Sunday, August 17, 2014

August in Poland.

August in Poland. The politicians are doing what they do best... taking a break.


During this period of inattention, it might be useful to compare what the Polish legislature  is doing on renewable energy compared to the French legislature in the same situation (albeit less severe in France).

The French did not notify Brussels of their wind tariff in their renewable energy law.When the preliminary memo came out that the European Court was getting ready to find the wind tariff to be state aid, everyone was quite attentive to the possible consequences. Unnotified and unapproved state aid is illegal in the European UnionLegal commentators noted that once the case got back to the national, French court, it "essentially has no choice but to cancel the preferential feed-in tariffs to wind power producers agreed to in 2008, likely resulting in massive refunds for consumers. France can expect down-stream lawsuits from wind power producers as a result of government FIT adjustments, or potential FIT payment claw-back."

The strategy adopted by the French wind industry and government was to try to beat the case on remand by passing, notifying Brussels and getting approval on a new wind tariff law, retroactively fixing the situation. One prominent law firm advised clients: "The legal uncertainty which could result from the cancellation of the Feed-in Tariff Order would be strongly mitigated by obtaining clearance of the Wind Tariff Support Scheme (i.e. decision of compatibility with the European Union common market) from the European Commission prior to the decision of the Conseil d’Etat." Other lawyers advised of the dire consequences if the tariffs were held to be state aid  that had not been approved and the situation was not rectified.

At the Eleventh Hour, the French Government passed the new wind tariff law and the French court let pass the years of "illegal aid" caused by the failure to notify Brussels and obtain approval. 

My reaction at the time was why would rationale people let the matter get that far? Once there was a challenge, it would have been prudent to fix it by a notification and retroactive approval, well before the ruling by the European Court of Justice. 

Yet at this point in time, the French reaction seems stellar compared to what we are seeing in Poland.  On June 5, 2012, the head of the Polish agency that deals with this stuff  told the Ministry of Economy  that runs energy policy that their Green Certificate program was state aid and needed to be approved by Brussels. On November 28, 2013, the same agency told the Ministry that the Commission had actually advised the Polish Government that the Green Certificates were considered to be state aid. This program had been operating since 2005 without notification and approval by Brussels. Approval that is required before-the-fact by the European Treaty. By February 2014, the Polish Government learned that there were complaints in Brussels over the Green Certificate program and they were asked to submit a very detailed list of information to the Commission.

Through a similar period, the French Government was racing to re-enact their questioned tariff and get it approved in Brussels. The Polish Government continues to deny there is a problem and has, incredibly, no plans to repair the Green Certificate program to meet the state aid requirements [1] and no plan to notify Brussels


Source: Joseph Wouk
This will mean that the Commission's enforcement action, whenever that culminates, will invalidate all certificates since 2005, require recovery of the money, and lead to endless unfair competition claims.  The Commission has already signaled this result to the Polish authorities and has the power to take these actions without going to court. Challenging these conclusions will require going to court with years of litigation and no chance of winning. 

I suggested last fall that the Polish Government should split the new renewable energy law in half and make the first half a revised Green Certificate program that met all of the Commission's guidelines, similar to the Romanian program that they approved in 2011.  The rest of the new law could include anything that they wanted in theory (but would also have to be notified and approved by the Commission). This suggestion was basically the French solution, i.e. try to minimize the consequences by anticipating the results.

The Polish solution, however, was not so easy, since major parts of the Green Certificate program beginning in 2005 do not comply with the EU state aid guidelines. Aid for co-firing and old hydro would have to be ended as incompatible with the fair competition rules (i.e. overcompensation distorting the market for competitors). This was a decision that the Polish Government simply could not make before the Parliamentary elections, since it involves billions of Euro of support that would have to be returned by state-owned companies. 

It is wholly unclear if the delaying tactic will work to actually defer the results. It is clear that the results will be worse for everyone from the delay. There will inevitably be a revised Green Certificate program and aid to co-firing will end or be sharply reduced., and aid to old hydro will end completely. Without a new law on certificates that meets the guidelines then in effect, all of the aid will have to be returned. Amounts paid for these objectives will be recovered. The transition will be anything but smooth. The biggest losers will be the folks that the government tried to illegally help, i.e. the big state-owned utilities. 

