Weronika Pelc, interviews

Weronika Pelc: Rising electricity prices reflect the cost of compliance with EU requirements

An interview with Weronika Pelc, who heads the Energy Law practice at Wardyński & Partners, about changes in the law and the prospects for growth of the utility industry.

Litigation Portal: Changes in the Energy Law are once again on the horizon in Poland. Wasn’t last year’s amendment sufficient?

Weronika Pelc: Power is a regulated industry. Once you start regulating a given field and intervening in dealings between businesses, after a while problems will surface. In order to address those problems, new regulations are enacted which in turn usually lead to a need to enact further regulations. Life is so complex that no legislature is in a position to foresee everything. Hence the necessity for continual improvements and clarifications.

Besides, the Polish power industry, which is based on coal, is not entirely consistent with European Union policy. This means it is necessary to take measures to adapt the Polish power industry to concepts and ideals generated in Brussels.

The industry underwent a boom in Poland in the 20th century, when power plants and transmission networks were constructed. Now new investments are needed, but Polish law throws up various barriers to investment. The amendments should create a more investment-friendly environment, and some barriers should be either eliminated or relaxed.

So how should the Energy Law be changed?

Work is underway on completely new regulations which break down the law into its primary elements. A new act on renewable energy sources should be adopted, and an act governing the gas sector, and what is left of the Energy Law will probably address only electricity. This results from the need to adapt the general regulations to suit the specifics of each of these sectors, and to implement the set of directives and regulations adopted by the EU, including the Energy Package and the Climate Package.

On top of this are the needs of the sectors, which would each like to have a set of regulations for themselves. The drafts are not available yet, but we do know that work is underway, and the results will have a huge impact on the shape of the energy sector in Poland.

Work is also underway on adoption of legal solutions enabling businesses in the industry to take the actions they must take. A proposal for an Act on Transmission Corridors has also appeared, which would make it easier for transmission system operators to carry out investments in transmission infrastructure. This would be another specific law governing various transmission systems, both gas and electric, as well as other transmission infrastructure.

Which energy sectors require separate regulations?

Nuclear power for sure. The policy of the Polish government in this area is consistent. The government supports development of nuclear power plants in Poland. Previously the Nuclear Law had generally not addressed functioning nuclear power plants, and thus it was necessary to adopt a package of acts, which have already been signed into law by the President of Poland. The package includes a comprehensive overhaul of the Nuclear Law and an act concerning investment in nuclear power facilities. It became apparent that in order to start up the process of constructing a nuclear power plant in Poland, it was necessary to have a special investment act in place, because without a special act modifying the general rules on implementation of investment projects it is very hard to build anything in Poland bigger than a single-family home.

Such a package of laws should help all stakeholders function: not only the company that builds a nuclear power plant, but also others cooperating with it. All of the parties must be aware of the formal requirements for nuclear power facilities, the approvals that must be obtained, where liability will rest and in what amounts, as well as safety requirements. These acts were adopted so that the framework for the entire process and for the operations of a nuclear power plant could be defined to a very great degree, and competences assigned to various authorities for overseeing the entire process and issuance of specific permits.

Another issue is the ability to exploit shale gas. The discovery of shale gas in Poland has generated great controversy. More and more firms are considering gas-fuelled power plants, where just a few years ago the profitability of building and operating such power plants was questionable. In June of this year an amendment to the Geological and Mining Law was passed. In my view it was not the act that business was hoping for, because it does not address key issues of identification, mining and permitting for gas deposits, particularly shale gas, but perhaps there will be the political will to adopt another amendment of these regulations. Nonetheless, the new act contains many regulations important to firms interested in exploring and mining unconventional deposits of gas and other hydrocarbons.

The Act on Maritime Areas was also amended with a view to growth of offshore wind farms. This amendment was necessary because before now the possibility to locate such wind generators at sea was too brief and did not assure an opportunity to obtain all the necessary approvals and then carry out the project and operate the facility for a commercially feasible period. This period was extended, but there are still certain problems remaining, primarily connected with development of transmission systems offshore. The rules under which an operator might invest in such transmission systems remain unclear.

Will the new regulations help increase the share of renewable energy on the power market in Poland?

