Auction-based Subsidies in the Renewable Energy Sector: Time to Forget the Safe Space of Guaranteed Tariffs

2020 | roadmap

Subsidies for power generation from renewable energy sources (RES) are undergoing material structural changes in the CEE region. In most CEE jurisdictions, auction-based subsidy schemes are replacing mandatory feed-in regimes, forcing investors to leave behind their safe space of guaranteed tariffs and to adapt to market circumstances by offering competitive subsidised tariffs. In the region, the implementation status of auction-based subsidy schemes varies from country to country. Therefore, in this article, we provide you with a CEE-wide overview of RES subsidy schemes with a special focus on auctions. 

Poland

Three different support schemes are available in Poland: (i) green certificates for power plants commissioned before 1 July 2016; (ii) feed-in tariffs / feed-in premiums for smaller biogas and hydropower installations; and (iii) contracts for difference awarded in the framework of auctions.

Auction-based support scheme in operation
The subject of an auction, the first of which was launched in 2016, is the amount of energy generated in a renewable energy source over a 15-year period but no later than until 2035.
Auctions are held via an online platform and may be organised multiple times a year. There are separate auctions for (i) new plants, (ii) modernised plants, and (iii) old plants, which can switch from the green certificates support scheme to contracts of difference. There are also separate auctions for plants with total installed capacity below and above 1 MW. The auctions are held separately for five groups of installations depending on the technology used. One group is dedicated jointly to wind and PV plants.
The auction is won by the bidders who offered the lowest prices and whose offers did not exceed the total amount of energy covered by the auction.
Energy generated in the renewable energy sources is traded on the Polish Power Exchange. The winners of the auction receive the negative balance (difference) between the price for the sale of electricity and the price they offered in the auction. The difference is paid monthly by the state-owned settlement entity.

Recent amendment
The RES support scheme was subject to material improvements in August 2019. The main aim of the amendment was to allow auctions to be conducted at the end of 2019 and to secure support for wind and PV plants, which should cover more than 3 GW, of which 2.5 GW will cover wind farms with total installed capacity above 1 MW. Additionally, the validity of the occupancy permits and the time for commencement of the sale of energy will be extended, thus putting the investors in a more comfortable position.

Slovakia

Up until the end of 2018, RES generators were subsidised mainly in the form of a guaranteed feed-in tariff granted for 15 years. The tariff depended on the date when the RES power plant was put into operation. The highest level of guaranteed feed-in tariff was granted for facilities put into operation in 2009 – 2010, while after these years the level of tariff has gradually decreased significantly lower. In addition, the construction and connection of new RES facilities to the grid was obstructed by various obligations mainly towards distribution system operators. Thus, the development of RES facilities and especially PV installations have been practically frozen in recent years.

New auctions expected at the end of 2019
As of 1 January 2019, RES legislation has undergone major changes that are expected to foster investments in the sector. As to small-scale RES projects, rules applicable to the installation of own equipment and production of electricity for own consumption have been simplified.
For new larger RES facilities, an auction scheme has been introduced, under which new RES projects with installed capacity from 10 kW to 50 MW will be selected in auctions organised by the Ministry of Economy. The ministry will be entitled to limit the maximum price to be paid following the auction. The deadline for submitting bids will be two months from the opening of an auction and the support in the form of additional payment will be guaranteed for the best bidders for 15 years.
The first auction is expected to be organised in late 2019 or early 2020. The notice of the auction will be published at least two months before the auction takes place.

Hungary

As of 1 January 2017, a new auction-based subsidy scheme replaced the previous general mandatory off-take regime. Pursuant to the new scheme, mandatory off-take has been limited to RES power plants under 0.5 MW capacity (save for wind power plants), and RES power plants above 0.5 MW capacity may be subsidised by way of green or brown premiums. The new scheme required green premiums to be allocated among RES generators above 1 MW capacity by means of auctions. In the course of an auction, the national regulatory authority specifies the amount of annual financial sources and volume of power that may be subject to subsidy. Bidders compete with respect to their proposed subsidised prices, with the lowest subsidised price winning. The amount of green premium payable to a RES generator is calculated with respect to the subsidised price and the applicable market prices available on the Hungarian power exchange.   

First pilot auction launched in September 2019
The national regulatory authority launched the first pilot auction on 2 September 2019. In the pilot auction, bidders may apply for green premiums in two different categories: (i) power plants between 0.3 MW and 1 MW capacity, and (ii) power plants between 1 MW and 20 MW capacity. In the first category, the total amount of financial support that may be allocated among successful bidders is HUF 333m per year. Furthermore, the total volume of subsidised electricity in the first category is limited in 66 GW/year. In the second category, the overall limit of financial support is HUF 667m per year, and the volume of subsidised electricity may not exceed 134 GWh per year. Winning bidders will be subsidised for 15 years under both categories.
It is expected that the national regulatory authority will launch several other auctions in the future based on the experiences gathered during the pilot auction.

