The European Commission recently approved the UK’s centralised capacity market mechanism and the long-term contract for differences between the future operator of the Hinkley Point C nuclear plant and the UK government. The EC’s approval of these mechanisms as legitimate state aid has intensified the ongoing public discussion about the introduction of similar mechanisms in Poland.
The Polish Ministry of Economy has commissioned a non-governmental organisation, the Economic Association of Polish Power Plants (Towarzystwo Gospodarcze Polskie Elektrownie), to undertake a study of potential state aid mechanisms to support the construction of new capacities in Poland. The study will also look at how such mechanisms should work. The preliminary study was completed in October 2014. Its results were announced on 29 October at a conference organised by the Ministry of Economy and the Polish Committee of the World Energy Council.
The study shows that there will be a significant shortage of capacity after the year 2020. The shortage will result from a combination of factors. In particular, the study mentions the shutdown of several conventional units, a forecasted increase in demand, and the limited investment plans of energy utilities for the period 2014-2028. The last factor is a result of low electricity prices. The President of the Energy Regulatory Office, Maciej Bando, stated that the Regulator agrees with the above forecast, as well as with the long-term need to address the capacity shortage by introducing additional support mechanisms for new investment in the generation sub-sector. All speakers at the conference, including the authors of the study, agreed that capacity requirements prior to 2020 are covered by the transmission system operator’s existing operational reserve purchases.
Based on solutions already applied by or planned in other countries, two alternative market models were proposed: a centralised (UK model) and a decentralised (French model) capacity market. The capacity market would be supplemented with contracts for differences, modelled on recent UK solutions, to support investments that consume more capital, such as nuclear. The authors of the study recommended the centralised capacity market as the easier solution to introduce. It could also evolve into the decentralised model.
The full study, along with a summary of legislative and regulatory changes required for the implementation of the chosen support mechanisms, was to be submitted to the Ministry of Economy on 10 November 2014. Based on the study, the Minister of Economy is expected to select which market structure to implement. According to the study, the selection could be made by the end of this year, in which case it may be possible to prepare the required legislative changes and obtain clearance from the European Commission in 2015. This could mean that the first capacity auction could be held in 2016, and the auctioned capacity could commence operation in 2020.
Critics of the study point to the lack of clarity around the relationship between the proposed capacity market and the structures of contracts for differences, and the renewable and cogeneration support schemes. Unlike in the UK, in Poland both the currently applicable support schemes and the mechanism proposed in the draft Renewables Act (scheduled to enter into force on 1 January 2016) are independent and separate from any future capacity market structure. Forecasts of capacity shortages are also criticised for failing to take into account the effect of demand-side response (DSR) measures over the coming years. Critics also point out that a decision on such a major change to the Polish electricity market, the cost of which will be transferred to customers, is unlikely to be made in the final year of a Parliamentary term. Hence it is more likely to be considered from 2016.
The time horizon for the reform of Poland’s electricity market is relevant not only for the development of conventional capacities, but also for the future of the Polish nuclear power plant project. In September 2014, the project company PGE EJ-1 (a subsidiary of Polska Grupa Energetyczna) selected its technical advisor for the project (AMEC Nuclear UK). It will now proceed with technical analyses to determine the final location of the plant, and choose other advisors. In October, the Polish Competition Authority cleared the acquisition of minority stakes in the project company in order to improve the equity prospects for the project. The shares have been acquired by two leading Polish energy companies (Tauron and Enea) as well as KGHM (global producer of copper and silver). In view of the current and forecasted electricity prices in Poland and the cost of the project, it is highly unlikely that the remaining equity and the required debt funding will be obtained without a long-term support mechanism guaranteed by the Polish state, such as a contract for differences.