Polish Green Certificates Will be Fixed and Justice Will Prevail

Randy Michael Mott, Vice President, Polish Biogas Association

    As the news broke that Poland has received notice of a state aid enforcement investigation into its Green Certificate program, particularly support for co-firing biomass with coal, the full implications of where this can lead have not been appreciated here. Several complaints were apparently received by the Commission. Support for co-firing in the current and proposed law is effectively over. There may be a delay in the acceptance of this fact, but it is a fact. Efforts to enact a complex law that still favors the state-owned utilities will also be frustrated by this development. However, things can also get a lot more complicated, especially if the Polish Government continues to bungle this issue.

     As background, the European Treaty prohibits state assistance to industry that will distort competition in the European market. All such state aid must be submitted to the European Commission for prior approval.[1] The rules applied to renewable energy assistance require that there be no overcompensation of a single technology and that support be levelized to provide comparable profit margins across technologies. In the same vein, old projects that have been fully depreciated cannot receive state aid. Such “incompatible aid” must be recovered from the recipient and competitors adversely affected may have unfair competition claims against the government and the aid beneficiaries.

     The Polish problem began in 2005 when the Green Certificate program to support renewable energy started without notification to Brussels. “Green Certificates” and the substitution fees paid in lieu of having the required level of green electricity or certificates have consistently been found to be state aid by the Commission. Beginning as early as 2001, in the case of the UK, the Commission found such programs, including substitution fees, to be state aid, requiring notification.[2] Now there is no doubt that the certificates themselves are also state aid, as the Commission concluded in the case of Romania in 2010: “…the fact remains that the State provides certain undertakings with an asset, which has a monetary value, and that asset originates with the State which has created it,” C (2011) 4938, p. 13. All of the elements relied upon by the Commission to find state aid in other green certificate cases exist in the Polish case.

     Any effort to dispute that the program is state aid seems to be a waste of time at this point. However, the issues rapidly grow more complex. All aid that is not notified is automatically unlawful under European law. The situation in Poland is so extreme that it is difficult to believe.

     All Green Certificates and substitution fees created since 2005 were never subject to notification and never approved as state aid compatible with the treaty. They are all unlawful and will have to be recovered from the recipients unless the notification and approval defect is cured. This means that utilities using these to meet the green quota could now find that they have no alternative to paying the penalties (the substitution fee times 1.3). Past compliance by use of these means might also be invalid and reopen the issue of past penalties. It means that all green certificates being held in the massive current surplus will be useless. It further means that the substitution fees used by the National Fund for grants and loans will have to be recovered from the recipients as unlawful aid. The invalidity of Green Certificates would stop all financing and investment in renewable energy in Poland, without altering the legal obligation to have the requisite quota of green energy. It is difficult to imagine a scenario more destructive to the Polish energy sector.

     We can see a smaller scale version of the same consequences in France today. The European Court of Justice ruled in December that the French wind tariffs were state aid (distinguishing an older case where it held the German tariffs were not state aid). The case is moving back to the French court which will be obligated to implement the ruling that the unnotified aid is void and has to be recovered. Investment in wind is in a state of chaos and thousands of French electricity users have filed claims for refunds on their bills which included extra charges based on the illegal tariffs. These consequences have been occurring in a situation much more contained than the one presented in Poland.

     The French Government, pushed by the wind industry, commenced a new tariff law and notified Brussels during the pendency of the case before the European Court in an effort to prevent the consequences of an adverse ruling. The notification of aid can be post hoc if the aid is compatible with the competition rules. The effect will hopefully be that the approval comes down in Brussels before the national courts are forced to start implementing the ruling of the European court.

     Unlike the French Government in this case, the Polish Government is moving on a complex legislative package that goes well beyond a simple post hoc notification cure. Several parts of the pending new law are also inconsistent with state aid rules. Support for co-firing continues in the new law and the auction procedures - according to URE- raise more obstacles to small RES producers worsening competition in the sector. The obvious solution is to enact a Green Certificate law that meets state aid rules and notify as fast as possible (exactly as the French have done). More complex issues might be better resolved when there is no pressing need for speedy resolution. The current draft is often incomplete as well as unnecessarily confusing.

