Selected questions regarding enterprising in the energy industry of renewable soureces of energy

The adoption of the above acts represents a delayed transposition of so-called third package of EU directives on energy industry[1], the purpose of which is, inter alia, electricity and gas market liberalization and improvement of consumers´ protection in this field.

This article purports to outline the current legal framework of enterprising in the field of electricity production from renewable sources of energy in the Slovak Republic and to provide a brief analysis on some of the changes brought about by the new Act on Energy Industry.

CONDITIONS FOR ENTERPRISING IN THE ENERGY SECTOR OF RENEWABLE SOURCES OF ENERGY

If compared to the Previous Act on Energy Industry the definition of enterprising in the energy industry remains unchanged. The Act on Energy Industry exhaustively enumerates activities that fall under the term enterprising in the energy industry and at the same time also exhaustively enumerates activities that are not to be considered enterprising in the energy industry[2].

Enterprising in the energy industry means, inter alia, electricity generation, transmission, distribution and supply.

Enterprising in the energy industry does not include:

• electricity generation or electricity distribution exclusively for the producer´s or distributer´s own use;
• electricity supply including procurement of electricity transmission, electricity distribution and other services related to electricity supply for other persons for a purchaseprice without further price increase, whereas the purchase price already includes electricity transmission price or electricity distribution price respectively and other services relating to electricity supply; and
• (compared to the Previous Act on Energy Industry the Act on Energy Industry has extended the negative definition of enterprising in the energy sector by this extra exception (iii)) electricity generation in a small electricity generating facility by a producer, provide

  ---

[1] In respect to electricity it regards mainly transposition of the Directive of EP and Council No. 2009/72/EC regarding common rules for the internal market in electricity and repealing of Directive No. 2003/54/EC.

[2]The entire definition of enterprising in the energy industry is set forth in Section 4 (1) of the Act on Energy Industry.

that the producer does not apply for support in form of surcharges[3] and at the same time the producer is a household costumer and its annual electricity production does not exceed by more than 50% the 12-month real consumption of the off-take point[4].

Entities performing activities under (i), (ii) and (iii) are subject to notification duty vis-à-vis the Regulatory Office of Network Industries (hereinafter referred to as the “Office”) within 30 days as of commencement, change or termination of performance of such activities.

Regardless of the aforementioned, the Act on Energy Industry specifies that the electricity supply to final customers who are connected to local distribution system is considered an entrepreneurial activity in the energy sector.
Enterprising in the energy industry may only be conducted on the basis of the following:

a) license for enterprising in the energy industry (hereinafter referred to as the „License“), which License is, upon compliance with the statutory conditions, issued by the Office.

The License can be issued for one or more activities. With respect to the License duration, the Act on Energy Industry prefers Licenses for an indefinite period, unless an applicant applies otherwise.

The Act on Energy Industry has simplified the License issuance procedure in relation to applicants applying for a license for electricity supply within territory of the Slovak Republic, provided such an applicant has its permanent residence or registered office within territory of the state which is a signatory of the European Economic Area Agreement (hereinafter referred to as the “EEAA”) and is a holder of electricity supply license under laws of the state which is signatory of the EEAA (i.e. a state of applicant´s permanent residence or a registered office or other state which is a signatory of the EEAA[3]). Such an applicant shall merely attach its electricity supply license translated into Slovak by a court-sworn translator to its application for issuance of the License, and needs not to prove compliance with any other conditions for issuance of the License stipulated by the Act on Energy Industry.

b) confirmation of notification duty fulfillment, in cases when issuance of the License is not required, i.e. in cases of electricity production and supply performed by electricity production facilities with total installed power of up to 1 MW including.

The aforementioned exception from obligation to apply for the License was stipulated also under the Previous Act on Energy Industry, however, at the same time the above exception was (doubly) specifically stipulated also in the Act No. 309/2009 Coll. on Support of Renewable Energy Sources and on amendments of certain acts (hereinafter referred to as the “Renewable Energy Support Act”) in regards to electricity production and supply from renewable sources of energy by electricity generating facilities with total installed power of up to 1 MW. From practical point of view, the previous legislation constituted duplicate stipulation of the same exception and therefore, as we presume, was the provision regarding the latter exception excluded from the Act.

