2022 changed the world’s approach to the energy market and energy transition

0
42

The energy market has significantly changed in 2022. The passing year’s key event was the war in Ukraine, which revised the assumptions on the energy transition and the development of new generation capacities, especially renewable ones. Geopolitical events have and will continue to exert a significant impact on the functioning of the energy sector in 2023 and in the following years – write Joanna Derlikiewicz, Bartłomiej Kupiec, Hubert Spychalski, Hubert Put and Aleksander Tretyn from the association „Z enegią o prawie” (With energy about law – ed.).

What about the wind?

Similarly to its predecessors, 2022 was not kind to the onshore wind industry in Poland. For nearly two years, a lot has been said about the amendment to the Law on Investments in Onshore Wind Farms, but, unfortunately, significant steps have not been taken towards the abolition of the 10h rule. It seemed that the war in Ukraine would provide a significant impetus to changing the unfavorable regulations, but unfortunately this did not happen. In the middle of the year, another draft amendment to the 10h rule was submitted to the Sejm, which assumed that new investments could be located at a minimum distance of 500 m from residential buildings or protected areas. The final say on the location of a wind farm in a given municipality would belong to local governments, and they would decide whether the wind farm can be built in the vicinity of buildings or protected areas. This solution seems to be a very good compromise between the current unfavorable regulations and those that will allow the dynamic development of onshore wind energy. Unfortunately, the ruling party failed to lift one of the most unfavorable regulations for RES, which means new investments in onshore wind will not launch.

According to statistical information on electricity from the Energy Market Agency, in October 2022 the total installed capacity in wind power reached 7.7 GW. In the same month of 2021, the total installed capacity was about 6.8 GW. It should be noted that this increase is mainly due to old projects that had received appropriate administrative decisions even before the adverse regulations entered into force.

According to the forecasts of the Polish Wind Energy Association, if the required distance between buildings and wind turbines is at least 500 m, in the minimum scenario, by 2030 we will be able to increase the capacity to 11 GW and in the maximum scenario to 22 GW, which is almost three times compared to what we have today. If the regulations remain as is, by 2030 the capacity in the Polish onshore wind energy sector may increase by less than 1 GW in the minimum scenario, and in the maximum scenario it may go up by 2 GW at most.
Without a doubt, in the new year, we should hope for the 10h rule to be amended as soon as possible, as it will bring the positive forecasts related to the increase in wind capacity to fruition. Onshore wind also enjoys increasing public support. According to a Social Changes survey, 81% of the public support the development of onshore wind energy, while 75% believe that onshore turbines will contribute to improving Poland’s energy security.

It should also be noted that wind power is one of the cheapest sources of energy. Considering the mounting energy and economic crisis, the development of onshore wind energy could significantly reduce energy prices, which in 2022 were record high.

Is PV still paying off?

In 2022 the installed capacity in Polish PV installations grew exponentially. At the end of October it reached 11,477.87 MW, which is roughly a 71 percent increase in comparison to the same month in 2021. The regulatory changes were equally impactful. The most significant event of this year was the change in the system of settlement for prosumers, which entered into force on April 1. The introduction of net billing at the expense of net metering caused considerable confusion and a literal installation boom in the months leading up to the new regulations entering into force. This happened because of unclear rules for natural persons who preferred staying with the discount system, as they believed it was more beneficial. In retrospect, it should be said that due to the high energy prices, the net billing system worked. However, it forces the prosumer to get engaged in the energy market more. Despite the new billing system, the number of micro-installations that got connected to the grid is staggering. According to the Polish Power Transmission and Distribution Association (PTPiREE), their number at the end of October 2022 amounted to 1 million 191 thousand, and their capacity was more than 9 GW: „In 2021, grid operators added more than 396,000 new micro-installations with a total capacity of more than 3 GW to their networks, for comparison, from the beginning of 2022 to the end of October, more than 337,000 micro-installations with a capacity of more than 2.95 GW have already been connected.” The above shows that that new generation capacities in micro-installations continue to be added to the grid.

Another noteworthy event was the amendment of the Act on Renewable Energy Sources that introduced the definition of installed capacity. From the point of view of power producers, this is important because now the connection conditions issued by operators, apart from the connection power also include the installed capacity. If it is exceeded, the operator may refuse to connect the installation to the grid.

