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The amendment of the Act on renewable energy sources (RES) hastily prepared by MPs will probably lead to the bankruptcy of some wind farms whose owners a few years ago signed agreements with state-owned companies on selling green certificates. BiznesAlert.pl learned that Energa, a company from the city of Gdańsk, most probably inspired the amendment,” writes Bartłomiej Sawicki, editor at BiznesAlert.pl.
The changes will decrease the so-called alternative fee from the current level of PLN 300 per MWh to about PLN 50 per MWh. This leads to a significant decrease in earnings based on long-term contracts for the sale of economic rights, i.e. green certificates for which the lowest guaranteed price is based on the percentage of the alternative fee. This in turn may cause the bankruptcy of project companies that will not be able to cover their debts. In result foreign investors may want to sue the Polish state for damages, which will be paid for not by the company that signed the above long-term contracts, but the State Treasury.
What are green certificates?
The amendment of the Act on renewable energy sources will change the support system for green energy producers. They profit not only from the sale of energy, but also from green certificates, which are re-bought by companies owned by energy firms.
The Energy Regulatory Office (URE) issues green certificates to producers of renewable energy. The certificate, which constitutes an economic right may be sold, either on the stock exchange or in an individual OCT transaction (over-the-counter). One certificate is awarded for the production of 1 MWh from RES. Another way to fulfill the RES duty by the obliged entities, i.e. energy producers, trade companies and large consumers is the payment of the so-called alternative fee, which each year by the end of March is determined by URE on the basis of indexation. For a few years now it has been frozen at the level of PLN 300.
Green red herring
During its last session before summer holidays, the Sejm was supposed to attend to the extensive amendment of the RES act presented by the Ministry of Energy. It was to, among others, restore some of the regulations regarding construction law to the Act on investments in wind power plants. According to those regulations, the definition of a “construction” will again only include construction elements of the power plant, i.e. the tower and foundation. Therefore, the property tax will be again levied on the least capital intensive components. The wind sector acknowledged that the changes proposed by the Ministry of Energy are showing a reasonable approach to RES technologies.
However, completely unexpectedly a group of the ruling party’s MP submitted a motion to the Sejm to change the fixed value of the so-called alternative fee, which is PLN 300.03 per MWh and link it to the market prices of Energy Guarantees of Origin on the TGE (Polish energy market). Today we are dealing with a significant oversupply of those certificates on the market. Its size is equal to the annual production of energy from RES. Therefore, paying the alternative fee is much less beneficial than the purchase of green certificates on the market where its current value is about PLN 30. After the amendment, the alternative fee will be only 25% higher than the average market price of last year’s green certificates. Considering this, until the act enters into force the fee will significantly drop. If the difference between the certificate price and the alternative fee is so low, green certificates and their trade will lose their significance.
A few years ago when it was expected that the government will consequently stabilize the situation on the green certificate market and balance the supply and demand, Energa, which was looking for a market niche, decided to focus on green certificate trade. Back then it was the most active player on the market. It signed long-term agreements with producers of green energy. The company that bought certificates guaranteed a fixed price for green energy producers, mostly wind farms, regardless of the stock exchange prices at the level of a certain percentage of the alternative fee. Such agreements were mostly signed with green energy producers that generated more than 10MW and from whom banks required specific contracts with price floor. The investment value of these projects was ca. PLN 60-70 million for every 10 MW.
These contracts guaranteed income to green energy producers and allowed banks, including Bank Ochrony Środowiska (BOŚ), Alior, Pekao SA and PKO BP, to grant loans for constructing wind farms. Additionally the banks financed 65-70% of the investment. The contracts were signed for 12-15 years to enable a stable repayment of the credit. A lot of farms connected between 2012 and 2015 were constructed from credits based on those kinds of contracts.
First a preliminary agreement for the sale of green certificates is signed, only then is it possible to receive the investment decision and credit. The final agreement enters into force when the installation is connected to the grid. From the moment the agreement is signed until the connection to the grid is completed the investment process takes two years. Apart from Energa Obrót, such agreements have been also made by other state-owned energy companies, such as Tauron, Enea and PGE, but also foreign trade companies, e.g. Axpo. After the government changed in 2015 and the management boards were replaced they discontinued this process. However, each of the companies approached the issue of terminating the green certificate agreements differently. For instance Enea terminated all of them. Interestingly enough the company, whose seat is in Poznań, is waging a court dispute with PGE, a state-owned giant, after such a contract had been terminated. The company bought wind farm projects from DONG Energy and Iberdrol together with signed agreements. While Enea had signed agreements for selling economic rights with those companies before the projects were taken over by PGE.
