Polish Green Certificates Held by the Commission to Be Compatible State Aid: a Curious Story Comes to an End

windmills

We are happy to welcome Dr Michał Bernat on the State Aid Blog today. He is a legal and tax adviser and State aid expert at the Dentons offices in Warsaw. Today he shares his insights on a decision in a case involving Polish green certificates issued to producers of energy from renewable energy sources. Read on to learn more.

 

On 2 August 2016, the Commission issued its long-awaited and precedent-setting decision in a case involving Polish green certificates issued to producers of energy from renewable energy sources (RES), following complaints filed as from 2013 in respect of co-firing and hydropower technologies. The Commission concluded its proceedings, extended since then into all RES technologies, at the preliminary examination stage, deciding that the green certificates did involve State aid. However, the Commission held that that aid was compatible with the internal market and decided not to raise objections.

The programme reviewed by the Commission was essentially based on certificates, shaped by the national legislation to be tradable in the market. They were issued to energy producers in respect of the RES energy they generated. Polish laws also required certain businesses to acquire these certificates up to certain levels (quotas), or instead pay a penalty fee, generally used by the authorities to fund other environmental investments. Only one other benefit was offered to the RES producers – selected utilities had the public duty to offtake RES-generated electricity at an average wholesale market price calculated and published annually by the National Regulatory Authority, while RES producers were free to sell their electricity to purchasers of their choice. In particular, no feed-in tariff or guarantee of the green certificates price was provided.

As long as the penalty fee, fixed by the authorities, was in excess of the green certificates price, the committed entities tended to acquire the certificates providing the RES energy producers with cash flow to supplement the proceeds from RES sales and to assure the bankability of RES projects. The support scheme did not discriminate between RES producers; intensity of support measured in certificates issued per MWh of generated RES electricity was exactly the same for any eligible technology. However, due to the open nature of the certificate system, over time the supply of certificates exceeded statutory quotas and the market for green certificates proved to be volatile. In the absence of any specific intervention from the government, prices declined over time, leading to levels currently considered by RES producers to be unsatisfactory, if not unsustainable.

Under these circumstances the Commission’s decision is of obvious importance for the Polish energy market, which had been awaiting the Commission’s conclusions on the case with some concern. Admittedly, it had been common to believe (for various reasons ranging from technical arguments to policy considerations) that the Commission’s decision would eventually be positive. However, the lack of a formal act terminating the Commission’s proceedings did appear as an impediment and, in particular, had tangible detrimental effects on various transactions involving Polish energy assets. It also added to a variety of other measures, regulatory or financial, recently implemented by the Polish authorities and perceived by part of the RES industry as having a telling harmful impact on their projects.

However, the Commission’s decision is interesting for a number of other reasons, which will only be outlined below.

The protection of legitimate expectations is obviously one of the fundamental principles of the EU legal order and, as such, it has also been held as immensely relevant to State aid matters. In particular, the EU courts made it clear that an unexpected turn in the Commission’s approach towards a particular State aid issue, going against a sufficiently clear and unambiguous line of earlier decisions, cannot result in the recovery of aid from the beneficiaries. As the Commission’s track record indicates (see for instance the Commission’s decision of 2 August 2004 in State Aid implemented by France for France Télécom) in manifest cases the Commission itself has been as reasonable as to rule, where it experienced such a radical change of mood, that its new approach would not apply to the detriment of beneficiaries in receipt of aid previously granted.


Do you know we also publish a journal on State aid?

EStAL banner
The European State Aid Law Quarterly is available online and in print, and our subscribers benefit from a reduced price for our events.


 

Poland introduced its green certificates system without a prior notification in 2005, whereas in the preceding years the Commission explicitly held various similar aid programmes not to qualify as State aid at all. The Commission made it clear inter alia in the decision on the green certificates granted in the UK (N 504/2000 – United Kingdom – Renewables Obligation and Capital Grants for Renewable Technologies), Belgium (N 14/2002 – Belgique – Régime fédéral belge de soutien aux énergies renouvelables) or Sweden (N 789/2002 – Sweden – Green certificates). In addition, outside the formal procedures the Commission officials also provided certain parties from other Member States, upon their request, with comfort letters reiterating that no aid would be found in case of the green certificates available in their respective jurisdictions. The Commission’s approach was largely inspired by the PreussenElektra judgement, although the latter concerned feed-in tariffs and not green certificates. However, that ruling indeed suggested that the award to RES producers, through national legislation, of the option to sell their output to mandatory purchasers does not engage any public funds and, consequently, does not constitute State aid either.

