Renewable Energy Market Entry: Barriers and Imperfections

sfw_4879113885_c2e94cf962_o
Duke Energy via flickr || Creative Commons

The EU and Polish Regulations

Directive 2009/28/EC of the European Parliament and of the Council adopted on April 23rd, 2009, which concerns the promotion of the use of renewable energy sources and which amended and subsequently repealed Directives 2001/77/EC and 2003/30/EC, is the basic regulation regarding renewable energy sources in the European Union. This Directive should have been transposed into national legalislation by December 31st, 2010. The prolonged work on the Renewable Energy Sources (RES) Act and the entire so-called Energy Three-Pack made Poland become a country of high investment risk, at least with respect to the development of renewable energy sources, over the recent years. Finally, the provisions of the Act on Renewable Energy Sources, adopted on February 20th, 2015, came into force on May 4th, 2015. The Act transposes the law of the European Union (Directive 2009/28/EC) into the Polish legal framework. Its purpose is to increase energy safety and environmental protection, rational use of renewable energy sources, development of mechanisms and instruments that support generation of electrical power, heat or cold or agricultural biogas in renewable energy sources installations and the development of optimal and sustainable energy supply for end users.

Thereby, it seems that the aspects of electrical power generation through renewable energy sources and the support system of renewable energy sources have been regulated in a comprehensive manner. Nonetheless, despite numerous amendments to the provisions of the Energy Law, which replaced, i.a., the requirements for running a business activity in the area of electrical power generation from renewable energy sources so that for small scale generation (microinstallations and small installations) it does not require licensing, an entity which plans to enter the renewable energy market (with particular reference to wind power) must overcome numerous legal barriers. Hence, it is useful to look closely into the legal regulations that hinder the development of renewable energy sources.

Spatial Planning and Land Development Act

The Spatial Planning and Land Development Act is one of the legal acts whose provisions impose a requirement to build an installation on a land property that was determined in a local spatial development plan as used for the purpose of the RES installation investment, making it a real obstacle in the development of renewable energy sources. This is due to the fact that the local spatial development plan covers only one fourth of the territory of Poland. Consequently, if there exists no agreed local plan, an investor who is interested to enter the renewable energy sources market has to go through an arduous process to obtain a decision on the development conditions. Furthermore, no clear and precise regulations regarding spatial development plans exists, and this i san obstacle in the development of renewable energy sources. Incidentally, it should be further noted that social conflicts that arise are often a result of ill-defined frameworks for accessibility of generating units’ location in a given area.

Grid Connection

Obtaining conditions for grid connection and concluding a connection agreement are often the most difficult stages of an investment process in new generating sources. Unfortunately, the existing provisions of the Energy Law and respective supporting legal acts do not facilitate the connection procedurę. Due to their ambiguity they raise numerous doubts and they often prolong the entire process. Under Art. 7 (1) of the Energy Law, an electrical power company that offers energy transmission or distribution is obliged to conclude a grid connection agreement with entities requesting grid connection on non-discriminatory terms, provided that they are technical and economic conditions for grid connection and supply of these fuels or energy, and the parties requesting the agreement conclusion meet the requirements for grid connection and off-take. If an electrical power company refuses to conclude the grid connection agreement, it is statutorily obliged to immediately notify in writing the President of the Energy Regulatory Office and the concerned entity of such refusal and to specify the reasons for the refusal. Yet, in practice, the grid connection issue is a major barrier.

Among all objects that were not connected to the grid in 2013 throughout 2014, a total of 97% comprised renewable energy sources – RES (mainly wind farms and solar power plants and biogas plants) of total output power of 670.998 MW (representing 99.7% of total output power).

A several dozen of disputed matters regarding the above was the subject of proceedings before the President of the Energy Regulatory Office.

The reasons for grid connection refusal as indicated by the Distribution Network Operator included, inter alia, the following:

- no possibility for electrical power infrastructure expansion;

- a negative result of a variant expert report;

- failure to meet the criteria of the local nature of a source, power margin, and grid stability;

- the exceeded permissible level of voltage in a linear sequence; and

- grid congestion.

The above data show a serious system fault which requires precise regulation. It results mainly from a lack of proper regulations regarding the Distribution Network Operator and low investment outlays in the Distribution Network Operator’s sector.

