Integrated Report 2019 | PGE Capital Group

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Regulatory environment

The regulatory environment has a decisive influence on the energy sector, thus determining its transformation. Supporting certain energy technologies or charging others has a special dimension. We monitor domestic and foreign regulations on an ongoing basis, and by actively participating in the dialogue with legislative authorities, we present our point of view.

Domestic regulatory environment

Segments Regulation Regulation objectives Latest conclusions Next stage Impact on PGE

 

 Draft act on compensation for the increase in electricity prices in 2020.
  • Introduction of compensation for the increase in electricity prices in 2020 as compared to prices in 2019.
  • The compensation would be available to end customers in households whose taxable income did not exceed the first tax bracket in 2019 and who will consume at least 63kWh of electricity in 2020.
  • ¡  The compensation would be paid in 2021 by trading companies at the request of the customer, through appropriate corrections to the invoices.
  • The act provides for 4 compensation thresholds depending on the amount of energy consumption.
  • The costs of compensation payments (an amount equal to the sum of the compensation paid to end customers) are to be financed with funds from the sale of 25 million CO2 emission allowances which form part of the national auction pool for the new EU ETS trading period starting on January 1, 2021.
  • Trading companies will be reimbursed upon an application submitted to Zarządca Rozliczeń S.A. For applications involving more than 4 million power take-off points, reimbursement would be made within 6 months of the date of application.
 The draft act was published on February 24, 2020 on the  Government Legislation Center’s (GLC) website. At present, public consultations are being held.  Upon completion of consultations, the draft will be sent to the Standing Committee of the Council of Ministers . To the greatest extent, the draft affects the operation of the Supply segment. It entails additional obligations imposed on trading companies, such as: notifying customers of their right to compensation, accepting and verifying requests, payment of compensation, and inspection activities in consultation with the competent head of the tax office.

The draft stipulates that electricity distribution companies qualify end customers to one of the four groups eligible for compensation, and this compensation is to depend on the consumption of electricity at a given power take-off point.

Regulation on the Low-Carbon Transport Fund The drafts set forth detailed rules for the functioning of the Low-Carbon Transport Fund established under the Act on Biocomponents and Liquid Biofuels.

The draft regulation on the detailed conditions for the granting and settlement of support granted under the Fund determines, in particular, the maximum amount of support, the list of eligible costs and the intensity of support.

The draft regulation on the detailed criteria for selection of projects to be granted support under the Fund, specifies the following key criteria: (i) significance of the project for purposes of market development, (ii) appropriateness and relevance of the activities planned and their implementation, (iii) assessment of the planned costs of the project in relation to the scope of works, (iv) organisational capacities of the applicant to complete the project and institutional arrangements for its implementation.

 The regulations were published in the Journal of Laws on December 23, 2019 and entered into force on December 24, 2019. The announcement of the first call for applications for funding from the Low Emission Transport Fund is scheduled for the first half of 2020. The support granted under the Fund can be used, in particular, for the construction of the infrastructure for charging electrical vehicles and for the production of biomethane used in transport .
 

Amendment to the Energy Law The updated energy law contains a number of changes, including:
  • comprehensive regulation for energy storage;
  • introduction of mandatory remote readings at metering installations;
  • establishment of an energy market information operator, responsible for establishing and developing a central market information system.
 Public consultations on the draft act ended in November 2018.

Another (significantly revised) draft was published on December 23, 2019.  The draft was submitted to the Committee for European Affairs on February 11, 2020.

 The draft is scheduled to be submitted to the Council of Ministers for approval in the first half of 2020. The proposed solutions will affect all segments of the PGE Group’s operations, especially the Supply and Distribution segments.
Draft act on promoting electricity generation in offshore wind farms The draft act provides for enabling the development of offshore wind power generation. Offshore wind farms are important for the fulfilment of international commitments in the field of renewable energy in the long term. The key to these is to create legal regulations that will stimulate the growth of this sector.

The draft provides for:

  • A separate support system dedicated to the offshore technology, adjusted to its technical and economic conditions, consisting in granting the so-called right to cover the negative balance to be calculated on the basis of the offshore installation’s LCOE, including the connection construction costs that will be incurred by the investor in the initial phase.
  • Numerous modifications of administrative procedures related to the investment process, taking into account the specificity of the project to construct offshore wind farms.
  

Public deliberations and consultation lasted till  January 15, 2020.

 Currently, comments submitted in public consultations are being analysed. Then, the draft will be sent to the Standing Committee of the Council of Ministers. The Act is of key importance for the development of offshore wind farms and thus for PGE Baltica, a company responsible for the implementation of the Offshore Programme at the PGE Group and coordinating preparations for the construction of three wind farms.
 

