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.

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.

Thursday, July 17, 2014

Energy Storage Economics 101: Finding the Business Case


This is the balancing market in Poland this week, July 15th. The peak two hour period in the middle of the day saw electricity prices at nearly 1000 PLN/MWhr. That is over twice the price of renewable energy in Poland even with subsidies included. 

It does not take a genius to see the potential of storing the energy on each end of this spectrum and selling it in the middle. The system must have the production capacity to meet the peak at any time, even though it is used only two or three hours a day. Shifting peak hours to off-peak electricity that is stored, if ubiquitous enough, would lower the need for additional capacity and save everyone money as well. The major energy storage issue is quantifying the economic benefits and finding the optimum methodology of distributing the cost of storage to the beneficiaries of storage. This is not an easy thing and is exactly why we need an association to work to pull all the pieces together and build a consensus of the results.

Tuesday, July 15, 2014

THE NEW POLISH RES LAW NEEDS TO PROMOTE ENERGY STORAGE

     Poland has a unique opportunity to avoid some of the problems now confronting Germany, as intermittent renewable energy sources take over the first slot in meeting demand for electricity. It has been widely reported that as intermittent energy sources play a larger role in the grid supply, more pressure is placed on “ramping up” power to meet demand peaks. Coal plants are notoriously poor at ramping up or simply backing up renewable energy sources, since they require a high utilization rate to remain economically viable. In this regard, Poland is more vulnerable to mismatched supply and demand than many other countries. This has been one of the main concerns of the Polish Government is debating the new law on renewable energy. 

     Yet the Government’s various versions of the law have never dealt in any fashion with energy storage. The term does not ever appear in the different versions of the law. Energy storage is viewed as vital to bridge the gaps in energy supply. The European Commission, DG Energy Working Paper onEnergy Storage, last year summarized the importance and role of energy storage:

Energy storage can supply more flexibility and balancing to the grid, providing a
back-up to intermittent renewable energy. Locally, it can improve the management of
distribution networks, reducing costs and improving efficiency. In this way, it can ease the market introduction of renewables, accelerate the decarbonisation of the electricity grid, improve the security and efficiency of electricity transmission and distribution (reduce unplanned loop flows, grid congestion, voltage and frequency variations), stabilise market prices for electricity, while also ensuring a higher security of energy supply.

They provide a graphic illustration of the benefits of energy storage:




     As the July 2014 version of the new RES law is debated and amended, it needs to address energy storage, at least in a preliminary manner. Right now, if intermittent renewable energy producers store electricity either to smooth very short-term fluctuations or to address peak/off-peak concerns, the stored energy is not clearly covered by the support scheme. So a RES facility would have to store electricity when it could be sold at a premium and re-introduce to end-users at a lower price without RES support. This is a totally illogical and unwise situation.[1]

     Clearly, energy stored from RES sources covered by the support system should receive at least the same level of support when it is released for use. Any other approach makes energy storage, which is vital to the future system, impossible at inception. The European Commission makes the point: It is important to ensure that electricity from RES keeps its RES label, even if it has been stored before the final consumption. Possible feed in tariffs should not be affected by intermediate storage.” DG Energy Working Paper. A more logical system would place a premium on off-peak electricity generated and stored to be discharge during peak hours. Besides helping RES producers, this would reduce the aggregate difference between peak and off-peak demand and increase the utilization rate of the traditional fossil-fuel energy plants. 

     A bigger market lesson can also be drawn upon from the emerging energy storage sector. The California Energy Storage Alliance, operating in the most advanced energy storage market in the world, reported earlier this year that a 40% differential between peak and off-peak electricity rates can make energy storage with today’s technologies economically viable. [Janice Lin, California Energy Storage Alliance, Energy Storage- Europe conference, March 24, 2014].  This is, of course, only true if the facility can receive the higher peak rate differential. Under a feed-in tariff as proposed in Poland for winners of the auctions, there is only one rate envisioned and no financial incentive for storage and discharge during peak hours. A means to finance investment in energy storage is essential and failing to utilize the natural market mechanism seems to be extremely short-sighted. 

     Multiple technologies are now available to provide for energy storage on different scales and with different temporal capacities. The appropriate system varies with the application, whether it is to even short-term fluctuations or to reduce peak/off-peak peaks and valleys. The Polish system is typical in that it is very inefficient due to the need to have capacity for peak hours and seasons, which is unused the rest of the time. See chart from URE data:

                       URE website, Load of the Polish Power System from Jan. 2011 to July 2014.  


