New support for energy-intensive industries | In Principle

The Ministry of Entrepreneurship and Technology has submitted a long-awaited draft of the Act on Compensation for Energy-Intensive Industries in relation to the rising costs of climate policy.

The idea of compensation is based on the assumption that the climate policy, with the increase of burdens, should not cause carbon leakage, i.e. relocation of energy-intensive industries outside the EU. Such support is permitted as state aid if it meets the European Commission’s current guidelines in this area. Based on the guidelines, following the example of other member states, Poland has presented its own compensation system for energy-intensive industries. It is a response to the sharp increase in electricity purchasing costs caused by the increase in the price of greenhouse gas emission allowances.

The conditions for use of the system are as follows:

1. Operation of an installation in an energy-intensive sector or subsector indicated in Annex 1 to the act, using the PKD codes
2. One of the following systems is implemented:
   • An environmental management system as referred to in Art. 2(13) of Regulation (EC) 1221/2009 on the voluntary participation by organisations in a Community eco-management and audit scheme (EMAS)
   • An environmental management system confirmed by an independent and authorised accreditation body with an ISO 14001 certificate
   • An energy management system confirmed by an independent and certified accreditation body with an ISO 50001 certificate
3. No tax or social security arrears
4. Submission of an application for compensation in accordance with the act.

The amounts allocated to the compensation system for the costs of emission allowances are significant. In 2018 the maximum amount of compensation will exceed PLN 530 million, and in subsequent years it will range from about PLN 1 billion to almost PLN 1.8 billion. Funds for support will come from the sale of emission allowances by Poland through auctions, which will go to the Indirect Emission Costs Compensation Fund operated by Bank Gospodarstwa Krajowego.

The amount of compensation will be calculated using three different formulae, depending on the products produced at a given installation, based on the forward price of emission allowances determined in accordance with the act (PLN 25.02 for 2018). Using one of the formulae, after substituting the numbers given for 2018 for electricity consumption at the level of 100,000 MWh in 2018, we obtain the amount of PLN 1,409,126.40. PLN 14,091.80 has to be deducted from this amount to obtain the final amount of compensation which can be applied for.

It should also be noted:

1. A maximum aid ceiling is set for each year (over PLN 530 million for 2018). If total applications for compensation exceed the ceiling, the compensation will be reduced proportionally.
2. The amount of compensation attributable to the consumption of 1 GWh of electricity (hence the deduction of PLN 14,091.80 in the calculation above) has to be subtracted from the calculated compensation amount. The aim is to exclude from the scheme small entities for which the administrative costs of operating the compensation system would exceed its benefits. Apart from this limitation, there is no other quantitative criterion for access to the system.
3. The values for formulae, such as reference production and reference consumption of electricity, will in principle be determined for the period 2005–2011, unless the installation was not operating then or was operating for a shorter period. In that case, the average annual production or consumption of electricity from the date of commencement of the activity until the activity is carried out for four consecutive calendar years is adopted. From that point in time, the reference production or reference consumption of electricity will take a fixed value in subsequent years, determined as the average value over the last three years of the period in question. In other cases, the relevant value will be determined as the average annual production volume from the date of commencement of operation through the last day of the year preceding the year for which the compensation is granted.
4. If, following the establishment of reference values for production or energy consumption, there has been an increase or decrease in production capacity, this must be demonstrated in the application for compensation in accordance with the procedure laid down in the act.
5. Since entities can already apply for compensation for 2018, the data to be used in the formula for that year are introduced in a transitional provision. Therefore, it is relatively easy for any interested party to assess whether the conditions for participation in the compensation scheme are worth meeting or not.
6. The support from the Energy Price Freezing Act of 2019 will have to be deducted from the compensation for 2019. At the customer’s request, electricity sellers will have to indicate the price difference per MWh they have saved through the price freeze.
7. The compensation must be attributed to an energy-intensive product. Therefore, if production includes items not covered by the PKD codes from Annex 1 to the act, the compensation may be requested only for the electricity allocated to energy-intensive production.
8. Compensation for the costs of emission allowances may not be granted in respect of electricity for which the cost of these allowances is not passed on in the price of the electricity. Therefore, the compensation will be reduced by the share of the consumption by an installation of electricity produced in units not participating in the emission allowance trading scheme, and electricity produced from biomass in installations participating in the EU ETS system, the amount of which is determined in proportion to the share of chemical energy of biomass in the chemical energy of the total fuel used to produce electricity.
9. The bill is based on current guidelines in this area. New guidelines are to enter into force from 2021, which is likely to require an amendment to the act.
10. The decision granting or refusing to grant compensation will be made by the president of the Energy Regulatory Office. The first application for compensation for 2018 will have to be submitted to the regulator within two months from entry into force of the act. The act is to enter into force 14 days after publication. In subsequent years, applications are to be submitted by 31 March, and the president of the Energy Regulatory Office will have until 30 September to issue a decision.
11. A decision by the president of the Energy Regulatory Office granting compensation will be suspended until the European Commission approves the new support scheme.

Marek Dolatowski, adwokat, Energy practice, Wardyński & Partners

This article was also published on CIRE.pl