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Piotr Mrowiec

Attorney at law (Poland), Mediator
Associate Partner
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Power Purchase Agreement in Poland

As in other countries, also in Poland the interest in PPAs concerning purchasing electricity from renewable power producers is constantly growing. The main reasons for the rise in popularity of PPAs as instruments for purchasing renewable energy are no different to those in other countries and include e.g. the constantly decreasing costs of energy (LCOEs) generated by renewable power plants, the increasing costs of energy generated from conventional sources, consumers‘ growing environmental awareness (even if this is often attributable to marketing) and the possibility of a long-term supply of electricity for a price agreed in advance. So far, the number of PPAs signed in Poland has been limited, but it can be assumed that this contractual structure will become a serious alternative. This significantly correlates with the spectacular increase in electricity prices in 2018 and the forecasts indicating their further increases in the coming years.

In Poland, there are currently two simultaneously operated main models in place to support enterprises generating green electricity: the system of green certificates introduced in Poland on 1 October 2005, and the auction model intended to replace the green certificate-based regime. Renewable power plants which started to feed energy into the grid before the end of June 2016 receive support in form of green certificates whose price has strongly fluctuated in recent years (see illustration 1). Project developers who did not manage to complete their projects before the end of June 2016 must compete for support at energy auctions, whereas the two energy auctions held so far only referred to power plants with a nominal capacity of up to 1 MWp. Energy auctions for large-scale PV power plants but mainly for wind power projects are scheduled for late 2018. As part of the auction system, bidders specify the amount of energy they would like to put up for sale during the auction and determine the purchase price which cannot exceed the reference price set by the state. Bidders who are awarded contracts as part of the auction sell energy for the price achieved during the auction, the pay as bid (power plants of up to 500 kWp), or sell electricity on the market and are refunded the price equal to the difference between the market price and the auction price. Irrespective of the support model, the support period is 15 years, counted from the date the relevant power plant starts to produce energy.

The problems with the effective organisation of auctions, and, in particular, the fact that large-scale projects are not admitted to the auctions, have caused a set-back in the development of the large Polish renewable energy sector. The record high surge in the installed capacity, especially in wind power, recorded between 2012 and 2016 suddenly collapsed. But PV power plants which earlier did not stand any chance of developing due to underfunding managed to hold their ground in the category of installations of up to 1 MW and are now developing into a very serious alternative to the dominant wind power.

Restrictions on signing PPAs with subsidised renewable power producers

As stated above, the Polish legal framework for PPAs is quite liberal. Where the subject matter of a PPA is the selling of electricity whose production was in any way subsidised then certain legal restrictions apply depending on the incentive system (quota regime, auction model). For maximum clarity, the various cases are discussed separately below. 

1. PPAs are signed by operators of renewable power plants supported under the
green certificate system.

For every 1 MWh of generated power over a term of 15 years - counted from the date electricity is fed into the distribution grid for the first time, such investors receive a certificate which they can sell either on the energy exchange or on the basis of bilateral agreements. In addition, they have the possibility to sell all of their generated electricity for a price equal to the average sales price for electricity paid on the competitive market in the previous quarter and advertised by the President of the Polish Energy Regulatory Office; in the 1st quarter of 2018 the price on the competitive market was 174.95 PLN / MWh (≈ 4 eurocents/kWh). There is, however, no obligation to sell electricity to a mandatory buyer (i.e. the state utility). The producer is fully authorised to sell electricity to a freely chosen business partner and for a price agreed with that business partner without losing the right to receive green certificates. A significant restriction should be considered though: the producer must not agree on selling a portion of its electricity generated on a daily basis, e.g. 3 MWh, as part of a PPA to a freely selected business partner while selling excess electricity to a mandatory buyer in line with the legal principles. The rule is: „The requirement for selling electricity to a mandatory buyer (...) is that all of the renewable electricity generated in a renewable power plant and fed into the distribution or transmission grid must be offered for sale at least within 90 consecutive calendar days“.35 A solution where all of the electricity is sold under a PPA over three quarters of the year and to a mandatory buyer in one quarter of the year is however perfectly allowable. Owners of power plants with a capacity of over 500 kWp are not authorised to sell electricity for the legally determined price, therefore they are free to decide how to sell the generated electricity - whether on the energy exchange, under the direct sale model, or as part of a PPA. 