While the law that could meet these requirements was drafted two years ago and ready to enact over a year ago, there is no sign that the Polish Government will do anything to mitigate the damages. Their legislative vacation is not just a respite  from work, but a break with reality.
 ___________________________ 
[1] The repair involves "levelizing" the certificate values by true costs of production across the different renewable energy technologies. State Aid Guidelines for Environmental Protection, par. 110. 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”).
 

Thanks to My Readers!

Many thanks to those of you who stop by this blog to pick up my posts and sometimes rants!

I am now running about 500 "hits" a day and will continue to keep readers updated on Polish renewable energy developments from the perspective of a practical "green businessman."

Please posts comments or questions, if you have any. I am happy to provide more information, links, and even documents.


Randy


Wednesday, August 13, 2014

New RES law in Poland Will Recognize Stored Energy As Renewable

In a big breakthrough, the Polish Government has now included energy stored from renewable sources to be part of the energy from a renewable energy installation. Article 2.13 defines a renewable energy installation to include "stored electricity produced from the equipment." This means that stored energy will still count as renewable energy if that was the source of the input.

This will create great opportunities for new energy storage projects, especially in the PV sector. The big thing to remember is that the law, when passed, will apply to all RES facilities and those that are already operating can add storage and not only keep Green Certificates, but directly sell the stored energy in the peak period market. This is only allowed the way the law is drafted for "grandfathered" facilities that do not have to sell to the grid through the new state-owned entity to be created by the new law.

The challenge is how to make the new law work to funnel electricity into the peak period from storage devices if the producer does not obtain any advantage from doing so [unless the producer is operating before the new law takes effect].  We will be working on ways to solve this and hopefully have the cooperation of the Government, since this is in everyone's best interests.

Tuesday, August 12, 2014

Commission Finds Polish Certificates are State Aid

There have been communications to the Polish Government that signal the Commission's intentions of finding both the co-generation certificates and the Green Certificates to be state aid. A formal decision will take longer, but there is no doubt as to the outcome at this point. This is completely contrary to the representations of the Government to the Parliament and public.

The Polish Government notified the Commission of the co-generation law in 2013 and did not receive a quick answer that it was not state aid. The Commission came back with detailed questions aimed at getting the information necessary to determine if the program was compatible with the current state aid guidelines (2008). See S.A. 36518 - certificates of origin for co-generation, May 31, 2013. This is no surprise because since 2001, the European Commission has found that every RES/CHP certificate program had provisions that constituted state aid.[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                                  cogeneration.” [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).

Instead of a plan to deal with this fact, the Prime Minister fired  Malgorzata Krasnodebska-Tomkiel, the well-respected and long-standing director of UOKiK who had been consistently advising the government of these facts, apparently near the time of the complaint on the Green Certificate program to the Commission. She was replaced by Adam Jasser, who was an English major in university, and close political ally of the Prime Minister as well as the man who actually chaired the Council of Ministers meeting that blocked the earlier version of the RES law which would have levelized support and ended support for co-firing and old hydro plants. The reasoning of the Council, at the urging of the Treasury and Finance Ministers, was solely to keep the revenue coming to the state-owned plants. 

The above facts are well-known, but need to be reviewed with an appreciation that the whole time of these developments the UOKiK was telling the Government that the program was state aid, that it had to be levelized as proposed in the earlier versions of the law, and  - we can probably infer - that the aid to co-firing and old hydro was illegal and had to stop. Moreover, it appears from at least May 2013 that the European Commission was telling UOKiK that the programs were state aid and had to be "levelized." UOKiK was, in turn, informing the Polish Government of this fact.

All of this information in turn should be considered along with the 2013 leaks that the Polish Government (read PM here) wanted the whole RES mess to be delayed until after the 2015 Polish elections. This also corresponds to the end of operations for 6000 MW of old Polish coal-fired plants, closing due to EU environmental rules - plants that have been co-firing to create Green Certificates. So the plan has always been to run Green Certificates for co-firing and old hydro as long as possible, leaving any consequences until after the Parliamentary elections. 


Amazingly the Polish reaction outside of government to all this seems to be confusion and denial. The consequences of billions of illegal aid that must be returned  and a Pandora's Box of other complications are just too massive to be real to anyone who has not  studied the issue. But the consequences will hit and during the elections, not after. 




