13 Dec 2018
The amendments to the Act on Production Subsidy for Electricity Produced from Renewable Energy Sources (1396/2010) entered into force on 25 June 2018. The amended Act and the decree supplementing it set the rules for a tender-based premium scheme promoting renewable energy sources in new power plant investments. Production subsidy is granted for annual production up to 1.4 TWh.
Only one tendering round is held and electricity producers must submit their tenders at latest on 31 December 2018 in electronic form available at the Energy Authority's website. The participants should review and verify the authorization of the person submitting the tender as well as the exact eligibility criteria, procedural and other requirements for the projects, tenders and security assets from the Energy Authority's instructions (1595/702/2018), published on 24 October 2018.
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 support new renewable energy projects cost-effectively as a transition-period solution. New wind, solar, biogas, wood fuel and wave power plants located in Finland may be accepted into the support scheme. Also, power plants consisting of small units of renewable energy may be accepted into the support scheme.
Although the scheme is intended to be technology neutral, it is expected to attract especially wind power projects.
Getting Accepted into the Premium System
The support scheme is set up as a pay-as-bid auction process. Electricity producers submit binding tenders concerning the premium (stated with accuracy of cents), the amount of electricity to be produced (stated with the accuracy of MWh), 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.
Each electricity producer accepted into the premium system will be paid a subsidy determined by the premium stated in its tender. 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 provisions concerning a lower margin price by issuing a decree.
The amount of subsidy granted under the premium system is calculated separately for each accepted power plant based on the amount of electricity qualifying for the subsidy during the tariff period, the premium stated in the decision of approval, and the reference price of electricity. When the three-month average market price of electricity is the same as the reference price of electricity (EUR 30 per MWh) or lower, the subsidy received will be based on the premium stated in the tender. In turn, a rise in the market price of electricity over the reference price will reduce the premium-based subsidy. Furthermore, if the three-month average market price of electricity is equal to or higher than the sum of the reference price and the premium, no subsidy will be paid. The rights and obligations based on the premium system shall be in force for a fixed term with a maximum duration of 12 years.
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 subsidy for each three-month tariff period, the electricity producer approved into 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 obligated to produce electricity on a 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, due to reasons originating from the electricity producer, the power plant is not fully connected to the grid so that it fully produces 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 the suspension of payment of the subsidy, the obligation to return the received subsidy, fines and/or revocation of the decision of approval.
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-to-build investment project concerning a wind power, solar, biogas, wood fuel or wave power plant. It is also possible to participate with power plants consisting of small units of renewable energy. A single unit may produce actual maximum of 10,000 MWh per year to qualify as a small unit and all small units in one tender must be of the same power plant type and owned by the same producer.
To be eligible for tendering, the power plant must, among other things:
be located in Finland or Finland's territorial waters;
be new altogether, except for the power plant 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.
The electricity producer may notify the exact number of generators and the nominal output of the power plant(s) or notify a range for them. The range must correspond to the permits and the eligibility criteria must be fulfilled in all cases within the range.
When submitting a tender, the electricity producer needs to confirm that no binding decision concerning the purchase of fixed assets related to the plant or the commencement of construction has been made. The Energy Authority describes a binding decision as a contractual legal action between two or more parties. An 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, in 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 of a binding contract and, therefore, is not an obstacle to the tender. A preliminary agreement is not an obstacle to the tender 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. A power purchase agreement concerning the power to be produced by the power plant participating in the tendering concluded prior to 31 December 2018 is an obstacle to the tender.
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 and the plant, to participate in the tendering process:
master plan for the construction of wind power;
planning requirement decision;
deviation decision referred to in the Land Use and Building Act (132/1999).
Contents of the permits need to correlate with the renewable energy power plant referred to in the tender. Permits included in one tender may not be included in another. The permits and other similar documents 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 permits before the 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 at or would lead to significantly preventing, restricting or distorting the tendering process. A power plant shall also be excluded from the competition if a member of the producer's management has committed certain offences (including a work safety offence and other employment offences) or 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. A power plant shall also be excluded if the producer of electricity has financial difficulties, e.g. its property has been taken in execution or it fulfills the EU state aid criteria of "undertaking in difficulty".
