Kamil Baj and Przemyslaw Krysicki, Ernst and Young
December 30, 2013 | 3 Comments
As the renewable energy market shifts and evolves each year, industry experts need to know where the next hot region will be in order to keep up with the changing tides.
Luckily, global consultancy Ernst & Young has released its Country Attractiveness Indices each year since 2003, which gives a numerical ranking to 30 global renewable energy markets by scoring renewable energy investment strategies and resource availability. The indices are updated on a quarterly basis and the most recent report can be found here.
Here is the firm’s assessment of Poland:
All change. After three years of trying to push through legislation that would see renewable technologies receive a differentiated number of GCs, the Polish Government appears to have changed its strategy. GCs are out; competitive bidding is in.
Auctions win this round. The Ministry for the Economy revealed its proposals for a revised Renewable Energy Sources (RES) law at a press conference on 17 September. It would see the GC system phased out by 2021 in favor of an auction system awarding guaranteed tariffs over 15 years. Price competition is likely to be fierce, with cost confirmed as the most important criterion. Separate auctions will be held for projects above and below 1MW, while biomass projects greater than 50 MW and all biomass co-firing plants will be excluded altogether. Projects must start producing power within four years of successful bidders being announced.
Existing projects on 2021 countdown. Facilities operating before the law takes effect will still be entitled to support for 15 years but will only receive GCs until 2021, after which they may participate in separate auctions for existing projects to bid for electricity sale contracts. There will also be a two-year window from the day the law comes into force for operators to elect to switch to the auction system ahead of 2021.
One size fits all. Though GC support will continue, previous proposals to vary the number of GCs by technology have been scrapped under the new proposals, with existing projects continuing to receive one GC per MWh. This currently represents around €93/MWh (US$125) baed on a GC price of €48/MWh (US$34) and an average electricity price of €45/MWh (US$60) in 2013. However, September’s proposals brought bad news for bomass co-firing projects, which will see support cut by 50 percent, and hydro plants over 1 MW, where support is to be withdrawn completely.
GC stabilization. In a bid to increase the stability of the GC market given volatile price shifts in recent years, the Government is also proposing to freeze the
"subsitution fee" at PLN297.4/MWh (US$94.5), being the payment energy suppliers may choose to pay instead of redeeming GCs. It will also restrict payment of this fee if GCs represent less than 75 percent of the substitution fee for a minimum period of one month. Energy producers staying in the GC scheme will also have to trade a portion of the GCs on the Polish Power Exchange, although the details are yet to be discussed.
Heading in the right direction? So are these dramatic changes a good thing or a bad thing? It certainly signals a very clear sense of direction from the Government after years of uncertainty. It also indicates a reaction to the lessons learned in other parts of Europe, where generous revenue-based support schemes have created unsustainable subsidy costs, triggering severe reductions or withdrawals of support. Therefore, switching now could save Poland heartache later on. The Government also estimates that the cost of support would more than halve to €1b (US$1.3b) in 2020 under the proposed scheme compared with the current system.
Drilling into the detail. Notwithstanding the clear signals from Government, the sector appears less convinced. September’s announcement set out only general proposals, with full details yet to be released yet even these general principles have triggered some hostile reactions. The Director of the Polish Wind Energy Association described need for existing projects to compete for support after 2021 as “absolutely unacceptable,” while the President of the Society for Small Hydropower Plants Development complained that a 1-MW support threshold for hydro is too low given 5MW is typically considered small across much of Europe.
Fixed-price pressure. The absolute fixing of prices through the auction process, without annual indexation, has also caused a stir. Investors will be required to calculate prices that will remain profitable for 15 years, regardless of what’s happening in the electricity market or wider economy. This increased strain on project bankability could potentially threaten investor appetite.
Technology tensions. Another concern arising from the changes is the future of more expensive technologies. The auction system will inevitably favor large onshore wind projects with relatively low capital costs, which conflicts with the Government's previous ambitions to boost support for solar and offshore wind to 1.8 and 2.8 GCs per MWh respectively. Such announcements quickly led to the creation of an 8-GW offshore wind pipeline according to the Polish Offshore Wind Energy Association, but a switch to an auction mechanism could throw the future of Polish offshore and solar into disarray.
Danger of delay. Perhaps the most worrying aspect of the new proposal, though, is the likely timeframe to implement given the scale of the changes and the level of consultation required, particularly given the precedent for delays. The Government’s continual amendments to the RES law since 2010 has resulted in a noticeable reduction in foreign participation in the wind market, illustrated by the exit of key players such as DONG, Iberdrola and Enertrag.
Daily reminder. But there are also factors that should encourage the Government to expedite the process. The country faces daily fines of around €133,000 (US$178,000) for failing to transpose the 2009 EU RES Directive into its national energy laws. The Government had hoped to address this in legislative amendments passed in July, known colloquially as the “little energy three-pack,” although legal opinion remains divided. Attention will therefore now turn to whether the more recent RES law proposals, part of the “big energy three-pack," could elp Poland avoid these fines.
Shining light. Perhaps the biggest impetus for fast-tracking a new RES law, though, should be Poland’s own energy challenges. In July, the Ministry of Economy claimed that the power shortfall may reach 1,100MW during peak demand in 2017, forcing the Government to look at capacity mechanisms to guarantee supply. This energy imperative plus high carbon emissions, combined with impressive wind resource (13GW potential by 2020) and solar success of neighboring Germany, should easily galvanize a burgeoning renewables sector. The withdrawal of interest in many of its Central and Eastern European neighbors following severe subsidy cuts should also position Poland as a beacon of hope for opportunities in the region.
The clock is ticking. But the Government will need to work hard to convince the market it won’t take another three years to reach an acceptable support regime if it is to avoid more exits from the market and heavy EU fines. Otherwise, there’s a risk that even these new proposals could become redundant by the time they’re actually enacted.
Lead image: Krakow, Poland via Shutterstock