The Energy Regulatory Office has confirmed that wind projects in RES auctions will not have to demonstrate the incentive effect. Here we explain what these changes will mean in practice.
The struggle for renewables projects to demonstrate the incentive effect came into existence on 1 July 2014 when the European Commission’s Guidelines on state aid for environmental protection and energy 2014–2020 took effect. The guidelines state that all state aid should be considered invalid unless it can be shown that it generates an “incentive effect.” An incentive effect is found to exist when the aid induces beneficiaries to change their behaviours, as evidenced by engagement in additional efforts which they would not have undertaken without the aid, or would have undertaken on a smaller scale or in a different fashion. The exception to this guideline is state aid provided through tender proceedings compatible with EU internal market regulations.
“Start of works”—the critical moment
It has always been clear that the old aid mechanisms did not fall under the exception mentioned above. For renewable energy projects built following the guidelines’ implementation, this meant potential challenges to aid provided in the form of certificates, if the existence of the incentive effect was not confirmed prior to the start of works. Under the guidelines, the “start of works” means either the start of construction works or the first legally binding commitment for equipment or other commitment that makes the investment irreversible (whichever occurs first). The mere purchasing of land or commencement of preparatory works (such as obtaining required permits and conducting preliminary feasibility studies) does not constitute the “start of works.” In the context of mergers, the “start of works” is deemed to take place following the acquisition of assets directly related to the purchased facility.
The guidelines were implemented into Polish law by changes to the Energy Law which went into effect on 4 May 2015. The amended law’s Art. 43 introduced a requirement to verify the presence of the incentive effect. The absence of an incentive effect precludes the issuance of certificates of origin.
Verification of the occurrence of an incentive effect proved to be problematic under the auction system. In principle, the system introduced by the Renewable Energy Sources Act was supposed to conform to the guidelines and meet the internal market criteria for state aid in public procurement proceedings. The Commission found otherwise, and the extensive process of resolving the issue was only completed in December 2017. The Commission conditionally approved the auction system provided that Poland modifies it as agreed during the negotiations. The changes to the auction system are to be implemented by planned amendments to the RES Act. The draft underwent a thorough review by the Ministry of Energy and was approved by the Standing Committee of the Council of Ministers.
No incentive effect in future auctions
The Commission’s acceptance of the auction system will release the president of the Energy Regulatory Office from the requirement to verify the occurrence of the incentive effect in future auctions that are expected to be announced after the amended RES Act takes effect. The regulator confirmed this in a 9 February 2018 statement.
This increases the likelihood that wind farm projects with valid building permits which were saved from the effects of the “distance act” will be completed. Prior to the Commission’s acceptance of the auction system, investors faced the additional risk of a potential finding of no incentive effect if they decided to begin construction work before the expiration of the three-year building permit. Now, investors only need to carry out one of the following four actions to extend the validity of their building permits: create a construction survey of the facility on the parcel, grade the terrain, establish the construction site (including building temporary structures), or connect the construction site to the necessary utilities.
Whether wind farm investors are willing to take on additional costs to save their expiring building permits in the current investment environment remains an open question.
Marek Dolatowski, adwokat, Wardyński & Partners
This article was originally published on the power energy portal WysokieNapiecie.pl