The Act of October 27, 2022 on extraordinary measures to restrict electricity prices and provide support to selected offtaker categories in 2023 (the Act) came into effect on November 4, 2022. In what follows we outline the main rules for protecting eligible offtakers from energy price hikes and for compensating energy suppliers, and discuss fund contributions that energy producers and traders will be required to make.

Energy price cap for households, small and medium-sized enterprises, local governments and other vulnerable offtakers

Officially, the Act is intended to serve as a means of applying Council Regulation (EU) 2022/1854 of October 6, 2022 on an emergency intervention to address high energy prices. To this end, the Act sets ceilings on prices that may be charged for supplying electricity in 2023 to households and other residential premises (PLN 693/MWh) and puts in place a temporary instrument - likewise a price cap (this one of PLN 785/MWh) - to protect other eligible offtakers identified in this regulation:

• Small and medium-sized enterprises,
• Local government units and municipal enterprises,
• Healthcare institutions,
• Various entities providing social and educational assistance,
• Schools and higher education institutions,
• Cultural institutions,
• Public benefit organizations,
• Labor unions,
• Fire departments
• Animal shelters.

The list of these offtaker categories is detailed and sets out additional conditions which must be met for entities to become eligible for protection (such as the type of activity using the electricity).

In this regard, the Act directly addresses the social challenges and economic tensions caused by Russia’s reduction of natural gas supplies to Europe, in the context of its military invasion of Ukraine.

For households:

The current cap mechanism is applied alongside an earlier price freeze applicable up to a maximum electricity consumption threshold of 2 to 3 MWh (under the Act of October 7, 2022 on special measures to protect electricity offtakers in 2023 in light of the situation in the electricity market). The new price cap will apply to energy consumption above this threshold.

For other groups of eligible offtakers, including in particular small and medium-sized enterprises and local governments:

The price cap will apply to energy supply billings from December 1, 2022 to December 31, 2023. In addition, for new energy supply contracts entered into after February 23, 2022, or if there is a price change in an existing contract, the price cap will also apply retroactively to deliveries made under such new or amended contracts until November 30, 2022. The Act provides for cyclical settlements of accounts so adjusted throughout 2023. The price caps will also apply to contracts under which energy prices are hedged based on commodity exchange quotations.

Settlements resulting from these price caps will have corresponding tax consequences, for example corrections to taxable income and tax-deductible costs, as well as indirect taxes.

Declarations required from eligible offtakers

Eligible offtakers - other than households wishing to benefit from the protection mechanism (price cap) - have until November 30, 2022 to submit a declaration to their energy vendor. The Minister for Climate and Environment is working on a form for this declaration and on November 7, distributed a draft regulation on the issue as part of a one-day public consultation exercise.

Entities filing these declarations are criminally liable for any misstatements made in them.

The key issue in this context is the qualification of a given eligible offtaker into any of the categories of micro-, small or medium-sized enterprise (SME) as it is these enterprises that are entitled to the price cap regardless of the type of business they are engaged in.

The Polish legislator relied in this regard on the definition of SME in the Polish Business Law, which in principle allows the SME status to be verified at the level of individual companies (without taking into account the parameters of their affiliates).

Meanwhile, under current EU regulations allowing member states to set fixed prices for SME undertakings, the status of an entity is examined while taking into account the situation of the entire group the undertakings are a part of.

What this means is that when assessing whether a given energy offtaker is or is not entitled to a fixed electricity price, the attendant risk levels must be gauged on a case-by-case basis.

Compensation for energy suppliers

The Act provides for compensation to suppliers delivering energy to price-cap eligible offtakers.

The regulations set out multiple formulas for calculating compensation, defining separate reference and contractual prices, depending on what delivery period and what type of sales contract is involved.

The compensations are to be paid by the billing management company Zarządca Rozliczeń S.A.

Completed applications for compensation must be submitted by the 25th day of the next month, except for December 2022 and January 2023. The Act provides for the option to apply for monthly advances towards the compensation due for December 2022 (application to be filed between December 1 and 9), payable by December 20, 2020, and for January 2023 (application to be filed between January 2 and 9), payable by January 20, 2023. The advances collected will be offset against the amount of compensation due for July 2023, completed applications for compensation for those two months are submitted separately, by February 14 and February 28, 2023, respectively.

As a rule, compensation will be paid out within 30 days. Compensation qualifies as taxable income of the receiving supplier from the sale of electricity or services.

