Spotlight: renewable energy project development in Poland

An extract from The Renewable Energy Law Review, 5th Edition

Introduction

The development of renewable energy sources in Poland has become one of the most essential goals in the Polish energy sector. Under EU legislation, Poland is obliged to achieve renewable energy targets. For 2020, the European Union established for Poland a 15 per cent renewable energy share in final energy consumption. For 2030, the European Union established that EU gross final consumption of energy should amount to at least 32 per cent. The Polish government decided, in its integrated national energy and climate plan, that it will commit itself to contribute to this target by achieving a 21–23 per cent share of renewable energy in the gross final consumption.

To be able to achieve these goals, the Polish government decided to provide stronger support to the renewable energy sector and, most notably, to strengthen support for offshore wind farms.

The year in review

In December 2020, the lower chamber of the Polish parliament (the Sejm) adopted the Act on the Promotion of Generation of Electricity in Offshore Wind Farms (the Wind Farms Act), which entered into force at the beginning of 2021. The Wind Farms Act sets the framework for a dedicated subsidy scheme for offshore wind projects. It also addresses other relevant issues pertaining to the development and operation of offshore projects – such as grid connection, investment process and local supply chain – and the requirements applicable to the construction, operation and decommissioning of offshore wind farms.

The main purpose of the Wind Farms Act is to regulate a support system for the generation of electricity from offshore wind farms. The Wind Farms Act sets forth that the offshore projects will be entitled to contracts for difference to settle the negative balance resulting from the difference between the fixed price and the average market price. The Wind Farms Act anticipates two phases of support for electric energy generated in offshore wind farms. For the most advanced projects, offshore wind investors may obtain support in the form of an individual decision issued by the President of the Energy Regulatory Authority (ERA). The total installed capacity of offshore wind farms envisaged in the Wind Farms Act for this phase of projects that may receive support is set at 5.9GW. The deadlines for the applicants to submit the applications and for the President of the ERA to issue the decisions were set for 31 March 2021 and 30 June 2021, respectively. The maximum price was set in a Minister of Climate regulation at 319.6 zlotys per MWh.

The President of the ERA has already issued decisions granting support for the most advanced offshore wind projects. In April 2021, three first-project companies obtained support: Elektrownia Wiatrowa Baltica-2 Sp z o.o.; Elektrownia Wiatrowa Baltica-3 Sp z o.o. (both projects developed by PGE SA and Ørsted); and Baltic Trade and Invest Sp z o.o. (developed by RWE). In May 2021, the President of the ERA issued decisions for MFW Bałtyk II Sp z o.o. and MFW Bałtyk III Sp z o.o. (both projects developed by Equinor and Polenergia). In June 2021, the President of the ERA issued decisions for Baltic Power Sp z o.o. (project developed by PKN Orlen SA and Northland Power) and BC-Wind Polska (developed by EDPR and ENGIE).

For the remaining projects, the right to settle a negative balance may be awarded through competitive auction held by the President of the ERA in 2025 (2.5GW) and 2027 (2.5GW), and, possibly, also in 2028 and beyond. The auctions are announced, organised and held by the President of the ERA. The fixed price shall be specified in the auction bid.

The subsidy scheme is envisaged for 25 years from the first day that electricity from an offshore wind farm is generated. The beneficiaries shall generate electricity (after obtaining a generation licence) and feed it into the grid for the first time within seven years of the date of the individual decision or closure of the auction, respectively. The right to cover the negative balance applies to electricity in an amount not exceeding the product of 100,000 hours and the installed electrical capacity of an offshore wind farm, or part thereof, resulting from the licence for electricity generation.

The Wind Farms Act also regulates grid connection issues. First, it specifies the requirements for applying for grid connection conditions and initial grid connection conditions (the choice of the method depends on whether the project will benefit from the subsidy scheme or not). Second, the Wind Farms Act sets forth that the project owner and the transmission system operator (in Poland, there is one transmission system operator, which is state-owned company Polskie Sieci Elektroenergetyczne SA) may conclude an agreement on the sale of the grid connection. However, the transmission system operator is under no obligation to enter into such an agreement.

