DOUBLING DOWN ON A JUNK POKER HAND: THE POLISH GOVERNMENT APPARENTLY INTENDS TO IGNORE ITS TREATY OBLIGATIONS ON STATE AID




     To anyone who has even a casual acquaintance with gambling, “doubling down” is a well-known and often dangerous strategy. The Oxford Dictionary defines it as to “strengthen one’s commitment to a particular strategy or course of action, typically one that is potentially risky.”  Doubling down or increasing your bet when you know that your cards are losers probably goes by a more generic name, say “stupidity.”

Operating since 2005 under a renewable energy support system that is unquestionably state aid, while ignoring the obligation to notify and obtain approval in Brussels under its treaty obligations, the Polish Government now seems poised to plunge ahead with more aid and no more notification. The Green Certificate program is totally intertwined with the new program since it can still be opted into by existing RES producers and since the reference price in the auction for existing sources is pegged to its value. Nor does the form of auction proposed by the Government even meet the draft European Commission exemption criteria.


     Article 107 of the Treaty on the Functioning of the European Union provides that “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.”  Article 108(3) provides further that Member States must provide advance notification to the Commission before state aid can be effective:  “The Commission shall be informed, in sufficient time to enable it to submit its comments, of any plans to grant or alter aid. If it considers that any such plan is not compatible with the internal market having regard to Article 107, it shall without delay initiate the procedure provided for in paragraph 2. The Member State concerned shall not put its proposed measures into effect until this procedure has resulted in a final decision.”

     The only consequence of being determined to be stated aid is that the system must then be analyzed for its effects on competition and whether it distorts the market.  It is pretty much a foregone conclusion that the Polish system as it exists and as it is proposed will flunk this test, so the Government wants to avoid the examination altogether.

     In 2001, four years before Poland adopted green certificates; the Commission determined that the UK certificate program was state aid due to the substitution fees involved. DG Competition, C(2001) 3267final, State aid No N 504/2000 – United Kingdom Renewables Obligation and Capital Grants for Renewable Technologies, November 28, 2001 The key fact the Commission relied upon was that when suppliers do not have a sufficient amount of green electricity certificates, they have to pay the buyout price, practically a fine, to a fund.” Id. p. 12.  Thus, the Commission concluded:

The Commission considers that State resources are involved and also all other criteria of State aid in the meaning of Article 87(1) are fulfilled. The measure would insofar constitute State aid within the meaning of Article 87(1) of the EC Treaty.” Id. p. 13(2001)(emphasis added).

 See also DG Competition, C(2010)2211, State aid No N 65/2010 - United Kingdom Amendments to the Renewables Obligation Certificates (ROCs) scheme, March 30, 2010. The Polish system also requires that the electricity provider have the quota of green electricity or sufficient green certificates to make up the difference or they also must pay a fine (the substitution fee).

     The Polish system is also indistinguishable from the Romanian Green Certificate program in every relevant aspect. See DG Competition, State aid SA. 33134 2011/N – RO, Green certificates for promoting electricity from renewable sources, C (2011) 4938, July 13, 2011. The Commission noted in the Romanian case, as here:

“…the Commission also observes that by giving green certificates for free to producers of electricity from renewable sources, the State is actually providing them, for free, intangible assets. In fact, the green certificates can be traded on a specific market and by selling them the producers of electricity from renewable resources obtain revenues. The Commission has already found this to constitute aid in the case of emission permits).”  Id.  p. 13, para. 53.

“Finally, the Commission notes in this context that if the obligated parties do not demonstrate that they have acquired the required number of green certificates, they must pay a penalty.”  Id.  p. 13, para. 52.

     Thus, the Commission concluded that “the State provides certain undertakings with an asset, which has a monetary value, and that asset originates with the State which has created it.” Id. p. 13, para. 53 (as in Poland, these Romanian green certificates are traded as a commodity). Finding that green certificates had all the attributes of state aid, the Commission, however, also found that the system met the compatibility criteria for state aid in that case. Id

     The issue was decisively resolved by the European Court of Justice in 2011. European Commission v Kingdom of the Netherlands (C-279/08 P) September 8, 2011 (NOx). “The Court of Justice held that, in the first place, it was not necessary to establish in every case that there had been a transfer of State resources for the advantage granted to be capable of being regarded as a State aid. Secondly, the tradability of NOx allowances could lead to the avoidance of the payment of fines, and the creation of emission rights without consideration paid to the State meant that it has forgone income which could have been made from their sale or auction.” Sauter & Vedder, “State Aid and Selectivity in the Context of Emissions Trading: Comment on the NOx Case ,”  37 European Law Review  327, 333 (2012). The NOx case cannot be distinguished from Polish Green Certificates on this issue.