The above is confirmed by the judgement of the Appeal Court in Warsaw of June 4th, 2012 VI ACa 1508/11, under which the legislator differentiates connection of an entity requesting electrical power grid connection from the development and expansion of a grid, even if the development or expansion of the grid was necessary for the purposes of connection. A distinction should therefore be made between investments carried out for the purpose of direct connection of a renewable energy source with a connector to the electrical power company’s grid and investments carried out in the electrical power company’s grid for the purpose of distribution network expansion, development of interconnections within the electrical power company operations and ensuring coherence of electrical power systems operation and coordination of their development, which should be implemented by the plaintiff. Accepting the arguments that grid expansion costs should be borne by an entity to be connected would mean that the entity to be connected would carry out the statutory duties of a distribution network operator.

Interestingly, the entities that applied for grid connection were mainly natural persons. The new Renewable Energy Sources Act of February 20th, 2015 implements legal regulations regarding the case of electrical power connection refusal, in particular, the ones that impose on distribution and transmission network operators duties that precondition the pursuit of solutions for the purpose of renewable energy sources connection as soon as possible.

The amendments to the content of Art. 7 (1) of the Energy Law Act should be made by means of clear separation of the rules regarding customers’ grid connection from the rules of generating units’ grid connection, including renewable energy sources. Due to the current wording of this regulation, the rationale behind connection that are adequate only for a customer are transferred in judicial decisions to sources and vice versa in a very inconsistent manner. Indeed, the current legal regulations do not make distinction between a customer’s connection and a generating unit’s connection, which causes major interpretative issues. It is a situation that hinders the possibility to effectively conduct administrative proceedings during the settlement of disputes regarding connection, as well as at the stage of voluntary negotiation of the connection agreement terms.

Environmental Barrier

The environmental protection duty is regulated in Poland by the Environmental Protection Law Act of April 27th, 2001. It sets out environmental protection rules and conditions for using its resources.

The conditions for the use of the environment are also stipulated in the following acts and implementing regulations:

  • The Environmental Protection Law Act which sets out, i.a., the rules and the procedure in the matters concerning provision of information on the environment and environment protection and the assessments of environmental impact. It also stipulates how social consultations should be conducted.

  • The Act on Prevention and Remedying of Environmental Damage which sets forth the rules of liability for prevention of damage to the environment and remedying environmental damages.

  • The Environmental Protection Act which stipulates the objectives, rules and forms of protection of animate and inanimate nature and landscape.

  • The Water Law which regulates water management.

In case of an exclusive access of an installation connection to the grid through a watercourse, obtaining a permit required by the Water Law Act is an additional burden. It is based on Art. 122 and other provisions of the Act. It should be changed so that the time for obtaining a respective permit is shortened.

  • The Waste Act which sets out waste management rules.

  • The Act on Protection of Agricultural and Forest Land which stipulates the rules of agricultural and forest land protection and reclamation.

Art. 7 of the Act states that erecting an installation on a real property classified according to valuation classes from 1 to 3 requires a consent of the minister in charge of rural development. This hinders the streamlined progress of an investment implementation.
To avoid this regulation efforts are made to include such real property into urban areas and to change land valuation classes. This regulation is thus frequently abused and should be repealed.

The Environmental Protection Law regulates the environmental aspects of wind farms’ functioning. The detailed regulations concern ground surface protection, noise protection, protection against environmental field’s impacts and flora and fauna protection. Performance of these duties is subject to the control by competent environmental protection services.

The noise protection is based on provision of the best possible acoustic condition of the environment through prevention of noise generation in the environment above legally permissible level. The permissible noise levels as prescribed by law regulations for a specific place determine indirectly the minimum distance within which wind farms are permitted to be situated. This regulation introduces the possibility of committing an investor to keep clearly defined minimum distances calculated on the basis of permissible sound intensity levels.

The protection against electromagnetic fields effects is based on establishing permissible standards of electric and magnetic components (including permissible power density in case of very high frequency) for particular frequency bands dependant upon a land intended use. The permissible field strength levels are established through the analysis of electric and magnetic field strength carried out each time and measured at the height of 1.8 m above the ground level or above other surfaces where people can stay.

Environmental protection law is a barrier to investments in renewable energy sources and at the same time it leaves the door wide open to abuses.