One could observe that over time, and in light of new matters submitted to the Commission’s appraisal (such as the emission allowances), the Commission became uncertain whether its earlier approach towards the green certificates was truly valid. Case law evolved likewise, including through cases such as Essent Netwerk Noord and Others (C-206/06), decided upon on 17 July 2008 by the Court of Justice of the European Union. The judges made a distinction from the PreussenElektra case in ruling that the mere fact of a publicly owned company being charged under national law with collection of funds and subsequently with the disbursement of payments from these funds to certain energy producers allowed for the imputation of these funds as originating from the State.

The Commission’s deliberation process meandered into the decision of 13 July 2011 in the Romanian green certificates case (State aid SA. 33134 2011/N – RO – Green certificates for promoting electricity from renewable sources). The decision is quite curious in that that the Commission discussed in more detail the arguments for both the existence and non-existence of aid in the green certificates systems, but eventually refrained from taking “a definitive position as to the existence of aid”. For the avoidance of doubt, the Commission made these comments despite there being no prior amendment in the Commission’s environmental guidelines, not to mention EU laws that would alter the assessment of the State aid implications in green certificates. In any event, the Commission eventually approved the Romanian green certificates system based on the compatibility of the (potential) aid with the internal market. However, taking into account the rather vague and discursive wording of this decision, as well as the apparent absence of any subsequent decisions dealing specifically with green certificates outside Romania, one might wonder whether the Commission’s decision in the Romanian case could indeed be taken as constitutive of a definite change in the Commission’s practice. The Commission was yet to strike the final chord in the green certificates crescendo.

Under these circumstances the Polish authorities were rather discontented to learn of complaints claiming the Polish green certificates to qualify as State aid (incompatible with the internal market due to the alleged overcompensation inherent in the scheme at hand) and even more of the Commission’s view confirming that the scheme may indeed involve State aid. In that regard the Commission did not seem receptive to any arguments based on its earlier practice and proved determined to rule on the compatibility of the programme despite any such concerns. Also the breakthrough judgment of the Court of Justice in Vent De Colère and Others (C-262/12) dealing with feed-in tariffs, believed by many to undermine the PreussenElektra jurisprudence to a great extent, came to the aid of the Commission in that regard as it imposed a rather extensive notion of public resources in the context of public support schemes applied in the energy sector.

It was under these circumstances that the Polish authorities, albeit contesting the Commission’s new view on the existence of aid in green certificates systems, reasonably focused on demonstrating the compatibility of the scheme and, in any event, the Commission’s decision turned out to be positive. Still, in the event of the Commission taking a negative decision in the Polish RES case, one could expect the rather plausible allegations of the Polish authorities (or of private claimants) of a breach of the legitimate expectations inferred from the Commission’s earlier decisional practice.

The Commission’s positive decision is currently rather unlikely to be challenged as far as the existence of aid is concerned and may thus be expected to stand out as a milestone in the Commission’s State aid practice in the field of energy. Therefore, most likely, we would not have the opportunity to see whether the legitimate expectations defence would be raised in litigation before EU courts and how it would be tackled by the Commission and received by the Court. The fact remains, however, that retroactive adjustment in the Commission’s practice concerning green certificates could just raise the judges’ eyebrows and warrant the annulment of the Commission’s decision. In addition, even though the decision is likely to remain uncontested in respect of the existence of aid, the legitimate protection argument could nonetheless resurface in  private enforcement cases.

On a practical note, the Commission’s decision in the Polish case seems to put an end to the debate on State aid classifications of green certificates, and it should also be taken into account in that capacity in any outstanding procedures pertaining to similar instruments (such as the Polish CHP certificates case still pending at the date of this entry). It may also impact on the identification of State aid in various instruments based on free-of-charge awards of specific benefits or entitlements – in the energy sector or well beyond it.