Finally, the Wind Farms Act introduces amendments to administrative proceedings, including significant simplifications of the development process. For instance, it sets a strict timeline for issuing key decisions concerning the construction and maintenance of offshore wind farms and sets of power evacuation facilities (i.e., decisions on environmental conditions, water permits, building permits and use permits). The possibility of challenging those decisions has also been limited because the Wind Farms Act sets forth that neither the higher authority nor the administrative court can reverse a decision in whole or declare it invalid where only a part of a decision concerning a part of the project is flawed. The aforementioned decisions as well as decisions approving geological work programmes or approving geological documentation are immediately enforceable by operation of statutory law.

In 2021, the government continued working on the secondary legislation regarding the offshore wind sector. One of the most important pieces of legislation is a Minister of Infrastructure regulation issued on 27 November 2021 on the assessment of the applications in the resolution proceedings. This regulation pertains to the part of the proceedings aimed at issuing the offshore location licence (i.e., the first permit that is issued during the investment process for the offshore wind farm project). The regulation sets forth detailed criteria for assessing the investors’ applications (in cases where more than one application has been submitted for the same water area), the method of determining the key criterion for the assessment of these applications and the scoring of the assessment criteria. This regulation is of the utmost importance for new potential offshore wind projects that, in the future, may participate in auctions dedicated to offshore wind farms as described above. The process for obtaining new offshore location licences for new water areas commenced in 2022 and will continue throughout the year.

Other crucial regulations for the offshore wind sector, which were all adopted on 15 December 2021, are:

1. a Minister of Climate and Environment regulation on a template for reports on the implementation of the supply chain plan for materials and services;
2. a Minister of Infrastructure regulation on a rescue plan and a plan to combat threats and pollution for the offshore wind farm and a set of devices; and
3. a Minister of Climate and Environment regulation on navigational expertise and technical expertise for an offshore wind farm and a set of devices.

Furthermore, the European Commission issued a decision on 20 May 2021 that approved a Polish scheme to support offshore wind technology.

However, it should be underlined that the Polish government not only decided to support offshore wind projects, but also plans to enhance investments in onshore wind farms. Consequently, it decided to amend strict rules of the Act on the Investment in Wind Turbines (the Turbines Act). According to the provisions of this act, wind farms must comply with a requirement pertaining to a minimum distance from residential buildings and nature protection areas that equals 10 times the height of the wind turbine with rotor blades (the 10H rule). Establishing the minimum distance at such a level has prevented investors from developing many new wind farms over the past few years. The first official proposal for an amendment to the Turbines Act was published in May 2021 and public consultations were commenced. According to the proposal, each of the local governments may adopt a local zoning plan that will allow a wind turbine to be located at a closer distance than that resulting from the calculation of the 10H rule, but respecting the minimum distance indicated in the Turbines Act. The proposed minimum distance is planned to amount to 500 metres. The distance of the newly built wind farms determined in the local zoning plan must be reviewed also by the Regional Director for Environmental Protection. It will be necessary also to conduct additional public consultations. The initial minister’s plan envisaged that the new regulations would have entered into force at the beginning of 2022. However, the overall process has been prolonged and, as at the end of April 2022, the amendment to the Turbines Act has still not been adopted.

Furthermore, the subsidy scheme for renewable energy sources (such as onshore wind farms as well as photovoltaic (PV) plants) was strengthened in 2021. As a result, support may have been granted for the maximum period of 15 years but no longer than until 31 December 2035, although after the amendments introduced to the Act on Renewable Energy Sources, this deadline has been prolonged until 30 June 2047. The amendment has also prolonged the deadline for the possibility to organise auctions. Therefore, the deadline is now set for 31 December 2027.

