Position of the RE-Source Poland Hub foundation on the draft Act on Emergency Measures Aimed at Limiting Electricity Prices in 2023

RE-Source Poland Hub foundation, involved in providing inexpensive, green electricity to the Polish industry through corporate Power Purchase Agreements (“cPPAs”), wishes to express its deep support for the actions of the Government and Parliament aimed at restoring stability and price predictability in the energy market.

For many years, RE-Source Poland Hub has been working to reduce the cost of electricity for industrial customers by connecting energy customers and producers who gain predictability and stability by concluding long-term contracts (for up to 15 years), which enables them to implement further investment projects. I would like to emphasize that long-term cPPAs are the best possible measure to guarantee stability of electricity prices in the medium and long term, which in the current context of high price volatility and uncertainty about the future behavior of the electricity market, is extremely important.

Bearing in mind our experience and ongoing commitment to reduce the cost of electricity for Polish entrepreneurs, I would like to present to you the position of the RE-Source Poland Hub foundation on the draft Act on Emergency Measures Aimed at Limiting Electricity Prices and Supporting Certain Customers in 2023 (”Draft Act”).

First, I would like to express our concern about the fact that the Draft Act was not subject to public consultation, which prevented numerous industry organizations from submitting their comments and recommendations. Consequently, the Draft Act, which in the crisis we all are facing responds to the emerging challenges, does not take into account all the circumstances that the project initiator should have considered. The key element in this respect is the fact that the differences between cPPAs and other power purchase agreements were not addressed. In our opinion, the inclusion of cPPAs in the regime of the Draft Act will result in the proposed mechanism for setting the maximum price of electricity from renewable energy sources substantially offsetting the key benefit that motivated enterprises to conclude such agreements, i.e. the stability and predictability of financial conditions, which until now guaranteed their profitability for both parties to the agreement. State interference with concluded and binding contracts will increase the investment financing risk on the producer’s side while signalling both parties that concluded agreements must be subject to an additional risk of state intervention. This applies to both concluded and planned agreements.

Furthermore, it should also be emphasized that the proposed solutions place producers who concluded such agreements in a much worse position than producers who did otherwise. This is because usually cPPAs are concluded below market prices for a long term to hedge against price volatility (the long-term nature of the agreement causes producers to offer customers much lower unit price for electricity than market prices at the time of conclusion of the cPPA. Therefore, the draft leads to a risk that renewable energy sources having such contracts will have to return the funds obtained from the market twice, i.e. to Zarządca Rozliczeń and to the counterparty. This results from the nature of cPPA financial arrangements, where the parties agree on a specific electricity price and only settle deviations. Under such agreements the actual electricity is traded on the exchange, and the parties only settle accounts on the agreed price. To illustrate this problem, below we present an example of the settlement:

• A producer’s revenue and the cost of electricity purchased by a customer from the Poliosh Power Exchange is 1,000 PLN/MWh

• The RES installation has a cPPA agreement with a price of 500 PLN/ MWh

• The Draft Act provides for a maximum price for renewable energy sources at the level of 400 PLN/MWh

• Therefore, according to the Draft Act, the producer must return 600 PLN/MWh on account of the Draft Act, because PLN 1000 – PLN 400 = PLN 600,

• Additionally, under the cPPA the producer must return 500 PLN/MWh to the customer.

Therefore, the revenue of the example RES installation after the regulation is introduced will amount to 100 PLN/MWh, because we have to subtract 500 PLN/MWh – the necessary compensation for the customer’s loss – from the 400 PLN/MWhleft after the difference is transferred to Zarządca Rozliczeń. This means that in extreme cases the introduction of the proposed solution will result in renewable energy sources actually paying for electricity they produce, , and will usually earn less than sources that did not conclude such agreements.

