Insight

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The Government Proposal on Changes in Taxation of Electricity Storage
8 Nov 2018 The Government Proposal regarding amendments to energy taxation has been submitted to the Parliament on 18 October. The most significant changes relate to electricity storages. Pursuant to the Proposal, electricity would be transferred to electricity storages without any excise duty on electricity. The excise duty would be paid when electricity is transferred to be consumed. The need for electricity storages has arisen since more and more electricity has been produced by using renewable energy sources such as wind and solar which are not flexible. The electricity storages can be used to even out the variation in supply and demand of electricity and prices. However, current legislation does not recognize electricity storages at all. Therefore, the excise duty on electricity has been paid twice, for example, in circumstances where the storage has been first charged from the grid and later supplied back to the grid to be consumed. The purpose of the Proposal is that transmission of electricity to the electricity storage would be duty free. The excise duty would be paid when electricity is transferred to be consumed from the duty free electricity storage. The condition would be the electricity storage is deemed to be a part of the grid or a power plant; or an owner of the electricity storage has a permission from the Tax Administration to uphold the duty free energy storage. In order to meet the purpose of the Proposal the definition of the grid would be broadened. The electricity storage would be deemed to be a part of the grid if the electricity storage is connected to the grid and no electricity can be transferred to be consumed from the electricity storage. In addition, the definition of a power plant would be changed. In the future, the power plant would mean a fixed functional unit which acts in a certain area and its purpose is to produce electricity (and heating) and store electricity in the electricity storage. Owners of electricity storages which are not a part of a grid or a power plant in accordance with the law should apply permission of the Tax Administration in order to be owners of a duty free electricity storage. Consequently, the Proposal allows duty free electricity storage for different operators as power plants, grid companies or end consumers or storage service providers. The recast electricity market directive, currently under legislative process in the EU, seeks to promote market based energy storage. It would limit the distribution and transmission systems operators (DSO and TSO) involvement with energy storage facilities. Among others, DSOs and TSOs would be prohibited from owning and operating storage facilities, except in cases where no other parties have expressed interest, or where the storage facility is necessary for fulfilling the DSO's or TSO's obligations. Exceptions are subject to approval of the regulator. Member States would have to re-assess whether third parties would be able to own, develop and manage or operate the storage facilities, in which case the operations of DSOs and TSOs would be phased out. We welcome the removal of double taxation. However, according to the Proposal, the electricity storage means only a unit of equipment, machines and buildings which are required in order to temporary store electricity electrochemically. Our view is that the definition of an electricity storage should not be limited only to storages based on electrochemical technology. The limitation might delay development of new technology and its adoption to use. Taxation should be neutral for all technology solutions. With the current wording, storage solutions based on for example power-to-gas or kinetic technology would not be duty free. The purpose of other, more technical, changes to energy taxation is to promote the use of natural gas instead of coal, which is part of the Government's plan to encourage the early phase-out of combined heat and power plants using coal by 2029. The proposed changes would enter into force in the beginning of 2019. Due to developments in technology and promotion of the transfer towards more sustainable energy system, changes in energy taxation as well as energy storages in general can be expected also on the EU level. We are happy to discuss in more detail the proposed legislation in concrete situations.
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The New Support Scheme for Production of Renewable Electricity Up to Tendering
16 Aug 2018 The amendments of the Act on Production Subsidy for Electricity Produced from Renewable Energy Sources (1396/2010) entered into force on 25 June 2018.  The amended Act presents a tender-based premium scheme promoting renewable energy sources in new power plant investments. Production aid would be granted for annual production up to 1.4 TWh. Only one tendering round will be held. According to the Energy Authority, electricity producers may submit their tenders from 15 November to 31 December 2018.  Background The support scheme is one of the policy instruments used by the Finnish Government to meet its energy and climate targets. The purpose of the premium scheme is to cost effectively support new renewable energy projects as a transition period solution. New wind, solar, biogas, wood fuel, solar and wave power plants located in Finland may be accepted to the support scheme. Although the scheme is intended to be technology neutral, it is expected to attract especially wind power projects. Effect of an accepted tender The support scheme is set up as an auction process. Electricity producers submit binding tenders concerning the premium, the amount of electricity to be produced, the power plant project and other necessary information. The tenders with the lowest premiums will be accepted until the annual production target of 1.4 TWh is met. The premium system will reduce the electricity production costs of the approved power plants and thus enable the most cost efficient projects of electricity from renewable energy sources to be carried out in the current market situation. When the market price of electricity is the same as the reference price of electricity (EUR 30 per MWh) or lower, the aid received will be based on the premium stated on the tender. A rise in the market price of electricity will reduce the premium-based subsidy. If the three month average market price of electricity is at least the same as the sum of reference price and the premium, no premium will be paid. The rights and obligations based on the premium system shall be in force for fixed term with a maximum duration of 12 years. The premium offered in the tender may not exceed the margin price of the tendering process, the maximum of which is EUR 53.50 per MWh. The Government may give further regulations concerning a lower margin price. The electricity producer will participate in the electricity market and receive the market price of electricity from the sale of its electricity. In order to receive the premium for each three month tariff period, the electricity producer approved in the support scheme must deliver a separate application to the Energy Authority within two months from the end of the tariff period. The producer will be obliged to produce electricity on renewable energy basis in accordance with the approved tender. A failure to comply with the requirements results in an obligation to pay underproduction compensation to the State. The power plant must be connected to and produce electricity to the grid, at least in part, within three years from the approval of the tender. If the power plant does not produce electricity to the grid within five years from the approval of the tender, the decision of approval becomes void. Failure to comply with the provisions of the Act, the decision of approval or the power plant's monitoring plan may, depending on the materiality of the breach, lead to suspension of payment of the aid, obligation to return the received aid, fines and/or revocation of the decision of approval. Required