Author: Christian Schnell, Partner - Energy & Natural Resources, Dentons
Poland is now one of the Top 5 solar PV investment markets in Europe. In 2021 alone, the country added around 3.2 GW of solar PV installations. With a cumulative installed solar PV capacity of 7.1 GW at the end of 2021, Poland is now a major European solar energy market, with many investors developing large-scale projects far exceeding the 100 MW project scale. However, such sudden growth does not come without challenges and its social and political impact is clearly visible. Getting new PV projects connected to the national grid is a key challenge for developers. Additionally, large-scale installations are in direct competition for land with the agricultural sector, especially as agricultural commodity prices are sky-rocketing, leading to legislative proposals to slow down future development in rural areas.
In the current power market environment, solar PV has become very competitive. In Europe, high power market prices are primarily driven by high natural gas prices, which have been rising sharply since the second half of 2021. This is mainly due to the economic recovery after the COVID-19 crisis, and to a lesser extent to the reduction of gas supplies from Russia. Currently, power prices in Poland are relatively low because thermal coal is still the fuel that dictates price levels. Once the 6 GW worth of gas units awarded at Polish capacity market tenders come online between 2024 and 2026, gas power plants most likely will define the prices in Poland. However, the general impact of prices for CO2 emission allowances will also still remain very high. The war in Ukraine has not yet had a direct impact on electricity market prices in Europe, but when Germany puts four new LNG terminals into operation over the next two years, the risk that Gazprom will manipulate the European natural gas market more strongly will increase. Industrial consumers in Poland are therefore looking to secure zero-carbon power supplies, as there is a risk of high electricity prices increasing further this decade. This drives the corporate PPA market, whereas baseload PPAs are clearly favored over pay-as-produced PPAs. However, with high power prices, baseload PPAs have a different risk profile.
The sudden increase in solar installations in recent years was mainly due to Poland’s rooftop PV incentive program and its net metering schemes, which ended by 1 April 2022, but also due to a ‘contract for difference’ (CfD) tender scheme for 1 MWp solar farms implemented at the end of 2016. Aside from those systems, there is also significant potential for large-scale PV development in Poland. Especially since 2019 - in the CfD tenders for large-scale RES installations - solar PV was able to successfully compete with onshore wind farms. It should be mentioned that new onshore wind farm development generally came to a halt in 2016 because of a rule on the required minimum distance to the nearest residential housing of 10 times the tip height. Consequently, onshore wind farms competing at tenders were developed with wind turbine generators of a pre-2016 technical market standard. In 2021, the government announced that the “10-h” distance rule would be softened, re-opening the market to new onshore wind farm development. Nevertheless, respective legislative changes have not yet been introduced and the first fully-developed projects will enter the market no earlier than 2024/2025.
2.1 ‘Contract for difference’ (CfD) tenders
In Poland, the regulatory office auctions energy volume in megawatt-hours (MWh). These volumes are auctioned in the form of indexed 15-year ‘contracts for difference’ (CfD). Depending on a bidder’s awarded bid price and the base index market price, the bidder might be paid the difference (“negative balance”) on a monthly basis. Alternatively, if the base index exceeds the bid price (“positive balance”) this will be settled against a future negative balance; or ultimately the bidder has to pay it back later at the end of a three-year settlement period. It is up to the government to set a yearly ceiling price based on the LCOE for each technology, the so-called “reference price” which cannot be exceeded by the bidders. The current tender system splits renewable energy projects into two categories: (i) projects up to, and including, 1 MW, and (ii) projects above 1 MW. Besides the capacity categories, there are also different technology baskets. To take part in the auction, the project must be fully permitted and the bidder has to post a bid bond of PLN 60,000 per MWp. The bid bond will be repaid after entry into the CfD support system. A generation license is a precondition for CfD entry for all installations exceeding 1.0 MW capacity. Solar PV projects compete in the same basket as onshore wind installations. In the current power market environment, CfD tenders have become commercially unattractive and many investors that were awarded CfDs are considering not entering into the CfD support system, forgoing their bid bond.
The Polish PPA market is currently booming, but the experience of market players with PPAs is still patchy. International (and bankable) traders dominate the market for the time being, but with industrial players and corporates, there’s been a sharp increase in the number of transactions since 2021. There is demand for both physical and virtual/financial PPAs. However, the players are often inexperienced in properly allocating risks between pay-as-produced/forecasted PPAs and baseload PPAs.
Below, please find a generic overview of the development and commissioning process for large-scale solar PV installations.