It should also be noted that the PV sector is the most dynamic and fast-growing sector in the renewables sector in general. According to information provided by the Institute for Renewable Energy, which based its assessment on data from Polskie Sieci Elektroenergetyczne SA (the Polish transmission system operator), the installed power in PV at the end of 2020 was 3,935.74MW. The Institute for Renewable Energy concluded that the increase in installed power in PV amounted to 200 per cent during 2020. Also, according to this analysis and forecasts by the same body, in 2021, interest in PV development was projected to grow and result in 6GW of operating PV installations at the end of 2021.² In reality, pursuant to a report prepared by the International Energy Agency, PV capacity amounted to around 7.7GW at the end of 2021.³ It was also stated therein that PV capacity could reach 18–20GW by 2025.⁴

The policy and regulatory framework

i The policy background

The policy regarding renewable energy has been a key element of the most essential strategic documents in Poland. One of them, the Energy Policy for Poland until 2040, stipulates the government’s plans for the development of the energy market. With respect to renewable energy in 2030, the share of renewables in the final gross energy consumption shall be at least 23 per cent and not less than 32 per cent in the power sector (mainly wind and PV); 28 per cent in heat; and 14 per cent in transport (with a large contribution from electromobility). In another important policy, the National Energy and Climate Plan for 2021–2030, the government declared that Poland will achieve a 21–23 per cent share of renewables in the final gross energy consumption. To achieve these goals, subsidy schemes have been introduced for investors in renewables.

Over the years, Poland has supported renewable energy sources through a system of tradeable certificates of origin (the green certificates). Green certificates are transferable property rights that may be received by a producer of electricity from a renewable energy source in which the energy was generated for the first time before 1 July 2016. Support may be granted for a maximum period of 15 years but no longer than until 31 December 2035.

The green certificates system is being slowly replaced by the new support scheme in the form of auctions. The winners of the auctions obtain the right to settle the negative balance between the applicable auction price and the power exchange price (average market price). The negative or positive balance is settled on a monthly basis upon an application submitted by a renewable energy source producer to the settlement operator (Zarządca Rozliczeń). Auctions for renewable energy are carried out separately within five technology baskets, separately for installations with an installed capacity of up to 1MW and above 1MW, and separately for electricity generated in:

1. renewable energy source installations commissioned before 1 July 2016;
2. modernised renewable energy source installations; and
3. new renewable energy source installations (i.e., planned installations, which will generate electricity for the first time after the closing of the auction session).

In auctions held to date, the majority of support was granted to onshore wind farm projects generating more than 1MW and PV projects generating up to 1MW.

According to information from the President of the ERA, because of the auctions held in 2020, over 1.56GW of PV installations, nearly 0.93GW of new wind farms and over 4MW of new capacity in other renewable energy technologies may be developed.⁵ In 2020, nearly 75.3TWh of electricity from renewable energy sources was allocated for sale in all auctions, with a total value of over 27.4 billion zlotys. However, only four out of eight auctions were resolved (the remaining four were not resolved because a sufficient number of bids was not submitted). Consequently, 54.5TWh of electricity was sold, with a total value of nearly 12.9 billion zlotys.⁶

As regards auctions in 2021, it should be noted that they were held twice – over the course of May and June, and in December. In May–June, in total, nearly 37TWh of electricity was contracted, worth over 8.5 billion zlotys.⁷ In December, a total of nearly 14TWh of electricity was contracted, with a value of over 3.2 billion zlotys.⁸

An alternative to the auction system has been envisaged for small capacity installations that may be supported by two other schemes, namely feed-in tariff (FiT) and feed-in premium (FiP) systems. FiPs and FiTs are dedicated for installations using only the following sources for electricity generation:

1. agricultural biogas;
2. biogas obtained from landfills;
3. biogas obtained from a sewage treatment plant;
4. another biogas other than those specified above;
5. hydropower; or
6. biomass.

Producers of agricultural biogas may also benefit from the support system in the form of certificates of agricultural biogas origin confirming its production and introduction to the gas distribution grid, which are granted by the President of the ERA. The certificate is granted for 15 years, counting from the date of first production of agricultural biogas or electricity from agricultural biogas but no longer than until 31 December 2035.

ii The regulatory and consenting framework

The key acts regulating the specific areas in Poland are statutes, which are the acts adopted by parliament (i.e., the Sejm and the Senate, which is the higher chamber of parliament) and signed by the President. With respect to the energy sector in Poland, the general rules are provided in the Energy Law. The Energy Law sets forth the rights and obligations of market participants as well as the powers and obligations of the administrative authorities (such as the President of the ERA). Most importantly, the Energy Law stipulates the rules of conducting business activities in the energy market in Poland by regulating the terms of grid connection to the transmission and distribution grid as well as by regulating the requirements regarding obtaining the energy licences necessary to conduct business activity (e.g., in electricity generation).