Compensation payments will be verified (settled) in 2024; this process will impose additional obligations on the compensation recipients. Any compensation paid out against a verification request filed late may be deemed undue and have to be repaid with interest.

Also, the cessation of business operations within 12 months from the date of payment of the last monthly compensation will result in the compensation being recognized as undue, with only one exception - DSO unbundling.

Additional discount – reducing SMEs’ energy consumption

Micro-, small and medium-sized enterprises, as defined in the Polish Entrepreneurs Act, are eligible for an additional discount if they reduce their 2023 energy consumption to 90 percent of their average annual consumption in the reference period (i.e. from January 1, 2018 to December 31, 2022). The discount is 10 percent of the “total billing amount of electricity sales incurred by the eligible offtaker” in 2023. As we understand it, this is the value of energy delivered during this period (the commodity part of the bill).

The law is inconsistent here, however. According to the current wording of the Act, the discount will not be available to SMEs that are eligible offtakers under Article 2(2)(c) of the Act, including farmers.

Contributions to the Fund – situation of producers and trading companies

The Act calls for the procurement of funds for compensation payments in the form of contributions by certain producers to a fund managed by the state-owned entity responsible for the financial side of the subsidy scheme - Zarządca Rozliczeń S.A. The rules for calculating contributions to the fund are specified in the Act and the respective regulation on the manner of calculating price caps (in force as of November 10, 2022) passed by the Council of Ministers on November 8, 2022.

The rule adopted for calculating separately the daily contributions to the fund is seriously problematic, as it doesn’t allow for offsetting losses on one day against profits earned in subsequent days. It is not possible to set off a loss incurred on a given day against profit made in the following days (periods), and such profit will have to be contributed in full to the fund (i.e. the amount exceeding the energy sales price cap).

This is inconsistent with the principle laid down in Council Regulation (EU) 2022/1854, which - as an exception - allowed governments for introducing a limit but to the income actually earned and in the period from December 1, 2022 to June 30, 2023. The Commission quickly identified this problem when drafting the respective regulation and no longer required the daily billing mechanism in its final wording.

Another problem is the extension of the period for applying contributions to the fund beyond the cutoff date of June 30, 2023, specified in the above Council Regulation (EU) 2022/1854. This disrupts market processes already taking place and cannot be justified in light of the prohibition of member states’ interference in electricity prices in the internal market arising from the basic architecture of the EU energy market.

Multiple detailed provisions governing how sales price caps are calculated raise concerns as to proportionality and non-discriminatory treatment of the specific groups of businesses affected by this regulation. This makes it necessary to individually assess the position of each producer and trading company.

For tax purposes, contributions to the fund will qualify as tax-deductible costs.

Producers – who must contribute and who is exempt?

The contributions are to be made by entities producing electricity in generation units with an installed capacity exceeding 1 MW, using energy from RES (wind, solar, geothermal, hydropower, biomass and bioliquids), waste, lignite and hard coal, liquid fuels and gaseous fuels.

Energy producers using biogas and agricultural biogas, operating demonstration projects, and RES operators reporting electricity to be accounted for by the billing management company within the auction support system, as well as those units that are covered by the negative balance billing system in accordance with Article 70a-70f of the RES Act and whose capacity exceeds 1 MW (also with respect to energy covered by the billing) are not required to contribute to the fund.

For energy generated in RES installations subject to the auction support system and not reported to the billing management company (Zarządca Rozliczeń S.A.), producers will have to make contributions to the fund to the extent their revenues exceed the price specified in the winning auction bid for that project (taking into account statutory indexation). This requires setting a price cap individually for each project benefiting from the auction support system. The cap will be different for December 2022 and different for the contributions to the fund in 2023 (following indexation).

We find the price cap is not clearly set for those generators, who yet need to enter into the action system (have not made the first settlement application under the auction scheme to Zarządca Rozliczeń S.A.). Depending on the bid price and indexation this ambiguous wording may lead to different results in December 2022 and from January 2023 and this matter should be clarified by authorities as soon as possible.

For electricity generated in RES installations not subject to the auction support system, contributions to the fund will apply with respect to revenues in excess of the reference price for the given technology in the auction system effective on the date of calculating the contribution to the fund. Currently, the reference prices arising from the Regulation of the Minister of Climate and Environment of October 31, 2022 are in force (for example, the price for wind installations is PLN 295/MWh and for photovoltaic installations PLN 355/MWh).