[3] Pursuant to Section 3 (1)(c) of the Act No. 309/2009 Coll. on Support of Renewable Energy Sources and High-efficiency Cogeneration and on amendments to certain acts.

[4] Section 4 (2) and Section 4 (4) of the Act on Energy Industry.

[5] In respect to a freedom of settlement applying in the EU, it might not necessarily be a state of a permanent

residence or a seat of the applicant (Explanatory Memorandum to the Act on Energy, page 14).

on Energy Industry. The current provision of Section 6 (4)(a) of the Act on Energy Industry governs also generation and supply of electricity from renewable sources of energy.

Entities conducting entrepreneurial activities for performance of which the License is not required are obliged to notify the Office on commencement, change and termination of performance of such activities within 30 days. The Office shall issue confirmation on notification duty fulfillment within 30 days as of delivery of respective notification.

CONSTRUCTION OF ENERGY PRODUCTION FACILITIES

As a general rule, the Act on Energy Industry provides for possibility to construct an energy production facility exclusively on the basis of certificate for construction of energy production facility[1] (hereinafter referred to as the “Certificate”) issued by the Ministry of Economy of the Slovak Republic (hereinafter referred to as the “Ministry”). The above mentioned also applies to cases when entity intending to construct an energy production facility performs activities which are not considered enterprising in the energy sector (please see above).

Issuance of the Certificate is not required in case of energy production facility designed for:

1. production of electricity from solar energy placed at a roof structure or external cladding of one building affixed to the ground by solid foundations, registered in the Cadastre of Immovables and with total installed power of up to 100 kW including, provided that such energy production facility is the first energy production facility for generation of electricity from solar energy constructed on the roof structure or external cladding of such building.

The new Act on Energy Industry specifies conditions for application of the above exception, as the Previous Act on Energy Industry stipulated the above exception for the energy production facility designed for electricity generation from solar energy with total installed power of up to 100 kW situated merely on a “building”.

The new wording of the above exception was presumably harmonized with Section 3 (8) of the Renewable Energy Support Act which requires the same conditions for the energy production facilities in order to obtain support for electricity production from renewable sources of energy in form of surcharges[2].

It should be noted that the term “building” is not explicitly defined by Slovak law. This term can only be derived from definition of so-called “ground-based construction” pursuant to Section 43a (2) of the Building Act[3]: “A ground-based constructions are spatially concentrated roofed buildings including underground space, technically suitable and designed for protection of people, animals or things; which need not to have walls, but must have a roof. According to the purpose the ground-based constructions are divided into residential buildings and non-residential buildings.”

[1] The Previous Act on Energy Industry used the term “certificate for compliance of investment plan with long-term concept of energy policy”.

[2] Section 3 (8) together with Section 3 (1) (c) of the Renewable Sources Support Act.

[3] The Act No. 50/1976 Coll. on Land-use Planning and Building Code, as amended.

Given the above, it can be determined that a building is a ground-based construction that needs not to have walls, however, it must have a roof and is designed for protection of people, animals or things.

For the purposes of the exception under this Section 1, the Act on Energy Industry requires the building on which energy production facility using the solar energy is placed to be affixed to the ground by solid foundations. Pursuant to Section 43 of the Building Act the affixing to the ground by solid foundation is only one type of solid affixing to the ground, i.e. other types of affixing to the ground do not constitute grounds for the above exception from the obligation to apply for the Certificate.

Also, it should be noted that the building on which an energy production facility is situated has to be registered in the Cadastre of Immovables.

2. electricity generation with total installed power of up to 1 MW including which uses other primary energy source than solar energy (i.e. includes also other renewable sources of energy).

Pursuant to the Act on Energy Industry the Certificate is required in case of increase of the total installed power exceeding the above stated maximum limits (i.e. 100kW and 1MW).