     The problem, however, goes well beyond the lack of notification of the state aid.  The notification triggers a review of the compatibility of the aid with competition rules. The new Commission investigation and enforcement action against Poland is focused on alleged violations of these competition rules by the current Polish system.  The hitch is that approval by the Commission requires compliance with the guidelines on state aid for environmental protection – an impossible hurdle for Polish Green Certificates as they are now structured. The pending new law also does not address these issues adequately and raises additional issues that will be problematic under the Commission rules.

          Two problems exist in the current Green Certificate program as far as state aid rules are concerned. Together they affect about 70% of the certificates awarded and the seriousness of the situation cannot be overstated. First, the support for co-firing coal with biomass at the full value of the support scheme provides disproportionate economic gain to the co-firers and has distorted competition. A single technology cannot receive wildly more favorable treatment under the competition rules. Under the Energy Law, all forms of renewable energy covered by its provisions receive the same support, i.e. one Green Certificate per MWhr. While this is seemingly neutral on its face, the fact is that all other forms of renewable energy, except co-firing, involve construction of electrical production facilities. The Institute for Renewable Energy, which was officially tapped last year to collect cost data for various technologies to provide for adjustments called correction factors, concluded in an unofficial report that co-firing biomass with coal only requires a maximum of 0.13 green certificates per MWhr to be profitable. The IRR for co-firing at 100% certificate value is over 120% or roughly ten times the other technologies.

     Consequently the certificates and substitution fees from co-firing and old hydro plants will inevitably be found illegal if prior decisions are applied to these facts. This aid violates the published guidelines and prior decisions.”… such compensation 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.” 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. “Where the market mechanisms constitute State aid, they may be authorised by the Commission if Member States can show that support is essential to ensure the viability of the renewable energy sources concerned, does not in the aggregate result in overcompensation and does not dissuade renewable energy producers from becoming more competitive..” COMMUNITY GUIDELINES ON STATE AID FOR ENVIRONMENTAL PROTECTION, 2008/C 82/01, Section 110(b)(emphasis added). The Commission requires that support be “levelized” across technologies so that one technology (like co-firing here) does not receive disproportionate support that distorts the market (like co-firing here).[3]   Similarly, facilities that have been fully depreciated obviously do not need support at that point and the aid to old hydro plants will be deemed incompatible as well.[4]

     This problem means that co-firing aid and support given to old hydro plants cannot be cured by simple notification. It is also clear that incompatible aid is illegal and that the Commission can make this determination at any point in the investigation. They seem to be obviously incompatible aid and will have to be recovered.[5]

     Attempts to continue aid to co-firing at levels of support still vastly greater than its cost of production will doom the new draft law to rejection in Brussels. Co-firing can continue and it can be a renewable energy technology accepted for the purposes of compliance with the EU Directive. The only issue is whether it needs support and the data clearly show it does not. Instytut Energetyki Odnawialnej, “Analiza Dotycząca Możliwości Określenia Niezbędnej Wysokości Wsparcia Dla Poszczególnych Technologii Oze W Kontekście Realizacji „Krajowego Planu Działania W Zakresie Energii Ze Źródeł Odnawialnych,” Pracę wykonano na zamówienie Ministerstwa Gospodarki (lipiec 2013). 

     The cure for the enormous blunder in the Green Certificate program has to be a straightforward new Green Certificate law with levelized cost as well as any major features found to be important by the Commission in their approval of the Romanian Green Certificate program in 2010.[6] The effort should be to provide an approach already accepted by the Commission in other cases to allow for a simple and expeditious approval. This will save everything that has been done earlier that is compatible with the state aid rules. Presumably minor differences in cost that are not historically reflected in certificate vale adjustments or coefficients will not be material. Going forward, however, everything should be done to assure that no distortion is created across technologies.

     This new law can cure the lack of notification for all Green Certificates and substitution fees that do not involve incompatible state aid. If this effort is compromised by including incompatible aid provisions in the new law, while the Polish Government prolongs its fascination with co-firing, or goes into a typical state of denial, then the widespread consequences for everyone in the sector can occur. Lacking any Green Certificates or substitution fees and paying penalties is certainly a worse outcome for the Polish power industry than only losing co-firing certificates. This is really the choice now before the Polish Government. The French began their race against the clock months ago, while our Polish politicians cannot seem to hear the ticking.