The annual amount of electricity to be produced stated in the tenders must be at least 20 percent higher than 1.4 TWh. If the prerequisite is not fulfilled, the Energy Auhtority shall reject all tenders. In case two or more eligible tenders have exactly the same premium and the tenders meet the conditions for approval, but the combined amount of annual electricity production of such tenders exceeds the unallocated amount of the annual production limit of 1.4 TWh, all such tenders shall be rejected.
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 securities 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 in euros is the annual amount of production of electricity in MWh according to the tender multiplied by 2. 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 a 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 into 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 in euros is the annual amount of production of electricity in MWh according to the tender multiplied by 16 and it shall be valid for three years and six months. Other requirements for the completion security correspond to the above mentioned requirements for 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 tender security into cash and account it to the State.
The completion security shall be released 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. To the extent that 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 corresponding part of the completion security into cash and account it to the State. The electricity producer loses the completion security in its entirety if the power plant is not constructed to meet the requirements for the location of the power plant, requirement of originality and replacement investments.
In addition to the securities, the electricity producer must pay a participation fee to the Energy Authority when submitting a tender. The participation fee is EUR 3000 per tender.
Monitoring the Electricity Producers Accepted into the Premium System and the Consequences of Underproduction
Electricity producers accepted into the system must provide the Energy Authority with a monitoring plan for the production of electricity eligible for the subsidy within three months before the beginning of the first tariff period.
If the electricity production of the power plant does not meet annual requirements set for the production of electricity, the electricity producer must return the subsidy paid in accordance with the premium during the calendar year.
A power plant in the premium system must each calendar year produce more electricity than 800 MWh. If the producer does not meet this prerequisite, the amount of electricity determining the subsidy when calculating the amount of the subsidy during the year in question is zero MWh.
In addition, during the first subsidy period, the electricity producer must produce, on average, at least 75 percent of the annual production stated in the decision of approval and during the second and third subsidy periods, on average, at least 80 percent. If the producer fails to produce the required output, it is obligated to pay underproduction compensation. There is, however, no obligation to pay the underproduction compensation for the hours when the market price of electricity is negative in the area where the power plant is located or if the shortage of production is caused due to the electricity network operator. In certain circumstances, the Energy Authority may exempt the producer from the obligation to pay underproduction compensation when the non-compliance with the annual production obligation is result of unusual and unforeseeable circumstances.
During the subsidy period, the amount of electricity production eligible for subsidy may be up to four times of the electricity production stated in the tender. In case the producer produces more electricity than this maximum amount during the subsidy period, the possible surplus is not shifted to the following subsidy periods.
What Happens Next?
The tenders may be submitted until 31 December 2018. It is estimated that the tendering process will be resolved during 2019.
The Energy Authority shall later publish instructions for the electricity producers accepted into the premium system. These instructions shall include information, among other things, on an electricity producer's reporting and accounting obligations as well as on applying for the production subsidy.
In certain situations, the Energy Authority's decisions are subject to administrative review and appeal. If the Energy Authority has unlawfully rejected a tender, the electricity producer may be entitled to compensation, the maximum of which is 4 per cent of the subsidy that could have been paid to the producer based on the tender.
The decision of approval of a tender may be enforced despite appeal, unless ruled otherwise by the court. The electricity producer whose power plant has been approved for the premium system may, therefore, begin preparing its investment immediately upon receiving the information of acceptance.
The preceding renewable energy support scheme will remain in force for power plants accepted into it. Furthermore, the provision on excluding feed-in tariffs from new biogas and wood-fired power plants will enter into force at the end of 2018.
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.
In addition to the technical and economic feasibility of the project, project developers, sponsors, suppliers and finance providers should carefully review e.g. the plans, permits, decisions and contracts relating to the project in order to ensure that the project is eligible for the premium scheme and that it can comply with the requirements thereof. Please note that non-compliance with the requirements of accepted tenders and the premium system may lead to significant financial losses if the electricity producer loses its securities or in worst case the right to the subsidy.
We are happy to assist you with your renewable energy projects and inform you of further developments.