Stibbe Utilities e-bulletin

Flanders’ Green View to the future:
the modified Green Power Certificate System

On 23 January 2008 the European Commission presented its new energy and climate package containing a number of concrete goals for each Member State including concerning renewable energy. The new Directive 2009/28 on the promotion of energy from Renewable Sources entered into force on 25 June 2009 and needs to be transposed by the Member States no later than 5 December 2010. The Directive prescribes for Belgium a 13% share of the total energy consumption in 2020 to originate from renewable sources.

The Flemish Parliament approved a Decree adding measures to the Flemish Electricity Decree with the aim of ensuring that Flanders will reach the aforementioned goal¹ set by the European Union. The amending Decree was published on Friday, 26 June 2009.

In view of the previous estimates of Belgium’s potential for renewable energy, set at a 9,3% share of the total electricity consumption, this 13% objective is ambitious, certainly when one takes into consideration Belgium’s high population density, low sun intensity, narrow coastal strip and flat relief.

Following the study ‘Prognoses for renewable energy and cogeneration until 2020’ (2015) conducted by the VITO² and commissioned by the VEA³, 12,3% to 14,6%⁴ of the electricity demand in 2020 could be met by so-called green electricity, on condition that adequate stimulation measures are taken.

Before proceeding to a review of the main changes of the amending Decree, we briefly outline the actual principal support measures for the production of green energy in the Flemish Region.

The main instrument to promote green energy in the Flemish Region is a hybrid model that combines (a) the free market system of trade in green power certificates (GPC⁷) with (b) guaranteed minimum prices (bearing resemblance to feed-in tariffs). In summary, the price of one GPC is determined by the free market⁸, on the basis of (i) the penalty for submitting less GPCs than the applicable quota and (ii) the supply and demand. On the one hand, demand for GPCs is generated by electricity suppliers who must fulfill their obligation to purchase and submit a certain number of GPCs. On the other hand, the supply of GPCs is provided by green electricity producers located in Flanders⁹ who receive from the Flemish regulator ‘VREG’ 1 GPC for every MegaWatt hour they produce.

However, the price that is thus generated by the market for GPCs (EUR 107,65 / GPC in May 2009) might not be high (cost-effective) or stable enough for a green power generator to be profitable. By bridging the ‘uneconomic part’ however, and this by guaranteeing a minimum price for a fixed period for the GPCs that the investment generates, the investment can become attractive. This guarantee is realised via the minimum support that obliges distribution system operators in Flanders to buy at fixed tariffs the GPCs that are awarded for each MWh generated by the green power generators connected to their grids¹⁰. The support tariffs for the different technologies depend on their investment cost. The generally high cost of solar cells can easily render them unprofitable so that its minimum tariff, exceeding the current GPC market price, is significantly higher than the other minimum tariffs (see para. 3. (iii) below).

Determining the minimum tariff is a sensible balancing exercise. A minimum tariff which is too low could lead to investments failing to occur, whereas a minimum tariff which is fixed too high could lead to windfall profits for investors, and this at the expense of the end consumers via the distribution tariffs.

Besides this certificates market (adjusted by the minimum support tariffs), green/sustainable power in Flanders is supported by the Flemish ecology premiums and the federal increased investment deduction for energy-saving measures:

- The former concerns a subsidy allocated to the most remunerative ecology investments (e.g. solar power cells, installation for the recovery of concrete debris, carbon dioxide retractor,…) via a call-system. This system requires investors to file their subsidy request and, after ranking these requests, the subsidies are awarded until the funds available are depleted.

- The latter concerns an increased investment deduction for investments in green power installations under the form of a percentage of the cost price, in addition to the regular investment deduction. This percentage was raised from 13,5% for assessment year 2009 to 15,5% for assessment year 2010.

On 6 March 2009 the Flemish Government approved a draft amendment of the Flemish Electricity Decree. The amending Decree is dated 8 May 2009 and was published on 26 June 2009. Hereinafter follows a brief review of the adjustments this Decrees entails concerning (i) the green share; (ii) the minimum support tariffs; (iii) the socialisation of the cost of the minimum support; and (iv) the penalty.

The share of GPCs to be submitted will increase gradually from 6% of the total electricity supply over the grid in 2010 to 13% in 2020. Together with the green share, the demand by the suppliers on the certificate market will increase. The Decree fixes the calculation method of the quota of the GPCs to be submitted yearly from 2011 to 2020, hence providing the indispensable legal certainty on the long term.

(ii) Minimum support tariffs and revision on the basis of ‘the unprofitable top’

The present article 25ter of the Flemish Electricity Decree obliges the distribution system operators (DSO) to buy GPCs from renewable installations connected to their respective grids at a minimum tariff. The DSOs must resell these purchased GPCs on the certificate market. Green electricity producers will only revert to the DSO insofar the minimum tariff is higher than the GPC market price. The resale by the DSO to third parties on the certificate market is then made at a loss. These costs are taken into account as a public service cost by the DSO and integrated in their distribution tariffs.

The Decree aims at differentiating and optimising the minimum tariffs together with introducing a certain degree of solidarity among the different DSOs.

Meanwhile, fuel prices have changed and green power technologies were newly developed or improved with corresponding changes in cost price. For example, the minimum support for solar energy¹¹ has diminished digressively, although remaining high in comparison to the other technologies.

