On 20 December 2022, the Official Journal of the Republic of Poland published the rather awkwardly titled Act of 15 December 2022 on Special Protection of Certain Gas Fuel Consumers in 2023 Due to the Gas Market Situation (Gas Prices Capping Act). In this legal alert, we’ll look at the main rules intended to protect eligible customers against spikes in gas prices, payment of compensation to eligible suppliers, as well as amendments to the Energy Law (EL) that are likely to affect the market for companies producing energy from renewable sources (RES Businesses).
Basic tenets of the Gas Prices Capping Act
The rationale for the Gas Prices Capping Act is essentially to minimize increases in the prices of natural gas-based fuels for certain groups of customers, to enhance energy security in the gasmarket, while at the same time maintaining the liquidity of energy undertakings. The regulatory mechanisms put in place are similar to those already introduced by parliamentary acts enacted in October and November of 2022 to protect electricity consumers and to cap prices in the electricity market.
According to the official website of the Polish president and the express wording used in the statement of reasons for the draft bill, the Gas Prices Capping Act will put in place in 2023 a mechanism designed to guarantee that protected customers of gas fuels and offtakers performing tariff-included public utility tasks pay capped prices for gas fuels and that the gas fuel distribution fees remain at levels not higher than those charged in 2022. Moreover, protected customers of gas fuels will stand eligible to receive VAT refunds.
At the same time, in an effort to balance the interests of gas market participants:
- The mechanism put in place to compensate gas fuel sellers for the effects of caps put on tariff-based prices charged to end-users is maintained.
- A parallel compensation mechanism for gas fuel distribution system operators has been introduced.
Mechanisms designed to monitor public funds spending have been stepped up.A number of changes have also been introduced to the EL, including with regard to grid connection of renewable energy installations. As far as the RES market is concerned, the amendments are expected to substantially streamline and increase the ability of both consumers and generators to connect on commercially feasible terms, as well as to make the entire process more transparent.
Major changes for the gas fuel market
Article 1 of the Gas Prices Capping Act stipulates that the goal of the new legislation in terms of gas market solutions is primarily to regulate the following issues:
- The maximum price for gas fuels and the rates for gas fuel distribution services to be used in settlements with eligible offtakers in 2023;
- Rules and procedures for awarding and paying compensation for the caps put on gas fuel prices and/or rates for gas fuel distribution services for energy undertakings;
- Rules and procedures for refunding VAT on paid invoices documenting the supply of gas fuels from 1 January to 31 December 2023 to gas fuel customers;
- Rules and procedures for enforcing the obligation to make contributions to the Price Difference Compensation Fund.
The group of eligible customers under the Gas Prices Capping Act includes those consuming gas fuels for broadly defined residential needs, as well as customers in the healthcare, social welfare, education and NGO sectors, to name just a few.
From 1 January to 31 December 2023, an energy undertaking (i.e. companies eligible for compensation) is obliged to charge as a maximum price PLN 200.17/MWh in settlements with eligible customers. The situation is different if the gas fuel supply contract is signed between an eligible undertaking and an eligible customer after 31 December 2022. In this case, the Gas Prices Act provides for prices that are more favorable than the maximum price. In such an event, the contracted prices will apply during the contract term, and the energy undertaking will not be eligible for compensation.
Likewise, the same rules will apply for eligible undertakings if in 2023 they use a gas fuel tariff approved by the president of the Energy Regulatory Office (ERO President), who sets gas fuel prices at a level below the maximum gas fuel prices. The lower prices will then apply, and no compensation will be due. If changes are made to the tariff at any time between 1 January and 31 December 2023, the eligible undertaking may, in principle, apply for compensation for the period starting as at the tariff update date. In this case, compensation will be calculated pro-rata for as long as the revised tariff is in effect.
The group of eligible customers under the Gas Prices Capping Act includes those consuming gas fuels for broadly defined residential needs, as well as customers in the healthcare, social welfare, education and NGO sectors, to name just a few.
From 1 January to 31 December 2023, an energy undertaking (i.e. companies eligible for compensation) is obliged to charge as a maximum price PLN 200.17/MWh in settlements with eligible customers. The situation is different if the gas fuel supply contract is signed between an eligible undertaking and an eligible customer after 31 December 2022. In this case, the Gas Prices Act provides for prices that are more favorable than the maximum price. In such an event, the contracted prices will apply during the contract term, and the energy undertaking will not be eligible for compensation.
Likewise, the same rules will apply for eligible undertakings if in 2023 they use a gas fuel tariff approved by the president of the Energy Regulatory Office (ERO President), who sets gas fuel prices at a level below the maximum gas fuel prices. The lower prices will then apply, and no compensation will be due. If changes are made to the tariff at any time between 1 January and 31 December 2023, the eligible undertaking may, in principle, apply for compensation for the period starting as at the tariff update date. In this case, compensation will be calculated pro-rata for as long as the revised tariff is in effect.
In its settlements with customers, an energy undertaking conducting business involving trade in gas fuels is required to apply fee rates other than the gas fuel price, known as “frozen prices.” These rates cannot be higher than those in effect on 1 January 2022 and will apply until 31 December 2023. Notably no compensation is due to energy undertakings charging these rates.
A generally similar solution has been adopted for DSOs conducting business activities related to distributing gas fuels for consumption by eligible customers who have an approved and effective gas fuel tariff, in the tariff intended for use in 2023 (or any part of this year). When billing distribution services that were provided in 2023, they are also required to use the distribution service rates provided for in the last gas fuel distribution services tariff applied in 2022.
