Winds of Change - Frequently Asked Questions under the RES Act
Still, since the final text of the RES Act was adopted by the Parliament on 20 February 2015, a wide range of questions have been raised by investors and other stakeholders with respect to how the Act will affect the industry. This article provides an overview of some of the key concerns caused by the Act.
How to qualify a RES installation for the green certificate system?
It is a major concern of many investors right now to complete and put into operation RES installations which are under construction (or ready-to-build) before the 1 January 2016 deadline. This deadline signifies the entry into force of Chapter 4 of the RES Act, which is the switch-date between the current green certificate (GC) and the new auction system.
The solution adopted in the RES Act provides that in order to qualify for GCs (for a period of the next 15 years), a RES installation needs to begin production of electricity for the first time before 1 January 2016. Experience shows that simple solutions are usually the best ones. Though, in this case, the Act is way too simple in its language and does not directly address the situation of RES installations that, by 1 January 2016, will still be in construction. The RES Act does not specify how to qualify projects consisting of multiple turbines in a situation where only some turbines of a RES installation begin producing electricity before 1 January 2016. Will the turbines which belong to the same RES installation, but built after 1 January 2016, qualify as a whole for the GC system? And what about installations that are developed in stages, e.g. stage I before 1 January 2016, whereas stage II after that date?
There are sound legal arguments to assume that in order to qualify a RES installation (e.g. a wind farm) into the GC system, it would be sufficient that the first turbine, constituting part of a wind farm, produces its first kWh of electricity before 1 January 2016. This is due to the definition of a "renewable energy source installation" in the RES Act which covers generators (e.g. wind turbines) interconnected to the grid in one common point of interconnection.
The Act specifically reads that the “installation” is a “dedicated set of devices”, so it does not restrict the meaning of the “installation” to a single power source (e.g. a single wind turbine). Consequently, turbines connected in one common interconnection point, constituting a “dedicated” - separated - set of devices (wind farm)should be treated as one RES installation and qualify for the GC system, even though only some turbines produced electricity before the 1 January 2016 deadline, and some did not. The only legal requirement is that a RES installation produces its first kWh before 1 January 2016. If one turbine produces electricity before the deadline, it follows that the RES installation as a whole has begun production.
Further, the system of certificates has been designed in the Act to cover green electricity produced until 31 December 2035. This extended period of support could mean that support in the form of green certificates may be granted to power sources that will produce energy for the first time after 31 December 2015. Otherwise, the maximum period of support (15 years), counted from 31 December 2015, would never go beyond 31 December 2030. The extended duration of the GC support system would constitute a reasonable transition period for many installations built at the turn of 2015/2016 and could mitigate the negative consequences of a relatively short cut-off date for the GC system.
It is necessary to remember, though, that some institutions, such as the Energy Regulatory Office, or the Ministry of Economy, might take a different, more restrained position. The RES Act does not directly address the concept of an “extension” of a RES installation (rozbudowa). For this reason an extension of a RES project after 31 December 2015, be it in the form of erecting new turbines or developing another stage of the project, might be treated as a “modernisation” of the installation in the meaning defined in the RES Act, with all the legal consequences that entails, including the shortened, 6-month period of support. In any case, legal advice for each specific project is required, which may serve to diminish the risk of not qualifying for the GC system.
How to qualify for the auction system? May a wind farm produce energy before the auction closure date?
The RES Act is based on a division between the green certificate system and the auction system. When it comes to auctions for the so-called “new installations” (referred to in article 72.2 of the Act), the general assumption is that a producer should win an auction, and only then should it start to provide the electricity contracted in the auction. It is clear from the wording of the Act that “investments” (RES installations) that are “completed” (built) can participate in auctions (article 75.5.5 of the Act). However, the question remains whether completed RES installations would be able to take part in auctions if they start to produce electricity between 1 January 2016 and the closure date of a particular auction.
The problem stems from the unfortunate wording of many provisions of the RES Act that restrict participation in auctions for the so-called “new installations” (the ones that did not qualify to the green certificate system) to those installations that will produce electricity “for the first time after the auction closure date” (i.a. article 72.2.a of the RES Act). Would that mean that a RES installation which is built prior to a given auction will have to stand idle until any future auction is won, in order to benefit from support? May such installations generate energy, and sell it on a commercial basis, before the auction is held?
Taken literally, the wording of some provisions of the RES Act might exclude from auctions RES installations that will send any amount of electricity to the grid before the auction closure date. Further, a strict interpretation of the Act might lead to a situation in which RES installations which start to generate energy after 31 December 2015 (so that they do not qualify for GCs), but before the auction closure date, will fail to qualify for any support system.
Such a rigid approach would certainly violate the rules of economy and contradict business sense of many projects. However, this is what many laws do, and the RES Act could be no exception.
Interconnection to the grid - will interconnection conditions for new RES still be blocked?
The RES Act has settled some controversies that haunted RES investors for years. The Act gives RES priority in access to the grid and requires RES owners to cover only shallow interconnection costs. The irony of these changes is that having to cover only the shallow interconnection costs means very little in the broader picture for investors when the national transmission grid operator has almost blocked the issuance of new interconnection conditions.
However, this situation might change under the new law. The Act provides that it is a competence of the Council of Ministers to set out the volume of energy to be purchased by way of an auction each year, taking into account, i.a., the state energy policy and the security of operation of the power system. This means,in simple terms, that the Council of Ministers will determine how many RES installations might be built so that the stability of the power system is maintained. The shift of authority in this area to the Council of Ministers should facilitate the process of interconnecting new RES sources to the grid. Hopefully, this change will prevent future refusals by PSE S.A. to approve interconnection conditions for new RES installations.
Impact of the RES Act on oversupply of green certificates
The RES Act brings in long-awaited measures to cut out on spending of more than PLN 2 billion per year on GCs for co-firing of coal and biomass and on large water installations. Specifically, the Act aims at reducing the oversupply of green certificates through complete exclusion of support for hydropower installations with total installed electrical capacity of more than 5 MW, and limitation of support to 0.5 certificate for non-dedicated co-firing installations.
The crux is in the timing. At the last possible moment in the legislative procedure, the provision pertaining to the limitation of support for co-firing was moved from Chapter 4 of the RES Act to the new article 194 located in Chapter 11. Chapter 11 comes into force 30 days from the publication of the Act, circa April/May 2015, whereas Chapter 4 not until 1 January 2016. This last-minute change, though seemingly technical, should have immediate consequences on the certificate allocation ratio for co-firing, and on the market for green certificates in general. Legally speaking, non-dedicated co-firing installations should be entitled to half certificate of origin from the moment the Act enters into force (April/May 2015). However, there are recent hints that the authorities may want to interpret the law in such a way as to leave support for co-firing on current levels until the end of 2015.
What comes next?
There is a whole spectrum of other matters that might be of particular concern to the RES sector, like the absence of indexation of the reference price, which is vital for calculation of the state support caps, or the impact of the new law on long-term PPAs and CPAs, and many more.
Investors are eager to hear the first official interpretations of the RES Act by the Energy Regulatory Office or the Ministry of Economy, but the reality is that they should expect neither quick nor definite official answers. It also seems inevitable that the Act will be amended. Bearing in mind its ambiguities, there is much space for investors, their counsel, and other stakeholders to shape or influence the proper and fair understanding of the RES Act, particularly at the early stage after its publication.
(By Hubert Wysoczański, K&L Gates, www.klgates.com)
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