Draft ordinance of the Minister of State Assets on the reference price of electricity from renewable energy sources in 2020, and periods for producers who won the auction in 2020. According to the draft, the proposed reference price values, except for those concerning installations with a total installed electrical capacity of not more than 1 MW which use only onshore wind energy to generate electricity, as well as installations with a total installed electrical capacity of no more than 1 MW and with a total installed electrical capacity of more than 1 MW, using only solar radiation energy to generate electricity – which were reduced – are the same as the reference price values set for 2019.

Reference price for installations:

  • with a total installed electrical capacity of more than 1 MW, using only onshore wind energy to generate electricity, is PLN 250/MWh (the price in 2019 was PLN 285/MWh);
  • with a total installed electrical capacity of no more than 1 MW, using only solar radiation energy to generate electricity, is PLN 360 /MWh (the price in 2019 was PLN 385/MWh);
  • with a total installed electrical capacity of more than 1 MW, using only solar radiation energy to generate electricity, is PLN 340/MWh (the price in 2019 was PLN 365/MWh).
 Draft ordinance published on February 27, 2020 and released for public deliberations and consultation. On April 2, 2020, results of the deliberations were published. At present, the ordinance is being reviewed by the Minister of Climate. Release for interdepartmental consultation. The draft regulation has revised prices for wind and solar installations, i.e. technologies that have been most popular in previous auctions and that should account for most of this year’s auction budget. The ordinance may affect the prices of energy produced by wind and photovoltaic installations of PGE Group that will participate in auctions in 2020.

Ordinance of the Minister of Climate of April 7, 2020 on detailed rules for the determination and calculation of tariffs and for settlements heat supply. The amendment to the ordinance refers, among other things, to:
  • adapting the cost method of determining the tariff for heat generation in cogeneration units to the new support mechanism for cogeneration,
  • streamlining and automating the adjustment of tariffs in case of unforeseen and significant changes in external factors – for the cost method,
  • making the process of revising tariffs drawn up using the simplified method more flexible in the event of publication of new reference prices by the President of ERO or modification of licences,
  • introducing a mechanism allowing for a one-off transfer in the tariff of purchase costs of  CO2 emission rights incurred in 2018, which so far have not been covered by the tariffs calculated using the simplified method.
 The draft ordinance was published in February 2020. Public consultation was held until March 6, 2020, followed by interdepartmental deliberations. The ordinance was signed on April 7, 2020 and published on April 23, 2020. The ordinance enters into force 14 days after publication, i.e. on May 8, 2020. The ordinance has a positive impact on the District Heating segment, in particular on the generation of power in cogeneration. It allows to increase revenues from these activities and makes the tariff approval process more flexible.

Draft Act amending the Act on disclosure of information about the environment and its protection, public involvement in environmental protection and environmental impact studies and certain other acts. The draft act aims to transpose the EIA Directive as regards Article 11(1) and (3), i.e. regulations concerning public access to justice in the area of the environment by granting environmental organisations new powers affecting the possibility to use decisions on environmental conditions of projects significantly affecting the environment and to obtain further investment decisions in the investment and construction process. The draft law was published on January 24, 2020 on the website of the Government Legislation Centre and has been released for interdepartmental deliberations. Release for public consultation. The Act affects all business segments of the PGE Group that implement infrastructural investments.
 

Act of March 31, 2020 amending the Act on special solutions to prevent, combat and counteract COVID-19, other infectious diseases and the resulting crisis situations, as well as certain other acts. The act introduces a number of measures to support the economy during the COVID-19 epidemic and the state of epidemic announced in Poland. These measures include:
  • deduction of loss incurred in 2020 from CIT for 2019;
  • ¡  temporary waiver of the extension fee with respect to amounts payable to the state treasury and social insurance institution;
  • wage subsidies for employers experiencing economic downtime, financed from the Guaranteed Employee Benefits Fund;
  • suspension of the obligatory periodic medical examinations for employees.

A key point is the waiver of the provisions allowing electricity companies to cut off the supply of electricity, heat or gas to customers who do not pay their bills on time. The special provisions are to apply during the period of the epidemic emergency and state of the epidemic.

 The act entered into force on March 31, 2020. – Provisions that prevent energy companies from conducting debt collection activities by suspending the supply of energy or gas fuels may have a material adverse effect on the financial and liquidity standing of the Supply and Distribution segment.

