Legal Alert – Government Proposes Introduction of a Tender-Based Premium System for Renewable Energy Subsidy

The Ministry of Economic Affairs and Employment submitted a government proposal for the amendment of the Act on Production Aid for Renewable Energy on 9 November 2017. This amendment will replace the current feed-in tariff system with a tender-based premium system. The proposed new production aid mechanism seeks to incentivise cost-effective projects, and it would apply to producers of wind, solar, biogas and wave power as well as wood fuel during the period of transition following the end of the current system. The tender process would take place in 2018–2019 and it would concern an overall amount of 2 TWh of electricity production capacity.

New tender-based premium system

Under the proposed new system, electricity producers will make a binding bid regarding the level of premium (EUR/MWh) based on which they would be prepared to put out a certain amount of capacity (MW) or production (MWh). A premium-based production aid would then be granted to the projects with the lowest bids up until 2 TWh is reached, and only participants whose bid is below the threshold price of EUR 53.5/MWh would be eligible to participate in the tender. Furthermore, the tender system is technology neutral, meaning that all abovementioned forms of electricity production are treated equally. However, in general, the new premium system is considered to favour wind power plants over other electricity producers.

Calculation of the premium

An electricity producer whose power plant has been approved in the premium system would receive the premium it has presented in its bid when the market price for electricity is no higher than the reference price for electricity (EUR 30/MWh). The difference between the market price and the reference price will be subtracted from the premium whenever the market price is greater than the reference price but smaller than the sum of the reference price and the premium. Accordingly, the electricity producer would also be obliged to produce at least the same amount of electricity as it has bid for. In cases of non-compliance, the electricity producer would be required to pay the state a sub-production allowance. The maximum duration of the subsidy period would remain unchanged, i.e. 12 years.

Eligible participants in the tender

Under the proposed new system, participants in the tender process would be required to have final and non-appealable land use plans, building permits and possible exemption permits required for the construction of the project upon filing their tender. In practice, this means that only projects that are at an advanced stage in the development process will be eligible to participate. The tender process is open also to projects that have been accepted in the quota under the old feed-in tariff system.

However, if a project has already applied for an actual approval in the feed-in tariff system and the process is still pending, the project cannot participate in the tender process under the new system. Consequently, a project developer that has a pending appeal regarding a negative feed-in tariff decision would have to withdraw the appeal in order to be eligible to participate in the tender process. Furthermore, participants in the tender would be required to place a participation security amounting to the projected annual production of electricity multiplied by EUR 2/MWh.

Less stringent requirements for novelty

Contrary to the current system that requires for the entire power plant to be new, the proposed new system requires that only the energy technology system needed to produce electrical energy and the technical systems closely linked to the production of energy should be new and not contain used parts. Consequently, the novelty requirement does not extend to the power plant building and its foundation.

However, for wind farms, the wind turbine tower will be considered to be closely related to the turbine’s energy-technological properties and should, as a result, be new. The proposal specifically states that the tender process is open to projects – e.g. extensions of existing wind farms – that use existing infrastructure, such as foundations, roads substations or grid connection infrastructure. The change in the novelty criteria will therefore reduce unnecessary deconstruction and rebuilding phases in retrofit projects.

The proposed amendment is expected to come into effect in 2018 after the European Commission has approved the proposed system as compatible with the internal market.

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