THE NEW LAW MUST REDUCE SUPPORT FOR CO-FIRING TO REFLECT ITS ACTUAL LOW COST OF PRODUCTION

     The July 8, 2014 draft of the new law on renewable energy provides that co-firing would continue to receive support at 50% of its existing level or in the case of the auction up to a reference price which is not disclosed by the draft. Co-firing is unique among the renewable energy technologies in that it does not create any new electricity capacity, only changing a portion of the fuel used in combustion.  The state aid rules and precedent require that co-firing only be supported to the extent that support reflects its actual cost of production.[1]  The current version of the law and the legislative record provide no basis for the 50% support level for existing co-firing and the full support for dedicated co-firing. These decisions are arbitrary and contradicted by the government’s own data. They constitute state aid that is incompatible with the European Treaty and will be rejected by the Commission in Brussels.

     The history of earlier versions of the law demonstrates that the political decision to keep supporting co-firing has no basis in the facts (as the information had been analyzed up to intervention by the Prime Minister’s office). We need only look to the Government’s Regulatory Impact Assessment that accompanied the December 2011 proposed new law. The Ministry of Economy there concluded that support should be levelized and that “[l]ess support…[should be] provided for technologies currently producing approximately 90% of RES electricity (co-firing, wind and old, depreciated hydro).” Id. p. 9. The 2011 proposal was to end support for co-firing and old hydro due to the need to adjust support to the costs of production and to the state aid guidelines. In the year that followed, the market was flooded with certificates from co-firing, destroying their value. In 2013, the Ministry of Economy provided a justification for the new draft RES legislation [enclosed] which stated:

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).

     On July 2, 2014, backing away from ending the support, the Government still criticized the uniform support system noting that “technology showing the lowest cost of power generation received unjustified support.” POLISH VERSION, p. 21. Despite these statements, the Government draft law provides no basis for arbitrarily using the 50% level of support for existing sources or for providing “dedicated co-firing” competition in auctions with undisclosed maximum prices. See Article 44.8, proposed law, July 8, 2014,  This is proposed at the same time that they continue to rely on co-firing biomass to continue to meet their 2020 obligation. See Table 17, Regulatory Impact Analysis, July 2, 2014 {PL}.  At the point when the head of the Polish Office of Competition and Consumer Protection was a lawyer and was independent of the Government politically,[2] the Polish Government proposed to end co-firing support along witrh old hydro support and to completely levelize the support scheme by adjusting the value of certificates based on technology.[3] See Article 47, (draft version December 2011). By 2013, after political intervention, they backed off of this proposal. See Article 44.8 (draft version 4, November 12, 2013). When this was proposed, they had acknowledged the need to comply with state aid guidelines. See Article 192, supra (2013 draft)(providing the effective dated of support “within 30 days from the date when the European Commission has issued a positive decision on the compliance of public aid, provided for in this Act, with the common market”).

     There is no factual basis asserted to support the re-instatement of aid to co-firing in the newer drafts of the law, including the July 2014 version. The Ministry with competency over energy concluded in 2011-2012 that the support should end due to its lack of relationship to the cost of production. Nothing has changed except the political intervention of the Prime Minister’s office. The law is the same that support must be based on costs of production.

     When the Polish Government still was proposing to notify and to levelize support and end aid to co-firing and old hydro (up until the summer of 2013), the Ministry of Economics retained the Institute for Renewable Energy (IEO) in Warsaw to study what correction coefficients would be necessary to levelize the support scheme.  Their study requested all of the co-firing facilities in Poland to submit their data to justify their costs. No large state-owned facilities or major co-firing plants submitted any data to support their cost of prtoduction. See IEO, “Analiza Dotycząca Możliwości Określenia Niezbędnej Wysokości Wsparcia Dla Poszczególnych Technologii Oze W Kontekście Realizacji „Krajowego Planu Działania W Zakresie Energii Ze Źródeł Odnawialnych, ” lipiec 2013.