The minimum tariffs are determined by the Decree and guaranteed during 10/20 years for the installations taken on before the possibly upcoming evaluation. Following the new article 25quater §4, the minimum support tariffs can be adjusted every three years¹² on the basis of the principle of the unprofitable top. This principle is defined as ‘the production dependent part of the revenues that is necessary to make the net constant value of an investment arrive at zero and that is calculated via a cash flow computation’. A correct estimation of the unprofitable top, determined by technological progress and economic evolution, enables the government to determine accurately the amount of the investment’s ‘uneconomic part’ to be bridged. To make sure this system follows the real prices truthfully, it is necessary that adequate data are used to calculate the unprofitable top, and thus the minimum tariff¹³.

The actual minimum tariffs are applied to the installations presently started-up and guaranteed during 10 years (20 years for solar power). Concerning green energy investments, a long period of time lies between the investment decision and the actual starting-up of the new installation due to the waiting periods with the producers of the energy installations, the complex procedures for building licenses and environmental licenses,.... In addition, all revenues during the entire depreciation period are determinative for the project’s profitability. The possible adjustments cause legal uncertainty since the minimum support tariff at the time of the investment decision might differ from the tariff at the time of the starting-up.

The new Decree also introduces an additional condition for the minimum support for solar energy installations: the roof or the attic floor of the house must be insulated in order to enjoy the minimum support, since such insulation investment is more cost-efficient. The effective control of the fulfillment of this condition however is likely to give rise to practical problems.

The Flemish Region counts 15 DSOs, each with a geographical area that is differently attractive to green power investments. The purchase cost of GPCs¹⁴ due to their purchase obligation can thus differ substantially between the different DSOs¹⁵. This leads to disparities in the net tariffs for the respective DSOs. The DSO has no free choice to refuse certain projects and cannot take into account the efficiency of the projects. To keep the costs for the DSOs (and hence the electricity tariffs) as uniform as possible, the Decree therefore introduces a cost settlement among the DSOs.

However, it should be noted that this cost settlement is limited to a percentage of the distribution budget (5%), beyond which the operator has to bear the cost himself. It remains to be seen how this system will work “in the field”. The cryptic definition of this limit threatens to lead to confusion and application troubles. Moreover, due to this upper limit of 5%, some DSO’s might still perceive the investments in green power as a disproportionate burden.

Electricity suppliers who fail to submit the required number of GPCs are penalised by a fine. The amount of the penalty presently functions as a ceiling for the GPCs’ market price, since the payment of the penalty discharges the supplier from the obligation to submit the missing GPCs¹⁶: depending on the amounts he will either purchase a GPC or pay the penalty. To the extent the market price is higher than the fixed penalty, the suppliers, who must meet the submission obligation, will preferably pay the penalty. In 2015 the penalty will be diminished to EUR 100 per missing GPC, compared to the current EUR 125, which will lead undoubtedly to a lowering of the market price. The minimum support for certain technologies assures the needed investment guarantees for certain new installations such as solar panels. Inevitably, for installations selling their GPCs directly on the market, the lower penalty will lead to lower revenues.

Thanks to the penalty’s fixation (decrease only as from 2015), the long-term goals on the green electricity’s share and the guaranteed minimum support, the investors can rely on a more or less clear investment scheme and they can assess the technological progress of renewable energy technologies and the expected price increases of fossil fuels. On the downside, the unprofitable top evaluations every three years (see para. 3. (iii) above), leave the door open for uncertainties.

1 - It should be noted that the goal formulated in the Flemish Decree does not entirely match with the Directive: it postulates a 13% green share of the total electricity supplies over the grid to end consumers, whereas the Directive refers to the total energy consumption.

3 - The Flemish Energy Agency; the Flemish Government’s executive body for sustainable energy policy.

4 - Respectively on the assumption of a high and a low increase in the demand for electricity.

5 - Some communities and distribution system operators (DSOs) grant subsidies as well, which we do not address.

6 - See Appendix II to the Royal Decree CIR92 of 27 August 1993 implementing the Code of Revenue Taxes 1992.

7 - The GPC trade is not to be confused with the EU Trade Emission Scheme (ETS); for an explanation thereof, see the introduction of our previous newsletter. We do not focus on the CHP certificate market, which is similar to the GPC market but concerns the trade in certificates for Combined Heat Power.

9 - Without regard to the off-shore wind farms that remain outside the Flemish certificate market.

10 - The Flemish regulator VREG attributes the GPCs to all onshore ‘green’ generators located in Flanders irrespective of the distribution or transmission grid they are connected to. The federal framework imposes a similar support obligation to the transmission system operator regarding the GPCs from all ‘green’ generators irrespective of the grid they are connected to. The federal minimum support tariffs are lower so that (onshore) producers will most likely rather revert to the DSOs, which are bound by the (higher) Flemish tariffs.

11 - The Flemish Region aims at all actual and future technologies of installations for solar energy, and not solely the photovoltaic panels.

13 - See the observation in the SERV’s (Flanders Social and Economic Council) advice of 19 February 2009, pa. 4.2.

14 - For the total number of 25.000 GPCs to be purchased by the operators in 2008, the average share of costs due to the purchase obligation is estimated at 0,9% in the total distribution cost per operator.

15 - E.g. on 10 July 2008 the operator Inter-Energa took 24,62% of the GPC for its account, opposed to the 0,05% taken by operator AGEM.

16 - Contrary to the ETS-scheme where the payment of the fine does not remove the obligation to submit sufficient emission allowances (article 26 Decree of 2 April 2004 regarding the reduction of the emission of greenhouse gases).

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