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.

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