In cases when issuance of the Certificate is required, the Ministry shall issue the Certificate within 60 days as of delivery of the respective application, provided that the submitted investment plan of the applicant in form of energy production facility construction is in compliance with the energy policy.[1]

The Certificate is subsequently used as an evidence in so-called zoning and building proceedings and used as an attachment to application for connection of the energy production facility into the transmission system or distribution system. Under the Act on Energy Industry validity of decision on issuance of the Certificate is limited to 3 years as of the day of its effectiveness.

OWNERSHIP UNBUNDLING

In accordance with the Directive 2009/72/EC of the European Parliament and of the Council regarding common rules for the internal market of electricity and repealing Directive 2003/54/EC (hereinafter referred to as the “Directive”), ownership unbundling of electricity systems from electricity generating and supplying activities is a basic precondition for due functioning of electricity market. The Directive provides for an option for the EU member states to choose from three solutions in order to secure fulfillment of the above goal, however, at the same time the Directive prefers the ownership unbundling of the transmission system from electricity generation and supply as an ideal model, i.e. “Ownership Unbundling, which implies the appointment of the network owner as the system operator and its independence from any supply and production interests, is clearly an effective and stable way to solve the inherent conflict of interests and to ensure security of supply.”

[1] The energy industry policy is approved by the government on the basis of proposal of the Ministry. The

Previous Act on Energy Industry used the term “long-term concept of energy industry policy”.

From the three possible solutions proposed by the Directive, the Act on Energy Industry preferred the model of the Ownership Unbundling of electricity generation and supply from transmission system operation or transmission network operation[1].

In the Act on Energy Industry the principle of Ownership Unbundling is reflected in (i) Section 30 and (ii) Section 32:
(i) Section 30 of the Act on Energy Industry sets out an obligation of a transmission system operator to be an owner of the transmission system. The same Section 30 also stipulates a ban for the owners of transmission systems to perform activities which would connect the owner of the transmission system with electricity generation or supply in any regard (e.g. performance of any direct or indirect control over an entity generating or supplying electricity, management of such entity or performance of other activities or rights in entities conducting entrepreneurial activities in electricity generation or supply). The transmission system operator is obliged to procure fulfillment of the obligations arising from the rule of Ownership Unbundling within 6 months as of effectiveness of the Act on Energy Industry.

(ii) Pursuant to Section 32 of the Act on Energy Industry a distribution system operator who is considered to form part of vertically integrated enterprise is obliged to remain independent from activities which do not relate to distribution of electricity from the point of view of legal capacity, form, organization and decision-making. The Act on Energy Industry further enumerates manners through which a distribution system operator is obliged to secure the said independence. For the sake of clarity, it should be mentioned that the above obligation does not constitute obligation of the distribution system operator to separate ownership to his own property from ownership to property of vertically integrated enterprise. The operator of distribution system is obliged to secure fulfillment of obligations arising from application of the rule of Ownership Unbundling within 4 months as of effectiveness of the Act on Energy Industry.

Pursuant to Section 91 (2) (a) of the Act on Energy Industry in case of breach of the rule of Ownership Unbundling stipulated in Section 30, the Office is entitled to impose a fine from EUR 50,000 up to EUR 1,500,000 as of expiry of the above mentioned periods (i.e. 6 months or 4 months).

OBLIGATIONS IN PUBLIC INTEREST

The Act on Energy Industry transposed into Section 24 thereof a right of the EU member state to impose obligations in general economic interest on certain entities. A general economic interest shall be approved by the government of theSlovakRepublicbased on a motion of the Ministry. The Act on Energy Industry demonstratively enumerates activities considered as being in general economic interest.

In compliance with the abovementioned general economic interest the Ministry shall be entitled to impose on exhaustively enumerated entities (including electricity producers, electricity suppliers, transmission system operators and transmission network operators) to procure fulfillment of exhaustively enumerated obligations, such as:

[1] In case of gas the Act on Energy Industry allows the government to decide on other model of unbundling until

December 1, 2012.

• security of supply, regularity, quality and price of electricity supply and energy efficiency of electricity supply;
• use of renewable sources of energy in electricity generation;
• priority access, connection, transmission, distribution and supply of electricity from renewable sources of energy.

In case of breach of the obligations imposed in general public interest the State Energy Inspection is entitled to impose a fine from EUR 50,000 up to EUR 500,000.

