Regulatory environment

The regulatory environment of Grupa LOTOS has recently changed in a number of respects. Below are the EU regulations that have had or will have the greatest impact on the development of Grupa LOTOS.

One of the major changes that occurred in EU regulations was the presentation of the Fit for 55 package, which aims to reduce emissions by at least 55 percent by 2030 relative to 1990. The main part of this package was published on July 14th 2021, and further proposals are made on a regular basis. The proposed legislative changes will affect every area of the economy. Representatives of the European Commission pointed to proposals for financial support that will be available to all EU member states to facilitate the green transition. The actions taken by the EU are intended to influence sustainable economic growth, reduce the use of fossil fuels and spread the use of renewable energy sources, which will enable the introduction of new technologies and the development of infrastructure.

The European Commission has presented an amendment to the RED Directive concerning the promotion of energy from renewable sources, which sets the general framework and mandatory targets for the minimum share of energy from renewable sources. A separate target for the share of renewable energy is defined for the transport sector (currently at 14%). As part of the public consultation process, the European Commission proposed the following changes:

  • fuel suppliers will be required to achieve a 13% reduction in greenhouse gas emissions (instead of a minimum share of renewable energy as is currently the case);
  • the target for advanced biofuels (produced from Annex IX waste feedstocks) will be 0.2% in 2022, 0.5% in 2025 and 2.2% in 2030. (in the aviation and shipping sectors – a multiplier of 1.2);
  • the target for “non-biological renewable fuels” (e.g. hydrogen, e-fuels) of 2.6% in 2030 (in the aviation and shipping sector – a multiplier of 1.2);
  • maintaining the rules on the maximum share of biofuels from food commodities – up to 1 pp above 2020, up to 7%;
  • maintaining the maximum share of 1.7% for the commodities listed in Annex IX B (UCO, animal fats);
  • the elimination of multipliers for advanced biofuels and electricity;
  • establishing of a system for emission trading in the transport sector, following the ETS model, to be ultimately integrated into the current ETS system;
  • electric vehicle energy suppliers will receive emission reduction certificates that can be purchased by fuel suppliers to meet their reduction obligations;
  • abolishing Article 7a of the FQD Directive, under which the NCR target has been implemented in Poland (obligation to reduce emissions by 6% over the life cycle of fuels);
  • introduction of the ON B10 standard (up to 10% FAME content) and the so-called protection grade (obligation to offer the B7 standard at the same time) by 2030;
  • introduction of a target for the use of renewable fuels of non-biological origin in the manufacturing industry at 50% of hydrogen consumed for energy and non-energy purposes, excluding hydrogen intended for fuel production by 2030.
  • to establish a CO2 emission allowance trading system covering emissions from road transport and buildings (parallel to the ETS currently in force), with the obligation to purchase and redeem emission allowances also applying to fuel suppliers;
  • the maximum emission level (cap) in the ETS for the above sectors will be defined in 2026 in such a way as to achieve an emission reduction of 45% by 2030 compared to 2005;
  • the reduction factor for the new ETS scheme for transport and buildings will be 5.15% (the number of allowances in the scheme will be reduced each year by this amount);
  • the ETS for transport and buildings does not provide for free allowances (as is the case in the current ETS), although a stabilization reserve mechanism is planned (analogous to the one existing in the current ETS);
  • inclusion of the shipping and aviation sectors in the existing ETS, scope:
    • 100% of the emissions from intra-EU voyages,
    • 50% of the emissions from non-EU voyages,
    • 100% of emissions occurring at berth in an EU port;
  • gradual introduction of the mechanism for the shipping sector;
  • 20% of verified emissions reported for 2023;
  • 45% of verified emissions reported for 2024;
  • 70% of verified emissions reported for 2025;
  • 100% of verified emissions reported by 2026;
  • increasing the linear reduction factor for emission allowances in the current ETS to 4.2% per year (from the current 2.2%), which is expected to accelerate the increase in allowance prices;
  • a one-off reduction of the pool of allowances by 117 million allowances;
  • changes in the market stability reserve (MSR), the tool for managing excess allowances under the EU ETS; MSR is triggered when the total number of allowances in circulation exceeds 833 million or falls below 400 million; the number of allowances in the reserve is to be limited to 400 million;
  • the number of allowances transferred to MSR will represent 24% of their total number until 2030;
  • updating the free allocation rules to reduce the potential need for a cross-sectoral correction factor (CSCF), increase to 2.5% as of 2026 (from 1.6% currently);
  • eligibility for free allowances will also depend on taking decarbonisation measures;
  • free allowances allocated to the aviation sector inside the EU will be phased out by 2026;
  • strengthening the Innovation Fund by increasing the pool of allowances transferred to the Fund from 450 million to 650 million allowances + funds from cancellation of free allowances;
  • introduction of a support mechanism for low-emission investments in the form of CO2 Contracts for Difference (CCfD).

