Implications of New Guidelines on State Aid on Pending Enforcement Case Against Poland

     The new European Commission Guidelines on State Aid for Renewable Energy, adopted on April 9, 2014, are quite controversial in the RES industry and even elsewhere in Brussels. Many believe that the shift to "competitive mechanisms" in RES support will mean that the targets for 2020 will become impossible to achieve. Remember that the targets were set by the European Parliament for renewable energy and the guidelines are simply an expression of policy by one Directorate of the European Commission. It is possible that the lobbying in Brussels will push changes in the guidelines' most objectionable features, including an unrealistically low ceiling for small project exemptions from auctions. However, the first nine years of Polish RES support under an unnotified Green Certificate system will be evaluated under the rules existing at the time, not the new guidelines. This spells continued major problems for the Polish Government.

   Several parts of the new guidelines are also, however, inconsistent with the draft RES law in Poland. It is virtually certain that major changes will be required before it can be approved. The pending attempt to use the new, still proposed, block grant exemption to avoid Commission scrutiny will fail for a number of reasons. The proposed exemption only applies to support system that meets all of the guidelines. It is fairly certain that the Commission will not allow Poland to use the exemption to implement a system inconsistent with the Commission's guidelines. Moreover, it is completely clear that new complaints to the Commission would be filed if the new support system violates any important guidelines or other rules.

     Since 2005, Poland has implemented a system of Green Certificates that was never sent to the Commission in violation of the European Treaty. The system to date does not comply with the general rule of levelized support applied up to this point.[1]  This is the essence of the pending Commission enforcement case against Poland, i.e. that co-firing received disproportionate support above its actual costs of production. The other element of their case is the support for old hydro plants that have been depreciated long ago. This violates an explicit guideline in the old rules (it is also inconsistent with another explicit rule in the new guidelines). Aid given that is incompatible with competition rules is illegal and must be recovered.[2] Most significantly, the certificates from these activities being now held unused at this point with cease to be effective, eliminating the oversupply problem. Nothing in the new guidelines will affect the outcome of this case as to past aid:

"Aid which has not been notified to the Commission will however be assessed on the basis of the guidelines in force at the moment of granting the aid (i.e. where applicable, the Guidelines on aid for Environmental protection adopted in 2008), with one exception: the new guidelines will apply retroactively for the assessment of reductions in the financing of renewables for energy-intensive users. The possibility for such reductions was not foreseen in the previous guidelines." 

Energy and Environmental State aid Guidelines – Frequently asked questions, European Commission - MEMO/14/276   09/04/2014.

    Prospectively, the matter is more complicated. Green Certificates will continue for projects that are started within twelve months of the Commission approval of the new Polish system. This is existing state aid under the Commission's approach. The new Guidelines do not presume to affect existing facilities receiving support:

Below: Danish biogas plant using cleantech (Thorso, Denmark).

"...the guidelines will have no effect on aid paid to the owners of existing installations. These continue to receive aid based on existing approved state aid schemes, to maintain investors' legitimate expectations on the returns on their existing investments."  European Commission- MEMO/14/276   09/04/2014.

Green Certificates adjusted as required by the older guidelines will remain effective for facilities that are done before the new guidelines are effective. The question is what will happen to facilities that subsequently qualify for Green Certificates, after publication of the new guidelines. Depending upon when the Commission approves the new Polish system, this period could be substantial. The most straight-forward solution is to allow these project the same type of weighted certificates as will be required for the period up to 2014. The guidelines for more competitive mechanisms are not obligatory until January 2017. The guidelines also explicitly note that: "Installations that started works before 1 January 2017 and had received a confirmation of the aid by the Member State before such date can be granted aid on the basis of the scheme in force at the time of  confirmation." Supra note 67. So nothing in the new guidelines will preclude facilities built within twelve months of the Commission approval of the new Polish law from receiving levelized Green Certificates up to January 2017.

     Even for facilities built after the Commission's transition period, it can be strongly argued that Green Certificates should continue. Small projects are regularly precluded from bidding or success in auctions by practical realities,[3]  especially in biogas. The major study of auctions in every country that has attempted them concluded: "A major empirical lesson of tenders is that they are

unsuitable for small installations and smaller actors." Del Rio et al. supra, note 3. Many auctions had no successful biogas bidders. Id.  For facilities below 1 MW in general [a level being challenged as too low] and 6 MW in wind, the new guideline suggests that competitive biding may not be required:

"(128) Aid may be granted without a competitive bidding process as described in point 

(127) to installations with an installed electricity capacity of less than 1 MW, or 

demonstration projects, except for electricity from wind energy, for installations 

with an installed electricity capacity of up to 6 MW or 6 generation units." Link. 

