The President of the Energy Regulatory Office to target electricity end users generating electricity on their own?
On 12 February 2021, the ERO President posted an announcement on the ERO’s website, noting that some energy market participants have concluded and executed Power Purchase Agreements in a manner that may indicate an attempt to circumvent the law, in particular the concession and registration obligations (the register of energy producers in small installations – MIOZE), and consequently also obligations to support electricity generation from renewable energy sources. […]. His attention was drawn to “situations where an entity does not transfer ownership of a particular installation to the counterparty to the agreement.” According to the ERO President, “the execution of agreements of this type is therefore in fact based on making available to the end off-taker not the generating installation, but the generated electricity, the consumed volume of which is translated into the amount of benefits payable to the providing entity. As a result, the entity making the electricity available in fact becomes a power company, engaged in the business of generating electricity and selling it to end users off-takers.” Consequently, such an entity is required to submit certificates of origin for redemption to the ERO President, or to pay a substitution fee, if applicable.
What does the ERO mean?
A careful reading of the above announcement leaves the reader perplexed. It is unclear to what kind of agreements ERO President is referring. The Energy Law and the Act on Renewable Energy Sources (RES Act) have never required electricity producers to own the equipment which they use to generate electricity. A producer is only required to have “the technical capability to ensure the proper conduct of its business” which, in practice, means having legal title to the installation (Article 3 section 1 point 3 of Energy Law). However, such legal title need not be ownership. Title may be based, for example, on a lease, rent other legal title, provided that it entitles the producer to use the installation to produce electricity and deliver the electricity to the grid or directly to the end user. This approach has never been questioned in the Energy Law literature. On the other hand, generating electricity or heat for one’s own needs, i.e. without connecting the generating installation owned by electricity producer to the system operator’s network, falls outside the scope of both the Energy Law and the RES Act, as it is not a business activity consisting in the generation of electricity. This thesis has never been controversial either. The owner of an electricity generating installation has never been deemed to be an energy company within the meaning of the Energy Law, provided that it does not use the installation itself to produce electricity. An electricity producer can generate electricity or heat even by using the services of third-party entrepreneurs. This situation often occurs in practice. There are many sources of electricity and heat to which the ERO President has granted concessions for the production of electricity or heat, which themselves have no ownership right over their assets, and even the entire O&M activity is carried out on the basis of agreements concluded with external service providers or other entrepreneurs who provide these producers with access to generating installations or essential elements thereof.
No need to be the owner to sell electricity to the grid…
It should be noted that it is impossible to find any obligation in the Energy Law requiring producers to own the installations and equipment they use for business activities falling within the scope of this law. Moreover, the Energy law (Article 9h section 3), explicitly provides for freedom in this regard, by entitling a grid owner to enter into an agreement with another entity to use its grid and function as the system operator (if the owner does not carry out such activity itself). In the Polish Energy Law, this is equivalent to conducting business activity consisting in the transmission or distribution of electricity.
The above examples prove that, as noted by the President of the Energy Regulatory Office, “making the generating installation available to the off-taker” is, in fact, fully compliant with the Energy Law and the RES Act. An agreement under which a generating installation is made available to an off-taker does not amount to an agreement for the sale of electricity but, rather, an agreement under which the generating installation is made available to the off-taker in exchange for a rent. If the energy from such a commissioned installation is sold via the grid, it would be qualified as the generation of electricty, and the entity which sold the electricity to the grid would be awarded the status of the electricity producer. The producer need not own the generating installation, as this issue can be dealt with in contractual arrangements.
…and no need, if you produce for your own needs either
An off-taker which, instead of buying electricity from the grid, enters into an agreement with another entrepreneur under which the entrepreneur will build an electricity generating installation exclusively used for the off-taker’s own needs, and thereby not incurring costs related to energy distribution, certificates of origin and other compulsory fees, acts in full compliance with the Energy Law and the RES Act.
Any interpretation of the law which required every entrepreneur who owns a generating installation to be treated as an energy company within the meaning of the Energy Law would have far-reaching effects. In principle, it would make it impossible for banks to finance electricity sources. A bank cannot establish a pledge on generating units (which in the majority of the cases in the form of a floating charge), because if the pledge were to be executed, the bank would become an energy company and would be unable to operate with the acquired asset. Accordingly, the bank would have to retain the asset only if it able to sell it immediately . According to the interpretation proposed by the ERO President, a bank would be unable to lease or even lend the asset free of charge. These considerations, among others, were decisive in the Energy Law, since its adoption, allowing the possibility to use third-party property to generate electricity or heat. This was a deliberate and intentional move and, most importantly, none of the amendments to the Energy Law or the adoption of the RES Act have changed this.
Power plants no different to planes or hotels
If the ERO President’s announcement was intended to convey the idea that the Energy Law and the RES Act permit the generation of electricity or heat solely in generating installations owned by the producer, this would represent a 180-degree turn in the practice, developed for over 50 years, of entrepreneurs using other entrepreneurs’ assets, on the basis of legal titles other than the formal ownership of buildings, equipment or vehicles. Airline transportation represents a good example of the meaning of such agreements in another quite heavily State-regulated industry. Today, only few of airlines in the world, carry passengers in planes that they own. The planes are mostly leased from specialized leasing companies. How many hotels are run by companies that do not actually own the hotel building? How many car fleets are leased and the car leasing companies are obviously not road transport companies, bus operators or cab drivers? The logical conclusion of the ERO President’s interpretation would be that all farmers who permit electricity producers to locate windfarms or solar panels on their land should be categorised as energy companies. If it is not possible for installations to be made available to the producer by a third-party owner, then logically the same rule should also apply to the land on which installations are located.
It is, therefore, to be hoped that the ERO President’s announcement of 12 February 2021 will be revised and clarified in the nearest future, to ensure that it applies solely to truly illegal situations.