Romania

In March 2019, the Romanian Ministry of Energy submitted for public debate a document outlining a new mechanism for supporting low-carbon electricity generation, by replacing the former green certificate support regime with a Contract for Difference (CfD) scheme.

Contracts for difference from 2021?
Under the proposed CfD scheme, eligible producers enter into a private law contract (CfD contract) with OPCOM S.A., the Romanian power and gas market operator, and agree on a "strike price". Producers sell electricity on the competitive market; if the market price (i.e. the "reference price") falls below the strike price, the counterparty will reimburse producers the difference. Likewise, if the market price exceeds the strike price, the producers will reimburse the difference to the counterparty.
The proposed new scheme is inspired by the British CfD system, targeting both the renewables and the nuclear sector. 
The CfD scheme would be funded by end consumers through the energy bill, which will include the CfD contribution as a separate item. The scheme is expected to be capped at EUR 125m per year for renewables projects and at EUR 215m per year for nuclear projects.
CfD supports would expire when an investment is recovered. The "reference price" is proposed to be set annually as the average price on the day-ahead market. In the case of renewables, the strike price would be set by way of an auctioning mechanism.
Eligible parties may enter into a CfD contract already in the development phase, thus facilitating the financing of the project in an early stage. The CfD contract will be regulated to include "change in law and change in tax" clauses, aimed at securing long-term certainty for investors.
Despite optimistic political statements, the CfD system may not be realistically implemented in Romania before 2021, as a detailed legal framework needs to be put in place, after being cleared for state aid by the European Commission.

Croatia

The amendment of the Croatian Act on RES and High Efficiency Cogeneration effective as of 1 January 2019 introduced a new auction-based support scheme in Croatia, which replaced the previous system based on a mandatory purchase with a feed-in tariff.

Auction-based support scheme
Amid the legislative changes, the new support scheme has not yet been put into practice. To this end, the government will need to define a new quota aimed at supporting electricity generation from RES and cogeneration plants for 2016 to 2020. The existing power purchase contracts concluded based on the old tariff systems as of 2007, 2012 and 2014 will also be included into the new quota. Depending on the availability of support quotas, the Croatian Energy Market Operator (HROTE) will organise auctions at least once per year.

Premium tariff: Operators of RES or high-efficiency cogeneration plants, who have obtained the status of an eligible generator and have been selected as best bidder in a public auction carried out by the HROTE, will be entitled to receive a premium tariff on top of the price of the electricity, which they have sold on the market pursuant to the Croatian Electricity Market Act.

Guaranteed purchase price: Operators of RES or high-efficiency cogeneration plants with an installed capacity of up to 500 kW will be entitled to conclude a power purchase agreement at a guaranteed purchase price if they are selected as the best bidder in a public auction carried out by the HROTE.
The implementing bylaws that will ensure full and effective implementation of new support schemes for RES and high-efficiency cogeneration plants are yet to be adopted (i.e. regulation on available support quota and state aid scheme to be approved under the current EU state aid rules by the European Commission). Therefore, the HROTE is currently not able to conclude new power purchase agreements with eligible generators.
Although the first auctions were expected to be organised in 2019, it is more likely that the new auction scheme will be launched in 2020, once the European Commission has approved the scheme from a state aid perspective and depending on the quota available to generators.

Czech Republic

A new RES support scheme in the Czech Republic is planned to be introduced as of January 2021. However, due to delays in implementation, this date seems ambitious. In order to introduce a new RES support scheme, a robust amendment to the currently effective act on RES was published in November 2018 and is still subject to public discussion. According to the Proposal, the new support scheme will be divided into two sections: (i) small installations below 1 MW (except wind installations up to 6 MW or composed of six energy sources) supported in the form of green bonuses paid for own energy consumption or as a "contribution" to the market price, and (ii) larger installations (except PV plants) supported by an auction scheme.

Auction-based support scheme as of 2021
Under the Proposal, auctions will be published by the Czech Ministry of Industry and Trade (the "MIT") multiple times a year as needed. The MIT will specify the type of RES and the total amount of energy covered by the auctions on a case-by-case basis. Separate auctions will be held for the production of renewable energy and combined energy and heat.
In the case of renewable energy, the auction will be won by the bidders offering the lowest reference prices. The winners will then sign an agreement with the MIT in which they undertake to commission or modernise the plant and to produce energy in accordance with the agreement in exchange for an hourly auction bonus, i.e. the difference between the reference price in the bid and the hourly market price of electricity. The bonus is provided by the Czech electricity and gas market operator OTE a.s.
The current Proposal does not allow for the support of PV installations above 1 MW. The MIT explains this as an attempt to prevent the construction of large "solar parks" and encourage the construction of small PV installations, e.g. on building roofs. However, many market players have challenged this position. Thus, the final auction framework in the Czech Republic might be made available for large PV installations.

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