At the end of the year, the legislator had to urgently address the soaring energy prices by introducing the Law on Emergency Measures aimed at capping electricity prices and supporting some customers in 2023, which regulated a write-off to a Fund, which is a public tax, which practically all electricity producers and energy trading companies are obliged to pay. Certainly, the additional tax imposed on producers may slow down primarily the development of renewable energy sources in 2023. The law also interferes with PPA contracts, which are becoming an increasingly popular alternative to public support from RES auctions.

High electricity prices encourage producers to invest in PV projects. On the other hand, the write-off for the Fund that will be binding throughout 2023 changes the profitability of projects, and the recent lawmaking procedures have become a cause for concern among investors who fear unstable legislation that puts investments at risk. In addition, the increasingly frequent refusal of operators to issue connection conditions leads to the conclusion that investing in large PV projects is becoming increasingly difficult.

It is worth noting that in 2022 photovoltaics dominated the RES auctions, which shows the climbing importance of solar power. Despite the small number of projects submitted for auction, which is due to the low attractiveness of public support, the percentage of PV projects submitted indicates that now is the time for solar energy.

Already in 2022, a draft amendment to the Law on Planning and Spatial Development, which provides for the obligation to locate photovoltaic power plants on the basis of the local spatial development plans, was talked about in the corridors of the Sejm committees. If this idea is introduced, it will do to large PV farms what the 10h rule did to the development of onshore wind farms – freeze the growth of this industry for years to come.

On top of that it has been suggested that the Act on Energy Law should be amended to increase the connection fee and introduce a non-refundable payment for processing the application for connection conditions, which would cost PLN 100,000. This type of regulation would lead to a situation in which only the largest entities with the appropriate financial background could invest in photovoltaic power plants.

2023 will therefore be a difficult year for producers, but in the long term, the development of new sources of power generation does not seem to be at risk. Projects fro large PV power plants are still being processed and with favorable legislative and economic conditions they will come into fruition in the coming years. By and large the freezing of energy prices for final customers is not enough, and they will continue to seek savings by investing in their own generation sources, which are PV installations, therefore it is expcted that prosumers will continue to expand the capacity of their installations. In addition, the Ministry of Development and Technology has prepared a package of solutions called a „housing prosument”, which provides for an overhaul of the law, so that housing co-ops and residential building managers can invest in PVs, as the definition of a collective prosumer failed to meet the expectations. The housing prosumer allows the manager of a multi-apartment building (cooperative, housing community) to invest in an installation with a capacity that is bigger than the demand for power of the common spaces. The auto-consumption under the housing prosumer is to apply only to the common part. All energy supplied to the grid will be settled monthly with the seller at wholesale prices and will be transferred to the owner’s bank account.

The future of biogas and biomethane in the national energy mix

Poland’s biogas and biomethane industry has a huge potential. According to an analysis by the Poznań University of Life Sciences in, the production capacity of biomethane in Poland is approx. 7-8 billion cubic meters a year. However, not a single biomethane plant is currently operating in Poland, and the construction of new biogas plants has slowed down due to long administrative procedures related to the investment and construction process. The development of the biomethane and biogas sector in Poland is mainly hampered by the lack of appropriate legal regulations. In addition, in Poland, similarly to other EU member states, the process of obtaining the appropriate administrative permits required for the construction of a biogas or biomethane plant is complex and time-consuming. This delays the construction of new plants and threatens a successful implementation of such projects. On 23 September 2022, the Regulation of the Minister of Climate and Environment of 6 August 2022 Amending the Regulation on Detailed Conditions for the Functioning of the Gas System (hereinafter: the Regulation of 6 August 2022) came into force.

Its primary purpose was to allow the injection of biomethane into the gas network. On the basis of this act, the quality parameters for gas fuels in gas grids were adjusted by specifying in paragraph 38 point 1, the quality requirements for chemicals that are present in biomethane. For some of them, the Regulation of 6 August 2022 defines a range for their share in the gas fuel, leaving gas system operators some freedom to adjust the individual parameters in line with the state of the network, or other technical aspects related to the functioning of the system.

This Regulation is not sufficient to provide a legal basis for the biomethane market. That would require changes at the statutory level, including introducing a system for guaranteeing the origin of the biomethane and creating incentives, especially financial ones that will lower the risk borne by investors. At the end of December 2022, the Ministry of Agriculture and Rural Development announced regulatory proposals for the biomethane industry. A legal definition of biomethane and the introduction of operational support instruments for the production of biomethane have been proposed. The support model is to be based on a contract for difference, which has been already tried and tested on the Polish renewables market. In addition, the Ministry promised to simplify the investment and construction process to speed up investments that will provide renewable gas fuel.

