 

Every Polish electricity customer could claim a refund on their bills since 2005 to recover all of the charges added because of Green Certificates. This process had actually started in France with the pending court decision.[3] 

The invalidity of Green Certificates will also cause the new law to fail, since Green Certificates are part of its support and even some auction values are pegged to their value.

There is absolutely nothing that Poland can do to change the law described above. It is embedded in the European Treaty, Articles 107 and 108. Enforcement of this obligations does not take the form of an infringement action and a long-drawn out process, since the Commission can order the relief itself [4]. 

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," gramwzielone.com [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 Commission has at least one complaint on Green Certificates pending which requires a formal decision. 

What in the world do Polish officials think will happen? 

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. After the many times that the Ministry of Economy and even the Prime Minister's office [5] have indicated that co-firing is overcompensated, this means some sharp reduction or termination of the support altogether. The Institute of Renewable Energy recommends no support based on a wide range of data. 

Failure to promptly take up an emergency bill to enact this remedy and to then notify the Commission to repair the system will be one of the most irresponsible actions ever taken by the Polish Government. 
 _________________________________________________

[1] The Commission apparently has already advised the Office of Competition (UOKiK) in Warsaw that the certificates are state aid. See UOKiK correspondence to Ministry of Economy, 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.” (emphasis added).

[2] See Case C‑39/94 SFEI and Others (‘SFEI’) [1996] ECR I‑3547, paragraph 41, and more recently, Case C‑368/04 Transalpine Ölleitung [2006] ECR I‑9957, paragraph 37.

[3] The French case got to the European Court on a request by the French court for a preliminary ruling. National courts can rule on state aid themselves but only the Commission can determine incompatible aid exists (a decision that can only be reviewed in the European Court of Justice). 

  
[4] Under the Treaty, the Commission is given the competence to determine whether or not the notified aid measure constitutes State aid in the sense of Article 87(1) of the Treaty, and if it does, whether or not it qualifies for exemption under Article 87(2) or (3) of the Treaty. Member States cannot grant any State aid unless it has been notified and authorised by the Commission. Any aid, which is granted in absence of Commission approval, is automatically classified as “unlawful aid”.  DG Competition, Vademecum Community law on State aid , 30 September 2008, p. 13 (emphasis added). UOKiK pointed this out to the Ministry of Economy on June 5, 2012. 

[5] As recently as March 2014 the Ministry of Economy stated that “technology showing the lowest cost of power generation received unjustified support. In 2013, the Ministry of Economy state that uncontrolled development of such technology caused oversupply of green certificates and led to the collapse of their market price .”  They further stated in the 2013 justification for the new draft RES legislation:
The presence of excess amounts of certificates of origin, was mainly due to the more rapid pace of development of renewable energy sources in Poland than was envisaged in the National Action Plan in the field of renewable energy. Multi-fuel co-firing plants contributed the most to the rapid increase in the volume of electricity production from renewable energy sources which in recent years recorded the highest growth (which is related to low expenditure necessary to run this type of production and high revenues generated by this practice). (emphasis added).

Even the Prime Minister’s website has recently conceded the point:
The dynamic development of technologies using renewable energy sources caused the embracing of all energy technologies have the same level of support has lost its justification. The existing system of certificates of origin stimulates only some sources, which in turn results in sub-optimal use of locally available resources, power terminal blocks for other technologies and limited economic development and creation of new jobs. In addition, the system of certificates of origin, there is a situation in which technology showing the lowest cost power generation receive unjustified support that interferes with the development of the RES market….” (emphasis added).
 

Thursday, August 21, 2014

Balancing with Biogas?

News that the peak market prices are getting out of hand in Poland raises the issue of using more means to balance energy production. The 24 hour cycle seems to be getting worse. Energy storage over a short span of hours seems to be an attractive idea.

While there are a number of energy storage solutions using batteries to store electricity, or devices to store kinetic energy to produce electricity later, one of the renewable energy sources itself has the potential to provide output matched to the 24-hour demand cycle - biogas,

All biogas plants have biogas storage in some form. The most common is shown below:

One biogas vendor explained one of the advantages of gas storage:

 "Since the gas-store can hold several hours of gas, the CHP unit can be turned down during off-peak generating times without loss of biogas. The stored biogas can then be burned during high-peak electricity demand hours to maximize revenue efficiency. In addition, the gas store provides a steady supply to the generator during peaks and troughs in methane production, thereby increasing efficiency, reducing wear on the generator, and eliminating waste."