1. The Green Certificates for co-firing and old hydro will be declared void, including all of them being accumulated and held. This will be ordered by the Commission (which can take the action without going to the European Court) or it can even be ordered by a Polish court  compelled to follow the European Treaty rules. 

2. The EU requires that all incompatible aid, as Ms. Tomkiel noted, be recovered. Several billion Euro will have to be refunded. My hope is that it goes to a fund to be used to compensate for the unfair competition, i.e. anyone who got a devalued Green Certificate has a claim. Companies whose investments were frustrated by the distortion of the market have claims as well and might be able to prove their damages. Funds remaining after that should be refunded to the consumers who paid for this on their bills. [Note to the Government: you are the principal liable party for unfair competition claims under European law].


3. No new system will be allowed to operate until it is approved by Brussels. Green Certificates will continue and companies have the option of taking them or going into the auction for plants built before the auction [whenever that will be and it pretty clearly will not be in 2016]. So until the Green Certificates are levelized by cost of production, there can be no legal way to compel anyone to make this choice.  New facilities could go into auctions, but only if all of the criteria for the GBER exemption were present in the Polish law (and this is not the case]. There will be unfair competition claims made against the Polish procedures as they now stand proposed and this will tie everything up for months in Brussels and end up forcing changes in the system. 


Unfair competition claims against the Government under EU law and against the aid recipients under Polish law will be strengthened enormously by the evidence that the chief government agency monitoring competition was telling everyone that it was problematic for years. The only issue will be proving damages and in some cases that should be pretty straight-forward. There will be an effort  to deal with the claims in a centralized manner to reduce transaction costs. Interested parties with possible claims can just let me know. randymott at envirosolutions.co

We also may see securities fraud claims, since these publicly-traded companies that received co-firing and old hydro support are often owned by the Treasury and the Treasury had notice of the UOKiK information, including that the Commission agreed with their assessment. 

For the last four years, the renewable energy sector has been  beaten over the head by the traditional oligopolies and their government allies. The response from most of my colleagues has been unimaginably weak and ineffectual from my standpoint as an American. Operating outside the law, the Polish  government  has been given a nearly free ride.  It is now inevitable that the ride is over and the final accounting will be done soon. 



_________________________________________________

[1] C(2001) 3267 Final, State aid No N 504/2000 – United Kingdom Renewables Obligation and Capital Grants for Renewable Technologies, November 28, 2001; State Aid N 550/2000 -Beligan Green Certificates; State Aid N 789/2002 — Sweden — Green certificates;    State aid SA. 33134 2011/N – RO, Green certificates for promoting electricity from renewable sources, C (2011) 4938, July 13, 2011.

[2] As pointed out by Ms. Tomkiel, the Commission requires that operating support be proportionate to cost of production across technologies to void overcompensation and distortion of the market [exactly what happened in Poland due to co-firing and old hydro support]. Ref. UOKiK letter of June 5, 2012; State Aid Guidelines for Environmental Protection, 110 (2008); 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.


Wednesday, August 06, 2014

New Report Recognizes Important Role for Energy Storage in Europe

EuroElectric just released a new report: FORGING A JOINT COMMITMENT TO SUSTAINABLE AND COST-EFFICIENT ENERGY TRANSITION IN EUROPE

The report recognizes the need for energy storage in the grid to reduce the impact of peak demand, but also acknowledges the need to have storage at the distributed grid level to improve voltage control and lower the cost of integration into the main grid.

The technologies mentioned are all in existence today and have been constructed and operated on a commercial scale.

The need is to change the legal and regulatory framework to create an investment climate to support energy storage. The first step is very simple, but still in not done in Poland, and that is to allow storage and discharge of energy to keep its renewable energy character and support. The next step may be to provide a premium for electricity stored during off-peak hours and discharged during peak hours.  We should be exploring whether something this simple could be the decisive factor and what additional amounts would be necessary to make it work for energy storage, energy producers and the end users.

These issues will be explored in detail by experts at the First Polish Energy Storage Conference on January 15, 2015 in Warsaw. Mark the date and contact Bellevue Consulting to reserve admission (500 PLN).  The event is sponsored by the Polish Energy Storage Association and others. We will feature case studies of technologies that have been applied and look at the economic and technical feasibility of various solutions. If your company is in the business, you can apply to be a presenter and if selected receive promotional consideration and get our special deal on joining PESA as well.