Compensation will be paid for each calendar month on the basis of applications filed by eligible undertakings to Zarządca Rozliczeń S.A. That said, applications for January 2023 may be filed no earlier than 15 February 2023. Zarządca Rozliczeń S.A. will process the applications and make the compensation payouts.
Conversely, each natural gas production company is obliged to make a contribution to the Price Difference Compensation Fund for the given calendar month by the 20th of each month following the settlement month
Most important amendments to the EL affecting the electricity market
Amendments to Article 7 EL (re: connection of RES Businesses to the power grid)
If an energy undertaking refuses to connect a user for economic reasons, the undertaking is required to send a requisite notice to the ERO President and the interested party, providing the estimated connection fee and at the same time advising the parties of their right to request the undertaking to explain how it calculated the fee. If so requested by the grid connection applicant, the energy undertaking has 14 days to disclose the fee calculation method and provide essential details of the capital expenditures adopted in the calculation. This further develops the third-party access (TPA) principle previously enshrined in Article 7 and implemented, among other things, by EU Directive 2019/944, and increases the transparency of actions taken by energy undertakings in disputes with customers they connect to the grid.
If a micro-installation with an electricity storage facility is connected to the distribution grid, the installed capacity of the electricity storage will not be counted towards the total installed capacity. This applies as long as the installed capacity of the energy storage facility and the total power that can be fed into the distribution grid by this micro-installation and the storage are not greater than the installed electrical capacity of the micro-installation. This amendment seems to be quite an interesting development since DSOs, when refusing to issue a connection terms document or sign a connection agreement as requested, will often justify their actions by attributing it to grid congestion caused by, among other things, energy storage facilities operating in discharge mode. They sometimes treat them similarly to traditional generating units.
Entities applying for grid connection will now be able to construct and/or develop grid sections necessary to connect their installations in consultation with the energy undertaking. This is a controversial solution since it is generally the obligation of the energy undertaking conducting the business of transmission and/or distribution of gas fuels or energy to ensure implementation and financing of grid construction and expansion works. This also applies to the connection needs of those applying for a grid connection. The obligation to retrofit the power grid is also counted as a legitimate business expense for the purposes of processing tariff applications filed by energy undertakings. That said, from a pragmatic viewpoint, this solution is likely to have a positive effect on the investment process duration and mitigate the risks of interconnection disputes with DSOs.
New Article 49aa EL (expanded contract reporting obligation formerly provided for in now-repealed Article 49a EL)
An energy undertaking conducting business activities in the scope of electricity generation is required to provide the ERO President with information on contracts or corporate group settlement agreements whereby it sells, buys or settles electricity. The notification deadline is seven days from the agreement execution date.
The reported information must include the names of parties to the contract or agreement, the quantity and price of electricity and the period for which the contract or agreement was entered into. Based on the reported data, the ERO President will publish the average quarterly price of electricity in the ERO Bulletin within 21 days from the end of each quarter.
Amendments to Article 56 EL (cash penalties)
If an energy undertaking:
- for no justified reason, delays sending a notice to the ERO President or the entity concerned to advise them of its refusal to execute an agreement or to give top priority to a connection request filed by a RES installation owner, the cash penalty is no less than PLN 10,000 and no more than 15 percent of the fined undertaking’s revenues in the previous tax year;
- does not fulfill such obligations as, e.g. the obligation to provide a fee estimate if refusing a service on economic grounds, and/or to explain reasonable calculation methods for the estimate, the fine is not less than PLN 30 per 1 kW of the connection capacity indicated in the grid connection application;
- does not provide the ERO President with information on the contracts or agreements regarding corporate group settlements whereby it sells, buys or settles electricity, by the deadline (as discussed above), the fine is no less than PLN 10,000 and no more than 15 percent of the fined undertaking’s revenues in the previous tax year.
Additional regulatory changes introduced by the Gas Prices Capping Act
Article 61 of the Gas Prices Capping Act amends the Energy Law and RES Act Amendments Act of 29 September 2022 (Journal of Laws, item 2370) (This was a one-off amendment abolishing the “power exchange obligation” (obligo giełdowe)). The changes were designed to adjust deadlines for implementation of the reporting obligation then in effect in situations where a power generation company sold electricity otherwise than via commodity exchanges.
Consequently, the previously effective deadline by which energy undertakings were required to provide the ERO President with information on the sales contracts they signed (i.e. seven days after the contract execution date), which had not expired before the Gas Prices Capping Act’s entry into force, expired within seven days of the effective date of the Gas Prices Capping Act, i.e. on 28 December 2022.
As for the RES Act, the amendments in Article 44 of the Gas Prices Capping Act extend deadlines associated with auction obligations.
In addition to the foregoing, the Gas Prices Capping Act introduces amendments to a number of other statutory laws, including the Personal Income Tax Act, the Excise Tax Act, the Construction Law, the Environment Protection Act, the Fuel Quality Monitoring and Inspecting System Act, the Electromobility Act, the Offshore Act, and the Electricity Prices Capping Act.
In accordance with Article 89, the Gas Prices Capping Act entered into force as of the day directly following its date of publication, i.e., on 21 December 2022, save for a handful of Articles of the Gas Prices Capping Act, which entered into force on 1 January 2023, and certain regulations regarding the Offshore Act, which will take effect on 1 January 2024.
By Arkadiusz Krasnodebski, Poland Managing Partner, Agnieszka Kulińska, Partner, Christian Schnell, Partner, Zbigniew Stasiak, Managing Counsel, Dentons