RES installation to support with the Green certificate system	Technology code	2013[4]		2017[5]
		OSR[6]	IEO[7]	OSR	IEO
agriculture biogas 200-500 kW	T1	1.50	2.89	1.41	2.98
agriculture biogas 500-1000 kW	T2	1.45	2.49	1.36	2.58
agriculture biogas >1000 kW	T3	1.40	2.19	1.32	2.26
landfill biogas > 200 kW	T4	1.10	-	1.00
water treatment plant biogas >200 kW	T5	0.75	1.30	0.67	1.24
biomass < 10 MW	T6	1.30	1.71	1.22	1.78
biomass - cogeneration < 10 MW	T7	1.05	1.83	0.99	1.90
biomass 10 - 50 MW	T8	0.95	0.81	0.89	0.77
biomass - cogeneration 10 - 50 MW	T9	1.70	1.04	1.60	1.02
biomass > 50 MW	T10	1.40	1.02	1.32	1.00
biomass - cogeneration > 50 MW	T11	1.15	1.35	1.08	1.35
biomass - cofiring  (multi fuel combustion)	T12	0.30	-	0.15	-
biofuel	T13	1.15	3.30	1.08	3.48
wind 100- 500 kW	T14	1.20	1.34	1.11	1.17
wind > 500 kW	T15	0.90	0.92	0.80	0.85
water < 75 kW	T16		2.44		2.55
water 75-1000 kW	T17	1.60	1.52	1.53	1.65
water 1000-5000 kW	T18	1.70	1.60	1.62	1.72
geothermal	T19	1.20	7.91	1.20	8.12
photovoltaics - on the building 100-1000 kW	T20	2.85	2.45	2.40	1.49
photovoltaics - on the ground 1000-2000 kW	T21	2.75	1.84	2.32	1.07
photovoltaics - on the ground 100-1000 kW	T22	2.45	1.72	2.07	0.97
offshore wind		1.80		1.80
hydropower plant 5 MW-20MW		2.00		1.91
hydropower plant > 20 MW		2.30		1.91

       The IEO for their study reviewed data from the Ministry of Economy, the International Renewable Energy Agency, a few co-firing plants in Poland, and the UK. IEO concluded that  new co-firing (not mentioning depreciated) could be profitable without any support from renewable energy legislation.

The IEO report was presented to the Ministry at the same time roughly that the Prime Minister’s office intervened and ordered the law to go through a complete rewrite, one that did not provide for any levelization of Green Certificates and continued support for co-firing. Since that point, no one in the Polish Government has supported or proposed levelizing the Green Certificate values, although the certificates will continue to be part of the support scheme for all facilities built before the effective date of the new law that elect to continue in that program in lieu of an auction. See Articles 42.1 and 72. So the Polish Government has abandoned its previous position, supported by the top competition authority in Poland and the top technical support organization in the RES sector. This shift is solely due to political expediency and pressure from the “stakeholders at the Treasury and Finance Ministries” who benefit from revenue from state-owned companies.  

      These admissions by the Polish Government prior to the 2014 draft law, illustrate what is well-known everywhere: that co-firing is significantly cheaper to implement than any other RES technology, arguably so cheap than it needs no support at all. The American Coal Council concluded: “Biomass co-firing has the potential to reduce emissions from coal-fueled generation, without substantially increasing costs or infrastructure investments.” [enclosed] (emphasis added).  A major German study concluded that “the funding requirement is well below the amount paid to other renewable-energy production technologies….” Brunner, Pa Consulting Group, Energiewirtschaftliche Tagesfragen - Co-firing solid biomass: the underrated option, July 2012[enclosed]. They show that co-firing is “well below the currently most expansive renewable-energy generation technologies.”  These conclusions are supported by the German Energy Agency report, “Die Mitverbrennung holzartiger Biomasse in Kohlekraftwerken,” August 2011 [enclosed](they note that co-firing biomass may pay off under some scenarios without any support and at that point needed no more than 3.5 ct/KWh).  Supporting the IEO conclusion, Luschen et al. concluded that “cofiring has only minor consequences on the profitability of the power plant.”  FCN Working Paper No. 23/2010, “Economics of Biomass Co-Firing in New Hard Coal Power Plants in Germany,” Andreas Lüschen and Reinhard Madlener, Aachen University, December 2010, Revised July 2012, p 17 [enclosed]. A Dutch report in 2013 concluded that co-firing “costs compare very favorably with any other available renewable energy option.” Koppenjan et al. “Global operational status on cofiring biomass and waste with coal Experience with different cofiring concepts and fuels” 2013 [enclosed]. The Austrian study of co-firing concluded that “biomass co-firing using biomass residues as a feedstock represents possibly the lowest cost and lowest risk option …for increased renewable energy production.” Obernberger, Bios Bioenergieysteme GmbH, Graz, Austria, “Co-firing Biomass with Fossil Fuels- Technical and Economic Evaluation Based on the Austrian Experience.” [enclosed].  