Randy Mott (at) envirosolutions.co

"Banking on Energy Storage"

Tuesday, July 29, 2014

What Will Happen to Polish Renewable Energy on the Current Course?

Perhaps the best way to view the consequences of  the Polish Government and European Commission actions is to refer to the doctrine of unintended consequences. "The law of unintended consequences, often cited but rarely defined, is that actions of people—and especially of government—always have effects that are unanticipated or unintended. Economists and other social scientists have heeded its power for centuries; for just as long, politicians and popular opinion have largely ignored it." Norton, Library of Economics and Liberty. 

I believe that the Polish Government has been deeply divided on the promotion of renewable energy development. Many of the "hands on" bureaucrats have tried to find a way through the problems (including the former head of UOKiK). The Prime Minister's office took over the legislative process in the summer of 2013 as the earlier draft that was prepared to meet UOKiK and the Commission's concerns  was being finalized with correction coefficients. This draft would have ended support for old hydro and co-firing once approved by the Commission.  It also would have forced the issue in front of the Commission over the failure to notify earlier and the incompatibility of the existing aid with the guidelines and prior decisions of the Commission. Thus, the dire consequences warned of by UOKiK as early as June 2012 could have arisen before the 2015 election. This also would have tolled the statute of limitations (ending the period for which the aid would have to be recovered). [1] 


To try to avert this disaster,  the Prime Minister's office  started the process of delaying the new law and at the same time, delaying notification and the opening of Pandora's Box in Brussels.  By changing the whole approach and continuing the oversupply of certificates, opponents in the sector would be squeezed and the way laid for the huge state-owned companies to emerge after the elections in a position to dominate the new energy sector as they have the old one.


This has been a very complex and high stakes game. Superficially it has worked to delay matters and starve or deter most potential  competitors.  But here we have to look at the doctrine of unintended consequences.


The strategy used by the Polish Government does not change the law or the fundamental problems presented by unnotified, non-levelized aid. In merely pushed them forward into a time frame where all of the bills become due at once.  The plan was to make this mess occur after the elections and after the state enterprises had sucked every zloty out of the support system that they could. 


However, as we often learn, the best laid plans of mice and men are usually about equal.  Blair's Observatio


First, the donnybrook will not occur after the elections, but in the middle of the campaign. At some point in 2015,  the complaints before the Commission will have been pending for two years, time enough to also expect action. However, the notification sent to the Polish Government in early 2014 has been ruled by the European Court of Justice in other cases to be sufficient action to toll the limitation period. See Scott SA v. Commission, Case C-276/03 P,  October 6, 2005. See Marc Hansen, "Recent Developments in EC State Aid Law," IBC Advanced EC Competition Law, London, 29-30 April 2004.

Second, efforts to silence opposition (such as the firing of Margaret Krasnodębska-Tomkiel) and the attempt to bury the incriminating documents only have the consequence of making the Government look more guilty and only increase the credibility of the criticism.


Third, the new law that includes auctions will be drawn into the pending investigation and  be delayed long enough for the  procedures to have little relevance to the renewable energy mix on the ground in Poland in 2020. It is impossible to give the existing sources that produce over 6000 MW of renewable energy the choice of going into the auction or accepting Green Certificates for the balance of their operations without also resolving the issues on the Green Certificates. See The Consequence of Going to Auctions Without Notification. The entire mechanism for setting different reference prices by technology also raises major competition issues that cannot be resolved without Commission involvement and approval. 


Fourth, the most likely early action by the Commission will be the suspension of the incompatible aid. "It is obvious that in certain circumstances there may be a need to adopt interim protective measures when the practice of certain undertakings in competition matters has the effect of injuring the interests of some Member States, causing damage to other undertakings, or of unacceptably jeopardizing the Community’s competition policy". Article 3, Regulation 17/62 as amended. See Uria and Menendez. Given the complexity of the remedial measures that must be undertaken and  the clear violation of the competition provisions of the European Treaty, there will be a great likelihood of some early Commission action in this regard.