As part of the Fit for 55 package, the European Commission has presented an amendment to the Energy Tax Directive (ETD). The main objective of the amendment is to support low-carbon alternatives to conventional petroleum-derived fuels, such as biofuels, electricity, or hydrogen. The amendment is expected to replace the volume-based taxation model with taxation based on the content of energy expressed in gigajoules (GJ). The Commission presented a draft in which it proposes the following changes, among others:

  • tax rates are expected to vary depending on the use of energy and fuels:
  • full rate for fossil fuels – EUR 10.75/MJ,
  • two-thirds (2/3) of the rate for transition fuels (LPG, grey hydrogen) for a period of 10 years – EUR 7.17/MJ,
  • half (1/2) of the rate for sustainable but not advanced biofuels – EUR 5.38/MJ and the minimum rate for biofuels -– EUR 0.15/MJ;
  • different tax rates depending on the purpose of the fuel (transport, construction/agricultural machinery, heating purposes);
  • where the product is a blend of different fuels (e.g. petrol E5, ON B7), each component is to be taxed at its own rate;
  • 10-year adjustment periods for phasing out tax exemptions for intra-EU flights (except cargo flights) and intraEU shipping, ultimately rates as for road fuel;
  • minimum rates will be adjusted annually for inflation – an adjustment based on changes in the EU-wide harmonized index of consumer prices excluding energy and unprocessed food;
  • the possibility for Member States to set tax rates for fuels used for energy production, provided that their environmental impact is reflected.

The directive is scheduled to enter into force on January 1st 2023 and become applicable on January 1st 2024.

The Energy Efficiency Directive (EED) aims to reduce energy consumption to help shape a greener future. The key element is a 2030 energy efficiency target of at least 32.5%. It is to be achieved collectively across the EU. The Commission reviewed the Energy Efficiency Directive. The main proposed amendments to EED include:

  • increase the energy efficiency target from 32.5% by an additional 9 p.p. by 2030 compared with the 2020 baseline projections;
  • higher primary energy consumption target (39%) and final energy consumption target (36%) by 2030 (Article 9);
  • the annual energy savings obligation for Member States between 2024 and 2030 will be increased from 0.8% to 1.5%;
  • stricter regulations on heat metering and billing;
  • requirements for transparent, publicly available national regulations for cost-sharing of heating, cooling and hot water consumption in multi-tenant and mixed-use buildings;
  • monitoring the efficiency levels of new energy generation capacities.

In July 2021, the European Commission also presented a legislative initiative on sustainable aviation fuels (’ReFuelEU Aviation’), with the overriding objective to accelerate decarbonisation of the aviation sector through increased production and uptake of sustainable aviation fuels (SAF) and synthetic fuels. As part of the consultations, a draft regulation was submitted containing various options for stepping up the use of SAF in the aviation sector, including:

  • obligation of fuel suppliers (entities delivering fuels to the market responsible for fuel declaration to the excise tax authorities, delivering fuels to EU airports) to ensure a minimum share of sustainable aviation fuels (SAF) and a minimum share of synthetic aviation fuels (defined as renewable fuels of non-biological origin in accordance with the existing RED directive) delivered to EU airports:
    • 2% SAF from 2025,
    • 5% SAF and 0.7% synthetic fuels from 2030,
    • 20% SAF and 5% synthetic fuels from 2035,
    • 32% SAF and 8% synthetic fuels from 2040,
    • 63% SAF and 28% synthetic fuels from 2050.
  • fuel suppliers report on an annual basis the volumes of aviation fuels and the volumes and types of sustainable aviation fuels delivered to EU airports, together with the information on emission reductions achieved;
  • each Member State sets penalties for missing targets; for fuel suppliers the penalty is to be at least twice the price difference between traditional jet fuel and SAF multiplied by the volume missing the target; the same applies to synthetic fuels.

These obligations for fuel suppliers are to enter into force on January 1st 2025.

