Challenges for renewables producers in 2023: Amendments to energy market rules
The end of last year abounded in new regulations in Poland governing the electricity market. There was also a lot of talk about the need to amend questionable regulations. But the changes are so numerous it is hard to predict their ultimate impact on the market and specific market participants. This is particularly evident in the case of generators of power from renewable energy sources benefiting from the auction support system.
Fines for underestimating energy volume in the auction system
A few months ago, we described the dilemmas of RES generators participating in the auction system related to generating a positive balance on energy reported within the system. Maximising profits from the sale of electricity due to the surge of prices on the market exposed generators to a fine for declaring the volume of electricity produced below 85% of that declared in the auction bid.
The emerging explanations regarding this fine disclose the view that the current wording of the regulations allows the formula for calculating the fine to include an annually indexed price indicated in the bid that won the auction, i.e. different in each year of the settlement period for which the fine is to be imposed. Indeed, the fine should increase as the support period progresses, similarly to the (annually indexed) price which is the basis for calculating the negative balance.
This argument might not have raised any doubts had it not been for the announcement of an amendment to Poland’s Renewable Energy Sources Act, under which the law would expressly provide that the price on which the fine is calculated is to be indexed. This clarification would be unnecessary if price indexation were already provided for in the regulations.
The regulations and case law prohibit an expansive interpretation of punitive regulations on administrative fines. Undoubtedly, the regulation under discussion, specifying the method of calculating the fine for the reduced volume of electricity reported by a generator within the auction system, is such a provision. Does the interpretation of the current provisions according to which the calculation of the fine should take into account the indexed price, which leads to an increase in the fine, violate this ban? This will be determined by the practice of calculating such fines and potential review by the courts if power generators do not agree with this approach by the authorities, regardless of the planned amendments to the provisions.
The same amendment would also address another alleged problem in calculating the fine, related to the fact that each year the price that is the basis for calculating the fine is different. It should be pointed out that such calculation should not be particularly difficult, as every year a negative (or positive) balance is calculated based on other indexed prices. According to the amendment, the price for calculating the fine will be determined as of the last day of the settlement period for which it is to be charged. Thus, as a solution to the alleged problem with calculation of the fine, a significant increase in assessment of the fine was announced (especially in light of the current inflation, after double indexation during the three-year settlement period).
The Maximum Energy Prices Act, contributions for the Price Difference Payment Fund, and generation and return of a positive balance
However, the issue of a positive balance and the potential fine has receded into the background, at least for those RES generators who are subject to the obligation to pay contributions to the Price Difference Payment Fund, introduced by the Maximum Energy Prices Act (Act on Emergency Measures to Restrict Electricity Prices and Support Certain Consumers in 2023 of 27 October 2022), which has already been amended. It by no means concerns only the sheer size of the contribution.
Ever since the Maximum Energy Prices Act was first proposed, doubts have been raised as to whether contributions to the fund should be paid by RES generators owning more than one generating unit with a capacity of less than 1 MW of generating power. After the amendment, a generator producing electricity through generating units with a total capacity of no more than 3 MW in its owned portfolio of individual units not exceeding 1 MW does not have to make a contribution to the fund. The issue of the introduction of the limit of 3 MW was not clarified during the work on the amendment. Also, pursuant to the act, it is difficult to find any other provision that would justify its adoption.
Nor do the regulations indicate whether a generator owning a number of separate generating units of less than 1 MW in excess of a total capacity of 3 MW will be required to make a contribution to the fund for the energy generated only from units beyond 3 MW, or with regard to all electricity, as it may not be eligible for the exemption from the deduction at all. During the legislative process, there were comments that only the energy produced by the generating units of a given generator from the level of total installed capacity of 3 MW and above should be the basis for contributions. However, the adopted wording of the act does not support this interpretation. Therefore, it seems that owning several generating units with a total capacity of 3 MW or more, where each unit has less than 1 MW of installed capacity, will oblige the generator to make contributions for all energy sold (from all generating units without exception).
Fund or auction system?
RES generators participating in the auction support system do not have to make deductions for the fund from the volume of electricity whose generation they report within the auction system. However, since generators have some discretion in reporting energy volumes for the three-year settlement periods, they must determine themselves which mechanism is more profitable (or unprofitable): generating and paying a positive balance, or paying a contribution to the fund.
There is no universal answer to this question. The basis for calculating the positive balance and the contribution to the fund is admittedly the same (the indexed price from the generator’s bid that won the auction within the auction system). However, this base is subtracted from differing electricity prices:
- With a positive balance, from prices from the Polish Power Exchange (TGE)
- Upon deduction, from prices from sales contracts (for energy covered by these contracts) or from the balancing market from energy sales on that market.
In the situation of a typical RES generator, the amount of the contribution for the fund is calculated based on prices from electricity sales contracts (unless the generator sells the electricity on the balancing market). For example, if the market price of electricity from the sales contract is based on prices from TGE, this price as the basis for calculation of the positive balance within the auction system and the calculation of the contribution to the fund should be similar.