This fourth development will mean that the value of Green Certificates will dramatically increase as about 70% of the current supply is withdrawn from the market and the surplus being held is ruled null and void. This will occur before levelized values are agreed to and approved by Brussels.


Fifth, the law requires recovery of the aid from the recipients,[2] as noted by UOKiK in the documents. This will be a massive undertaking supervised by the Commission and will likely involve one or more major lawsuits in Poland. Note that Polish courts will have very little discretion in implementing state aid decisions and cost recovery. Any action to enforce  a ruling on the incompatibility of this aid will toll the limitation period. See above.


Sixth, injured parties have a European cause of action for damages against the Polish Government and a national cause of action against the competitors who used the aid to unfair advantage. This could be a major development, since the normal issue of proving damages is generally obviated by the simple measure of known Green Certificate values:





 It seems impossible with the Commission already on the case, the NGOs complaining, and the Government having completely alienated the RES sector, that 2015 can go by without this issue coming to a major head. Exactly when the Polish Government wanted it buried.


The unintended consequence most note-worthy to me is that the Green Certificate program will undoubtedly continue longer and stronger than the Government intended and at values much closer to or even higher than the historical values before the oversupply caused by illegal aid. 


___________________________________


[1] Article 15 of Regulation No 659/1999 provides: "1. The powers of the Commission to recover aid shall be subject to a limitation period of 10 years. 2. The limitation period shall begin on the day on which the unlawful aid is awarded to the beneficiary either as individual aid or as aid under an aid scheme. Any action taken by the Commission or by a Member State, acting at the request of the Commission, with regard to the unlawful aid shall interrupt the limitation period. Each interruption shall start time running afresh. The limitation period shall be suspended for as long as the decision of the Commission is the subject of proceedings pending before the Court of Justice of the European Communities."


[2] Notice From The Commission, Towards An Effective Implementation Of Commission Decisions Ordering Member States To Recover Unlawful And Incompatible State Aid, (2007/C 272/05).  “It is essential for the integrity of the State aid regime that these Commission decisions ordering Member States to recover unlawful State aid (hereafter ‘recovery decisions’) are enforced in an effective and immediate manner.”  Id. par. 3.  Article 14(3) of the Procedural Regulation states, that “recovery shall be effected without delay and in accordance with the procedures under the national law of the Member State concerned, provided that they allow for the immediate an effective execution of the Commission decision.Id. par. 11, citing Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty (OJ L 83, 27.3.1999, p. 1).

The Office of Competition Agreed that Notification of Brussels was Required (before the head of the office was fired)

The Polish Government has made some very misleading statements to the Parliament in the last few months. Pretty much everything that they have stated publicly about state aid for RES and CHP has been 180 degrees from the truth.

Let me first summarize the issue in lay terms.  The European Union  is based on the idea of a single economic market. Aid to enterprises by national governments is restricted by the treaty, since it can adversely affect competition. So all state aid has to be approved in advance by the European Commission to assure that it is fair to competition and  does not distort the market.

Poland never notified Brussels on its renewable energy program. So it is all unlawful until approved. Similar programs for the UK and Romania were ruled to be state aid and the Commission required that different technologies had to receive levelized support, so that competition was not distorted. Poland did two prohibited things: first, old hydro plants that were built long ago got a lot of support (30% of the total to date) which is against the rules since they really did not need support to get built or to operate; second, coal-fired power plants get support at the same level as everyone else when they just add some biomass to the coal and co-fire it. The cost to do this is nominally higher than only burning coal, but not nearly as costly as other RES technologies.The practice got 40-50% of the total support and drove the market for the Green Certificates awarded as support for green energy in Poland into the cellar due to oversupply. See "Why Poland Urgently Needs A New Law on Green Certificates."

Complaints have been filed in Brussels and an investigation/enforcement action is underway.  The Polish Government denies Green Certificates are state aid, denies that there is any distortion of the market, and argues that they do not have to notify Brussels on the new law now being debated. If the state aid is illegal or "incompatible" with the EU rules, the money has to be recovered, which involves billions of Euro at this point. It is also an unfair trade practice under EU law and can create claims for damages.