The main objective of the package is to introduce incentives for increasing the number of zero-emission vehicles, and the European Commission has therefore:

  • revised CO2 emission standards for passenger cars, delivery vehicles and heavy goods vehicles;
  • revised the Alternative Fuels Infrastructure Directive.

In 2020, new CO2 emission standards for passenger cars came into effect (currently at 95 g of CO2/km). However, the Commission has commenced work on revising these emission standards for passenger cars, delivery vehicles and heavy goods vehicles.

The main objectives are to:

  • increase the emission reduction target for new passenger cars by 55% and for delivery vehicles by 50% by 2030 (compared with 2021 emissions);
  • mandatorily reduce emissions from new vehicles by 100% by 2035, which means a de facto ban on the sale of combustion vehicles in the EU.

The revision of the Alternative Fuel Infrastructure Directive is also a step towards increasing the share of zero-emission transport. The directive currently provides for the development of infrastructure comprising charging points for electric vehicles, hydrogen refuelling points, and CNG/LNG refuelling points. It sets out minimum requirements for the deployment of alternative fuels infrastructure, to be implemented by means of member states’ national policy frameworks.

The draft revision proposes to:

  • amend the existing definition of alternative fuels, by breaking them down into:
    • alternative fuels (electricity, hydrogen, ammonia),
    • renewable fuels (biofuels) and
    • alternative fuels of fossil origin (PLG, CNG, LNG);
  • impose an obligation to provide a minimum number of charging points for passenger vehicles on the TEN-T (Trans-European Road Network) road network at a distance of no more than 60 km on both sides of the road; in addition:
    • by 2025, the minimum power of a station is to be 300 kW, and the minimum power of a single charging point at a station is to be 150 kW,
    • by 2030, the minimum power is to be 600 kW for a station and 150 kW for a single point;
  • impose an obligation to achieve cumulative power available at charging stations of a minimum of 1 kW for each nationally registered electric vehicle and a minimum of 0.66 kW for each registered hybrid vehicle;
  • launch such number of charging stations for passenger cars outside TEN-T which will ensure unlimited free movement of electric vehicles – each Member State will determine the number based on the estimated number of electric vehicles;
  • impose an obligation to provide a minimum number of charging points for heavy goods vehicles on the TEN-T network at a distance of no more than 60 km on both sides of the road, in addition:
    • by 2025, the minimum power of a charging station is to be 1,400 kW and the minimum power of a single charging point at a given station is to be 350 kW,
    • by 2030, the minimum power is to be 3,500 kW for a station and 350 kW for a single point;
  • in addition, impose an obligation to install charging points on publicly available car parks and parking places;
  • impose an obligation to enable electronic payments at charging points;
  • impose an obligation to provide by 2030 a minimum number of hydrogen refuelling stations with a throughput of at least 2 t/day and a pressure of 700 bar (and the obligation that the station can serve both passenger vehicles and heavy goods vehicles), at a distance of at least 150 km along TEN-T roads;
  • impose an obligation to provide at least one hydrogen refuelling station at each urban node of the TEN-T network by 2030;
  • impose an obligation to provide for the refuelling of liquid hydrogen at stations located at distances of no more than 450 km;
  • electronic payments must be enabled at hydrogen refuelling stations;
  • impose an obligation to ensure an adequate number of LNG stations to navigate the road network and TENT ports from January 1st 2025; no more specific obligations;o the manner in which the obligations are to be fulfilled will be determined by each Member State on its territory.

On December 15th 2021, the European Commission published the Hydrogen and Decarbonised Gas Package and a draft Regulation on the reduction of methane emissions in the energy sector.

The Gas Package consists of:

  • Draft Directive on common rules for the internal markets in renewable gases and natural gas and hydrogen with annexes,
    • Draft Regulation on internal markets in renewable gases and natural gas and hydrogen (recast) with annexes.

Definition and certification of “low-carbon” gases:

  • the Commission proposes to introduce a definition of „low-carbon” gases and low-carbon fuels, whereby lowcarbon gases and fuels must meet a GHG reduction threshold of 70%;
  • rules were also introduced to certify low-carbon gas and its derivatives to ensure that emission reductions from their use are at least 70%:
    • Member States will require operators to demonstrate compliance with the 70% threshold by providing „reliable information” and through a „mass balance” system, regardless of whether the fuels are produced in the EU or imported;
    • operators would also be required to provide evidence that an appropriate and independent level of audit of the information submitted has been carried out to verify that the systems in place are accurate, reliable and fraud-proof;
    • the EC will adopt delegated acts by the end of 2024 to define a methodology for assessing emission reductions from low-carbon fuels;
    • the certification rules are intended to complement the certification system for renewable fuels and gases proposed in the RED III project.