The above seems to contradict the assumption of the EU legislator, which in recital 30 of Council Regulation (EU) 2022/1854 of 6 October 2022 on emergency interventions to solve the problem of high energy prices indicated that: “independently as from the form of the contract under which electricity can be traded, the market revenue ceiling should only apply to realized market revenues. This is necessary in order not to harm producers who are not benefiting from the current high electricity prices as they have hedged their revenues against fluctuations in the wholesale electricity market. Therefore, to the extent that existing or future contractual obligations, such as renewable energy purchase agreements and other types of energy purchase agreements or timely safeguards, result in market revenues from electricity production up to the market revenues ceiling, such revenues should not be covered by this Regulation. A measure that imposes a cap on market revenues should therefore not deter market participants from entering such contractual obligations.”.

Bearing the above in mind, it should be clearly emphasized that the proposed solutions will adversely affect the development of the cPPA market, for producers, bearing in mind the above- mentioned risks will be much more cautious about this type of contract, which will entail much less opportunities for customers willing to hedge electricity prices in the long term. Thus, eventually, the government will achieve the opposite effect and, in the long term, the costs of electricity paid by customers will increase, because producers will no longer be interested in concluding cPPAs due to the risks involved. Additionally, this solution will discourage financial institutions from financing investments collateralized with this type of contracts, which in the long term will significantly reduce the pipeline of RES projects under construction. Currently, institutions financing the construction of renewable energy sources perceive cPPAs as a collateral on a par with RES auctions, and are willing to finance investments secured by such agreements. The proposed change may permanently discourage such institutions from taking the risk and financing the construction of renewable energy sources.

Additionally, I would like to emphasize that the form of cPPAs resembles the RES auction support scheme. Under such agreements , similarly to an auction, the producer undertakes to deliver a certain volume of electricity at a specified price, and the customer undertakes to receive such specified volume and pay the price. Therefore, the Draft Act caused a great concern among us, for, in our opinion, it discriminates arm’s length contracts against those concluded between the State and producers. In our opinion, cPPAs and auction mechanisms are equivalent, therefore should be regarded in the same way. Bearing the above in mind, RE-Source Poland Hub proposes that this type of contracts be exempt from the regime of the Draft Act similarly to auction contracts. The exemption should apply to both cPPAs with physical delivery as well as financial contracts.

If you do not find it justified to exclude cPPAs from the regulation in question, we suggest introducing the following amendment to the Draft Act, which to a minimum extent implements the proposals of RE-Source Poland Hub:

“In Art. 2 points 5 and 6 shall be replaced by the following:
5) wholesale electricity market – the market on which wholesale energy products are traded:

a) through commodity exchanges within the meaning of the Act of October 26, 2000 on commodity exchanges (Journal of Laws of 2022, item 170, 1488 and 1933), a market organized by an entity operating a regulated market in the territory of the Republic of Poland, an organized platform trading conducted by a company operating a commodity exchange on the territory of the Republic of Poland, within the meaning of the Act of 26 October 2000 on commodity exchanges and under the single day-ahead and intraday market coupling conducted by designated electricity market operators,

b) under contracts for the sale of electricity, in which one of the parties is an electricity producer, excluding contracts concluded with end customers before the entry into force of this Act for a period of at least 5 years, and under contracts for the sale of electricity concluded between energy companies performing electricity trading activity;

6) market price – the price specified in PLN / MWh determined under the electricity sale agreement on the wholesale electricity market, taking into account the costs resulting from the financial instruments concluded by the producer with regard to the electricity covered by the sale agreement; ”.

To recapitulate, from our perspective it is crucial for the intervention in the energy market not to result in disruptions which – contrary to the legitimate intentions of the project initiator – endanger the short- and long-term security of electricity supply. We regret that the Draft Act does not take into account the actions taken by an increasing number of producers and industrial customers who secure electricity prices at a reasonable, acceptable level through long-term cPPAs.

Having regard to the common interest of providing customers with affordable electricity, we hope that our arguments will find your understanding.