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