     The efforts by politicians to support the state-owned utilities to minimize the impact of RES legislation on their bottom-line have now come to a completely counter-productive end. The state utilities and other co-firers face tremendous potential liability in the billions of zlotys. Their future compliance with RES requirements will be more expensive. Consumers, however, may actually get refunds on their bills that contained illegal charges. New RES support will only go to recipients who add new electricity generation which will impact end-users prices much less.

     The system with co-firing and old hydro support removed will function much more like it was intended. The removal of the incompatible certificates from the market will create a major shortage of Green Certificates and increase the prices to roughly the same as the substitution fee (297 PLN/MWhr). The surplus of certificates will disappear. Investment in green energy that in the long run is less expensive to consumers than nuclear or new coal plants will be greatly encouraged.

     If the Polish Government finally starts acting in the interest of the public instead of the utilities that it owns, the system should rebound and new capacity may be added faster than conventional energy production could achieve. The pending legislation should be split into two parts with the Parliament taking immediate action on the green certificate provisions with levelized support based on actual production costs. If our politicians do not react well and intelligently, an epic disaster in the energy sector is still possible.

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[1]     Article 107 of the Treaty on the Functioning of the European Union provides that “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.”  Article 108(3) provides further that Member States must provide advance notification to the Commission before state aid can be effective:  “The Commission shall be informed, in sufficient time to enable it to submit its comments, of any plans to grant or alter aid. If it considers that any such plan is not compatible with the internal market having regard to Article 107, it shall without delay initiate the procedure provided for in paragraph 2. The Member State concerned shall not put its proposed measures into effect until this procedure has resulted in a final decision.”

[2] The early rationale hinged on the substitution fees which were collected and used to assist other industry efforts in renewable energy. “The constant practice of the Commission is to consider that the proceeds of such levies are state resources (2). This practice is line with the Court’s case law, according to which the proceeds of levies imposed by the State, transferred to funds designated by the State and used for the purpose of advantaging certain companies, are deemed to be state resources.” 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, par 69, (emphasis added) citing Case N 161/04 — Portugal (OJ C 250, 8.10.2005,p. 9);  Judgment of July 2,1974 in case C 173/73, Italy v Commission;  Judgment of March 22,1997 in case C-78/79, Steinike v Federal Republic of Germany.

[3] 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”). “In order to assess whether there is no overcompensation in the aggregate, the Commission needs to verify that the revenues of the generators do not exceed the costs of production and a reasonable benefit in the aggregate of the scheme i.e. over time and over technologies.” C (2011) 4938 (Romania), par. 64, p. 15. 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. “…such compensation 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. 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.”).

[4] “…under the Guidelines operating aid may be granted in order to compensate for the difference between the cost of producing energy from renewable sources, including depreciation of extra investments for environ-mental protection, and the market price of the form of energy concerned and until the plant is depreciated according to the normal accounting rules.” Becker et al. supra, citing  Community Guidelines on State aid for environmental protection 2008, OJ C 82/1, par. 109(a).

[5] “…[the Commission] has systematically ordered Member States to recover any unlawful aid found to be incompatible with the common market, unless it considered that this would be contrary to a principle

of Community law.”  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),  para. 2. “Article 14(1) of the Procedural Regulation …provides that the Member State concerned shall take all necessary measures to recover unlawful aid that is found to be incompatible. Article 14(2) establishes that the aid is to be recovered, including interest from the date on which the unlawful aid was at the disposal of the beneficiary until the date of its effective recovery. The Implementing Regulation elaborates the methods to be used for the calculation of recovery interest. Finally, Article 14(3) of the Procedural Regulation states, that ‘recovery shall be effected without delay and in accordance with the procedures under the national law of the Member State concerned, provided that they allow for the immediate an effective execution of the Commission decision’. Para. 11, citing Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty (OJ L 83, 27.3.1999, p. 1).

[6] 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”). “In order to assess whether there is no overcompensation in the aggregate, the Commission needs to verify that the revenues of the generators do not exceed the costs of production and a reasonable benefit in the aggregate of the scheme i.e. over time and over technologies.” C (2011) 4938 (Romania), par. 64, p. 15. 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. “…such compensation 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. 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.”).