    Technology exists to reduce this "wild ride" as well as to smooth shorter term variations. These systems include advanced lithium ion and other battery systems, fly wheels, compressed air, traditional pumped hydro, and other innovative solutions. The Edison Electric Power Research Institute reported a benefit to cost ratio over one for nearly every technological scenario.  “Cost-Effectiveness of Energy Storage in California,” Application of the EPRI EnergyStorage Valuation Tool to Inform the California Public Utility CommissionProceeding R. 10-12-007 3002001162  (2014). The recognized need for energy storage occurs at each level of the energy network, as illustrated by DG Energy’s schematic:



       The ability to differentiate between peak and off-peak prices can provide a key incentive to provide energy storage capacity in the integrated electrical system, especially at the pre-grid distribution level. See above graphic.     

     We are working now to formalize the Polish Energy Storage Association and to hopefully start a constructive dialogue immediately with the Polish Government on how to provide the preliminary support for this essential sector. It will be necessary to obtain cooperation from all of the interested energy storage technology providers, and other stakeholders to achieve the right solutions. 

Introduction translated by www.photonlab.pl.   Thanks!


[1] For biogas, the storage can be in the form of methane and it can be used to generate additional power during peak hours. This is an unusual characteristic for renewables, but requires that a higher price be charged to finance the additional storage and generation capacity. This can be done under the current Green Certificate system, which allows direct sales, but will be lost under the auction system that requiring one flat rate for grid sales.

Monday, June 30, 2014

Basic Orientation on Energy Storage

This youtube video brings it all together.



https://www.youtube.com/watch?v=h2iyQcXQUSw

I expect to be in this market in Poland in 90-120 days. I hope to form the Polish Energy Storage Association at the same time.  Interested parties should contact me!  randymott (at) envirosolutions.co.

Note: I am still in the biogas business and environmental consulting business.

Friday, June 27, 2014

EU notification or not? Political Repercussions Inevitable

The Ministry for Infrastructure is raising issues about the announced intention of the Polish Government not to notify Brussels on the new law. [They never notified on the existing law and are in an enforcement case with the Commission on the subject]. The Ministry's point is not one of mine and may even be a "stalking horse" for the real arguments which are harder to admit (i.e. the auction is not technologically neutral, the procedure is not transparent, Green Certificates are still used without necessary Commission approval, and the whole exemption relied upon is not even finalized yet).

Failure to notify will lead to a Commission complaint and the review will be done by Brussels whether the Polish Government seeks it or not. The ruling coalition seems to be convinced that it is somehow served by delaying the inevitable smack down. My own educated guess is that the smack down will occur in time to be an issue in the elections next year, so their timing is totally counter-productive. The recovery of 70% of all aid to renewable energy in Poland since 2005 is a big enough issue that even the general media will pick up on it. It is more than the total national deficit for example.

In the interim, we face local elections where I have done whatever is possible to raise the issue of the government's policies hurting local government and small communities. Without changes in the draft law as it pertains to biogas, local small town residents will lose most chances for cheaper biogas heating in the local systems, cheaper processing of sewage sludge and household food wastes, and on the flip-side will see more biogas plants without the most environmental and odor control since the government policies make these expensive add-ons quite difficult to fund. We will be expanding on this theme throughout the local elections in Poland.

All of this should be viewed against the political back drop of the coalition misreading public opinion, which favors green energy more than the government's preferred coal and nuclear projects (70%; 24% and 26%). If even a small percent of the electorate make this an issue in their voting, it can be decisive in a close election. I noted in the past that on a levelized cost basis, new coal plants and nuclear plants are more expensive that some renewables right now and that this trend will continue.

One of the great ironies in Poland is that the new anti-communists seem to act like communists more than they will ever admit. Heavy-handed, ham-fisted policies with very little transparency in government or regard for the public's input may as well be coming from the old communist bosses in Moscow.[1]


___________________________________



[1] Note to the government: having repeated public hearings with the sole function of announcing the decisions already made behind closed doors is not conductive to building democratic institutions in Poland. See my earlier post on the legislative process compared to the United States. There is virtually no effort to receive opinions from stakeholders before decisions are made. This also helps explain the stop-and-go nature of the RES bill, since its various iterations have been put together without much if any consideration of input from the public and the sector. They publish something dumb and then run back behind closed doors to make another decision in the dark.


UPDATE: If you would like a copy of the advantages of biogas plants to local communities, focusing on the Danish model, please download it here (PL) or please contact me (randymott (at) envirosolutions.co.)(EN version). The paper emphasizes the advantages of adopting the PBA amendments. This is the information that is being provided to local government and NGOs relevant to the local elections. It makes no sense to promote farm-based biogas plants in Poland and not to support community-based biogas plants with higher technology and more benefits to the local residents.

Wednesday, June 25, 2014

The Small RES Auction: Where will the Competition Come from?