     The recent UKOK opinions do not support the fact that the system does not have to be notified. See http://legislacja.rcl.gov.pl/docs/2/19349/212691/212692/dokument114265.pdf  The UKOK analysis rejects analogy to the German feed-in tariff case that the European Court declined to find as state aid (Case C-379/98 Preussen Elektra [2001] ECR I-2009)(UKOK to MG, August 2012).  The June 5, 2012 UKOK letter to the Ministry of Economy specifically refutes some of the Ministry’s conclusions and argues that the support scheme requires notification. IdPast UKOK pronouncements on the subject were considerably less well-reasoned.[1]

     Other parts of it may or may not trigger a notification obligation, but the Green Certificates clearly create such an obligation. UKOK agrees with this part completely in its correspondence to the Ministry of Economy.  The new State Aid Guidelines, section 3.3.1.4., allow Green Certificates to be used as state support as compatible with the competition rules under certain conditions. But the GBER block grant exemptions, as proposed, do not exempt certificates from notification. Draft Article 34, May 2014 interim version.

     The auction system that the Ministry of Economy thinks may be implemented without notification does not meet the proposed test for such an exemption. The draft GBER exemptions for notification of state aid only cover feed-in premiums (an adjustment above the basic price paid by the grid for electricity to reflect added RES costs). See draft Article 34. The Polish law proposes feed-in tariffs based on an auction system for their allocation to producers. This may not meet the test for the exemption, assuming that the GBER package is approved as it is now drafted.[Some argue that the Polish system will be a contract for the difference that satisfies the criteria]. 

     The biggest problem is separate reference prices for technologies in the same auction. Separate reference prices - setting the maximum allowed bids by technology- are not "technology-neutral." The maximum allowed price for some technologies will be higher or lower than others. While people argue that this still allows the minimum price to be bid, that misses the point. The Commission must guard against distortion of the market by over-compensation. The reference prices can allow some technologies to bid at a premium from the prospective of their costs of production, but still be the "low bidder," thus over-compensating and distorting the market. This is not non-discriminatory or transparent as required by the Commission.

     Beyond the fact that it does not use feed-in premiums, the auction system as proposed will allow co-firing to compete against other technologies. Existing co-firing installations are allowed to use as a reference price the average certificate values from prior years (before it collapsed) regardless of the cost of production of co-fired energy. This allows them to bid far higher than their actual costs and still beat other bids. The auction as proposed is rigged to perpetuate the support for co-firing that wildly distorts the green certificate market and will continue to do so under the proposed law. While all technologies that produce new renewable electricity might be considered equal now by the Commission, co-firing does not produce any new electricity and does not require construction of new generation capacity. While it counts as renewable energy under the EU broad definition that is a completely different point that what support it requires.  This issue is at the heart of the current Commission investigation and cannot be totally ignored as the Ministry of Economy attempts to do in the analysis of the auction system. The GBER rule also provides that “the investment aid shall be granted to newly installed capacities….” Draft Article 34(4). Co-firing is not a newly installed capacity for electricity production, i.e. it only partiallychanges the fuel used.

     The Polish auction plan is also not in compliance with the general criteria of the GBER exemption: it is not a genuinely competitive, technology-neutral bidding process on the basis of clear, transparent and non-discriminatory criteria, effectively ensuring that the aid is limited to the minimum necessary for delivering newly installed renewable energy….” Id. We have already seen how the reference prices can be used to distort the market. The Government proposes to only provide a sixty-day notice period for the reference prices being used in each auction. The UK just provided one year. The investments must have building permits and must be started at least two years before the auction. This will destroy competition, driving out small and medium size businesses and favoring the large state-owned utilities. I also doubt that the integrity of the Polish system will mean that all bidders (even Treasury-owned companies) will not know reference prices until two months before the auction.

     We in the biogas sector will be litigating a premise of the April 9 guidelines that affects the GBER exemptions as well. Auctions for small projects (normally defined by Member States and other countries as under 5 MW) are inherently discriminatory, unfair and not “genuinely competitive.” See comments of the Polish Biogas Association on the proposed State Aid Guidelines for Environmental Protection, February 14, 2014.

     The Polish Government’s attempt to avoid notification of its RES law involves a very poorly reasoned explanation with very high risk, a classic “double down.”

     The effort to avoid notification, unless it is just another delaying tactics which may well be true, will fail. If the Government really follows through with this strategy, it will most likely only force the Commission’s hand in the enforcement case now underway. Alternatively, it could easily lead to litigation to declare the whole Polish system unlawful aid since it was never notified.

