Polish Renewable Energy Policy: The Emperor Has No Clothers

   The old tale of the Emperor getting taken by the tailor, who sells him an invisible suit, is a bit over-used. However, the analogy is just to apt for the Polish Government's renewable energy policy to leave it alone.

   The RES policy is full of contradictions, mistakes, and empty promises. The market will, however, do well - despite the government - once the European Commission acts on the illegal state aid issue.

   The biggest lie told by politicians is that the system cost too much and adversely affects economic growth. The system costs about 28 PLN per MWhr or 4.5%. The following table from the Polish Economic Chamber for Renewable Energy sets out the costs to end-users by each element:

   Most of that support goes to state-owned utilities to bolster their bottom-line and allow dividends to go to the State Treasury. Without aid to old hydro projects (illegal under EU rules since they have been depreciated long ago) and aid to co-firing (which does not cost anything like the support provided, also illegal), the picture is quite telling:

 

   Replacing the illegal aid with Green Certificates to legitimate renewable energy producers would add more to the above table, but the data from numerous studies shows that the total amount of support for new electricity production does not get transferred to consumers, only some fraction of the support costs ends up in higher prices.(1)  The examples that the politicians use in Poland refer to Czech, German and Spanish support schemes that were historically providing over 40 Euro cents/kWhr in support. That is almost four times the current Polish level of support (assuming full Green Certificate value)!!!!

   Using a dynamic economic model - based on real world experience - the actual impacts of a Green Certificate system that only support new RES electricity production would likely be 1-1.5% increased prices to the end-user at the most. 

   So if the Polish Government wanted to reduce the economic impact on energy users by the system, they would immediately stop the illegal aid and only support new RES production based on its actual cost of production. Aid that distorts the market and over-compensates remains illegal under the new EU Guidelines as well as their numerous past decisions on competition. 

   The lie used by politicians is also clear in their effort to restrict the direct sale of electricity to end-users. This is the model of distributed energy and is particularly applicable to biogas that is produced from local organic waste and used for local electricity and heat needs. See CEERES the Advantages of Centralized Anaerobic Digestion Plants. The new system will only allow sale to the grid, unless plants are "grandfathered" by starting before the cut-off date (a planned restriction that itself will largely prove illusory as discussed below). This same mentality is seen in the effort to limit micro-projects from selling at normal prices to the grid. The only explanation for the position of the Polish Government is that it wants to restrict competition with the state-owned utilities- an objective that is, of course, highly illegal.

   Another mistake in the government's plans is the attempt to use the new auction system to support the state utilities at the expense of virtually everyone else. Auctions by stacking up the prequalification requirements and only looking at the price per MWhr have historically rewarded big organizations with a low cost of capital pursuing large projects. Del Rio i Linares, “Back to the future? Rethinking Auctions for Renewable Electricity Support,” 2013. However, it is now clear that the auction system will likely not be functional until 2017 or 2018. See Mott's Blog, "More Inevitable Delays in the New Renewable Energy Law," March 29, 2014; Derski, USTAWA O OZE DOPIERO ZA ROK W SEJMIE?   

   This means that nothing the Polish Government has been doing with the new law will have much effect on the 2020 target (especially since facilities will have extended periods - up to four years - to build their projects that win in an auction. Since the Polish Government has also announced no support for RES will be provided for new projects once the 2020 goal is met, it seems that their new scheme risks being irrelevant.

   What will happen to the RES market from now until 2020? For one, the European Commission will stop co-firing and old hydro support, probably within twelve months from now, and certainly before the new law is approved (especially since it will have to be amended extensively to meet EU rules). Once this happens, the Green Certificate value will be close to the substitution fee (300 PLN/MWhr). This will make RES profitable again in Poland, even for biogas where direct electricity sales and co-generation certificates will add to the margins. The "end game" will be when do new projects not longer receive the option to opt for Green Certificates? The proposal says twelve months after the Commission approval of the law - a point which may be quite problematic. Some Member States have had new RES schemes (less controversial) in Brussels for review for two years. 

   The normal course of things may extends the grandfather period until 2017 or 2018. If Poland is short of the 2020 target ( mandatory under EU law), there will be pressure to continue the grandfather period to allow new projects to come online before 2020.(2) The auction seems to promise only post-2020 results on the ground. None of this is what the Government here intended. None of it will be especially helpful to the state-owned utilities (who will be required to refund their incompatible state aid while also facing unfair competition claims). 

   The further consequences of the Government's bungling this subject will include litigation for several aspects of their plans which are contrary to European and Polish law. Obviously, we can expect the results of any litigation to be further on the horizon, but it is also not clear that those results will be any more delayed than the approval of a new Polish RES scheme in Brussels. When the illegal aid issue is resolved by the Commission (it does not need to go to the European Court to enforce its decision), then the political fallout will likely also hit in time for the Polish elections. Add the possible bankruptcy of the Polish coal company and the picture for the Government energy plans is not very rosy.

   The only solution is to revert to the previous Ministry of Economy draft law on Green Certificates and enact it with a rapid approval in Brussels. The auction system can be debated, amended and enacted to meet the European Commission's post-2017 concerns, but it will do little to affect the 2020 deadline and projects constructed in the next three to five years.

      

(1) A 15% green energy target for the United States (RPS) was projected to only cause a “cumulative electricity and natural gas expenditures increase … [of] 0.3%.” U.S. Energy Information Agency (2007). “A review of state-level RES policies shows that utilities are successfully meeting their annual renewable energy requirements with little or no additional cost to consumers (emphasis added).” Livermore National Lab (2013).

(2) It is quite possible that the auction mechanism will be determined to be an inadequate transposition of the RES Directive, since its import will hit almost entirely after 2020. A valid transposition must provide “all necessary measures” to assure that the mandatory objectives are achieved. “Blackpool Case,” Case C-56/90, Commission v. UK,[1993], ECR I-4109 (European Court of Justice).; Case C-198/97, Commission v. Germany, ECR I-3257 [1999]. Legislation that adopts the objective without providing adequate means to achieve it is an infringement.