As the RE-Source Poland Hub foundation dedicated to providing low-cost green electricity to Polish industry through Corporate Power Purchase Agreements (hereinafter: “cPPA”), we express our deep support for the Government’s and Parliament’s efforts to restore price stability and predictability in the energy market.

RE-Source Poland Hub has been working for many years to reduce the cost of electricity for industrial consumers by combining consumers and power generators, who, by entering into long-term contracts (even 15 years), gain predictability and stability, which enables the implementation of further investment projects. At this point, I would like to emphasize that long-term cPPAs are the best possible way to guarantee the stability of electricity price levels in the medium and long term, which in the current situation of high price volatility and uncertainty as to the future behavior of the electricity market is extremely important.

Given our experience and previous commitment to reducing the cost of electricity purchases by Polish entrepreneurs, I would like to present to you the RE-Source Poland Hub Foundation’s position on the Draft Law on Emergency Measures to Reduce Electricity Prices and Support Certain Consumers in 2023 (hereinafter: the “Draft Law”).

First of all, I would like to express our concern over the fact that the bill was not subject to public consultation, which prevented many industry organizations from submitting their comments and recommendations. The above has resulted in the fact that the draft law, which responds to emerging challenges in the current crisis situation, does not take into account all the circumstances that the drafters should take into account. A key element in this regard is the failure to take into account the distinctiveness of cPPAs from other electricity sales contracts. In our opinion, the inclusion of cPPAs in the regime of the above-mentioned law will result in the proposed mechanism for determining the maximum price from RES sources significantly violating the main benefit that motivated companies to conclude such contracts, i.e. the stability of financial terms and their predictability, which until now guaranteed their profitability for both parties to the contract. State interference in concluded and existing contracts will increase the risk of investment financing on the part of the generator, while at the same time signaling to both parties that concluded contracts must be subject to additional risks of state intervention. This applies to both concluded and planned contracts.

At this point, it should also be stressed that the proposed solutions put generators holding these contracts at a much disadvantage vis-à-vis generators who do not hold them. This is because it is customary for cPPAs to be entered into below market prices for a long period of time to hedge against price volatility (the long-term nature of the contract results in generators offering customers a much lower unit price for electricity than currently (at the time of entering into the cPPA) observed in the market). Thus, the project in question generates the risk that RES sources holding such contracts will have to return the funds obtained from the market twice, i.e. once to the Settlement Manager and the second time to the contracting party. This is because the peculiarity of cPPA financial contracts is that the parties agree on a certain price for energy and only settle deviations from this price either upwards or downwards. In these contracts, the energy is actually sold on the exchange, and the parties settle against the agreed price. To illustrate this problem, below is an example of settlement:

  • For example, the revenue of the farm and the cost of energy purchase by the customer from the POLPX was set at 1000 PLN/MWh.
  • The RES installation has a cPPA, for example, at 500 PLN/MWh
  • The law assumes a maximum price for RES sources, for example, at 400 PLN/MWh
  • Thus, according to the law, the Farm must return 600PLN/MWh on account of the planned law because 1000 PLN – 400 PLN = 600 PLN,
  • In addition, the farm must reimburse the customer for the contract cPPA = 500 PLN/MWhThe income of the RES installation after the introduction of the regulation will be minus 100 PLN/MWh because from the amount of 400 PLN/MWh, which will remain, after giving the difference to the Clearing Board, the amount of necessary compensation for the loss of the customer at the level of 500 PLN/MWh must be deducted. This means that in extreme cases the introduction of the solution will result in RES sources adding to energy production, and regularly earning less than sources that do not have such a contract.

    The above seems to contradict the assumption of the EU legislator, who, in recital 30 of the preamble of Council Regulation (EU) 2022/1854 of October 6, 2022 on emergency intervention to address high energy prices, indicated that: “regardless of the form of the contract under which electricity may be traded, the market revenue ceiling should apply only to realized market revenues. This is necessary in order not to harm producers who do not benefit from the current high electricity prices, as they have hedged their income against fluctuations in the wholesale electricity market. Therefore, to the extent that existing or future contractual obligations, such as renewable and other types of power purchase agreements or forward hedging, result in market revenues from electricity production up to the level of the market revenue ceiling, such revenues should not be covered by this regulation. The measure introducing a market revenue ceiling should therefore not discourage market participants from entering into such contractual obligations.”

With the above in mind, it should be clearly emphasized that the proposed solutions will negatively affect the development of the cPPA market, because generators, bearing in mind the aforementioned risks, will be much more cautious about this type of contract, which means that a customer wishing to secure the price of energy in the long term will have much less chance of entering into such a contract. Thus, in aggregate, the Government will achieve the opposite of the intended effect, and in the long term the cost of obtaining energy by consumers will increase, as generators will not be interested in entering into such contracts due to the risks. In addition, this solution will discourage financial institutions from financing investments that are secured by such contracts, which in the long term will result in a significant reduction in the number of RES projects being built. Currently, institutions financing the construction of RES sources view cPPAs as collateral on a par with RES auctions, which is why they are eager to finance investments secured by this type of contract. The proposed change may already permanently discourage such institutions from taking the risk and financing the construction of RES sources.

In addition, I would like to emphasize that cPPA contracts resemble by their form the auction system of RES support. In this type of contract, the parties, as in an auction, undertake to deliver a certain volume of energy at a specified price, and the customer undertakes to receive this specified volume and pay this price. Therefore, it was with great concern that we received this bill, which discriminates, in our opinion, market-based contracts against those concluded between the State and generators. In our view, the cPPA and auction mechanisms are the same and should therefore be treated equally. With the above in mind, RE-Source Poland Hub calls for the exclusion of this type of contracts from the regime of the Act, following the example of the auction contract solutions – both cPPA contracts with physical delivery and financial contracts should be subject to such exclusion.

In the event that it is not considered reasonable to exclude cPPA from the regulation in question, we postulate the following amendment to the bill, which at a minimum provides for the demands of the RE-Source Poland Hub:

“”In Article 2, points 5 and 8 are replaced by the following:

5)

Wholesale electricity market – a market in which wholesale energy products are traded:

  1. (a) through commodity exchanges within the meaning of the Commodity Exchanges Act of October 26, 2000 (Journal of Laws of 2022, item 170, 1488 and 1933), a market organized by an entity operating a regulated market on the territory of the Republic of Poland, an organized trading platform operated by a company operating a commodity exchange on the territory of the Republic of Poland within the meaning of the Commodity Exchanges Act of October 26, 2000, and within the framework of a uniform combination of day-ahead and intraday markets operated by designated electricity market operators,
  2. (b) under contracts for the sale of electricity, one of the parties to which is an electricity generator, and under contracts for the sale of electricity concluded between electricity trading companies, excluding contracts concluded with end-users before the entry into force of this Law for a period of at least 5 years;

“8) market price – the net price of electricity specified in PLN/MWh determined under:

  1. (a) a contract for the sale of electricity; in the case of an energy company engaged in the business of electricity trading, the price is set under the electricity sales contract under which the top company sells electricity, or
  2. (b) the electricity balancing market;

– taking into account the costs arising from the financial instruments entered into by the generator in respect of the electricity covered by that sales contract;”

In summary, it is crucial from our perspective that the State’s intervention in the energy market does not lead to distortions that, contrary to the rightful intentions of the drafters, will threaten short- and long-term security of electricity supply. We regret that the proposed bill does not take into account the actions taken by a growing group of generators and industrial consumers who secure the price of electricity at a reasonable, acceptable level through long-term cPPAs.