The contracts that the companies whose shareholder is the State Treasury want to now terminate pertain to, according to the information provided by Związek Banków Polskich (Association of Polish Banks), about 100 projects, or up to 2 GW of capacity. This means the investment may be worth ca. PLN 6 bn.
Impact on wind farm sector and banks
The amendment submitted by the MPs will firstly cause a significant drop in the profit for green energy producers. If an agreement guarantees a price at the level of, e.g. 50% of the alternative fee, then if it is not terminated the profit will drop from PLN 150 to PLN 25 per MWh. Long-term contracts for the purchase of green certificates will cease to be economically viable. However, the loan has to be paid back, so the management board of the project company is forced to announce bankruptcy to avoid personal responsibility. A wind farm without significant profits from green certificates is valued by the market at 40% of the investment costs. Those entities will not become insolvent immediately. Banks have a half-year financial reserve to service the loans. This is why, if the amendment passes, prolonged bankruptcies will occur. The wave of liquidations may therefore take place in mid-2018.
Once this happens, banks will have at their disposal wind farm designs, which could be sold for about ca. 40% of investment costs. It seems certain that buyers will be easy to find. From then on such a wind farm will be able to profit only from selling electricity in bulk. The investor will lose 30% of their own capital and the bank up to 30% of their loan. The bank losses may reach PLN 1.5 bn. Smaller banks, managed by the State Treasury or with its shares, mostly Bank Ochrony Środowiska and Alior, are facing a serious challenge. The situation of BOŚ may be the most difficult because a third of its assets are based on green certificates. Any write-offs may entail a serious risks for the bank’s future.
State Treasury Problems
A significant number of companies that will go bust in result of the amendment belongs to Western companies. Most probably they will sue for damages. Poland signed the Energy Charter Treaty. It is an international agreement, which determines a multilateral, international cooperation framework in the energy sector. The treaty encompasses all aspects of trade in the energy sector, including trade itself, transit, investments and energy efficiency. It allows the companies to sue Poland for breaching the contracts. The legal changes will cause the bankruptcy of investors. This is when the case will go to the Arbitration Tribunal. So far, other countries have lost to private companies in similar cases. This happened, e.g. in Hungary and Spain. The case usually takes 3-5 years.
The damages are paid by the State Treasury, not by the company that signed the long-term deal. In this case it is Energa Obrót, which is the de facto initiator of the amendment. This means Energa’s losses caused by the contracts will be covered by the State Treasury. This way the company is doing away with a burdensome problem and additionally does not pay the damages out of its own pocket. However, at the same time it causes the bankruptcy of the wind farm sector, which is not in a good shape to begin with. Banks, including those whose shareholder is the State Treasury, will also be impacted.
Internal contradictions in the RES amendment
Additionally, it is worth noticing that the amendment, which was written in haste and submitted by a group of MPs goes against the amendment of the RES act prepared by the Ministry of Energy. The so-called “extensive amendment” will restore some of the regulations introduced before the previous amendment from 2016. During the Tuesday meeting of the Committee on Energy and State Treasury, Ireneusz Zyska MP of the MP Group “Free and in Solidarity”, noticed that the regulations on the alternative fee proposed by MPs went against the “extensive amendment” supported by the Ministry of Energy.
The point
The amendment submitted by the MPs alters the rules for awarding state aid, which should be notified by the European Commission before the changes are introduced. Once can only guess that the MPs behind the amendment were hoping that in the face of the heated debate on the shape of the judiciary in Poland and in the shadow of the so-called “extensive RES amendment” nobody would notice the changes. If the amendment is adopted, it will deal another blow to the wind farm sector, which may experience a wave of bankruptcies next year. This is also crucial to Poland’s obligation on producing 15% of its energy from RES. Today wind energy constitutes 7.9% of the Polish energy mix. Further problems of the sector and lack of legal stability make take Poland further away from fulfilling the European Commission’s target. Therefore, a question needs to be asked: considering the investment and economic risks as well as collision with the EU law, should we take the risk just because a given company wants get out of the green certificates business without footing the bill? Will taxpayers pay for the mistakes or change in strategy?