Draft Act amending some acts in the field of protective measures due to the spread of the SARS-CoV-2 virus The Act introduces further protective tools for the economy during the COVID-19 epidemic and the epidemic status announced on the territory of the Republic of Poland. The Act contains provisions that allow limiting the scope of collateral for monetary transactions, including:
  • raising the limit for possible certificates confirming generation of energy from renewable energy sources (without reduction coefficient and limits for a given chamber member and the entire chamber);
  • abolition of the reduction coefficient for non-cash collateral in the form of CO2 emission allowances and abolition of limits at the level of a given chamber member and the entire chamber;
  • introducing the possibility of presenting, as non-monetary security, guarantee by the parent company;
  • exemption from the obligation to provide financial security required for some of the deposits if an appropriate investment rating is provided.
 The draft act was published on April 28, 2020 on the Sejm website. On May 15, 2020, the Act was published in the Journal of Laws, entering into force, as a rule, on the day following the day of publication, i.e. May 16, 2020. The Act affects all business segments of the PGE Group by offering further tools that are to enable liquidity to be maintained in 2020 or to reduce losses due to the ongoing COVID-19 epidemic.

International regulatory environment

Segments Regulation Regulation objectives Latest conclusions Next stage Impact on PGE

 

 Regulation of the European Parliament and of the Council establishing the framework for achieving climate neutrality (European Climate Law) Enshrining the 2050 climate-neutrality objective in EU law. The EC submitted a legislative proposal on March 4, 2020. The key solutions proposed include:
  • enshrining the legally binding 2050 climate-neutrality objective in EU law;
  • by September 2020, the EC The EC will review Member States’ reduction ambitions and assess the current legal framework in the light of the climate neutrality objective. The EC will also present an assessment of the increase in the emission reduction target from the current 40% in 2030 relative to 1990 to 50-55% in 2030 relative to the same base year;
  • by June 30, 2021, the EC will present relevant legislative proposals, inter alia, on the revision of the ETS Directive, the Directive on the promotion of the use of energy from renewable sources and the Directive on energy efficiency;
  • revising the trajectories for the reduction of CO2 emissions indicated in the National Plans for Energy and Climate, together with an indication of how to achieve emission reductions in order to achieve climate neutrality by 2050;
  • The EC reserves the right to issue recommendations if a Member State fails to demonstrate a sufficient level of ambition;
  • giving additional powers to the EC to set the EU-wide trajectory for achieving the climate neutrality objective by means of delegated acts – with limited control by Member States;
  • introducing an additional assessment taking into account the climate neutrality objective for all legislative proposals and other draft measures taken by the EC.

On March 31, 2020, The Legal Service of the European Parliament has presented a preliminary opinion that the establishment of the trajectory for achieving the climate neutrality objective by means of delegated acts would be contrary to Article 290 of the Treaty on the Functioning of the EU (“TFEU”).

 The preliminary position of the European Parliament is expected to be adopted by September/October 2020. The Council’s position is likely to be developed no sooner than during the German Presidency (which will start in July 2020). Improved competitiveness of renewable sources and, in the short term, of gas units, at the expense of high-carbon fuel-based generation units.

Increase in operating costs of conventional electricity generation.

Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the EU (ETS Directive) as well as implementing and delegated acts,

Decision (EU) 2015/1814 of the European Parliament and of the Council concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme (MSR Decision).

 Combating climate change and performance of obligations resulting from the Paris Agreement.

Development of investment incentives through a CO2 price signal to develop low-emission sources.

 The legislative proposal presented on March 4, 2020 by the EC, concerning the Regulation of the European Parliament and of the Council establishing the framework for achieving climate neutrality (European Climate Law), provides that, among other things:
  • by September 2020, the EC will review the EU’s 2030 climate target in the light of the climate neutrality objective and examine options for introducing a new 2030 target of 50-55 % emission reductions compared to 1990 levels.
  • by June 30, 2021 The Commission will assess how the EU legislation implementing the Union’s 2030 target should be amended to achieve emission reductions of 50-55% compared to 1990 and to achieve the climate neutrality objective.

This means that the EC is planning to carry out another revision of the ETS Directive and, potentially, the MSR Decision over the next year.

A public consultation on the Climate Target Plan 2030 was

  

Adoption of the implementing act on the functioning of the Modernisation Fund expected in Q2 or Q3 of 2020.

A comprehensive plan to increase the EU climate target for 2030 to 50-55% is to be presented by the end of September 2020, whereas proposals for the next revision of the EU ETS inter alia the ETS directive and MSR decision are expected in June 2021.

  

 

 

Improvement in the competitiveness of renewable sources and – in short-term- gas units to the detriment of generation assets using high-emission fuels.

Increase in operating costs for conventional generation of electricity.

Option to obtain direct investment support from 2021 from the Modernisation Fund or Innovation Fund.