   
While the European Commission background document on energy storage pushes the idea of storage of hydrogen in the future to be used to balance energy production with demand, the same European Commission ignores the potential for doing this with biogas/methane right now. The costs are much lower since the only requirements are more methane storage capacity and more generation capacity. See below. The new state aid guidelines, however, seem to require that all renewable electricity be sold to the grid , where it gets swept up in one flat rate regardless of the time of production. This seems incredibly short-sighted to me, when the whole Commission document is complaining about demand and supply mismatches.

It is quite possible to store methane over-night and run more generation of electricity during the peak day hours. "The stored methane would subsequently be converted by a generator owner in order to dispatch MW power to the grid to supply high demand prices ($/MWh) on the spot market."  Stefan J. Minott,  Onpeak Market Dispatchable Energy From Megawatt Scale Fuel Cells And Stored Digester Methane, PhD thesis (Cornell Univeristy 2014).  This can be done without purification of the methane or any additional expensive processing. As Minott observed, this is easier to do when the facility can sell directly to the end-user.[1] This is the case now in Poland under the Green Certificate program and as long as that system is used, differential electricity pricing is possible.

A variable peak  feed-in tariff is also possible, as it done in Ontario.[2] This would require some additional paperwork at the Polish Energy Regulatory Agency, but would allow the technologies capable of "bending" production to do so. Given the huge problems from intermittent renewable energy production and even conventional peak cycles, this seems to be a solution worth serious consideration. Properly priced, such a solution could also foster additional energy storage technical solutions for intermittent producers like PV and wind.

The added costs for a biogas plant would be additional biogas storage capacity and additional generator capacity (which would not be used during off-peak hours). It is already feasible to produce additional peak hour output with direct sales of the electricity produced. It could be feasible to do so with grid sales if the differential were adequate. The direct sales market mechanism seems preferable since it can adjust itself to changes in the market. This should be the preference for both the European Commission and the Polish Ministry of Economy, who both espouse the need for market-based mechanisms (while not always finding them or recognizing them when they are presented). Using the existing differential in market price between peak and off-peak electricity does not really cost anyone anything more. It simply matches the solutions to the problem.

I am eager to discuss differential temporal electricity production  with potential direct users,  energy sellers and traders, as well as government officials. Poland has the time now to incorporate some sensible solutions into the new law. Under the current Green Certificate system, we still have some time to add the necessary facilities to ongoing biogas projects to  provide differential output for direct users.

__________________________________

[1] More elaborate processing to purify to natural gas quality could be used to develop a commodity that could be sold on the natural gas spot market (as Minott describes and models). But this seems to be a lot of added expensive with little to gain, if the electricity itself can be sold at a premium in the peak hours.

[2] From the Ontario Power Authority website:  "Is there an incentive for peak production? Yes.
  • Technologies that are not intermittent (i.e., dispatchable), such as bioenergy and waterpower, will be encouraged to shift production to peak periods when the electricity is most needed.
  • Payments will be 35% higher from 11 a.m. to 7 p.m. on business days, and 10% lower during off-peak hours.
    • Projects will earn the posted FIT price multiplied by:
      • 0.9 for off-peak periods
      • 1.35 for peak periods
  • Projects that operate 24 x 7 every day of the year will earn the same total revenue as if they had been paid the posted FIT price.

Sunday, August 17, 2014

August in Poland.

August in Poland. The politicians are doing what they do best... taking a break.


During this period of inattention, it might be useful to compare what the Polish legislature  is doing on renewable energy compared to the French legislature in the same situation (albeit less severe in France).

The French did not notify Brussels of their wind tariff in their renewable energy law.When the preliminary memo came out that the European Court was getting ready to find the wind tariff to be state aid, everyone was quite attentive to the possible consequences. Unnotified and unapproved state aid is illegal in the European UnionLegal commentators noted that once the case got back to the national, French court, it "essentially has no choice but to cancel the preferential feed-in tariffs to wind power producers agreed to in 2008, likely resulting in massive refunds for consumers. France can expect down-stream lawsuits from wind power producers as a result of government FIT adjustments, or potential FIT payment claw-back."

The strategy adopted by the French wind industry and government was to try to beat the case on remand by passing, notifying Brussels and getting approval on a new wind tariff law, retroactively fixing the situation. One prominent law firm advised clients: "The legal uncertainty which could result from the cancellation of the Feed-in Tariff Order would be strongly mitigated by obtaining clearance of the Wind Tariff Support Scheme (i.e. decision of compatibility with the European Union common market) from the European Commission prior to the decision of the Conseil d’Etat." Other lawyers advised of the dire consequences if the tariffs were held to be state aid  that had not been approved and the situation was not rectified.