The draft RES law in Poland provides for an auction for electricity support for green energy beginning sometime in 2017. There is a faint hope that this will be 2016 if the Government is successful in bypassing the EU notification process (an unlikely contingency). When the auction day does arrive, if at all, the small auction for under one MW projects will have a result completely at odds with the announced objectives of the Government.

If and when the day comes, the Government will reserve 25% of the auction for small producers, i.e. under 1 MW. While I have objected to the 1 MW and to the requirement that an auction be used, it is interesting to speculate on the effects of this proposal if it is realized.

Pre-qualification of bids will be required, which will include the need to have planning permission, environmental approval, gird connection conditions and a building permit for your project. A deposit with the bid and penalties for failure to build the project if your bid is successful will be included. A developer will not know the actual reference price (the maximum bid) until 60 days before the auction.

Auctions will be conducted at least annually and there will be a window after a successful bid to actually construct the project adding a substantial downstream delay.

Poland has roughly speaking 5000 MW of RES capacity installed at the end of 2013 and will need over 10,000 MW of capacity installed and in use by 2020 to meet the Directive target (for electricity it is 19%). This means that support for about 1700 MW of electricity capacity will have to be auctioned for each year in 2018, 2018 and 2019. Arguably there is a need to front-end load the auctions to provide for the downstream delay in construction caused by using this procedure, so all of the 5000 MW will have to be auctioned at least two years before 2020 to meet the target.

This means that 1700 to 2500 MW of RES capacity will be annually auctioned to meet the 2020 target (theoretically). The small auction 25% share will be  425 MW to  625 MW. At 1 MW per project, this is 400 to 625 projects. Assuming a mix of smaller sizes as well as 999 kW projects, the system will need to generate over one thousand projects with building permits, planning permission and funding. To create any competition in bidding, there will have to be two to three times that number.

How likely is Poland to successfully implement this goal, i.e. to have enough bidders to meet the 25% target and have competition among bids?

Experience in small project RES auctions has clearly shown that the procedure tends to not produce bidders. The Instituto de Investigación Tecnológica in Spain just published a detailed review of renewable energy auction experience in every country where it has been attempted. See del Rio and Linares, “Back to the future? Rethinking Auctions for Renewable Electricity Support,” 2013. One of their major points from looking at dozens of different auction systems was as follows:
Unfortunately, these theoretical advantages of auctions come at a cost. Due to the
complexity of the bureaucratic procedures, and also to the planning required ahead,
auctions have higher transaction costs (Finon and Menanteau 2008) which, together
with uncertainties on the final price and the tendering schedule, deter participation by
smaller firms, resulting in a low degree of competition (Butler and Neuhoff, 2008), and
creating opportunities for market power. In turn, this may eliminate the higher
theoretical efficiency of this instrument. Id. at p. 3.

     Later in their paper after reviewing every country’s auction experiences, they conclude:
Unfriendly for small projects and actors. A major empirical lesson of tenders is that they are unsuitable for small installations and smaller actors. Competition may thus be affected. It has been argued that some of the aforementioned factors and, namely, information failure and difficult access to finance, have a disproportionately negative impact on small actors and, thus, that the instrument is not suitable for small actors, suggesting that smaller projects should be promoted with a different instrument (Morthorst et al 2005, Mitchell 1995). It is difficult to tell a priori if encouraging large installation or actors instead of small ones is a negative aspect. Although it is explicitly assumed to be so in the specialised literature, size is a double-edged sword. Larger installations facilitate economies of scale in production but a model of distributed generation calls for smaller plants scattered around the territory.[1] Furthermore, some RE projects are inherently large (offshore wind and concentrated solar power) and tenders may be particularly suitable for these technologies. In contrast, smaller projects may need to be promoted with another instrument.[emphasis added].



We can assume that fewer small projects will be proposed than would occur with a stable, guaranteed support mechanism such as Green Certificates or Feed-in tariffs. Small investors or project owners (such as farmers) will face having to advance all of the development costs of the project will no assurance of what the level of revenue will be or whether they even will get support at all. For many biogas and PV projects (assumed to be the lion's share of the small market here) the reference price itself is likely to preclude bidding. The Institute for Renewable Energy report from last year gave us a road map on the actual costs of production by technology. If the reference prices are set at that only 80% of the industry can "make a profit,"  then presumably the level will be below the 12% IRR assumed by IEO and lower than their figures.  Higher marginal cost projects will likely be stopped in the planning stage due to this risk.

This result is consistent with every country's auction experiences.  Without technology "bands," all small projects will compete solely based on costs. [There is some discussion of a bonus for "stable electricity" production but it is unclear how this will work in practice].[2] Most small and medium size businesses will be relying on external financing for project completion and this will somewhat difficult to obtain in the climate of uncertainty over the reference prices.