Another revision of the ETS Directive is likely to cause a further increase in prices of emission allowances.
 

 

 

 Revision of the Council Directive 2003/96/EC restructuring the Community framework for the taxation of energy products and electricity (ETD Directive). Revising the minimum rates of taxation of energy products and electricity with a view to achieving, including through fiscal measures, EU climate neutrality by 2050. Revision of the scope and structure of rates, exemptions and reliefs. On March 4, 2020 the European Commission published an action plan and a preliminary impact assessment for the revision of the ETD Directive. The consultation on these documents was completed on April 1, 2020.

As previously announced, the revision of the ETD is to include, among other things, a review of excise duty rates and a link between the minimum tax rates and greenhouse gas emissions with a view to adapting EU tax policy to the objectives of the European Green Deal.

The Commission also proposes to move away from unanimity in the Council to qualified majority voting for the adoption of the fiscal policy measures in question, with Article 192 TFEU on environmental policy being indicated as the appropriate legal basis for the proposal.

 A large-scale public consultation is scheduled for the second quarter of 2020.

A legislative proposal for the ETD Directive is expected to be published in June 2021.

  

Depending on the content of the legislative proposal: impact of the regulation on the rules of taxation of electricity produced in high emission units – possible further reduction of competitiveness of these units.

Improved competitiveness of low-carbon energy sources compared to high-carbon energy sources.

Revision of the Directive 2010/75/EU of the European Parliament and of the Council on industrial emissions (integrated pollution prevention and control) (IED Directive). Comprehensive revision of regulations on industrial emissions. A public consultation of the internal impact assessment on the revision of the IED was held until April 21, 2020.

The objective of the IED revision is, inter alia, to potentially extend the scope of the Directive to new types of pollutants, to amend the emission standards set out in the Directive, to introduce changes to the rules for establishing BAT (Best Available Techniques) conclusions for different industrial sectors.

 The second stage of the public consultation is planned for the third quarter of 2020. The legislative proposal is to be submitted in 2021.

 

 Depending on the content of the legislative proposal, there is a potential need for additional investment expenditure to maintain the operational capability of the existing generating assets.

Potential impact on planned gas and cogeneration projects in terms of expected emission levels.

 

Segments Regulation Regulation objectives Latest conclusions Next stage Impact on PGE

Regulation (EU) 2019/943 of the European Parliament and of the Council on the internal market for electricity (EMR regulation). Establishment of legal framework for further integration of internal electricity market. The Directive was published in the EU Official Journal on June 14, 2019 and it entered into force on July 4, 2019.

Most of the provisions of the Regulation have been in force since January 1, 2020.

On December 17, 2019,the European Agency for the Cooperation of Energy Regulators (ACER) published an opinion containing technical guidelines for calculating the EPS 550/CB 350.

On December 17, 2019,the Committee for European Affairs adopted an Action Plan to enable Poland to fulfil its obligation to make 70% of cross-border transmission capacity available to the market by the end of 2025, assuming year-on-year increases in the volumes made available.

On December 30, 2019, the President of the Energy Regulatory Office issued a decision approving for 2020 a derogation for the Polish market area from the obligation to make available a certain level of cross-border transmission capacity.

By January 5, 2020, the European Network of Transmission System Operators for Electricity (ENTSO-E) was obliged to submit to the Electricity Coordination Group (ECG) and ACER a draft methodology for European Resource Adequacy Assessment (ERAA), and only to ACER a draft methodology for calculating the Value of Lost Load (VoLL), the Cost of New Entry (CONE) and the reliability standards.

Due to the delay, the public consultation process, launched by ENTSO-E on December 5, 2019, continued until January 30, 2020.

 In accordance with the schedule provided in the regulation, by July 5, 2020, ENTSO-E is to submit to ACER a draft methodology for the calculation of the share of foreign power in the Capacity Remuneration Mechanism (CRM).

By July 5, 2021, ENTSO-E will establish a register of foreign capacity providers.

 Effects of implementation of the provisions of EMR Regulation on the capacity market after 2025.

Existing units that exceed the emissions standard 550 g CO2/kWh (EPS 550 and 350 kg CO2/kW/year (CB 350) will not be entitled to capacity payments from July 1, 2025.

Need to include lack of support for existing generating assets from July 1, 2025 in assessments of capacity sufficiency. A potential drop in volume of and price for electricity sold on the wholesale market by domestic units due to increased import, gradual replacement of existing generation units by new, ones, which meet emission requirements.

Further business consequences will also result from the way in which the solutions included in the EMR Regulation are implemented wherever there is room to act by national authorities.

