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.”
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. Id. Past 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.
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?
[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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