Introduction
Road map
Energy law amendment
How to create sufficient natural gas demand on power exchange
Comment


Introduction

On January 1 2015 an obligation to sell at least 55% of high methane natural gas on a commodity exchange entered into force in Poland.

The Polish natural gas market is undergoing a process of liberalisation. One of the most important steps (ie, the separation of natural gas sale and grid operations) has already been completed. The European Commission has initiated proceedings against Poland for its infringement of EU Directive 2003/55/EC by regulating natural gas prices, in particular for commercial end customers. This has accelerated the liberalisation process.

Road map

The Road Map for the Liberalisation of Natural Gas Prices outlines the actions to be undertaken. It was prepared by the president of the Energy Regulatory Office (ERO) and published on February 5 2013. According to the road map, the implementation of its measures will facilitate the emergence of significant volumes of natural gas on the public wholesale market and ensure that players in the commercial sector have the possibility to switch supplier. Further, the implementation of these measures is expected to trigger the development of competition mechanisms in the wholesale and retail markets that will release natural gas prices for commercial customers from the ERO president's administrative supervision.

The road map divides the proposed measures into three priorities:

  • the deregulation of prices for commercial customers, which includes the creation of a liquid wholesale market for natural gas;
  • the development of competition on the national natural gas market and integration with regional markets within the European Union; and
  • the liberalisation of natural gas prices for small end users and households.

According to the road map, the creation of a liquid wholesale market for natural gas will be achieved by:

  • releasing natural gas trading companies from the obligation to submit wholesale tariffs for approval; and
  • requiring the obligatory sale of a certain amount of natural gas on a commodity exchange.

Initially, the road map proposed a progressive requirement to sell natural gas on a commodity exchange that encompassed 30% of natural gas demand between July 1 2013 and January 1 2014, 50% between January 1 2014 and July 1 2014 and 70% as of July 1 2014. However, ultimately a more conservative approach was adopted.

Energy law amendment

On September 11 2013, the July 26 2013 Act Amending the Energy Law came into force. It introduced several important changes to the regulatory regime, including an obligation to sell at least 55% of high methane natural gas on a commodity exchange or a commodity platform. According to the relevant transitional provisions, the figure of 55% of natural gas fed into the Polish transmission grid will be reached through the following measures:

  • 30% of natural gas fed into the transmission grid from the date on which the Amendment Act entered into force until the end of 2013;
  • 40% of natural gas fed into the transmission grid from January 1 2014 until December 31 2014; and
  • 55% of natural gas fed into the transmission grid from January 2015 onwards.

The above obligation applies to gas fed into the transmission system through:

  • entry points to the national transmission system at interconnections with other countries' gas systems;
  • upstream pipeline networks; or
  • liquefied natural gas regasification installations.

However, the obligation does not apply to high methane natural gas:

  • constituting mandatory stocks of natural gas;
  • released in a certain year from the transmission grid through the exit points of national gas systems at interconnections with other countries' gas systems, in a volume that is equal to the volume of natural gas fed into the transmission grid through entry points in the same year (this means that the transit of natural gas through the country, between entry points and exit points, is not covered by the above power exchange obligation);
  • sold to grid operators to carry out their tasks as defined in the draft gas law; and
  • used by a given entity for its own needs.

Further, gas utilities are exempt from the obligation in a given year if they own the rights to less than 10% per cent of the transmission capacity of all entry points to the national transmission system at interconnections with other countries' gas systems.

How to create sufficient natural gas demand on power exchange

In practice, Polish Petroleum and Gas Mining (PGNiG) is the only entity covered by the obligation to sell natural gas on the power exchange. However, according to publicly available information, it failed to meet this obligation in 2013. PGNiG sold only 200 million cubic metres on the power exchange, whereas it should have sold approximately 1.4 billion cubic metres. This is primarily because the natural gas market is still dominated by long-term bilateral supply agreements, which in turn result in insufficient natural gas demand on the power exchange. Consequently, PGNiG decided to establish a retail company (PGNiG Obrót Detaliczny sp z oo), to purchase high-methane gas for end users on the power exchange. The key purpose of establishing PGNiG Obrót Detaliczny sp z oo was to create higher demand on the power exchange and help PGNiG to meet the obligation to sell natural gas on the power exchange.

On April 24 2014, PGNiG's extraordinary general meeting approved the transfer of part of PGNiG's business, including six local retail trading divisions, to PGNiG Obrót Detaliczny sp z oo. As a result, PGNiG Obrót Detaliczny sp z oo acquired all of PGNiG's business with retail customers that purchase less than 25 million cubic metres per annum (around 6.5 million customers). Further, in order to facilitate the transfer of retail customers to PGNiG Obrót Detaliczny sp z oo and avoid the time-consuming and expensive procedure of drawing up new natural gas supply contracts, Parliament passed an act amending the Energy Law which entered into force on August 1 2014. The act introduced additional provisions (Article 5b1) under which, from the date of the transfer of an energy company's retail trading business to another energy company, all natural gas supply agreements by operation of law automatically become agreements between retail customers and the newly established energy company that holds the retail trading business. PGNiG Obrót Detaliczny sp z oo officially commenced operations on August 1 2014.

Comment

As the ERO president announced on December 31 2014, the liberalisation of the natural gas market accelerated noticeably over the last year. The number of entities holding licences for natural gas trading has increased. In November 2014 139 entities held licences for natural gas trading in Poland and 47 entities held licences for cross-border natural gas trading. Since the start of 2014, the ERO president has granted an additional 22 licences for natural gas trading in Poland and 14 licences for cross-border natural gas trading.

For further information on this topic please contact Grzegorz Filipowicz at Norton Rose Piotr Strawa and Partners LLP by telephone (+48 22 581 4900), fax (+48 22 581 4950) or email (grzegorz.filipowicz@nortonrosefulbright.com). The Norton Rose Fulbright website can be accessed at www.nortonrosefulbright.com.

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