Clarification of the operator on the Rules for reducing the quantity of delivered biomass

Given the increased number of requests from the participants regarding the applicable rules with a view to reducing the quantity of the entered into biomass purchase-sale transactions, we hereby remind the applicable rules and rights and obligations of the participants in reducing the quantity of transactions entered into on the exchange

1. Possibility to reduce up to 20 percent due to weather conditions the quantity of biomass to be delivered during the delivery week

Pursuant to Point 4.4 of Biomass Supply Typical Conditions [1] (hereinafter – the Supply Conditions), the buyer shall have the right, in case of monthly, quarterly, half-yearly and yearly transactions, during the heating season (weakly transactions are not included), unilaterally reduce up to 20 percent the quantity of biomass to be delivered during a specific delivery week if the demand for biomass decreases due to weather conditions.

In order to exercise this right, the buyer must:

• submit a significant information notice not later than 2 (two) working days before the start of the relevant delivery week;
• one significant information notice can be submitted only for one specific delivery week. If there is a need to reduce the quantity for the next delivery week too, a significant information notice should be repeated before each such delivery week;
• the quantity of biomass is reduced by the same extent for all monthly, quarterly and half-yearly transactions without exception (the buyer cannot choose selectively that he chooses to reduce quantities only for a part of the available transactions);
• under this point, the buyer can unilaterally reduce the quantity of biomass supplied by submitting a significant information notice. If the specified conditions are met, the seller‘s consent is not required for such a reduction of the quantity. The reduced quantity of biomass takes effect immediately, after the moment of publication of the significant information.

2. Possibility to reduce the quantity of the transactions entered into with the possibility of termination in case buyer lost a heat auction

It is established in Point 8.2 of the Conditions of Trade in Biomass Products [2] (hereinafter – the Trade Conditions) that in case of such a transaction “the buyer has the right to unilaterally terminate (or proportionally reduce its quantity) if, according to the results of the heat auction, during the corresponding period, the buyer does not produce heat energy or it is not purchased from the buyer (or the quantity of the produced or purchased heat energy is reduced)“.

In order to exercise this right, the buyer must:

• submit a significant information notice. A significant information notice must be submitted not later than the last working day of the month in which the heat auction took place, but in all cases not later than on the last working day before the beginning of the delivery period;
• the transaction quantity can be reduced in proportion to the results of the heat auction, that is, if the buyer won at the heat auction 75 percent of the offered quantity, such a buyer would be entitled to reduce a quantity of the biomass transactions up to 25 percent;
• in the relevant period, termination or reduction of quantity applies to all transactions entered into at the exchange under this non-standard condition without exception (the buyer cannot choose selectively that he chooses to reduce quantities only for a part of the available transactions).

Under this point, the buyer can unilaterally reduce the quantity of biomass supplied by submitting a significant information notice. If the specified conditions are met, the seller‘s consent is not required for such a reduction of the quantity. The reduced quantity of biomass takes effect immediately, after the moment of publication of the significant information.

Please note that this provision does not apply to balancing heat auctions, that is, after losing the balancing heat auction, such buyers do not acquire the right to reduce the quantities of biomass transactions.

Additionally, we would like to draw your attention to possibility of reducing by 30% of the quantity of transactions with non-standard condition “Termination of transactions after losing heat auction“, that were entered into before 29 July 2022 for biomass supply in Kaunas city.

On 29 July 2022, the National Energy Regulatory Council adopted amendments to the Description of the Procedure for and conditions of heat production and/or purchase [3], according to which heat auction participants, during the cold season, can offer in the systems, where balancing heat demand auctions are carried out (currently this applies only in the cities of Kaunas and Telšiai), at the main heat auction, only 70 percent of the heat amount (MWh), which can be produced at maximum heat production capacity (MW).