Problematic, however, would be a procedure where the power producer would sell part of electricity under the auction system and the other part under a private PPA signed between the producer and a freely selected offtaker (e.g. an industrial company). On 14/07/2018, the extensive amendment to the Polish RES Act imposed a strict obligation on most renewable power producers (except micro and some smaller-scale power plants) to feed all of the produced electricity into the distribution network and sell the electricity on the energy exchange or on another regulated market in Poland - this is the so-called obligatory sale on the energy exchange.37 If the operators breach this provision, they must be ready to face the punitive consequence of being fully excluded from the support system. The applicability of this provision, however, is limited in time because it relates to renewable power plants which start to produce electricity no later than 31/12/2020. If the provisions are not amended, this scenario will be possible only from 1 January 2021. In this context, the legislator has scheduled the auctions to be held by late 2020 at the latest, which means that this regulation will most likely apply to all renewable power plants receiving support under the auction system. In mid-September, the President of the Polish Energy Regulatory Office announced rules of the procedure for the auctions. The rules also include a significant regulation on the sale of electricity. According to the vague wording of Article 9 (26) of the rules of the procedure for the auctions38, the electrical energy generated by the renewable power plant subject to the auction system should be sold not on the energy exchange but to a mandatory buyer. Importantly, however, this regulation relates only to the amount of electricity which the relevant power plant operator who won the bidding process committed to sell as part of the auction system. In this model, if only a part of energy is put up for sale during the auction, it should be expected that the remaining amount of the energy will be subject to the obligatory sale on the energy exchange. In conclusion, it should be stated that the combination of support in form of the auction price and the PPAs might not be possible, whereas we should wait for another consolidation of the regulatory framework due to the vague wording of the provisions.

2. PPA is signed by operators of renewable power plants who would like to participate
in auctions

Renewable investors who offer for sale electricity to be generated in planned renewable power plants have so far adopted a business model where they would offer all of the energy intended to be generated in the relevant renewable power plant over the entire period of 15 years. It should be mentioned, however, that also a scenario is very possible that only a portion of the generated energy is sold as part of the auction. The Polish auction system is characterised by the fact that the subject matter of the auction is not the sale of all of the electricity generated by a relevant renewable power plant, but an amount of energy that the producer would like to generate and offer for sale at the auction.

According to Art. 92 (1) of the Polish RES Act, the state is under the obligation to buy from the producer who won the auction electricity “only in an amount which does not exceed the amount stated in the bid by the producer“. A structure where the owner, e.g. a wind farm, chooses this option to diversify the investment risk by auctioning 50% of its estimated energy production to ensure that it receives a fixed remuneration over the period of 15 years and by selling the remaining amount of energy on the energy exchange is possible and can be an attractive alternative to auctions where, although indexed on an annual basis, the achieved price proves to be not particularly attractive after several years.

3. Public aid and PPAs

It should be noted that some renewable power plants were or are being built using significant support in form of aid granted under EU funding programmes or from state resources. The level of co-financing and the payment conditions usually depended or depend on the type of the operational programme normally advertised by the relevant voivodship. Nonetheless, the signing of PPAs is quite safe for operators of renewable power plants who implemented or want to implement their projects based on the CAPEX investment support in form of EU or national grants. Although the Polish RES Act does include provisions aimed at eliminating the so-called over-funding, the provisions apply to situations where aid is accumulated as part of the auction system and combined with other forms of state funding. It is thus admissible to sell electricity under a PPA in the case of power plants whose construction benefitted from public aid.

New renewable energy projects and PPAs, market analysis and outlook

As already mentioned above, PPAs are particularly suitable for existing larger-scale renewable power plants which receive green certificates and can sell the produced electricity in any way of their choice. But a question arises whether this model can be also attractive to developers of new renewable energy projects. First of all, if you analyse the drastic increase in electricity prices in Poland, this question should be answered affirmatively. 80% of the Polish electricity production is based on coal. Due to the enormous level of their CO2 emissions, coal-fired power plants are required to pay a high price for the CO2 emission permits. The price for the „CO2 certificates“ however increased by 250% over the past 12 months alone: from EUR 5 per ton in August 2017 to over EUR 20 (as of 24/08/2018). In combination with the quite significant increase in coal prices, this has led to an increase in the prices for electricity to be supplied next year, from PLN 163 per MWh to over PLN 250 per MWh. In the summer of 2018, the electricity price in Poland was much higher than that in the neighbouring countries.

Electricity market experts assume that this tendency will not change in the coming years. According to the forecast of the European Commission, Poland‘s average electricity price will reach nearly PLN 340 in 2020 and EUR 373 per MWh in 2025 (see illustration 2). If you compare this price with the maximum auction price for on-shore wind (with a capacity of over 1 MWp), being PLN 350 per MWh, then the question will arise whether the support scheme in form of the auction system makes sense at all in the long term. It should be also considered that because the auction rounds have not been organised yet, projects with a total capacity of 3 GW are waiting for development. PPAs can become an opportunity to indeed develop such projects.

If you would like to discuss this topic in more detail or if you are interested in a legal advice in Poland, Rödl & Partner experts from CracowGdansk, GliwicePoznanWarsaw or Wroclaw will be glad to help.

Piotr Mrowiec

04.01.2019