Reduced input tariffs:

  • to encourage the introduction of renewable and low-carbon gases into the EU gas network, the Commission proposes to grant a 75% discount for such gases on the input tariffs;
  • the Commission also proposes to eliminate cross-border tariffs for such gases, including at entry and exit points to third countries, as of January 1 of the year following the adoption of the new Regulation. In addition, cross-border tariffs will not apply to the special hydrogen network in the future.

Limiting long-term natural gas supply contracts:

  • the Commission proposes that no long-term natural gas supply contracts be entered into where contract terms would extend beyond 2049.

Joint gas procurement:

  • Under the draft, Member States particularly affected by the energy price surge will be able to set up a mechanism for joint strategic stock ordering by transmission system operators, reporting in advance to the Commission a range of information such as the amount of gas they plan to purchase or the expected costs and benefits;
  • Member States are to analyse their gas storage levels and the potential risks to security of supply within the framework of the joint regional risk assessment. Where risks are identified, Member States should be able to implement countermeasures from a range of options, such as minimum stockholding obligations for gas storage users and tenders that encourage reservations of storage capacity.

Hydrogen market:

  • To ensure a competitive, open and dynamic hydrogen market in the EU by 2030, the Commission proposes to establish an EU-wide 10-year hydrogen network development plan and to create a European Network of Hydrogen Network Operators (ENNOH);
  • in terms of „blending” natural gas with hydrogen, the Commission proposes a European cap on cross-border interconnection points to limit the risk of market segmentation. From October 1st 2025, transmission system operators would have to accept cross-border gas flows with up to 5% hydrogen content (by volume).

Other initiatives under the European Green Deal

In June 2020, the EU endorsed a classification system for environmentally sustainable economic activities (known as the ‘taxonomy’), Based on it, it will be possible to determine which type of activity is sustainable (in other words leads to climate neutrality). This classification is intended to redirect capital flows from the private market and EU programmes to investments that fit with the goals of energy transition and achieving climate neutrality. The effect of the regulation will most likely render fossil fuel projects facing limited access to favourable financing, while projects including decarbonisation will have access to capital on preferential terms.

In July 2020, the European Commission published the EU Hydrogen Strategy, describing measures intended to help the EU achieve climate neutrality by 2050. The Strategy places the greatest focus on hydrogen production using emission free technologies, such as water electrolysis. The strategic priority is to support the production and use of hydrogen as an important tool for decarbonisation, particularly in energy-intensive industries or freight transport, and for stabilising the power system in view of the growing share of renewable generation sources (the role of hydrogen in energy storage). During the transition phase, low-carbon or ‘blue’ hydrogen (produced from methane based on a CCS process) and other low-carbon generation technologies will also be supported.

Another previously announced change is the Mobility Strategy. It sets out an action plan with concrete policy measures, divided into 10 key areas that the Commission will work on in the coming years. Key elements of the Mobility Strategy:

  • its primary objective is to reduce emissions from transport, which currently account for more than one-fourth
  • of CO2 emissions in the EU;
  • to place at least 30 million zero-emission vehicles on the roads;
  • to double rail freight traffic, triple high-speed rail traffic and complete the trans-European transport network with state-of-the-art traffic management systems, with the target being 100 climate neutral cities by the end of the decade;
  • to ensure that intercity journeys under 300 km are carbon neutral by 2030, with rail as the preferred mode of transport for distances below 1,000 km;
  • aviation: zero-emission aircraft market-ready by 2035; the draft defines fuel targets for the aviation industry: the share of renewable and low-carbon fuels should reach 5% by 2030 and increase to over 60% by 2050, with road and rail transport expected to rely on a mix of electricity and hydrogen; the Commission is seeking to change the exhaust emission standards for passenger cars and heavy goods vehicles in order to encourage transition to non-emission vehicles.

This strategy sets out measures to reduce methane emissions in Europe and globally. It sets out legislative and nonlegislative measures in the energy, agriculture and waste sectors, which account for approximately 95% of global human-related methane emissions. To reduce methane emissions in the energy sector, a requirement will be proposed to improve leak detection and repair on gas infrastructure and regulations will be considered to prohibit routine gas flaring and venting practices. The Commission will engage in dialogue with its international partners and explore possible standards, targets or incentives for energy imports into the EU and tools for their enforcement.

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