     All the international studies and references support the need to limit support for co-firing.

      Nothing in the legislative record on the new law provides any basis whatsoever for the proposed treatment of co-firing in the July 2014 draft. When given an opportunity to document their actual costs of production with IEO, the major co-firing plants declined to do so. There is simply no valid reason, and certainly no transparent one, to continue high levels of support for co-firing that no other European country provides, which violate the European Commission guidelines and past precedents on state aid.[8]

     All of the certificates should be adjusted by correction coefficients established by the IEO report. The support for co-firing should be limited to avoid continued distortion of the market for other technologies.  Co-firing should not be in any auction competing with any other technology, since to do so would be unfair competition. Other technologies construct new electricity production facilities and co-firing is just a partial fuel switch. Any support that can be justified based on the cost of production should only be used as a reference price in a separate technology auction for co-firing restricted to a percent of the market and a level defined by the National Action Plan.

     As long as the Commission allows co-firing of biomass with coal to be considered a renewable energy technology that can be used to comply with the 2020 mandate, it can continue to be used in Poland. But the support that it receives must not distort competition and should be carefully calculated to only reflect the actual cost of production. Any other approach will not be approved by the European Commission or the European Court of Justice (CJEU).

Note: Polish version was published at GramwZielone.

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[1]     The UOKiK previously noted the requirement that Green Certificate support be levelized across technologies:  "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”  UOKiK to Min. of Economy, June 5, 2012. “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 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. After January 2017, the new guidelines apply but they still ultimately require that the support system not distort the market by overcompensating technologies well beyond their cost of production.

[2] The appointment of a non-lawyer and political ally of the Prime Minister caused UOKiK (OCCP) to reverse their position. The same man who chaired the meetings in the PM’s office that lead to dropping the levelized support and the phase out all co-firing support. Nothing changed but the political motivations.

[3]  From the Ministry of Economy’s Regulatory Impact Assessment on the December 20111 proposed law: “To optimise the existing support scheme it was assumed that it is necessary to modify the certificates of origin mechanism in a way such that different minimum guaranteed financial aid level is specified for each technology. Such optimisation will ensure more balanced development of sources based on all RES technologies and will allow for allocating the aid for these technologies that need it most. Ministry of Economy proposes to optimise the support scheme on the basis of differentiation of its level depending on the technology used by a particular source.” Draft RIA dated 20 December 2011 – version 1a.4 of the Act, p. 8 [enclosed].

[4] The first year the correction factor was published in Regulations implementing the Act - Energy Law, the Law - Law  Gas and the Law on Renewable Energy Sources version 0.11 (9.10.2012).

[5] The last year the correction factor was published in Regulations implementing the Act - Energy Law, the Law - Law  Gas and the Law on Renewable Energy Sources version 0.11 (9.10.2012).

[6] Ministry of Economy, Regulatory Impact Assessment - document issued with the RES act project.

[7] Institute for Renewable Energy - prepared report ordered by Ministry of Economy, July 2013.

[8]  There is an extremely flimsy position that the law does not provide for state aid, which is contradicted by the UOKiK (now on tax preferences and earlier on certificates as well). Most importantly, the Commission communicated to UOKiK that the support scheme being continued in the draft law was state aid in their opinion. November 28, 2013 UOKiK letter to MG: "According to the UOKiK, the certificate system constitutes state aid. Detailed clarification in this 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….”(emphasis added).