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Poland’s Renewable Energy Story (Warning: It Sucks)

Editor’s Note: If you are curious about Poland’s renewable energy history, current climate, and future, this guest post by Michal Bacia is excellent. However, the story isn’t particularly uplifting. Nonetheless, it deserves a read, and 48 million shares.

By Michal Bacia

Michal Bacia hs2The Polish government published yet another version of their renewable energy legislation in April. It’s hard to tell which version it is. Everyone has lost track, including the government itself I believe, as the first proposed legislation was presented some 3 years ago.

This is a great opportunity to observe how, over the last 3 years, the big 4 energy companies have killed the renewable energy (RE) industry in Poland with support from the government.

This story started somewhere in 2011. Back then, the electricity market was controlled by 4 huge, vertically integrated, state-owned corporations. There were also independent generators on the market, but the entire distribution network (and direct access to customers) was controlled by the big 4.

Enter renewable energy, which was supported by a green certificates (GC) scheme. For each MWh of renewable energy generated, the producer received 1 GC. This was the same for every technology. Electric distribution companies were obliged to buy GC from the generators in the amount set each year by the government. In 2011, the distributors had to buy GCs in an amount equal to about 10% of the energy sold to their clients. If distributors didn’t have enough GC for each certificate missing, they had to pay a fine to the national fund for the environment, in an amount of some €65-70.

This support mechanism worked pretty well during the 1st decade (2000-2010). A lot of renewable energy projects (mainly wind) were commissioned by independent companies. At the same time, the big 4 also developed some renewable energy projects but also came up with the idea of “co-firing.”

Co-fring in Poland means that wood, straw, or peanut shells, typically imported from Southeast Asia, are burned together with coal in a coal-fired plant. The coal plant then claims its GCs and CO2 certificates because this “biomass” is a renewable energy fuel.

In 2011, the EU kept pushing a renewable energy obligation and, surprisingly, was not happy with the Polish biomass co-firing solution. The EU commission began discussing ‘other measures’ (read “penalties”) to persuade Poland to implement EU renewable energy requirements. Money (read “penalties”) talked. The first draft was presented in December 2011. After consultation, the second draft was published in mid-2012.

Renewable energy legislation is prepared by the Minister of Economy. At that time, the Minister was also the leader of the Peasant Party and a fan of Jeremy Rifkin and his “The Third Industrial Revolution.” He understood the importance of distributed generation and saw an opportunity for the Polish countryside in developing renewable energy.

His legislation would introduce feed-in tariffs with different rates for different technologies and capacities (tariffs for solar PV were very attractive). Micro-generators had the highest tariffs, did not require licences, and were tax-exempt. As for co-firing, it would receive much lower support and would be phased out completely within few years.

I doubt anyone took the Minister seriously at first. Then, when the legislation draft was presented, people actually did the math based on the feed-in tariff rates. Independent generators, especially in the PV industry, were very enthusiastic. Polish farmers began planning to rent out their farmland for solar.

Then an interesting thing happened. The big 4 hired a very reputable management consulting company to assess the influence of his proposed legislation on their business. The reputable consultants did some financial modelling to find out that the market value of the big 4 companies would go down by some €3.5 billion. Big 4 presented this report to the Minister of Economy and asked him to reconsider his renewable energy law. He said, more or less, that the renewable energy law should be beneficial for the people, the country, and the entire economy, not for one particular group of interest. This is not very common to hear in Poland. I was very happy hearing about his firm position.

In early 2013, the Rifkin-fan Minister was fired. The new minister announced that he had to reconsider the renewable energy legislation and make sure no group of interest would suffer from it. At the same time, biomass co-firing was flooding the market with GCs. To make it even more interesting, electricity distributors stopped buying GCs from independent generators.

The new Ministry decided it was in Poland’s best interest to simply pay the fine. This fine is conveniently paid by a state-owned company to a state-owned National Environment Fund. (BTW: in the most recent draft of the law, the fine is no longer paid to the fund but directly to the budget, like dividends from state-owned companies). GC prices plummeted from around €65 to about €20/MWh. No bank wanted to invest in any renewable energy projects in Poland anymore.

This situation continues. There is no renewable energy law in place. No one knows if the recently proposed draft is the final one. No one knows when renewable energy legislation will come to force. No one knows what is going to happen with the GCs. Will they be worth anything in 2 years? 5 years? This kind of environment is suitable for gambling, not long-term investing. The 4 big casinos can easily collect all the cash from the small payers without worry of renewable energy, as no one is investing.

The recently proposed version of the legislation introduces renewable energy auctions instead of the green certificates schemes. This means a renewable energy project has to be pre-developed and licensed. Only then can it take part in the auctioning process. This is a significant entry barrier for smaller companies as pre-development costs can be significant. It is also unclear if new generation sites will be treated the same as existing generation assets. Commissioned, operating, and partially paid-off generators would offer better prices at auction only to stay on the market.

Distributed generation is being graciously allowed in the latest legislation draft. Installing solar PV on residential rooftops luckily has not been made illegal. Energy can be exported back to the grid for 80% of the wholesale price (some €0.04/kWh). With no feed in tariff, no grants, a very poor (undervalued) wholesale price, and the Polish weather, a residential PV system will pay itself back in… 22.5 years.

The bill has not been approved by Parliament yet. Initially, Parliament was to approve it just after presentation and then notify the EU. The plan was for the law to be binding within 1 year from EU approval. Now, instead of passing the bill to Parliament, the government wants to consult with the EU first. This stalls the entire process even longer. Experts believe the law will start working no sooner than in 2017. This means the first renewable energy plants (if any) commissioned under the new legislation, would start generating in 2018, 2019.

This results in an extra 8 years in total (2011 – 2019) of co-firing biomass with coal in conventional power plants and an oversupply of green certificates. After 8 years, not one independent energy generator or project development company would ever want to invest in Poland and risk sudden loss of revenues. The only companies capable of handling such risk would be… yes, the 4 big state-owned vertically integrated energy corporations. In 2019, if the EU will still push this ‘silly renewable energy obligation,’ there will be plenty of cheap renewable energy generation assets to buy from the bankrupt independent generators.

So, what is going to happen in the renewable energy market next? Independent generators will start selling assets in Poland. The Big 4 will buy these assets cheaply and start offering cheap renewable energy at auctions. Even more independent generators will be forced out of business and have to sell their assets in Poland. Rinse, repeat.

About the Author: Michal Bacia is a solar energy project manager and consultant as well as an author. He recently completed 3 solar sites in the UK (20MWp in total) and published a book about solar energy for anyone who uses electricity (How to choose the best solar system and financing offer for you). 

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