securities and fees To ensure that only technically and economically feasible projects participate in the tendering, the Act requires the tenderers to provide different security at different stages of the process. In order to participate in the tendering, an electricity producer must place a tender security, the amount of which is the annual production of electricity according to the tender multiplied by EUR 2 per MWh. A written directly enforceable or first demand guarantee, suretyship insurance or pledged deposit to an escrow account with a non-set-off commitment from the bank are accepted as tender securities. The grantor of the security must be credit, insurance or other professional financial institution with its domicile in the European Economic Area. The electricity producer needs to attach a copy of the abovementioned document to the tender and deliver the original without delay. The tender security shall be valid for 6 months and it is released if the tender is not accepted into the premium system. If an electricity producer is accepted to the premium system, it shall give a completion security to the Energy Authority within a month from being accepted. This releases the tender security. The amount of completion security is the annual production of electricity multiplied by EUR 16 per MWh and it shall be valid for three years and six months. Other requirements for the completion security correspond to the above mentioned requirements of the tender security. If the electricity producer does not give the completion security, the decision of approval shall become void and the Energy Authority shall convert the bid security into cash and account it to the State. The completion security shall be given back without delay when the electricity producer fulfills its obligations stated in the Act. If only a part of the power plant has been connected to the grid in such way that it produces electricity to the grid within three years from the approval of the tender, only a corresponding part of the security shall be released. If the power plant does not produce electricity to the grid within three years from the approval of the tender, the Energy Authority shall convert the completion security into cash and account it to the State. The electricity producer should verify the exact procedural and content requirements for the security assets from the Energy Authority's instructions 1505/702/2018 published 25 July 2018. In addition to the security, the electricity producer must pay a participation fee to the Energy Authority when submitting a tender. This is estimated to be around EUR 2,500 per tender. Tendering: Process, prerequisites and impediments The Finnish Energy Authority shall organize the tender in a fair and non-discriminatory manner. An electricity producer can participate in the tendering with a ready-for-execution investment project concerning a wind power, solar, biogas, wood fuel or wave power plant. To be eligible for tendering, the power plant must, among others: be located in Finland or Finland's territorial waters; be new altogether, except for the building and its foundations; not have a previous connection to State aid; have valid land use planning and construction permits; have a binding offer to connect to the electricity network or a network connection agreement. When submitting a tender, the electricity producer needs to confirm that no binding decision concerning purchase of fixed assets related to the plant or the commencement of construction has been made. The Energy Authority describes binding decision as a contractual legal action between two or more parties. Electricity producer's intra-company decisions made for example by the Board or the shareholders are not regarded as binding decisions in this context. Negotiations between parties before concluding a contract do not themselves violate this prohibition of a binding decision but all the pre-contract documents arising from such negotiations need to be reviewed on a case-by-case basis. A letter of intent that does not include contractual commitment does not fulfill the criteria for a binding contract and therefore is not an obstacle for the bid. A preliminary agreement is not an obstacle for the bid if its object is concluding the primary contract depending on results of the tendering process. However, a preliminary agreement is regarded as a binding decision if the primary contract is going to be concluded regardless of the result of the tendering process. The electricity producer needs to have the following legally valid permits required for the construction of the renewable energy power plant, as applicable to the site, to participate in the tendering process: town plan; master plan for the construction of wind power; planning requirement decision; building permit; construction permission; deviation decision referred to in the Land Use and Building Act (132/1999). Contents of the permits need to correlate to the renewable energy power plant referred in the tender. Permits included in one tender may not be included in another. The permits and other similar document need to be valid for the entire process of completing the power plant and connecting it to the grid, i.e. at least three years from the approval of the tender. The permits may be conditional, for example a building permit may require that the producer obtains valid environmental permit before start of the construction works. Project-related decisions, permits and other similar documents that are not preconditions for the construction of the power plant do not need to be legally valid and are not examined in the tendering process. Regardless of the fulfillment of the obligations, a power plant can be excluded from the premium system if its tender is based on agreements, decisions or policies which aim or would lead to significantly prevent, restrict or distort tendering process. A power plant shall also be excluded from the competition if a member in producer's management has committed certain offences (including work safety offence and other employment offences), if approval of the tender would lead to a compensation which would considerably exceed the reasonably acceptable production costs of similar projects, or if the total annual production in the tenders is not sufficient. What happens next? The Finnish Energy Authority will launch a call for tenders in autumn 2018. There will be only one tendering round. According to the Energy Authority, electricity producers may submit their tenders from 15 November to 31 December 2018. It is estimated that the tendering process will be resolved during 2019. The Energy Authority will hold a briefing on the tendering process in Helsinki on 20 September 2018 and publish further guidelines for tenderers. Other comments The preceding renewable energy support scheme will remain in force for power plants accepted in it. Furthermore, the provision for excluding feed-in tariffs from new biogas and wood-fired power plants will enter into force at the end of 2018. More information regarding the support scheme is presumed to be issued as the Act enables the Government to give more detailed regulations about various matters, such as the marginal price, form of the tender document, security assets and underproduction compensation. We expect that the new scheme will attract a large number of potential projects, mostly concerning wind power and especially larger wind farms. There are already partly-developed wind power projects available corresponding to an annual production capacity of approximately 7.3 TWh with the required land use planning completed or with the construction permits granted by municipalities. Project developers, sponsors, suppliers and finance providers should carefully review, in addition to the technical and economic feasibility of the project, among others the plans, permits, decisions and contracts relating to the project in order to ensure that it is eligible to the premium scheme and that it can comply with its requirements. We are happy to assist you with your renewable energy projects, the tendering process and inform you of further developments.
