Speculating on the Minimum Impact of the European Commission Decision on Green Certitifcates

Any day now we expect the European Commission, DG Competition, to announce its decision of the Polish green certificate system as state aid.  Several issues will be addressed and possibly some complex cost recovery issues raised but not entirely answered.

The thrust of the complaint in SA 37244 was that support of co-firing was too much and was out of line with the cost of production via that technology. This fact was admitted by the Ministry of Economy and even the former Prime Minister's website. In addition, the support for old hydro plants that were built many years ago was attacked as illegal or incompatible with the rules, since the law precludes providing operating support for projects already fully depreciated.  Much of the law is set out in earlier posts on this blog.

Taking the incontrovertible facts about co-firing and old hydro, it appears that co-firing might get a 50% retroactive* reduction (maybe more?) of aid already provided in line with the adjustment made in the new law and the admissions of the government. The data suggest a lower figure, but this is one case were the Polish Government might get a big break. However, no certificates for old hydro cannot be justified under any interpretation of the rules.The immediate impact will likely be that accumulated certificates from these sources will have to be reduced by 50% and 100% respectively. This in itself will largely solve the over-supply problem. Requiring a rule limiting accumulation could reduce this even more.

      Big utilities will be the losers

But what about all of the certificates used from 2005 to date that were illegal due to their incompatibility with the state aid competition rules. The law is clear that the funds must be "recovered." Again, the legal references are in earlier posts on this blog. But how can this be achieved and what about the long chain of buyers and sellers who will involved? This is a major problem with no easy solutions.

One effect might be to allow those holding co-firing 50% certificates (after the adjustment) to use those to pay back the over-payment on earlier certificates. This would create a non-cash means to effect cost recovery with lower impact on the market and the players. Of course, there is no such option for old hydro certificates.  The advantage of this cost recovery means is that it would totally eliminate the over-supply of certificates.

Having done this and adjusted the certificates to reflect the cost of production across technologies (required by the state aid rules and proposed in Poland in 2013), Poland would then have a system that complies with both the old and new state aid guidelines. See para. 136 of the Guidelines for State Aid for Environmental Protection (2014). Since the new law is not approved by the Commission and will not be even formally submitted until all of the amendments are finished, it is impossible for there to be an auction in 2016. Something many of us predicted all along. There will likely never be a small auction, because Commission approval of that provision is quite problematic.

If there is an auction in 2017, the construction of projects winning bids would not start until that year or much later. It is therefore very unlikely that any more than half of the necessary MWhr of new green energy can be produced under the new procedures by 2020. As pointed out by the Polish Wind energy Association, the delay between the old law ending (now July 2016) and projects going ahead under the new law (now some unknown date in 2017 possibly),  means no new construction for an extended period of time.

The solution advocated by me and the PBA is to extend the green certificate program (as revised) for a much longer period, even up to 2020. During this period, auctions might occur for new large projects (say over 5 MW) at the election of the developers. This is exactly how the UK is managing the transition from its certificate program to its auction system. Moreover, the old premise that all Polish support for new projects will stop in 2020 is both inaccurate and foolish. First, Poland will be short the 2020 target and will need to continue projects and second, the EU now has higher goals for 2030 that require more new projects after 2020.

The levelized green certificate program, approved by the Commission, offers a viable way to get there from here. It also can allow for some large auctions of RES support to simultaneously occur without completely interrupting and disrupting the flow of new projects. We should also remember that Poland is short generation capacity and many of the new coal blocks planned by the government-owned companies now have serious financial issues that may well preclude their construction on time or altogether. Only RES projects can add capacity in a relatively short turn-around to meet capacity shortfalls.
* The EC takes the position that state aid which is incompatible with the European Treaty competition requirements in null and void from the "get go." COUNCIL REGULATION (EU) 2015/1589of 13 July 2015, par. 25 COMMISSION REGULATION (EU) 2015/ 2282. There are no vested rights in illegal aid. The Commission has ordered over 110 cases of recovery, recently ordering over 1 billion Euro to be recovered from EDF.

Note: Expert advice on how to navigate the new situation is available by contacting the author. randymott (at) envirosolutions.co.


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