One of the first rules in gambling is to never bet more than you can afford to lose. In its zeal to keep the current system running, largely to the benefit of state-owned utilities, the Government has never really looked at the downside. The whole support scheme could collapse if legally challenged, but more likely the incompatible parts of it like the 30% of all certificates going to old hydro plants (fully depreciated and illegal to support under the old guidelines and the new ones as well) will be affected. Such incompatible or illegal aid will have to be recovered.[2] In this context, since consumers ultimately paid for the RES charges on their bills, it would mean refunds of all electricity bills in Poland since 2005. The losses to the Government do not stop there, since the law is clear that illegal aid is unfair competition and this creates a legal right to claim damages from the aid-giver, here the Polish Government.[3]   Everyone in the RES sector who got a certificate whose value was dramatically reduced due to oversupply of certificates contrary to the EU rules can claim damages based on the deflated value. Projects that lost money or went bankrupt could claim their lost profits or ruined investments as damages. The litigation that could come from the stone-walling strategy of the Government could run on for many years at huge cost.[4] Note: all of these consequences have been detailed to the Government by UKOK in the correspondence provided last week on the internet.

Solution
      The solution is to move back to the 2012 Ministry draft bill, incorporating the correction coefficients from the IEO report. Quickly pass the law and submit it to Brussels for approval. If the coefficients are well-documented based on the Commission’s new guidelines, then that bill will also satisfy the prospective requirements for the post-2017 period.  Only one law is necessary if it is done right.
     The “optimization” of the system will come from eliminating support for 70% of those now receiving it (old hydro and co-firing). Other adjustments can occur in the future as the cost of production changes for some technologies. The real impact of this will be that the sum total of the support will not be the “cost of the system” to consumers. By adding capacity, allowing direct sale of electricity and only supporting technologies that need it, the system will have a much smaller final price tag that simply adding up the amount of the certificates. See Mott, “Analiza prawdziwych kosztów energii odnawialnej,” February 5, 2014, GramwZielone.pl.[5]

     Kenny Rogers famously sang that “you have to know when to hold’em and know when to fold’em.” His gambler in the song broke even. That would be a wonderful result in the present game of bluffing being played by the Polish Government on renewable energy support. Lacking the ability to break even, perhaps they can start thinking about cutting their losses?

    
                                                Kenny Rogers, sings The Gambler






[1]     Previously efforts to try to justify the lack of notification since 2005 were entirely superficial in their legal basis. Anyone can buy a Green Certificate and resell for a profit so that the beneficiaries of the aid may not necessarily be the producers or distributors of electricity. Similarly, the failure to meet the quota with either actual electricity production or Green Certificates leads to payment of a substitution fee or penalty fee. Both of the later are given to the National Environmental Protection Fund that uses the funds to support yet another set of beneficiaries. See Polish Energy Law Article 9a(1)and(5), Article 56(1a)and (3). The fees and penalties are clearly state resources used to support other projects and hence state aid is involved under the Commission’s prior decisions. See UK (2000); Beligum (2000). The Polish Government attempted to justify their lack of notification in their 2012 comments on proposed modifications to the Community Guidelines. They tried to pass off the Commission’s decisions to treat green certificate programs as “state aid” decisions made after the Polish system was enacted in 2005. See Government of Poland, Discussion Paper - State aid for environmental protection - a questionnaire for stakeholders (Dokument do dyskusji – pomoc państwa na ochronę środowiska- Kwestionariusz dla zaintereso-wanych podmiotów), 2012.  Citing the Belgian green certificate decision, N 550/2000, they argued that the Commission did not consider the green certificates as state aid, ignoring the fact that the Commission has considered the fines and substitution fees to be subsequently implemented in Belgium to be state aid. See Hancher, EU STATE AIDS (4th ed.) 2012, p. 860. All doubts have been removed in newer cases that even the certificates are now state aid and the new law has to be notified.

[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).

[3]  The Commission explains: “As part of their role under Article 88(3) of the Treaty, national courts may also be required to uphold claims for compensation for damage caused to competitors of the beneficiary and to other third parties by the unlawful State aid (70 ). Such damages actions are usually directed at the State aid granting authority. They can be particularly important for the claimant, since, contrary to actions aimed at mere recovery, a successful damages action provides the claimant with direct financial compensation for suffered loss.” 2.2.4. Damages claims, par. 43, supra, (2007/C 272/05).

[4]  One theory is that the Polish Government is delaying the issue until 2015, since the statute of limitations for cost recovery on illegal state aid is ten years and the system started in Poland in 2005. Article 15, COUNCIL REGULATION (EC) No 659/1999 of 22 March 1999. I seriously doubt that the Commission or private complainants will allow that date to pass unnoticed at this point.

[5]  In theory, the current system in Poland adds 3% to the consumer’s bill. This, however, is simply a static score of the total amount of RES support divided by the hours of electricity sold. By encouraging competition among various forms of energy, experts have shown that the real impact of RES support on end-users is much smaller. Over the longer run, it may actually be cheaper than the alternatives. This analysis is borne out by the U.S. Energy Information Agency, Livermore National Laboratory, and the sources cited in the February 5, 2014 article, linked above.

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