In December 2021, the European Commission presented a proposal for an EU framework for the decarbonisation of gas markets, which sets out rules to facilitate the integration of biomethane into gas networks across the Union in order to harmonize industry regulations. Currently, the growth of biomethane and biogas production in Poland and other EU countries is hampered by differences at the level of national legislation of member states, resulting from the characteristics of national producers and customers, different types of substrates used in production units. It should be noted that at the time of writing this article, the Ministry of Agriculture and Rural Development did not provide details of the regulation of the biomethane industry. The Polish regulations on the biomethane industry must comply with EU law. In addition, the system for obtaining permits to implement the investment and construction process of biogas and biomethane plants in Poland should be more flexible. A long-term support policy could be a step in the right direction to creating a favorable environment for the biogas and biomethane sector, providing a stable and predictable framework for both producers and consumers, but at the same time the biogas and biomethane industry cannot be over-regulated.

Offshore and hydrogen

In 2022 offshore projects in the Polish section of the Baltic Sea were developing rapidly. Progress was made with regard to permitting, including permits for artificial islands, as part of which companies applied for the right to a negative balance in the so-called 1st support phase on the basis of the Offshore Act. Among them, back in 2021 seven projects had received decisions from the President of the Energy Regulatory Office (ERO President) awarding them the negative balance. The decisions need to be notified to the EC, which declares whether the support meets the internal market rules. In December 2022, PGE and Ørsted received a green light from the EC, and the so-called second decision of the ERO President for the projects „Baltica 2 “(1498 MW) and” Baltica 3” (1045 MW). Most of the phase 1 projects have secured environmental decisions for their offshore farms, as well as signed connection agreements. Dialogue and agreements with key providers of materials and services are in progress, while the planned deadlines for launching the projects span between 2026 and 2028.

Investors also submitted applications for permits to build artificial islands for 11 new locations offered on the basis of the Spatial Development Plan for Polish Maritime Areas and the Offshore Act, as part of the so-called phase 2 of support. A total of 132 applications were submitted to the Ministry of Infrastructure in 2022. For five of the sites, final clearance procedures were initiated to select the entities to which the island permits will be issued as part of a competition, and the applicants submitted documents to demonstrate that they met the various criteria for evaluating the applications. On their basis, the relevant authority awards points to individual applicants and selects the winner. It is expected that the first results of the proceedings will be published by the Minister of Infrastructure in January 2023. The first results will cover areas 53.E. 1 and then 43.E. 1, 60.E. 3 and E. 4. and 44.E. 1. The procedures for the remaining six locations, for which the competent authorities are in the process of commenting on the proposals, will be carried out and the winning investors will be selected in the coming months of 2023. The investors that obtain a valid artifical island permit and then secure environmental decisions and connection conditions for the projects will be able to apply for support in the form of the right to a negative balance in the so-called phase 2 of the support scheme based on competitive auctions. According to the Offshore Law, the first auction for the offshore farms is planned for 2025.

2022 was replete with numerous legal changes aimed at introducing a number of adjustments in the regulatory environment regarding the application for the artificial island permits, as well as the implementation and operation of offshore wind farms, including a resolution to the problem when competing investors receive the same score during the final proceedings. According to the amendment to the Act on Maritime Areas of the Republic of Poland and Maritime Administration, which came into force on 22 December 2022, in the event that several applicants receive the same number of points, the winner is the entity that has received a higher number of points for a larger number of criteria assessed during the application process for a permit to build an artificial island. If this step fails to select the winner, the company that will receive the highest number of points for the most important criterion (i.e. financing of the investment) will win the proceeding. The final (and, in practice, probably the key) criterion for deciding a draw is that the investment which has the lowest ratio between the value of the planned investment and the maximum installed capacity of the offshore farm will be the winner. The updated rule will apply to all pending cases. At the same time, the legislator ruled out the possibility of modifying the submitted proposals, including in terms of the planned value of the offshore farm, treating such a change as a new proposal.

A number of beneficial changes taking into account the demands of the industry were introduced under the Act on the Special Protection of Certain Recipients of Gas Fuels in 2023 in connection with the situation on the gas market, the provisions of which essentially came into force on December 21, 2022. Under it, a provision was introduced that says that the permit for building an artificial island will be extended to 30 years starting on the day the offshore farm was launched. In this way, the validity of the permit is guaranteed not only for the period for which the support is granted (i.e. 25 years from the date of the first introduction of power into the network on the basis of a concession), but for the entire period of the currently estimated life of the investment. In this way, the investment risk associated with the investor’s application for the extension of the artificial island permit was also minimized.