The share of renewable energy must increase, because the directive promoting energy from renewable sources imposes an obligation on Poland to demonstrate that by 2020 15% of total electricity used in Poland will come from renewable sources. This forces us to take certain efforts to achieve this goal.

It should be borne in mind, however, that renewable energy is more expensive than that generated from coal or oil. If the Polish power industry is to rely on anything other than coal, electricity prices will have to be much higher than they are now. This increase would not affect just households. The greatest burden would fall on large enterprises and heavy industry, which consume the most energy. If industry in Poland were burdened with such high costs, its products would become less price-competitive and we would lose the competitive battle with companies from other regions around the world where there are no climate fees. This is a major topic for debate, because if all the costs are factored in, there should not be any steel mills in Poland at all—or anywhere else in Europe.

Electricity from coal is definitely the cheapest in this part of Europe—but only so long as it is not burdened with CO2 emission fees. There is a certain virtual mechanism, however, because the EU has decided that this element of costs for CO2 pollution must be introduced. Nonetheless, under current regulations energy from renewable sources must be twice as expensive as energy from coal in order for it to be profitable to invest in generation from renewable resources. While the average price of electricity last year was PLN 196 per MWh, according to the Energy Regulatory Office, a green certificate, which is a form of subsidy for green energy, costs about PLN 270 per MWh. That is what renewable energy costs, and it is not growing nearly as fast as we would like—that is, fast enough to assure that Poland will meet the targets set by the EU.

In order to meet the energy efficiency requirements imposed on us by EU membership, the Energy Efficiency Act was adopted in April of this year. The purpose of the act is to introduce mechanisms supporting energy efficiency—in other words, solutions designed to cut energy use. After all, it is better to save energy than build new power plants.

You mentioned green certificates. How does the system of green certificates work?

Every producer of renewable energy receives “green certificates” for each unit of energy produced. Any company that sells electricity to end users has a statutory obligation to purchase a certain quantity of green certificates, which makes them customers of green certificates. The price may be negotiated, but if the company does not purchase the certificates, it must pay a “substitute fee” of about PLN 270 for each missing MWh of certificates.

At the moment, the demand for green certificates is higher than the supply, and thus the price of certificates is at about the same level as the substitute fee. Because the targets with respect to quantities of green certificates rise each year, more and more energy must be produced from renewable sources, or ever-higher substitute fees must be paid. Paying the replacement fee does not directly result in growth of renewable energy sources, but because the directive has been adopted, the EU will carry out a reckoning with Poland. That is why, as a member state, we must meet the targets, or otherwise we will be forced to pay high penalties.

What is the situation now with renewable power generation in Poland?

The number of renewable energy sources is growing, mainly wind, but we will soon be up against the wall because of the inability to connect the wind farms to the grid. Other sources are growing more slowly, and there are also certain problems with connecting them to the grid, because we have just one grid and it is what it is. For this reason, the government has declared in its National Action Plan for renewable energy sources that it will introduce a system to differentiate in the level of subsidies depending on the source.

Wind farms, which are managing fairly well, would receive support at a level no greater than they currently receive, or even a bit less, while other sources—biomass, biogas, or perhaps small hydroelectric plants and photovoltaic installations—would receive higher amounts.

Of course this has sparked a huge controversy in the industry, because investments in wind generation are made on the basis of a business plan stretching out over at least 20 years. Changing the assumptions at this stage can cause drastic consequences. If banks learn that the support is less than forecast and less than it is now, they may accelerate the loans. Who is in a position to pay off a loan in a couple of weeks when the original repayment schedule was spread out over 20 years? That would be brutal, which is why I doubt that an act on renewable energy sources will see the light of day before the parliamentary elections this autumn.

But let’s not fool ourselves. Under the current state of technology in Poland, renewable sources will not replace the existing coal-burning power plants. In this part of Europe, coal is the foundation. In this respect we are on our own in the EU, because certain member states, just by the nature of things, did not rely on coal from the very start because their terrain and surface area allow them to generate a significant percentage of their power from hydroelectric sources, for example. That is not an option in Poland, hence the concept of nuclear power. There is no doubt that we should move in the direction of cleaner technologies, but it is difficult to create a new industry and a new power sector in a short time, with limited funds.

Interview conducted by Justyna Zandberg-Malec