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Ban on Coal, What Next?
23 Apr 2018 Finnish Government Plans to Ban Coal and Redirect State Aid for Renewable Energy The Finnish government plans to ban coal in energy production in 2029. The government prepares a EUR 90 million incentive package for energy producers to voluntarily commit to phase-out of coal by 2025. The incentives package would be financed by lowering the annual production level proposed for the planned tendering scheme for renewable electricity from 2 TWh to 1.4 TWh. The tendering processes are expected to be tough also due to large amount of partly developed projects. Ban on Coal and Compensation for Energy Producers The Ministry of Economic Affairs and Employment pronounced on 10 April 2018 that the use of coal in energy production will be prohibited by law in 2029, a year earlier than stated in the energy and climate strategy. In connection with the ban the government would introduce an incentives package designed for cities to phase out coal already by 2025 to support investments in energy technologies to replace coal. Half of the package would be reserved for renewable heat and power (CHP) and the other half for other technologies needed in the conversion from coal. The government supports renewable CHP also in order to ensure the security of supply in peak load conditions. The planned ban is part of Finnish government's efforts to reduce greenhouse gas emissions to mitigate climate change. According to Minister Tiilikainen, phasing out coal-based energy production would enable Finland to significantly reduce the emissions from heating. The ban and the incentives package have already raised criticism of inefficient climate policy, as the use of coal is expected to phase out during the early 2030s without government intervention. Industry representatives have demanded that the government should focus its efforts to ensure efficient operation of the emissions trading scheme (ETS). Prices of district heating are expected to rise in cities where coal is used for heating (mainly metropolitan area and Vaasa and Turku). This may further lead to increased demand of alternative heating solutions, such as heat pumps.  Furthermore, prices of alternative fuels (such as wood and gas) may rise. The ban must comply with the requirements of protection of private property and the incentives package must comply with the EU state aid rules. The incentives package could be seen as a way for the government to decrease the likelihood of compensation processes or the potential amounts payable. Further details concerning the ban and the incentives package are expected during the autumn. Support for Renewable Energy Is Redirected from Electricity to Heat The incentives package will be financed by lowering the required annual production level proposed for the tendering scheme for renewable electricity, from 2 TWh to 1.4 TWh. According to Minister Tiilikainen, "Redirecting support from renewable electricity to renewable heating is justified on the grounds that while nearly 80 per cent of electricity production is already emission-free, only 36 per cent of district heating uses renewable energy sources.” The planned temporary support scheme for the production of renewable energy is expected to move forward. Production aid would be granted for 1.4 TWh of new renewable production in technology-neutral auctions to be held during 2019 and 2020. The temporary scheme has been considered a transition to a subsidy-free system. After the scheme has been approved in the Parliament, it must be notified to the EU Commission to check compliance under the EU state aid rules. The expected aggregate amount of the proposed new production aid for renewable electricity is 100 million euros in 10 years whereas the current costs of the feed-in tariff scheme is approximately 245 million euros annually. Although being technology-neutral, we expect that the new scheme will attract mostly wind power projects and especially larger wind farms. There are already partly-developed wind power projects available with necessary land use planning completed or construction permits granted by municipalities corresponding to an annual production capacity of approximately 7.3 TWh. Investors should carefully review the legal validity of the plans and permits relating to a particular project. The large number of potential projects means that the competitive bidding process will be tough. Investment Aid for Biofuel and New Technology In addition to the production subsidies, discretionary energy investment aid would continue to be granted. Investment aid would be paid primarily for projects commercializing new energy technology such as electricity storage, integration of variable production into the electricity system and arctic offshore wind power. Investment aid would also be granted to new biofuel production facilities. The government strives to cut the import of oil to half from the current level by increasing the local production of biofuels which would require investments of approximately 1.5 billion euros to new production facilities. The investments depend heavily on the final wording of the EU renewable energy directive (RED II) currently under negotiation.

Dittmar & Indrenius