Avoiding a solar repeat

The wild times of solar investment brought such sobering consequences, like rising electricity prices, that more stable renewable energies may be stifled by a chastened government.

As work continues on a new framework for energy from renewable sources, some government officials are suggesting that regulation on the development of biomass energy plants be tightened to avoid a repeat of the solar boom - a move investors and advisers say would be going overboard.

"I cannot exclude [a change in the law]," Prime Minister Petr Nečas said on Czech television Nov. 14, saying interest groups in the biomass sector were strong enough to cause fears of a boom in the sector, including Czech companies involved in producing biomass from waste wood. "Maybe we can use some executive action to identify who the candidates for big business in biomass might be."

Although a risk of a boom in biomass is not entirely impossible, according to experts, regulation on biomass and other renewables under upcoming legislation will likely be sufficient to control, if not suffocate, growth.

"The situation of biomass is different than the one of solar power," said Jiří Sochor, a spokesman for the Industry and Trade Ministry. Biomass plants require much more time to be developed, and the price fluctuations associated with the supply and demand of organic materials for firing can limit the sector, he said, as opposed to the unlimited supply of sunlight.

"Any significant biomass project requires a multiyear effort to get through zoning, permitting, construction and commissioning, whereas very large solar projects are able to do this in a few months," said George Formandl, a partner at EnerCap Capital Partners, which manages a 100 million euro fund that invests in renewable energy across the CEE region.

In September, the government passed an amendment to the standing Renewable Energy Act that will take effect March 2011 and define limits on the amount of energy that can be produced by each type of renewable resource. Energy derived from biomass will be allowed the highest production quota, and according to estimates provided by law firm Norton Rose, biomass plants will produce 4,819 gigawatt hours of energy in 2015, compared with 1,930 this year, far outpacing any other renewable energy source.

The government is also working on a completely new draft of the law on renewable energy that is scheduled to be voted on at the end of this year and would take effect in January 2012. Under this new framework, support for biomass plants would only apply to co-generation plants - plants that produce both electricity and heat. And in a recent development in negotiations, those plants would also have to be certified by the Industry and Trade Ministry as "high efficiency," and plants that co-fire both biomass and traditional fossil fuels would only receive subsidies for energy produced using the biomass material.

In addition, the law will emphasize green bonuses, which are shorter term and more flexible and will be determined by the Energy Regulation Office based on daily electricity prices.

Already, previous legislation has handicapped development in the biomass sector, according to Formandl. He said the first amended renewable act passed in March that allowed solar subsidies to be cut had the side effect of making biomass projects "not financeable" because it is "not possible to predict what the revenues will be."

"The current legislation and the new draft being prepared assume that investors and banks will finance and start to build projects without knowing what the revenue will be upon commissioning. It's simply not realistic, and we expect this will be amended prior to the final passage," he said.

Fears of unpredictable legislation are legitimate, according to Radim Kotlaba, a lawyer with the renewable energy team of law firm CMS Cameron McKenna. Kotlaba noted that, under the draft law for 2012, biomass plants that were not cogeneration would not be supported at all, and because of the slower nature of development in the biomass sector, there are a number of noncogeneration plants under construction that will not receive any support once they are up and running in a couple years.

"I think the proper approach would be that the facilities now under construction should be supported, because there was legitimate expectation from the investor that this type of facility would be supported," he said.

Pavel Kvíčala, a partner at Norton Rose who works with clients investing in renewable energy, added that any fears of a boom are only "justified" when legislation allows for "extraordinary opportunity to reach profits."

"This would not have been a major issue if the state had reacted at an appropriate time and in an appropriate manner," he said. "In my opinion, regulation as such does not really solve issues. ... Any regulation should set clear rules and create a stable environment, and at the same time, the state must simply be prepared to react to changing circumstances in both a commercially and legally appropriate manner."

Cat Contiguglia can be reached at
ccontiguglia@praguepost.com