Given that heat producers participating in such heat production systems could not reasonably foresee such possible changes in legislation, in the opinion of the operator, such participants have the right to unilaterally reduce by 30 percent the quantity of biomass, which is delivered under biomass purchase-sale transactions entered into before 29 July 2022, by submitting significant information notices.

3. Possibility to agree with the seller regarding carrying forward to future periods of the quantities to be delivered

If the buyer needs to reduce the quantities in a larger volume than the options listed above establish, the buyer has the right, in accordance with the provisions of Point 4.5 of the Supply Conditions, offer the seller to carry forward part of the transaction quantity to future periods. Please note that the consent of the seller is required for such carrying forward of the quantity.

In carrying out biomass purchase-sale transactions, the parties are subject to a general duty of cooperation, that is, the parties to the contract must cooperate during the performance of the contract. Nevertheless, in the event that the parties fail to reach a compromise, the parties have the right to approach the operator for presenting an opinion in resolving mutual disputes in carrying out the biomass purchase-sale transactions entered into at the exchange.

Buyers must exercise in good faith the right to unilaterally reduce the quantities of biomass purchase-sale transactions.

We would like to point out additionally that even though legal acts provide for cases where buyers have the right to unilaterally reduce the quantities of biomass purchase-sale transactions, these conditions must be used in good faith. Please note that the general prohibition of manipulating or attempting to manipulate the market also applies in these cases. The Energy Market Surveillance Rules [4] directly establish that the operator performs a continuous evaluation of the behaviour of the exchange participants, and, after having found out suspicious information related to possible violations of the exchange participant in the energy resource exchange, must submit such information to the Council (Point 37).

Spreading false information, including significant information notices, is indicated as a possible case of such violations.

In the event that the below or similar actions of the participants are identified, they could be seen as potential violations, and information about them should be submitted to the National Energy Regulatory Council, for example:

• the buyer publishes a significant information notice stating that he reduces the quantities of biomass transactions by 50 percent due to the partially won heat auction, although he actually won the heat auction at the 80 percent volume;
• the buyer publishes a significant information notice stating that he does not accept biomass because his heat production facilities using biomass broke down, although in fact he produces heat using the specified facilities during the specified period;
• the buyer publishes a significant information notice stating that he reduces the purchased quantities of biomass by 20% due to unusually warm weather conditions, although at the time he is entering into new biomass purchase-sale transactions for the supply of biomass for the same periods.

4. Consequences of reducing quantities without complying with the established rules

If the buyer unilaterally reduces the quantity of biomass supplied in the absence of the circumstances or conditions listed above, such reduction of quantity creates consequences, that are provided for in Point 16 of the Energy Exchange Regulation: paying a fine to the seller. This is provided on the assumption that the buyer chooses the biomass purchase strategy and the quantities purchased being best aware of the specifics of his activity and forecasted uncertainties of the activity. Therefore, all possible operational loopholes and risks must not become the sole responsibility and additional costs of the biomass supplier.

In cases where the biomass supplier has information that reduction of biomass supply has been done after information about the situation in the heat production market, air temperature and the like has been wrongly provided, and, in the opinion of the supplier, the buyer cannot exercise the right to reduce, without a sanction, the quantity of biofuel accepted, the biomass supplier has the right to approach the Operator for dispute resolution by providing reasoned explanations.

Footnotes:

[1] https://www.baltpool.eu/wp-content/uploads/2015/08/Tiekimo-salygos_LT_2022-04-26_.pdf

[2] https://www.baltpool.eu/wp-content/uploads/2015/08/prekybos-salygos-lt-2022-11-28.pdf

[3] Regulation No O3E-1089 of the National Energy Regulation Council of 29 July 2022 “On the amendment of regulation No O3-202 of the National Energy Regulation Council of 4 October 2010 “On the approval of the Description of the Procedure for and conditions of heat production and/or purchase“.

[4] https://www.e-tar.lt/portal/lt/legalAct/f3cf7b90722e11e3bd0ecaffd80c672a/asr