     Competitive processes may also not be required for any project "where ... Member States demonstrate that a competitive bidding process would result in low project realisation rates." Par. 127(iii). Auctions for biogas projects due to the nature of the projects have been chronically plagued with low realization rates. See Comments of Polish Biogas Association to DG Competition, February 2014 and references cited therein. There will likely be litigation o the issue in the European court, if the lobbying efforts in Brussels do not otherwise secure a revision in the definition of small project and the suitability of auctions for such projects.

     There are strong incentives to build biogas plants in this interim period due to the inevitable implementation of levelized support through a correction coefficient on the Green Certificates. The only factor the Commission recognizes as affecting the correction is the cost of production, which have been detailed by the Institute for Renewable Energy report, July 2013. This fact coupled with the elimination of the oversupply of certificates will create a very favorable climate for new projects, despite the Polish Government efforts, not because of them.

     In the later years, biogas projects below 1 MW - while less than optimum - still should be competitive with other technologies in the "small auction" [if it occurs as suggested by the draft Polish law]. The difficulty will be principally for smaller players in the biogas market and those trying to do a "one off" project. Ironically, the auction mechanism will hurt farm biogas the most, which is the part of the sector most openly embraced by the Polish Government. The final rules post-2017 are still to be written and there will be continued and major efforts, both in Brussels and Warsaw, to improve these provisions for small projects and biogas plants.

Randy Mott
Vice President, Polish Biogas Association
Policy Committee, European Biogas Association
Warsaw, Poland

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[1]   “As stated in point 59, 1st subparagraph, of the environmental guidelines, Member States may compensate for the difference between the production cost of renewable energy and the market price of the form of power concerned. Thus, such compensation can relate only to the extra production costs for environmentally friendly electricity production as compared to the production costs for energy based on conventional energy sources.” cited in 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.      In the case of certificate systems, the Commission has been consistent in requiring proportionality to actual or reasonably expected costs of production.  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”). In fact, co-firing has been specifically identified as an area that might be over-compensated without adding restrictions. The UK certificate system limited co-firing certificates: “To reduce the risk of flooding the ROC market the contribution of co-firing stations is limited to 25% of an individual supplier’s obligation. This limit will be further reduced to 10% (from 1 April 2006 until 31 March 2011) and to 5% (from 1 April 2011 until 31 March 2016). Co-firing will cease to be eligible for ROCs after 31 March 2016.” DG Competition, C(2005)480, Subject: State aid No N 362/2004 – United Kingdom Renewables Obligation Order 2005, November 23, 2005, p. 2-3.     Romania used a levelized cost calculation to evenly apply the green certificates for different technologies, based upon production costs for each technology. C (2011) 4938, State aid SA. 33134 2011/N– RO, Green certificates for promoting electricity from renewable sources, July 13, 2011 p. 8-9. Various measures in addition to initially levelized costs were used to assure no over-compensation and resultant market distortion.“37. The Romanian authorities confirm that the production costs and revenues (market price of electricity, revenues from green certificates) will be monitored on a yearly basis and that the support levels for new beneficiaries will be adapted in case a risk for overcompensation is identified.” P. 10. Note 20: “In case a risk of overcompensation is identified, ANRE shall propose measures to reduce the number of green certificates to be granted to new entrants to the scheme. Such measures to be adopted by the Government will enter into force on 1 January of the following year.…40. The support in the form of green certificates can be cumulated with the investment aid. The number of green certificates will then be reduced so that reasonable profitability rates should result around the values considered.” Id, p. 11.  It was critical to the Commission’s approval of the Romanian scheme that it provided a means to address over-compensation, a means absent in the Polish scheme:  “ In the light of the above mentioned considerations, including the commitment of the Romanian authorities to adapt the notified measure in time in order to avoid overcompensation, the Commission finds that the notified measure is in line with the condition of absence of overcompensation in the aggregate.” Supra at par.70, p. 16.  (emphasis added). The approved system starts with adjusted compensation based on production costs and further allows for adjustment to avoid future over-compensation.  The Polish Green Certificate system has done neither.

[2] Incompatible state aid must be recovered from the recipients under European law.   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).

[3] Where countries have tried to throw biogas into auctions, the results have been universally

negative. 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.