In the case of the renewable energy sector, the key statute regulating the rights and obligations of the renewable energy investors is the Act on Renewable Energy Sources, which describes previously mentioned subsidy schemes (i.e., green certificates, the auction system, and the FiT and FiP systems). Another important act for the renewable energy sector is the newly adopted Wind Farms Act, which sets the framework regulations for offshore wind farms.

Acts of parliament are not the only source of law regulating the energy market in Poland. Technical information is usually regulated in secondary legislation such as regulations, which are issued by government bodies. In the case of renewable energy, the issuing body is usually the Ministry of Climate and Environment or the Minister of Infrastructure.

The energy market in Poland is regulated. Although the President of the ERA, as a Polish regulator, does not have a competence to issue binding acts on a national level such as statutes or regulations, it shapes the framework for business activities in the energy market by, among other things, issuing administrative decisions for specific market participants. In these decisions, the President of the ERA is entitled, among other things, to impose financial penalties for violation of the provisions of energy-related acts and, most importantly, to grant licences for energy companies. In the case of renewable energy sources, the President of the ERA is entitled to issue licences for the generation of electric energy from renewable energy installation, which are issued at the end of the development process for renewable projects. This obligation does not apply to micro and small installations.

When developing a renewable energy project but before obtaining the generation licence from the President of the ERA, the investor shall also obtain many permits that are needed for the construction and operation of such a project. Polish law requires several permits to be held, wherein the most important decisions are the following:

1. A local zoning plan or zoning permit, which constitutes a legal basis for location of renewable projects. As regards the local zoning plan, the municipality council adopts it as a resolution that covers a group of plots not necessarily owned by the same landowner and that are not issued for the benefit of one party, whereas zoning permits are issued by the relevant authority to the particular addressee. In practice, when there is no local zoning plan, the investors must obtain zoning permits to be able to continue the development of the project.
2. A decision on environmental conditions, which determines the environmental conditions for a renewable energy project and approving its environmental impact assessment (EIA). It needs to be obtained prior to the zoning permit (if, in the specific case, it is needed as pointed out above) and construction permit.
3. A construction permit, which is a decision allowing construction works to start. However, in some cases, solely a notification on construction works is sufficient.
4. A use permit, which is a decision allowing for the use and operation of a renewable energy project. However, in some cases, solely a notification on construction works’ end is sufficient.

Obtaining the environmental decision is one of the critical stages in the permitting process for renewable energy projects. The environmental decision is issued by the head of the municipality, or the mayor or president of the city in which the project will be implemented. The procedure for issuing the environmental decision is initiated at the request of the party who plans to implement the project (i.e., the investor). At the very beginning of the proceedings, the relevant authority examines the application for issuing the environmental decision to assess to which category the project should be qualified (i.e., with an obligatory EIA or a facultative EIA). Under Polish law, there are two groups of projects for which an environmental decision needs to be obtained:

1. projects that can always significantly affect the environment (for which it is obligatory to perform an EIA prior to issuing the environmental decision); and
2. projects that may potentially affect the environment (for which an EIA is not obligatory but may be required by the authority that is responsible for issuing the environmental decision).

Renewable energy project development

i Project finance transaction structures

One of the interesting features of renewable project financing in Poland is that the structure of the financing must be in line with the support scheme that currently exists under Polish law. The finance documentation should properly address the mechanism of the settlement with the settlement manager (which is Zarządca Rozliczeń SA) owned by the Polish state. The financing is provided to the special purpose vehicle (SPV) that owns assets of a project and the relevant permits, and is controlled by the investor (sponsor) of the given project.