Segments Regulation Regulation objectives Latest conclusions Next stage Impact on PGE
 

 

 

 Multiannual Financial Framework, including regulation of the European Parliament and of the Council establishing the Just Transition Fund. EU’s financial framework (income and expenditures) established for 2021-2027. On January 14, 2020, the EC adopted a proposal for a regulation to create the Just Transition Fund (JTF). The aim of the Fund is to support areas facing significant socio-economic challenges resulting from the transition to a climate-neutral economy by 2050. Key information on the JTF (draft):
  • The JTF budget is expected to be EUR 7.5 billion in fresh funding, of which Poland would receive EUR 2 billion.
  • Per each EUR of JTF funding, the Member State concerned should contribute between EUR 1.5 and EUR 3 from the Structural Funds (European Regional Development Fund and European Social Fund Plus).
  • The JTF can be used to finance, among others, RES projects, energy efficiency, new employment for employees, circular economy (including waste recycling), reclamation of post-mining areas or additional education of employees.
 Work at the Council on adoption of a general approach to financial issues of MFF and the related specific legislative acts – H1 or H2 2020.

The legislative process for the regulation establishing the Just Transition Fund, involving the Council and the European Parliament, is expected to continue in 2020.

 Impact of regulation on decrease in funding that can be secured by PGE Group companies for investments.

Impact of the Just Transition Fund regulation on the availability of funds to be raised by PGE Group companies.

 
EU package for funding sustainable economic growth, including regulation on the establishment of a framework to facilitate sustainable investment (concerning the criteria for assessing economic activities in order to determine whether they are environmentally sustainable). Implementation of regulations intended to facilitate funding for sustainable economic growth in EU. In December 2019, the European Parliament and the Council reached an agreement in the trialogues on the regulation on criteria for assessment of economic activities in terms of their environmental sustainability. Key issues addressed in this agreement:
  • recognition of gas and nuclear energy as a transitional activity. The assessment of whether this activity is environmentally sustainable will be made on the basis of technical criteria to be established by the EC in a delegated act. The EC is to prepare this delegated act by December 31, 2020, to become effective on December 31, 2021.
  • imposing an obligation on large businesses (with more than 500 employees) to include information on the share of turnover, CAPEX and OPEX of environmentally sustainable activities in the non-financial report or consolidated non-financial report.

In March 2020 the Technical Expert Group published a final report.

In the report, the Technical Experts Group:

  • did not recommend, at this stage, that nuclear energy should be considered sustainable because it did not meet the criterion of „causing no significant damage”, while recommending further work on this issue in the future by a group with in-depth technical knowledge on this subject;
  • indicates in the case of gas-based generation sources that those activities where life cycle emissions are below 100g CO2e/kWh are considered sustainable, this threshold is to be reduced to 0g CO2e/kWh by 2050.

On April 15, 2020, the EU Council adopted a regulation concerning the criteria for assessing economic activities in order to determine whether they are environmentally sustainable.

 Expected adoption by the European Parliamnt of the regulation for criteria based on which economic activities will be assessed to determine whether they are environmentally sustainable – May 2020.

Expected entry into force of this regulation – H1 or H2 2020.

Preparation by the EC of delegated acts laying down detailed technical and screening criteria for assessing economic activities in order to determine whether a given activity is environmentally sustainable – by the end of 2020.

 

 Possible impact of regulation on availability and cost of funding obtained by PGE Group companies for investments.

Additional information with regard to international regulatory environment

Segments Proceeding Objective of the action brought Key events Next stage Impact on PGE Group
 

 

 

 Proceedings brought by Tempus Energy Germany and T Energy Sweden against the European Commission (case file no. T-167/19). The objective of the action is to annul the European Commission’s Decision not to raise objections to the Polish capacity market (SA. 46100). On March 14, 2019 Tempus Energy Germany and T Energy Sweden brought an action against the EC decision concerning the Polish capacity market (case T-167/19). The summary of main reproaches and arguments brought up in the complaint was published in the EU Official Journal on May 6, 2019. From the published abstract it results, that in their action brought they argue that the EC failed, in particular, to initiate formal investigation proceedings (the second stage of the capacity evaluation mechanism) and that the demand side response (DSR) suffered alleged discriminatory treatment within the Polish capacity market. It is difficult to estimate the duration of the proceedings before the General Court of the EU, but the British experience shows that they may even take several years.

The proceedings pending before the European Court of Justice concerning the appeal in the case Tempus Energy and Tempus Energy Technology versus the EC (case file no. C-57/19 P) may have an impact on the action brought.

 Depending on the outcome of the dispute, the case may have an impact on the conditions for the performance of and entering into the capacity contracts.

 
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