The latest amendment to the Act on renewable energy sources (RES act) may have long lasting consequences – writes professor Konrad Świrski, engineer from the Warsaw University of Technology and Transition Technologies company.
Few things happen immediately in the energy sector. Of course the initial impact can be witnessed on the day following the adoption of a new act or a major investment decision. However, the final results of the energy jigsaw, the interplay between various market segments and the way the sector will change can take years to manifest. Today the RES act is being amended and the energy sector, as always, will start to adapt.
The amendment to the RES act introduced on 27 June 2017 is in fact a quickly introduced act, which changes the way the alternative fee for the green certificate market will be calculated (today the fee is equal to 125% of the average price of green certificates from the previous year) and has a key impact on wind farms, which are the most important segment of the renewable energy sector (RES sector). The amendment will influence the market participants in different ways.
A heated debate between various market participants showed what we can expect in the short-term: RES investors who profit from selling green certificates (according to the previous support system, before the introduction of the FiT auction system) will see a decreased income. At the same time the key result (beneficial for the buyers) of the amendment will impact long-term purchasing contracts, which had been previously signed by energy companies with RES producers. The agreements often had clauses on the minimum price that depended on the alternative fee. The financial chaos is already causing legal disputes and another wave of suits over the terminated contracts filed by Polish market participants is about to follow. Poles are the only ones that are left in view of the systemic withdrawal of foreign investors.
The act will indirectly influence the wellbeing of the financial sector, especially banks historically engaged in the development of RES, which will have to reassess credit risk and get ready for problems with a large amount of credits.
Medium-term effects: the amendment will translate into (positively or negatively) appropriate changes in balances and financial statements of companies. On the one hand, energy concerns will see positive changes because of the decrease of the value of long-term contracts usually signed by their subsidiaries. They will also witness that the value of contracts in the ongoing negotiations on terminated agreements will drop. On the other hand, there will be negative changes caused by the estimated profits from private RES generation installations, or in some cases, problems related to the value of RES investments taken over from other investors together with long-term contracts.
The amendment will have a decisively negative impact on the owners of wind farms, who built them thanks to bank credits and who signed long-term agreements for the sale of green certificates. The longstanding slowdown and the latest change to the way the alternative fee is calculated will cause either the termination of the contracts or a banking appraisal, which will force the banks to react, as they need to include all of the issues in their balances. In 2018 independent RES producers may become insolvent, or even go bust, which in the end may reshape the market structure.
Long-term: A new wave of consolidations is possible on the energy market.
Once foreign companies will abandon the generation market (traditional power generation and heating), and sell larger RES installations, the entire segment of wind energy will consolidate in result of a takeover (buyout) of the remaining (independent) installations by Polish companies (today this is the only buyer of RES installations, which are bogged down in credits and are facing takeover by banks or insolvency). On the one hand, a practical cleanup of the market will take place. This is welcomed by the government’s energy policy as it will make it possible to easily manage the RES participation in the energy mix. However, at the same time this will happen at the price of a virtually complete consolidation of all generation segments (traditional generation, heating, RES) within the structures of the biggest energy companies (with the state as the dominant shareholder). Future investments in the RES sector may be implemented by companies that have bigger borrowing capacity, even though it is already strained because of the expansion of traditional power generation.
However, on the other hand the fallout after the RES act amendment will deprive the Polish energy sector of independent foreign investors and domestic private ones for a long time. Naturally, one could argue whether the previous investments were in fact to a large degree stimulated by short-term speculative capital. Still, there should be a debate on the fact that in the future Poland’s modernization of the energy sector will have to be paid for by energy companies (no foreign banks and funds, tougher resistance and risk for Polish banks). This might be a problem in, e.g. the sector of small municipal or industrial entities, that will be subject to the new BAT regulations (but which are not owned by companies, which is why they might find it difficult to acquire capital for investments). In general – the development of the RES market fits in with the trend where at the system level, the Polish energy sector will be dominated by strongly centralized government decisions easily implemented by quasi-government energy companies. At the same time the role of the independent energy sector and other players will be marginalized. Meanwhile, the long-term policy for RES (e.g. until 2030) will remain unclear as there is no comprehensively articulated energy policy for Poland and no full status of final negotiations on EU energy packages.