The values for calculating a positive balance and contribution to the fund should be known in advance, allowing a simulation of the calculation of both the balance and the value of the contribution, in order to decide what should be paid.
The parliament excluded electricity reported for balance settlement within the auction system from the obligation to make a contribution to the fund. Therefore, this exclusion applies to the portion of electricity reported to the settlement administrator (Zarządca Rozliczeń SA) as part of the monthly application for coverage of a negative balance. The generator will be subject to the obligation to make contributions to the fund for the “unreported” portion of electricity.
A matter of time
When deciding whether to generate a positive balance or make a contribution to the fund, it should be borne in mind that the contribution is due by the 10th business day of the month following the month in which the energy producer received payment for the energy sold. The positive balance created within the auction system becomes due for payment much later (even after the entire support period) and only if it is not settled along the way with a generated negative balance. Hence, in many cases, since the Maximum Energy Prices Act is to be applied until the end of 2023, investors are seriously considering first generating the balance resulting from the auction to be paid at a later date, since the revenues generated from the sale of energy at high prices will remain on the company’s balance sheet for a long time, which makes economic sense in the case of investments funded by credit and at high interest rates. Moreover, a cost incurred currently is usually much more painful than a deferred cost.
Decision time
The decision whether, and in what proportion, to report the electricity sold in December 2022 for settlement within the auction system, or to make a contribution to the Price Difference Payment Fund, must be made by 16 January 2023. This is the deadline (postponed from 15 January, a Sunday) for submitting a report to the settlement administrator on the settlement of a negative balance for December 2022.
Does it comply with EU law?
At the same time, we point out that contributions to the fund are to be in effect until the end of 2023. At first glance, such a lengthy period of this obligation seems non-compliant with EU Regulation 2022/1854, which introduces the possibility of establishing the operation of these mechanisms until 30 June 2023. It is possible that the European Commission will challenge the extension of this period, which could allow the return to selling electricity on the market without the need to make a contribution to the fund (at least in the second half of the year). Nevertheless, this issue deserves separate study.
Importantly, the settlement for electricity within the auction system instead of a contribution to the fund will allow for reduction of the fine (or avoiding the fine) for declaring electricity below 85% of the volume in the auction bid. It should be borne in mind that contribution to the fund does not relieve the generator of the risk of having to the fine, and the fine may be imposed alongside the obligation to pay a contribution to the fund.
Elimination of the commodity-exchange obligation
All of this should be overlaid with the date of 6 December 2022, when the obligation of certain power generators to sell 100% of the electricity they generate on the Polish Power Exchange was lifted. Although there were various signals that this is a suspension of the mechanism and not ultimate abandonment of it, the amendments to the law do not indicate this.
Thanks to the obligation to sell electricity on the exchange, electricity trading was more transparent, making responses on the exchange more fully reflect the actual market situation, including the balancing market. Without the exchange obligation, this may no longer be the case. With lifting of this obligation, major market players (primarily conventional producers) will be able to decide for themselves how to sell the electricity they generate, and thus for example reduce transaction costs, and even stabilise power prices, if only in response to the pressure to increase prices caused by the rise of commodity prices or power system failures.
Critics of abolition of the exchange obligation point to the risk of price speculation and manipulation on the power exchange with reduced turnover on TGE. At a time of energy crisis, ensuring greater control over prices on TGE or flattening out the response to market shocks seems to be in the interest of consumers, for whom the price of energy depends more or less on the exchange price. However, only the market verification of the operation of the TGE price-setting mechanisms under the new conditions will show whether market participants’ concerns about the future reliability of the exchange in setting prices in energy sales contracts will prove to be exaggerated.
Summary
It is difficult to predict the ultimate impact of the “new order” on the electricity market going forward. This poses an obvious problem for investors in renewables, especially those investing in capacity outside the auction system using the project finance approach. When making investment decisions, they need a reliable projection of the revenue from installations for the coming years, without surprises in the form of new, high, quasi-taxes reducing the profitability of the investment. Many investors may have a problem with the bankability of projects, which could also boost the market for M&A transactions involving renewables installations.
On maps showing the level of CO2 emissions from energy production in EU countries, Poland is still a black spot (illustrating the very high concentration of CO2 emissions accompanying production), although other EU countries are facing similar energy problems, and by definition pursuing the same climate policy goals. Perhaps the explanation for this state of affairs is the lack of a stable renewable energy development policy encouraging investors and banks to invest in this area, and a law that instead of offering clear solutions encouraging investors to take risks, raises even more questions and doubts.
So in the New Year, the hope for all of us is that instead of playing hide and seek with RES market participants, policymakers will contribute to acceleration of the development of renewables for the greater good. In particular, this year we would very much like to celebrate the abolition of the “10H rule” for siting of onshore wind farms, after another year of waiting. However, the inclusion of liberalisation of provisions on onshore wind farm construction among the milestones necessary for disbursement of funds from the National Reconstruction Plan gives grounds for cautious optimism on this issue.
Igor Hanas, adwokat, Marek Dolatowski, adwokat, Łukasz Bondaruk, adwokat, Energy practice, Wardyński & Partners