The large number of bids required to meet the 25% target as well as the disincentives to bid for small project developers will combine to make the auction for under 1 MW quite a different result than intended. It seems likely that every bid within the maximum reference price will likely be successful, simply because there will not be bids sufficient to fulfill the 25% share of all electricity support being auctioned. This is the empirical result that Del Rio et al. noted in their study of all such auctions: they do not result in more competition, but actually promote market concentration. Companies organized and funded to provide for all the project costs up to the building permit without external financing can do well in an auction, especially one with the "set aside" for small projects. 

Practically speaking, to meet the deadline of an auction in 2016 or 2017, work would have to be underway today to obtain all of the permits and approvals. Uncertainty in the law, including its auction mechanism and reference prices, as well as the Green Certificate over-supply problem have sharply reduced the number of small projects in the Polish pipeline. Before the Green Certificate crisis, there were about 300 biogas projects in development in Poland. Admittedly a large percent of these would have inevitably failed due to financing problems or local opposition.  In the EU, only about one in three biogas projects make it from planning to construction in any event. The number in development should also be divided by at least two, in that they will not all be available to bid (have building permits, etc.) in a given single year. 

Viewed from another angle, after nine years of plugging biogas, the Polish Government can see only 50 anaerobic digestion plants in Poland instead of the 2500 plants they sought for 2020. What are the chances than hundreds of projects will be ready for bidding in 2016 or 2017? Virtually zero.

Reference prices by law must reflect the various and different costs of production of the energy. The key variable in play is not that competitive bidding will reduce the number of accepted bids, but rather how many bids can successfully "game" the reference price. There is no doubt that the biogas reference price if the criteria are honored will be significantly higher than the "factor of one" used by IEO, i.e. the grid fee of 200 PLN/MWhr plus the full substitution fee of 300 PLN. This 500 PLN/MWhr or 12.5 Euro cents is substantially lower than the generic cost of producing electricity from biogas (or PV right now). So a project that can be profitable at that level or slighter above that level will be a very strong candidate for a successful bid. I just do not see small wind (one small turbine) doing much in the market,[3] so biogas and PV should be the major players in the small auction. In any event, it is impossible to see how over 400 MW of small projects can be ready to bid in each of three or four successive years.

The people hurt by the auction mechanism will be the "mega-prosumers"  trying to supply their own energy up to 1 MW. Farmers will be the biggest casualty, since they have struggled to accept biogas under a program that was historically more predictable than it is now or will be under the auction. PSL can talk about organizing cooperatives, but I cannot imagine having to attend a meeting of farmers with the goal of reaching a consensus on collectively investing their own money in one of these projects that has to go to the auction. The credibility of the Ministry of Agriculture in urging farmers to invest in biogas plants is pretty much zero or single digits at this point.  

The players in even the small auction will be the bigger firms with sizable budgets for project development. As long as the reference price meets the statutory criteria, the auction can be a route to profitable projects for this portion of the sector. Their success, however, will come at the price of lower participation by the very people the Government keeps making promises to. The end result will inevitably mean that Poland does not reach the 2020 target of 19% green electricity  and hundreds of potential developers will drop out of the process.

A better solution would be the use the fix of Green Certificates with adjusted values to reflect cost of production as the vehicle for support of small projects and let the auction do what auctions have done elsewhere, attempt to provide some competition for large projects.





[1] Biogas is the perfect example of distributed energy, where local sources of agricultural waste and products provide a local source of energy that should also be allowed to be used locally. See Mott, “Biogazownie jako wzorcowy model rozproszonej energetyki: lokalne odpady lokalnym źródłem Energii,www.reo.pl (2013).   Local, direct sale of the electricity is also imperative to achieve the best results to the economy (decentralizing electricity and lowering its price).

[2] The bonus for stable electricity production does not affect the reference price which is already set. The lower capex for wind, for example, with a lower number of available MWhrs is already considered in the reference price. So adding a bonus for biogas reliability will not affect the small auction results since there will generally not be enough bids for the competition to matter. In the big auction, it is difficult to see how the bonus can be large and significant enough to affect the disparity in the cost per MWhr between wind/co-firing and biogas. 
  
[3] I can be wrong and invite comments, but the European wind association successfully got a 5 MW exemption for small projects in the new EU state aid guidelines, also indicating that the project economics seem to tip for above 1 MW wind projects. The investment in a 1 MW wind tower seems to be 1.6-1.8 MM Euro with only 2000 or so MWhr output. Most project development costs are the same as a large wind farm, so the economics seems to be less favorable than some other technologies. Some vendors claim that they can produce cheaper small wind energy, but it is hard to imagine 50-100 MW of these small projects every year.