——————————————————–

[Photo credit: warrenski from flickr.com]

Tags

About

Michał Bernat

Related Posts

03. Apr 2020
Guest State Aid Blog by P. Kamil Rosiak
Corona Virus

Covid-19 Support Package for Entrepreneurs: An Update from Poland

We are happy to share with you an update on the Covid-19 support package that Poland is creating to support entrepeneurs fighting the impact of the corona pandemic. Our guest auhor P. Kamil Rosiak is Attorney-at-Law & Partner Associate at KPMG D.Dobkowski LP in Warsaw.* On 28 March 2020 the lower house of Polish parliament (Sejm) passed a bill (so […]
11. Mar 2017
Guest State Aid Blog by Erika Szyszczak
brexit

State Aid is on the Agenda: Deal or No Deal

With great pleasure we welcome again Professor Erika Szyszczak to our blog. Erika is a Research Professor in Law and a Fellow of the UK Trade Policy Observatory. She is currently the Special Adviser to the House of Lords Internal Market Sub-Committee in respect of its inquiry into Brexit: competition. She is the author of The Regulation of the State […]
16. Mar 2015
State Aid Uncovered by Phedon Nicolaides

Relief from Pension Contributions and Reduction of Taxes

Compensation for structural disadvantages encumbering undertakings is still State aid. Compensation for structural disadvantages encumbering SGEI providers is not State aid only if it satisfies the Altmark criteria. Reductions of excise duties approved by the Council may still be subject to scrutiny by the Commission under State aid rules. Exception of fossil fuel from energy taxes when it is not […]
28. Nov 2014
Guest State Aid Blog by Erika Szyszczak

State Aid for Nuclear Power: No Thanks! Maybe? Yes Please!

The Commission’s decision on the Hinkley Point C nuclear power station of 8th October 2014 and what this might mean for the approach to nuclear energy… In 2014, the European Commission adopted new Guidelines on State aid for energy and the environment. These were followed by the adoption of a new General Block Exemption Regulation that also included measures relating to energy […]
02. May 2014
State Aid Uncovered by Phedon Nicolaides
recycle sign

The New Guidelines on State Aid for Environmental Protection and Energy, 2014-2020

The new guidelines are wider in scope: They also cover energy infrastructure, energy capacity and reductions from electricity levies. The new guidelines have higher thresholds for individual notifications. They allow higher aid intensity when aid is granted through competitive bidding. They require more rigorous application of the principles of necessity and proportionality of aid. Introduction   In 2012, the latest year for which […]
10. Jan 2014
State Aid Uncovered by Phedon Nicolaides
electrical sockets

The Non-Equivalence of the Various Methods of Supporting Green Electricity

Introduction Ever since the judgment of the Court of Justice in 2001 on PreussenElektra [case C-379/98], Member States have been grappling with the question of how to support electricity from renewable resources [green electricity] without granting State aid. In PreussenElektra the Court found that there was no transfer of state resources and no State aid, because the German government imposed […]
18. Oct 2013
State Aid Uncovered by Phedon Nicolaides
fortress

A Case of Public Funding of Infrastructure that Does not Constitute State Aid: But Many Questions Remain

Introduction After the landmark judgment in Leipzig-Halle, public authorities are justifiably careful to ensure that the infrastructure they fund is either free of State aid or, if that is unavoidable, that the State aid is compatible with the internal market. Recent cases have shown that there are two problems in this regard. First, public authorities must verify whether the organisations […]
05. Jul 2013
State Aid Uncovered by Phedon Nicolaides
industry

How to Use Economic Tools to Ensure the Proportionality of Aid (Commission Decision SA.34938 on a gas storage facility in Poland)

Introduction Normally, economic analysis is used by the Commission to find out whether a measure confers an abnormal advantage to an undertaking. This would be the case, for example, when a public authority makes an investment that generates a return that falls below what the market would demand. The recipient undertaking derives an abnormal advantage [i.e. an advantage that would […]
26. May 2013
State Aid Uncovered by Phedon Nicolaides
windmills

The Puzzle of Environmental Aid: Why Do Firms Make Environmental Investments?

Introduction Environmental aid is the second largest horizontal category of state aid, after regional aid. It accounts for about 24% of all aid to industry and services. Yet, one often hears from public officials that the current Environmental Aid Guidelines (EAG) do not provide sufficient incentives for environmental protection. The problem is that aid is calculated as a percentage not […]