The consequence of the above protection are guidelines regarding the assessments of wind farms effects on these species. Under these guidelines it is recommended, i.a., to conduct stocktaking of pre-execution areas where wind farms are planned to be erected, which is to reduce and exclude any negative impact. It may be implemented, i.a., through adjustment of turbines’ location, the changes of quantity and power of planned installations, reduction of wind farm size, etc. Such evaluation may also lead to an investor’s decision on resignation from an investment.

Another burden that arises before issuing a decision on environmental conditions of an investment is to provide by an authorised body the possibility of the participation of civil society in the proceedings of the assessment of environment impact of a planned investment is conducted (Art. 5, Art. 29-38, Art. 44 and Art. 79 of the Environmental Protection Act).
Administrative Barriers and Reporting Duties

The duties related to obtaining and submitting a substantial number of projects and plans make the “start-up” costs of an investment relatively high. The plans and projects submission procedure should be simplified to the necessary minimum. In addition, there are reporting duties.

On May 4, 2015, implementing acts to the RES Act, which regard reporting and registers related to small investments, came into force. They included Ordinance of the Minister of the Economy regarding a sample quarterly report of an electrical power distribution system operator, Ordinance of the Minister of the Economy regarding a sample application for entry into the register of producers running a business activity in the area of small installations, and Ordinance of the Minister of Economy regarding a sample quarterly report of a producer of energy with the use of a small installation.

Regulation (EU) No. 256/2014 of the European Parliament and of the Council of 26 February 2014 concerning the notification to the Commission of investment projects in energy infrastructure within the European Union, replacing Council Regulation (EU, Euratom) No. 617/2010 and repealing Council Regulation (EC) No 736/96 imposed on companies a reporting duty regarding provision of information on existing, under construction or planned energy infrastructure, i.a., in the electricity sector, including electricity from renewable sources and biofuels that are within the area of interest of the EU. The above regulation is an act applicable in whole and directly, without the necessity to implement its provisions into the national legal order.

The form and technical details of the notification to the Commission of data and information on investment projects in energy infrastructure are listed in the Annex to the Regulation.

Furthermore, pursuant to Art. 9t of the Energy Law Act, an energy enterprise whose activity consists in electricity generation, including at renewable energy sources installations, except for electricity generation from agricultural biogas, electricity or gas fuels transmission, gas fuels storage, liquefaction of natural gas or regasification of liquefied natural gas, as well as the entities that are implementing or plan to implement investment projects perform the duty specified in the regulation through notification to the President of the Energy Regulatory Office of information on energy infrastructure in natural gas and electricity sectors in the scope as prescribed in the Annex to this Regulation. On the other hand, Art. 30 (2a) of the Act of 25 August 2006 on Biocomponents and Liquid Biofuels provides that producers and entities which implement or plan to implement investment projects are obliged to notify the President of the Energy Regulatory Office of the information on energy infrastructure used for generation of liquid biofuels in the scope of installation which may produce or refine liquid biofuels.

Pursuant to Art. 15e of the Energy Law Act, the Ministry of Economy is the body responsible for notification to the European Commission of information on energy infrastructure referred to in the Regulation.

Distance from a public road

At the stage of locating an investment, an investor must take into account the standards under the Act of 21 March 1985 on Public Roads (Journal of Laws 1985, No. 14, item 60, as amended), which determine a minimum distance between a building facility and a road. The provisions regulate distance between wind farms and public roads. The distance depends on a type of a road and whether a building is located within a built-up or a non built-up area.

In particularly justified cases, locating a building facility at the public road within a distance shorter than as prescribed might be allowed only upon a road operator’s consent given prior to receiving a building permit by the facility’s investor or construction reporting or construction works performance.
Scale Barrier

Lobbying big players against small investments influences adversely market growth and it is a barrier that restricts competition and access to the market. Large companies prefer spending their funds on their own installations and they restrict using any possible means the development of small installations non-linked by capital with large energy companies, since it leads to arising a payment obligation under the Energy Law Act (Art. 7 of the Act).

Tax Burdens

An entrepreneur who decided to invest in renewable energy sources is also taxed with a real property tax. For the above reasons, the wind farm investment might increase the revenues of communes in the first place, as the subject tax is an essential element of budgetary revenues. The real property tax is a revenue of a commune that is the main beneficiary of this investment. Therefore, communes should seek to attract such investor to its area instead of succumbing to pressure of local residents who are opposed to the investment.