The new development is some hot documents that show that the head of the Office of Competition and Consumer Rights in Poland agreed with the complainants on these issues and had been advising the Polish Government of these conclusions months before any complaint was made to Brussels. When the complaint was sent to the Polish Government, the Prime Minister simply fired the director and appointed someone who would give him the answers that he wanted to hear. See firing of Malgorzata Krasnodebska-Tomkiel (who was a recognized expert on state aid issues). No one at the time knew that her firing came immediately after the notification of the co-firing investigation from Brussels. Now we also know why the Tusk Government  moved so quickly to clear the deck, because the director had been telling them the same thing and they needed to get someone to stonewall the Commission until after the election.


The documents now show that UOKiK (OCCP) gave the Government advice exactly opposite what the Government has been saying [the translation is not precise and is being professionally done and the original Polish documents will be posted here this week]:

June 5, 2012, letter from UOKiK to MG:

"... the Commission clearly shows that countries using in combined heat RES support instruments constituted state aid, despite the fact that their implementation was required by the RES Directive. 

"[while the Ministry of Economy has denied that the certificates constituted state aid] for the reasons detailed in the above footnotes, the position of the Ministry of Economy is not correct." [She went on to detailed the consequences of failure to notify, including recovery of the aid from the recipients and claims for unfair competition].

"... in subsequent decisions ", the Commission emphasized that the certificate system offers free to certain entities intangible assets having a market value. Certificates not only provide evidence produce a given quantity of energy in the RES or CHP, but also allowing the marketing certificates and setting up of such a trading market (forming on them demand) - the state gives them a specific financial value. In addition, according to the Commission, assets in the form of certificates come from the state where it may sell them, thus obtaining a certain income."

"[With certificates], the state grants for certain entities with the opportunity to acquire certificates in order to avoid payment of fees and penalties. In addition, the consequence of the introduction of the system was to create a certificate - without no consideration to the state - which, because of its negotiable character have an economic value. [The State] could sell these certificates, if system gave a different structure. Meanwhile, the state, giving character certificates transferable non-property assets and distributing them free of charge at the disposal of beneficiaries, rather than to sell them, waives, in fact, public resources." [citing several Commission decisions].

 "Similar instruments were assessed by the Commission, which stated that that the mechanism - guaranteed prices along with bonuses based on RES technology leads to the depletion of public funds (to subsidize energy prices over the market value) and give benefit to the producers of RES who receive additional measures beyond those that they could earn as a result of the sale of energy on the market. This means that the mechanism is state aid must comply with the rules on the admissibility of the aid."

"[On the draft RES bill]...Existing provisions for public support do not provide this kind of assistance exempt from the notification,referred to in art. Paragraph 108. 3 TFEU. For this reason, the draft laws ...should be notified to the Commission to enable it to assess their compliance with the internal market. I therefore propose preparation of the draft notification instruments pursuant to Art. Paragraph 108. 3 TFEU as an aid in accordance with Art. Paragraph 107. 3 TFEU.


 "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 letter to MG, November 28, 2013 

"According to the OCCP, 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 within the framework of the ongoing process notification of the restoration of the certificate system for high-efficiency cogeneration.” [referring to the 
Commission's May 31, 2013 opinion on co-generation certificates in Poland, S.A. 36518].

"On the new auction system, the purchase of electricity at guaranteed prices from an auction “affects competition and EU trade since the energy generation market is competitive and open to trade in the EU dimension, and it should be considered that the establishment of the obligation to purchase renewable energy at a specified price is state aid….”


“Due to the participation of public authorities in the auction system ( the determination by the President of URE of the  reference price which is the maximum price and the refunding the 
seller's undertaking with funds from the RES  fee if there is a negative balance between the purchase price set at the auction and the market price of the sale ) , this system should be considered state aid ..” 