SPECIAL CONTRIBUTION

For the sake of completeness, the Act No. 235/2012 Coll. on Special Contribution from Enterprising in Regulated Sector Industries and on amendments of certain acts (hereinafter referred to as the “Act on Special Contribution”), which act also entered into effect on September 1, 2012, should be briefly mentioned.

The Act on Special Contribution sets out an obligation for regulated entities to pay a special contribution from entrepreneurial activities performed in regulated sector industries, whereas a regulated entity:

• is an entity or a branch of a foreign entity which is entitled to perform entrepreneurial activities in energy industry on the basis of the License issued by the Office (hereinafter referred to as the “Regulated Entity”). As already mentioned above, performance of entrepreneurial activities in the energy industry is allowed either on the basis of the License or Certificate on notification duty fulfillment. Therefore, please, be aware that the above obligation to pay special contribution relates only to entities conducting entrepreneurial activities on the basis of the License;
• at the same time the Regulated Entity presumes that its revenue resulting from the regulated entrepreneurial activity during the accounting period in which it obtained the License will amount to at least 50 % of its total revenue for this accounting period. The Regulated entity shall be considered a Regulated Entity even if its revenue resulting from the entrepreneurial activity in the energy industry in the accounting period in course of which the Regulated Entity already has the License for performance of such activity, does not reach 50 % of its total revenue for this accounting period[1];
• the economic result of the Regulated Entity for the accounting period in which the Regulated Entity obtained the License shall reach at least the minimum amount of the special contribution threshold, which constitutes an obligation to pay the special contribution, i.e. EUR 3,000,000. The Regulated Entity is obliged to assess its presumed economic result for the above purposes, therefore, the special contribution shall be paid in form of advance payments.

The period for special contribution payment shall be each calendar month of the accounting period in which the Regulated Entity has the License for performance of entrepreneurial activity in the energy industry.

[1] Section 3 (4) of the Act on Special Contribution.

Upon submission of the economic result for the respective accounting period to the respective Tax Administration Office, the paid special contribution shall be accounted for, i.e. calculated according to the actually reported economic result for the respective accounting period.

Pursuant to the Act on Special Contribution the last contribution period for special contribution payment is December 2013, i.e. the obligation to pay special contribution represents only temporary solution. As the length of the contribution period is known in advance, the Act on Special Contribution provides for an option to reimburse at once all special contributions for all periods in which the obligation to pay the special contribution shall apply, and thusly, cause expiration of the obligation to pay the special contribution by fulfillment of the obligation for all periods (i.e. all respective calendar months), in course of which the respective legal entity or a branch of foreign legal entity is considered a Regulated Entity.

The Act on Special Contribution expressly stipulates that payment of the special contribution may not constitute grounds for regulated price increase[1], as the paid special contribution shall not be considered as justified expense which could be added to the regulated price.

The special contribution payment in excess or as underpayment shall be included in the income tax base.

OTHER CHANGES

Apart from the aforementioned changes other changes may also be of interest with respect to entrepreneurial activities in the field of electricity supply, in particular, changes relating to consumer´s protection. The Act on Energy Industry introduces strengthening of rights of household customers/purchasers, such as:

• the right for free of charge withdrawal from the electricity supply agreement within three weeks;
• the right for withdrawal from the electricity supply agreement within 14 business days as of conclusion thereof;
• the right to be informed by the electricity supplier on each price change, change of commercial terms, relating services and on customer´s right to terminate the electricity supply agreement by notice, no later than 30 days before effectiveness of such change;
• in case of the customer´s disagreement with change of the electricity price or any other change the customer has is entitled to terminate the electricity supply agreement on the basis of free of charge notice within 15 days before the day of effectiveness of such change at the latest;
• the right to be informed on content of the electricity supply agreement in reasonable time period before conclusion thereof.

The adoption of new Act on Regulation also brought about re-stipulation of competencies of the Office in order to strengthen its independent position as well as new regulation regarding proceedings before the Office and procedure regarding supervision performed by the Office, etc.

[1] Under Section 11 of the Act on Price Regulation electricity production from renewable sources of energy is

also subject to price regulation.