At this point it should be stressed that, as the Warsaw Institute of Economic Studies’ report “The impact of wind power industry on the Polish labour market” shows, the wind power sector will have created 42,000 jobs, including 11,000 in the industry, by 2030. It is conditional upon a favourable regulatory environment and the sector’s dynamic growth. Building an onshore wind farm of power output of 10 MW entails creation of 114 jobs during its construction and, additionally, 5 permanent jobs during its operation, as the report’s authors write. It means that the wind power industry will have employed more people than a coal mining industry by 2030. Coupled with jobs created at other renewable energy sources, the received result provides the government with food for thought.

Lack of Executive Directives and Problems with Legislative Uncertainty

At this point it should be stressed that, as a rule, the important implementing acts to the Renewable Sources Act will come into force as late as on 1 January 2016, while other will still take some time. One of such acts coming into force the next year is the Ordinance of the Council of Minister of 18 June 2015 regarding the maximum quantity and value of electrical energy from renewable energy sources, which may be sold through an auction in 2016. Furthermore, what is worth mentioning is the Regulation of the Minister of Economy of 11 August 2015 regarding quantity and value of electrical energy generated in renewable energy sources of total installed power output not exceeding 1 MW, which should be sold through auction in 2016. The above regulation will come into force on 1 January 2016.

Unfortunately, we are still waiting for the rules and regulations of the auction, which shall be established by the President of the Energy Regulatory Office and will specify the procedure and method for the auction settlement, the conditions of processing data regarding the auction participants, technical requirements for an access to the Internet auction platform, the method to ensure safety and proper process of an auction as well as conditions of suspending an access to the Internet auction platform.

In addition, we expect a regulation governing a detailed method for calculation of total value of public aid, provided for in Art. 39 (7) of the RES Act, regulation concerning the method for calculation of intensity ratio of energy consumption by an industrial customer provided for in Art. 53 (4) and provided for in Art. 77 (1), regulation regarding establishment of the maximum price in Polish zloty for 1 MWh for which electricity from renewable energy sources might be sold by producers through an auction in a given calendar year (reference price).

It should be emphasized that the draft of regulations regarding reference prices has been put up for public consultation on 15 September 2015. Unfortunately, the reference price for producers operating before 1 January 2016 has not been regulated therein. For new and modernised installation after 1 January 2016, the proposed reference prices range from PLN 210/MWh to PLN 480/MWh, depending on technology and the type of renewable energy source used in a given installation.

It is necessary to make the provisions of proposed regulations more precise, and, in particular, with respect to specification of the types of transactions that should be taken into account when determining the weighted average of certificates, clear indication of concessions and exemptions and investment-type forms of aid, which are considered when establishing the value of public aid that a given entrepreneur has received.

Conclusions

The following conclusions can be drawn from this analysis:

  1. The long waiting period for implementation of Directive 2009/28/EC of the European Parliament and the of the Council of 23 April 2009 concerning promotion of the use of energy from renewable energy sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC has impededed the growth of the renewable energy sources market in Poland. Over the recent time, the long waiting period for issuing implementing acts to the Renewable Energy Sources Act has not helped entrepreneurs either. Given another planned amendment to the Renewable Energy Sources Act, no one can clearly say how the renewable energy sources market is going to evolve in Poland and whether the barriers existing in numerous legal acts will not lead to another turmoil.

  2. Polish legislation, somewhat inexplicitly, imposes numerous barriers that hinder free growth of the renewable energy sources market. Due to the lack of a comprehensive and well-thought-out approach to the entire issues related to renewable energy sources, the solutions provided for in the RES Directive have not been fully implemented.

  3. From an entrepreneur’s perspective, what is disturbing are the symptoms related to the will to amend a legal act that has just come into force. In order to ensure legal certainty and avoid frequent law amendments in future, it is necessary to conduct a reliable and thorough analysis of the effects of legislative drafts.

  4. Taking into account the content of the already enacted implementing acts to the RES Act and those which are underway, we may expect that the “green mechanism”, which will become actually effective on 1 January 2016, should work. No sooner than next year we shall see, though, whether it will function effectively and meet the expectations of the majority of players.

Michal Wach
More Liberal Voices