The financing of renewable energy projects is usually provided under the standard documentation as used for the other kind of financing (i.e., the facility agreement, usually based on the Loan Market Association standard, the security documents and, if applicable, the inter-creditor agreement). Direct agreements are more typical and specific documents for the financing of renewable energy projects are required in relation to the key project documents (e.g., the engineering, procurement and construction contract; the operations and maintenance contract; power purchase agreements (PPAs); and turbine supply agreements). The tenor of the financing varies depending on the project, but it is usually approximately 15 years. The standard structure of the security interests envisages:

1. registered and financial pledges over shares in the SPV;
2. registered pledge over all assets and rights of the SPV;
3. registered and financial pledges over rights to bank accounts of the SPV;
4. security assignment of the SPV’s rights under the project documents;
5. submission to enforcement of the SPV and other security providers;
6. subordination agreement with assignment of rights under shareholder loans; and
7. depending on the project, cost overrun guarantee or support agreement provided by a sponsor.

Many financial institutions and private funds are currently interested in providing the financing of renewable energy projects in Poland (in particular, Polish and foreign commercial banks, development banks, and investment funds). In larger projects (i.e., with a capacity higher than approximately 50–60MW), financing is very often provided by a partnership of financial institutions.

The growth in popularity of renewable energy sources in Poland encourages financing entities to invest in such projects. According to a report prepared by WiseEuropa, a dominant role in financing low-carbon technologies was played by capital from the private sector (primarily, commercial banks), which was responsible for approximately 83 per cent of funds allocated to these investments. The remaining 17 per cent of funds came from public funding sources, mainly European funds and debt instruments.⁹

The WiseEuropa report also stated that, with respect to wind farm projects, private energy companies were responsible for over 90 per cent of all investments in wind energy during 2013–2019 but, in addition, over 90 per cent of them were financed from commercial banks and equity.¹⁰ As regards PV, initially, development of PV projects depended on public investments (local governments) and EU funds. However, after 2017, private entities (prosumers) and commercial banks became more visible.¹¹

ii Power purchase

With respect to the sale of power, the most popular model is sale of power based on PPAs, or route to market agreements with a utility or a private trading company. However, new models are becoming more popular in Poland, in particular corporate power purchase agreements (cPPAs), whether virtual or physical, and the energy as a service (EaaS) model, which are described below.

There are two main categories of cPPAs that are considered on the Polish market. The first one is the physical cPPA in which the electricity producer sells power to the corporate buyer for a specified term and electricity is physically transmitted from the producer to the corporate buyer. The power producer is paid directly for the electricity by the corporate buyer.

The other model is the virtual (or synthetic) cPPA. In this case, the cPPA is a financial instrument rather than a contract for the sale of electricity because there is no physical delivery of power. Generally, the power producer delivers the electricity to the grid and sells it on the wholesale market, whereas the corporate buyer purchases the electricity on its own, usually from an electricity trader. The parties of the cPPA settle the agreed volume of power produced in the renewable energy installation through a financial contract for difference. The virtual cPPA sets the fixed price and the market reference price. Depending on which price is higher, either the corporate buyer or the producer pays the other the difference. Such a model provides financial security and stability for both parties.

When calculating the price in cPPAs (or any other PPA with the end user), the supplier should take statutory obligations into consideration. The seller of electricity is obliged to cover a specified portion of the power sold to end users (such as a corporate buyer) with certificates of origin from renewable energy sources as well as energy efficiency certificates. The quotas that must be met are stipulated in the Act on Renewable Energy Sources. However, the minister responsible for the climate may change them in the dedicated regulation until 31 August of the applicable year.

cPPAs are still considered a new structure for renewable developers in Poland. However, several cPPAs have already been concluded in the past few years. According to public information, cPPAs in the renewable market have been concluded between such companies as GIG and Signify, Acciona and Brembo, and Danone and GIG. The most common tenor of the cPPAs has been established for 10 years.

As regards the wholesale power market, market participants such as electricity producers or large final customers act on the Polish Power Exchange (i.e., TGE SA, which is the licensed commodity exchange that exists in Poland operating on, among other things, the electricity, property rights and CO2 emission allowances markets).