For hydropower installations, the cap on the selling price of electricity above which a contribution to the Fund will be required is 40 percent of the reference price (currently standing at PLN 270/MWh).

For energy generated in installations using biomass, coal, liquid and gaseous fuels, the law provides for more complex mechanisms for calculating the sales price cap (above which contributions to the fund are required) taking into account, among other things, the cost of the fuel used, a three-percent margin (calculated in relation to the reference market value of energy on a given day), the cost of CO2 emission allowances (for fossil fuels) and an investment and overheads allowance of PLN 50/MWh (regardless of the technology).

Corporate RES power purchase agreements (cPPAs)

The Council of Ministers has taken into account criticism that the law fails to regulate settlements made as a result of various hedging instruments put in place to secure electricity sales prices, which affect the actual revenues generated by RES power generators that, in numerous cases, do not stand to benefit at all from the growth in market-level electricity prices.

In accordance with the regulation, the price cap must be increased by the amounts billed by the power generator to offtakers (payments) on the basis of a power purchase agreement incorporating a financial instrument designed to hedge the generator’s revenues and the offtaker’s purchase costs against fluctuations in electricity prices on the wholesale market. Power generators have the right to increase the basic price cap set for its generating installation in accordance with the general rules described above by an “average claim due to the offtaker” on account of such a contract.

We cannot help but note the vague wording of the Regulation - it still requires more analysis to determine how the average value of the “claim due” (or rather, shall we say, “consideration”) should be calculated. In our estimation, this instrument should guarantee the protection of settlements under financial instruments from fund contributions.

The Regulation does not include provisions on settlements made on under corporate power purchase agreements with a fixed or periodically indexed price settled by physical delivery to offtakers. In such cases, the difference between the contract price and the price cap for a given RES technology may trigger the obligation to make fund contributions. This differentiates the position of offtakers without an apparent need to do so and, in our opinion, may in some cases justify allegations of disruption of investment signals and violation of investment protection rules.

Trading companies

Perhaps the greatest brunt of exposure to the changes brought about by the Act will have to be borne by trading companies - with respect to their wholesale operations and the sale of power to end users. The Council of Ministers took into account the costs of purchasing energy by these companies, but at the same time it limited the difference between these costs and the price of further resale (the margin) above which a contribution would need to be made to the fund.

In the wholesale market, the margin is capped at 1.5 percent for transactions on a commodity exchange, an organized trading platform or as part of a single market coupling by designated operators (NEMO), and at 1 percent for other transactions.

In the case of sales to end users, the margin is set at 3 percent and may be increased by the unit cost of redemption of certificates of origin. It is indeed a puzzling solution that a margin of 3.5 percent should be allowed for transactions executed on a commodity exchange, an organized trading platform or as part of a single market coupling, seeing as, in principle, such transactions are anonymized - the trading company will not be able to identify the end customer who purchased such energy.

Other legislative glitches include references made to the market price - especially that the Act defines “market price” differently than the Council of Ministers’ regulation does. We presume that this will be eventually corrected in an amendment to the regulation.

Strict rules for paying and reporting fund contributions

Payments to the fund must be made within no more than five days following the end of the month for which the contribution value is calculated. In our opinion, this deadline is incommensurately short.

At the same time, reports confirming fund contributions must be prepared and submitted in electronic format to Zarządca Rozliczeń S.A. by the 20th day of the following month. This provides an additional opportunity to verify the amount of the contribution due, and any resulting shortfall must be included in the sum total of contributions for that subsequent month (although even here the statutory wording is to some extent misleading).

The billings may be verified by Zarządca Rozliczeń S.A., following which, the ERO president will be given an option to launch audit proceedings. Dire consequences will follow if, in the course of the audit, a company is found to have underestimated its fund contributions, as in such an event the ERO president will decree an additional surcharge in an administrative decision. The surcharge, plus statutory default interest accrued from the decision delivery date, will be due and payable within 30 days of delivery of the decision. It will be possible to appeal against the decision to the Competition and Consumer Protection Court.

Additionally, persons signing the reports will be subject to criminal liability for misrepresentation of facts.

The Act also provides for a number of severe administrative sanctions for companies failing to put a price cap on billings to eligible customers, or to comply with the obligation to make a contribution to the fund, or the obligation to submit a report confirming the contribution to the fund.

Please feel free to contact us if you have any specific questions about the new regulations.