A number of simplifications have also been introduced regarding the offshore farm’s permitting procedure, such as the waiving of the requirement to obtain a legal water permit for parts of the farm’s power evacuation infrastructure located in the maritime areas of internal waters and the territorial sea.

Importantly, the terms of valorization of the price that is the basis for covering the negative balance indicated in the decision of the ERO President, or resulting from the auction offer have been clarified. They will be subject to annual valorization on the basis of the average annual price index of total consumer goods and services from the previous calendar year, as specified in the communication of the president of the Central Statistical Office of Poland, respectively from 2022 (in the case of granting the right to cover the negative balance on the basis of the decision of the president of the Energy Regulatory Office, in phase 1 of support) or the year following the year of the auction settlement (in the case of phase 2).

Moreover, the producer will be able to change the way of accounting for the public aid by once submitting to the ERO President a statement of what percentage of the price per 1 MWh is to be expressed in zlotys and euros. The producer will have the opportunity to change this once within 15 years, starting from the date when the offshore farms was launched. This solution allows for cheaper debt service when the project is bankrolled by credit. According to the authors of the article, this proposal was submitted by PKN Orlen.

Forecasts prepared by the Polish Wind Energy Association reveal that the potential of offshore capacity in the areas currently allocated to the Spatial Development Plan for Poland’s Maritime Areas is estimated at 15.3 GW (phase 1 projects – 5.9 GW; phase 2 projects – 9.4 GW). If more areas are added to the spatial development plan, the installed capacity of the offshore farms in the Polish part of the Baltic could reach up to 33 GW. However, the potential of offshore capacity will be used fully only if the necessary changes are made in the legislative environment, including a revision of the Spatial Development Plan for The Maritime Areas, the offshore wind and, as well as an overhaul of the energy strategy.

Undoubtedly, considering the plans for offshore wind in the Polish part of the Baltic Sea 2023 looks very promising. First of all, it is expected that key decisions on awarding permits for building artificial islands in phase 2 will be made. Moreover, the EC is also expected to make a decision and so is the ERO President, who needs to issue the so-called 2nd decision on the individual level of support for the Baltic Power Project (1200 MW).

It is also worth paying attention to the possible decisions on selecting more suppliers for offshore farm projects (taking into account local content enshrined in the sectoral agreement), as well as the adoption of the so-called final investment decision for the Baltica 2 and Baltica 3 offshore wind farms.

In the face of the energy crisis that has hit Europe as a result of Russia’s aggressive war with Ukraine, the European Union has stepped up efforts this year to accelerate the deployment of low-carbon hydrogen technologies. In line with the RePower EU plan, the Fir for 55 program has been altered to be more ambitious. In response to the need to replace the use of natural gas, coal and oil in the difficult to decarbonise industrial and transport sectors, the EC has set a target of achieving 10 million tonnes of domestic production of hydrogen from RES and 10 million tonnes of imports by 2030.

Poland is in the process of creating a regulatory environment on low-emission hydrogen, which includes introducing regulations that will partially implement the Polish Hydrogen Strategy adopted at the end of 2021 on the basis of a draft Act on Updating the Act on Energy Law and Other Acts. This draft includes the introduction of a list of definitions necessary to develop a hydrogen economy in Poland (e.g. hydrogen system, direct hydrogen pipeline, hydrogen network, hydrogen transmission, hydrogen storage), as well as regulations on licensing hydrogen-related activities – as a rule hydrogen storage, its transmission and sale are to be licensed. The project is currently under review.

While investments in hydrogen in Poland are not going full steam, it is worthwhile to mention that PKN Orlen is one of the companies that will get a permit from the EC to receive state aid to bankroll a hydrogen project (Hy2Use) as part of the Important Projects of Common European Interest framework. The company itself intends to allocate PLN 7.4 billion to low-and zero-emission hydrogen projects, based on RES and municipal waste processing technology.

2023 will bring both legislative changes and the development of pilot hydrogen projects. The first group includes the aforementioned amendment to the Energy Law, while the second includes a trial hydrogen installation in the PKP Energetyka traction substation, and the launch of the Hydrogen Academy with the participation of such organizations as PKN Orlen, Toyota or the Lodz and Warsaw Universities of Technology.