The market participants may join TGE SA as members or through brokerage houses. In 2021, there were 78 members of TGE SA.¹²

iii Non-project finance development

Renewable energy projects have also been developed using non-project finance structures. In practice, such structures include mostly private equity models.

Distributed and residential renewable energy

An on-site power purchase model has become more popular in recent years in Poland. However, not all structures that are used by investors in Europe are also used in Poland. The structure that is used in Poland is a model of energy as a service that is common for smaller projects.

In such a case, the renewable energy installation developer owns the installation but leases it to the corporate buyer against the payment of rent. The lease rent may be related to the volume of generated power but may also be agreed as a fixed yearly or monthly price. The owner of the installation sometimes also provides maintenance services (such as repairs) to the corporate buyer. Installations are usually designed to achieve 100 per cent self-consumption. However, if there is an excess of electricity that has not been consumed locally, it may be introduced to the electricity grid and then sold on the wholesale market. Because there is no sale of electricity, energy as a service should not be subject to energy regulatory obligations and requirements.

Mergers and acquisitions

Renewable energy supply chains

The Act on Renewable Energy Sources and the Wind Farms Act provide requirements for renewable energy source generation devices. The devices installed are to be manufactured:

1. in PV power plants, not earlier than 24 months before the first electricity generation in that power plant;
2. in onshore wind power plants, not earlier than 33 months before the first electricity generation in that power plant;
3. in offshore wind power plants, not earlier than 72 months before the first electricity generation in that power plant; and
4. for other devices, not earlier than 42 months before the first electricity generation in that power plant.

Development of offshore wind farms provides new opportunities for local companies. The Wind Farms Act provides that, when applying for a subsidy for the offshore wind farm project, the project owner must submit a supply chain plan. The supply chain plan shall describe the investor’s plan of participation for local devices and services. The supply chain plan is supposed to include, among other things:

1. the results of initial discussions with the representatives of the seaports and terminal operators in Poland;
2. an indication of activities that are planned for the purpose of human resources development in the area of offshore wind expertise; and
3. a description and estimated number of jobs that the producer and suppliers of materials or services used in connection with the construction or operation of the offshore wind farm intend to create on the territory of Poland in connection with the construction or operation of the offshore wind farm.

The supply chain plan must be updated 18 months after submitting it. The Wind Farms Act also provides that the investor shall prepare the documentation showing the status of the implementation of the supply chain plan as well as submitting reports to the President of the ERA on the implementation of the plan and potential derogations from it. On 15 December 2021, the Minister of Climate and Environment adopted a regulation on a template for reports on the implementation of the supply chain plan for materials and services.

Other key considerations

Although the renewable energy market in Poland is becoming more popular for investors, it is still growing and drawing on the experience of other countries.

Some of the aspects of the activities in electricity generation are still not regulated in detail. This pertains to repowering or decommissioning of renewable installations. There are, of course, general rules in this respect. For instance, the licences for the generation of power issued by the President of the ERA usually contain provisions according to which, after ending the licensed activity, the producer is obliged to eliminate the effects of its activity, in particular in the field of land reclamation, restoration of the relief to its proper condition and disposal of hazardous waste.

As regards the mergers and acquisitions landscape, in practice, most investors have been interested in investing in projects that have already secured the right to settle the negative balance through the auction system for renewables. However, more and more companies have recently decided to develop projects that are not fully permitted and that have not yet obtained support.

Conclusions and outlook

The development of the renewable energy sector is one of the most crucial goals for the Polish government in the coming years. The share of renewable energy will be growing in the Polish energy mix and it appears that the Polish government is putting great effort into fulfilling Polish obligations under EU legislation.

The coming years will be dominated by investments in offshore wind projects thanks to the Wind Farms Act, which provides a long-awaited dedicated support scheme for offshore wind farms. However, because of ongoing auctions as well as the planned liberalisation of the 10H rule, which prevented the development of many wind farm investments, Polish as well as foreign investors will also develop onshore wind and PV projects.