3.1. Securing land
Land for development can be secured by (i) a land lease agreement, (ii) a usufruct, (iii) a leasing agreement or (iv) purchase of land. Each title faces certain legal restrictions and should be individually assessed for appropriateness in the particular circumstances. Depending on the land title, various legal risks arise if the land owner is declared bankrupt or enforcement proceedings are started on the basis of mortgages established on the land. Another important restriction is the 30-year maximum time limit on a fixed-term land lease agreement. Nevertheless, the most common legal title to secure land is the land lease agreement.
3.2 Planning regulations
Solar PV can be developed on the basis of a land use designation including protection zones in the study (“Study”) and the local master plan (“Plan”) or alternatively by a location permit (“WZ”) in areas which are not covered by a Plan, including agricultural land of soil classes IV to VI. A discussion is underway as to whether to exclude soil class IV - constituting roughly 40% of agricultural land - from solar PV development.
3.3 Environmental decision
Development of a large-scale solar PV installation often requires an environmental impact assessment before it can obtain a decision on environmental conditions (“ED”). Based on the supporting opinions of the environmental, sanitary and water authorities, the head of the municipality may issue a decision stating that an environmental impact assessment is required and, in such a case, the investor is obliged to prepare the report on environmental impact assessment within the scope prescribed by the authority. Alternatively, the municipality may state that an environmental impact assessment is not required and may determine other solutions to limit the environmental impact. Environmental impact assessment procedures are complex and involve public participation and consultations with other environmental authorities. A number of interested parties may challenge the ED, including local communities and NGOs. Based on the ED, a building permit shall be issued within 6 years, or - in the case of a phased project - within 10 years. If the WZ decision approach is taken for planning permission, an ED is a precondition for obtaining the WZ decision.
3.4 Building and occupancy permit
Under Polish building regulations, the construction and commissioning of large solar PV installations requires a building permit and, once construction is complete, an occupancy permit. A building permit is issued for the entirety of a construction undertaking, but it is also possible to obtain several permits for sub-projects and grid and auxiliary infrastructure. The building permit can provide for the phasing of the development. As part of the building permit application process, the applicant must submit detailed design documentation prepared by a qualified architect or construction engineer. A building permit is valid for 3 years and can be extended by the start of construction works and an appropriate entry in the construction log.
3.5 Grid connection
In order to obtain the right to access the public power grid, the solar PV installation needs to (i) obtain grid connection conditions (“GCC”), which are issued by a distribution system operator (“DSO”) or the transmission system operator (“TSO”) and define the technical grid connection point, and to subsequently within a period of 2 years (ii) conclude a grid connection agreement (“GCA”) which sets out the timeline for grid connection works and electrification. An advance payment of PLN 30,000 per MW of connected capacity is required for GCC. The connected capacity and installed capacity may differ, but this requires individual discussions with the grid operator.
3.6 Commissioning process
Once construction work is completed and documented in the building log, one can apply for the commissioning of an RES installation with the grid operator (“EON”). Within 2-4 weeks of the application, the local DSO (or TSO) will visually check the erection of the installation and start the energization procedure for the export of the first kWh into the public grid (“ION”). Prior to export of the first kWh generated by the RES installation, and the electrification of the installation, the project company has to conclude a distribution services agreement with the DSO or a transmission service agreement with the TSO (“DSA” or “TSA”); it also has to sign a “power purchase agreement during the testing period” (“Test-PPA”) to cover the time until it obtains an electricity generation license and appoint the Balancing Responsible Party (“BRP”). Both the Test-PPA and BRP are usually signed with the local supplier of last resort, which is a group company of the local DSO. Formally, the RES installation is not entitled to sell energy before it obtains a generation license. Therefore, in practice, the Test-PPA off-taker usually sells the energy on the technical balancing market and the project company invoices the sold energy to the local utility after the generation license is obtained. Subsequently, within 2 to 4 weeks of signing the distribution services agreement and the Test-PPA, ION occurs. Based on ION, a final occupancy permit is obtained, which is a precondition for obtaining an energy generation license from the energy regulatory office URE. This usually takes around 2 months. The power purchase agreement that the project company concluded earlier with a trading company (and a commercial balancing agreement) enters into force after the energy generation license is obtained. Also after the energy generation license is obtained and by the deadline set at auction, the project company operating the RES installation may apply to Zarzadca Rozliczen S.A. and URE for the first monthly settlement of the negative or positive balance (contract for difference).
As the Polish market is entering a more mature phase, there is an increasing shift from the CfD scheme towards a PPA-development model, which allows a faster pipeline development and the sale of power directly to highly-rated corporate off-takers. However, as baseload PPAs are growing in popularity, RE producers are also exposed to price volatility risk, given the extremely uncertain and fluctuating energy prices forecasted for the coming years. Despite the challenges related to grid connection bottlenecks and legislative uncertainty over the use of land for PV projects, the Polish PV market is an extremely interesting segment for international players.