At the Eleventh Hour, the French Government passed the new wind tariff law and the French court let pass the years of "illegal aid" caused by the failure to notify Brussels and obtain approval. 

My reaction at the time was why would rationale people let the matter get that far? Once there was a challenge, it would have been prudent to fix it by a notification and retroactive approval, well before the ruling by the European Court of Justice. 

Yet at this point in time, the French reaction seems stellar compared to what we are seeing in Poland.  On June 5, 2012, the head of the Polish agency that deals with this stuff  told the Ministry of Economy  that runs energy policy that their Green Certificate program was state aid and needed to be approved by Brussels. On November 28, 2013, the same agency told the Ministry that the Commission had actually advised the Polish Government that the Green Certificates were considered to be state aid. This program had been operating since 2005 without notification and approval by Brussels. Approval that is required before-the-fact by the European Treaty. By February 2014, the Polish Government learned that there were complaints in Brussels over the Green Certificate program and they were asked to submit a very detailed list of information to the Commission.

Through a similar period, the French Government was racing to re-enact their questioned tariff and get it approved in Brussels. The Polish Government continues to deny there is a problem and has, incredibly, no plans to repair the Green Certificate program to meet the state aid requirements [1] and no plan to notify Brussels


Source: Joseph Wouk
This will mean that the Commission's enforcement action, whenever that culminates, will invalidate all certificates since 2005, require recovery of the money, and lead to endless unfair competition claims.  The Commission has already signaled this result to the Polish authorities and has the power to take these actions without going to court. Challenging these conclusions will require going to court with years of litigation and no chance of winning. 

I suggested last fall that the Polish Government should split the new renewable energy law in half and make the first half a revised Green Certificate program that met all of the Commission's guidelines, similar to the Romanian program that they approved in 2011.  The rest of the new law could include anything that they wanted in theory (but would also have to be notified and approved by the Commission). This suggestion was basically the French solution, i.e. try to minimize the consequences by anticipating the results.

The Polish solution, however, was not so easy, since major parts of the Green Certificate program beginning in 2005 do not comply with the EU state aid guidelines. Aid for co-firing and old hydro would have to be ended as incompatible with the fair competition rules (i.e. overcompensation distorting the market for competitors). This was a decision that the Polish Government simply could not make before the Parliamentary elections, since it involves billions of Euro of support that would have to be returned by state-owned companies. 

It is wholly unclear if the delaying tactic will work to actually defer the results. It is clear that the results will be worse for everyone from the delay. There will inevitably be a revised Green Certificate program and aid to co-firing will end or be sharply reduced., and aid to old hydro will end completely. Without a new law on certificates that meets the guidelines then in effect, all of the aid will have to be returned. Amounts paid for these objectives will be recovered. The transition will be anything but smooth. The biggest losers will be the folks that the government tried to illegally help, i.e. the big state-owned utilities. 

While the law that could meet these requirements was drafted two years ago and ready to enact over a year ago, there is no sign that the Polish Government will do anything to mitigate the damages. Their legislative vacation is not just a respite  from work, but a break with reality.
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[1] The repair involves "levelizing" the certificate values by true costs of production across the different renewable energy technologies. State Aid Guidelines for Environmental Protection, par. 110. 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”).
 

Thanks to My Readers!

Many thanks to those of you who stop by this blog to pick up my posts and sometimes rants!

I am now running about 500 "hits" a day and will continue to keep readers updated on Polish renewable energy developments from the perspective of a practical "green businessman."

Please posts comments or questions, if you have any. I am happy to provide more information, links, and even documents.


Randy


Wednesday, August 13, 2014

New RES law in Poland Will Recognize Stored Energy As Renewable

In a big breakthrough, the Polish Government has now included energy stored from renewable sources to be part of the energy from a renewable energy installation. Article 2.13 defines a renewable energy installation to include "stored electricity produced from the equipment." This means that stored energy will still count as renewable energy if that was the source of the input.

This will create great opportunities for new energy storage projects, especially in the PV sector. The big thing to remember is that the law, when passed, will apply to all RES facilities and those that are already operating can add storage and not only keep Green Certificates, but directly sell the stored energy in the peak period market. This is only allowed the way the law is drafted for "grandfathered" facilities that do not have to sell to the grid through the new state-owned entity to be created by the new law.

The challenge is how to make the new law work to funnel electricity into the peak period from storage devices if the producer does not obtain any advantage from doing so [unless the producer is operating before the new law takes effect].  We will be working on ways to solve this and hopefully have the cooperation of the Government, since this is in everyone's best interests.