“In this context, I wish to point out that the exemption from excise duty for RES energy in the Directive on the taxation of energy is optional, and hence the establishment of this type of release is not an obligation of a Member State, but the only element implemented by environmental policies. Bearing in mind that this exemption applies to public funds (depletes the proceeds of excise duty) is selective (only specific technologies are affected), is for the benefit of the beneficiaries (reduced costs associated with running business) and due to the competitive nature of the energy market and the EU dimension  affects competition and trade in this market,  it should be considered that it is state aid. “  

“Acceptability of aid in the form of certificates and other instruments is defined in the operational guidelines…. Support of this kind is not covered by the so-called “block exemption". It requires notification to the European Commission under art. 108 paragraph. 3 TFEU, preceded by the procedure expressing opinions by the President of the OCCP referred at art. 12 of the Act of 30 April 2004 on the procedural issues concerning state  aid and expression by the Council of Ministers for approval notification. Until the Commission's positive decision, it is not possible to grant the aid. “               

“In the same paragraph 110 of the Guidelines, the Commission points out that support for renewable energy may not ultimately lead to overcompensation. This means that total support for renewable energy cannot exceed the difference between the cost to generate the energy and the market price of energy. “     


These quotes probably have some translation errors in them, but those errors do not affect the meaning. The Office of Competition and Consumer Rights (UOKiK) repeatedly advised the Ministry of Economy on the need for state aid notification and approval in Brussels of not only the existing system, but the provisions proposed in the new law. They also advised on the need to assure levelized or proportionate support. These statements and recommendations were clearly followed by the Ministry of Economy in the October 2012 draft law. This included providing correction coefficients to levelize the support and to phase out aid to co-firing. Just as clearly the UOKiK poisition and that of the Commission has been ignored since the Prime Minister's office directly took over drafting the new law.[1] The PM simply replaced the UOKiK head to try to delay the inevitable until after the Polish Parliamentary elections.

Statements  by the Government that the system does not involve state aid and  that it need not comply with the rules on proportionality and  overcompensation are inaccurate and disingenuous.[2] Until the director of the office was fired, the UOKiK opinion was quite the opposite of the Government's representations. Most troubling is the fact that the correspondence repeatedly refers to not only Commission written decisions but to other Commission communications supporting the historical view point of the UOKiK [S.A. 36518 on co-generation]. The Government has departed from the earlier position at its own considerably risk. 

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[1] The GBER exemptions were put out for public comment in 2013 and were being circulated prior to the UOKiK letter of November 18, 2013. So the UOKiK opinion, that the exemptions did not cover everything in the proposed new law including auctions, Green Certificates and tax exemptions, considered and rejected the argument  that the exemptions justify no notification on the new law.

[2] The Commission kicked back the Polish notification on co-generation certificates on May 31, 2013, requesting more information, including details on how the costs were levelized by technology.  The Government characterization of this development is also strained to say the least. If you read the Commission opinion in that case, S.A. 36518, it is impossible to ignore the UOKiK legal conclusions made under Malgorzata Krasnodebska-Tomkiel. The current rules on state aid apply for all aid granted  until 2017  and the new rules - while softening the need to levelize support - still preclude overcompensation and require proportionality. Aid to plants that have been fully depreciated(such as old hydro) is still prohibited, for example.



Thursday, July 24, 2014

Cover Up? Missing UOKiK document

On May 30, 2014, the Ministry of Economy was reported to have decided not to notify the European Commission on the new law on renewable energy.  The Ministry released a group of documents from the Competition Bureau which allegedly supported their conclusion that notification of the bill as state aid was not required. See Original article.

I jumped on the documents and downloaded them (a bulky pdf image file of 30 pages). Part of the bundle was a June 5, 2012 letter from the former head of UOKiK to the Ministry of Economy. That letter actually concluded that green certificates were state aid, that they had to be notified, and that they had to be levelized to reflect the actual costs of production across technologies. Following that letter, the Ministry proposed the October 2012 version of the RES laws which implemented those recommendations, including phasing out aid for co-firing and old hydro plants.

We all know that the next thing that happened was the Finance Minister intervened and directed that the bill be changed entirely.

Now that the European Commission is on to this problem and investigating the same issues described in the June 5, 2012 letter, the same letter mysteriously disappeared from the Ministry's website and link. This left blank pages in the faxed sequence included in the pdf document (pages 12-14 out of the thirty-page sequence faxed from UOKiK to MG). If any readers also downloaded the UOKiK letters at the time (June 2014), I would appreciate them contacting me and sending a full pdf file and their download date if available. It will be interesting to see how many copies of the June 5, 2012 letter got retained. For the truly brave, just send an email with the file to the DG Competition, European Commission, Brussels

NOTE: For the truly inquisitive, the June 5, 2012 letter refers to a March 29, 2006 UOKiK letter on the subject of notification. Presumably that also advised that notification of Brussels was necessary, at the same time the rest of the Polish Government ignored the advice.

UPDATE: July 26, 2014 - the Ministry also seems to have removed a November 2013 letter from the web from Margaret Anna Krasnodębska-Tomkiel, then head of UOKiK, that explained the state aid problems in the new law related to auctions. Her biggest point was that Green Certificates would continue and existing facilities could opt to continue them or go into the auction. And since the certificates were clearly state aid according to UOKiK's numerous letters to the MG, the new system had to be notified (the GBER exemption did not cover the system). She also mentioned in this letter that the Commission had told UOKiK that certificates were state aid. UOKiK also had advised the MG on several occasions that aid had to be based on the costs of production across technologies. New article will be forthcoming on these developments!  

Tuesday, July 22, 2014

The Consequences of Proceeding to Auctions Without Notification

The Polish Government in its famous double down is still talking about going ahead with a new support system without notification to the European Commission as required by the European Treaty for new state aid measures. This decision, if it sticks, will mark one of the most suicidal moves since Thelma and Louise  drove their car over the cliff.


The rationale for this decision is that the system is either not "state aid" (despite multiple Commission decisions that say the opposite) or that it is exempt under new rules  (which have only been proposed and exclude the type of auction proposed here). The legal explanation for this bold move relies upon a series of UKOK (competition agency) letters which within their context do not even support the decision.

What happens if the Polish Government is wrong, which there is every indication is the case?


For background, the current system of Green Certificates is certainly state aid (as the Commission has ruled in the case of the UK, Romania and Belgium).  The Commission already has an enforcement case on this issue which will inevitably find the state support for co-firing and old hydro projects is incompatible with the European Treaty due to over-compensation, distortion of the market and general unfairness. This will void these certificates retroactively  and prospectively. This means that the aid must be recovered under EU rules and that the utilities using the certificates cannot assume that they were valid under Polish law to satisfy the green quotas in the past.  See Dlaczego Polska Potrzebuje Pilnie Nowego Prawa Dotyczącego Zielonych Certyfikatów, GramwZielone.com [PL version][English version]. 

Green Certificates continue for existing facilities under the new law, at least those built before the new law's effective cut-off (suggested optimistically as January 2016 at this point. Existing facilities can opt to continue this support or go into the auctions. As long as the Green Certificates are under-valued due to over-compensation and distortion from co-firing and old hydro (including an oversupply being held from the past with prospective effect on their value),  the choice under the new law is fundamentally flawed. The incompatible aid will effectively force more companies into the auction and continue the distortion of the market. 

At the same time, the auction is not technologically neutral or transparent as called for by the draft block exemption rules. Separate reference prices by technology, separate rules for existing facilities, 4000 hour limits, and only 60 days of notification of reference prices will make the auctions anything but neutral and transparent. The new auction system will clearly lead to multiple complaints to the European Commission DG Competition.

Prevention of this morass of legal proceedings which will undoubtedly void the results of the auctions is exactly what pre-notification is designed to remedy. It will be impossible to sort out the auction results when bidders and discouraged bidders can complain that system constituted illegal state aid incompatible with the Treaty. 

Instead of using the time over the next 12 to 18 months  to obtain Commission clearance, the Polish Government seems intent on putting the Commission process on the other side of the auction, where it will be the most divisive, costly and disruptive. 

In the likely event that the Commission rules on the green certificates before the first auction,  it seems impossible to keep the Polish Government's avowed schedule, especially if the Commission is next reviewing the auction itself as incompatible aid while Poland struggles to conduct one or more successful auctions. 

The big question is why would the Polish Government want to take these risks and who gains by obfuscation? 

UPDATE: July 24, 2014 - The Commission just approved the new UK auction system yesterday after only seven months of review. My take is that this means it is state aid, because they ruled on its compatibility and that they moved relatively quickly. If everything is fine with the Polish draft law on state aid issues, why not submit it for approval? There is time now to do so. If there is a serious risk (which I believe) that the system is incompatible with competition rules for any reason, it is clearly better to find out earlier than to wait for an auction to be challenged and everything thrown into a messy, protracted legal fight. Such a fight will also involve claims for damages from unfair competition, which can be avoided by notification.