At the beginning of July 2014, the Polish President singed a bill amending the Polish Energy Law. The amendment is intended to enable the major Polish oil and gas company (PGNiG) to easily spin off its retail business to a separate entity. Based on the new law, the new company (PGNiG Retail) will be released from the obligation to sign new agreements with a few million of its new customers.

Obligation to trade gas on the power exchange

In September 2013 an obligation to trade gas on the power exchange was introduced. Entities trading high-methane gas were first required to trade on the exchange 30% of their yearly volume of gas put into the transmission system. This has increased from 1 January 2014 to 40% and from 1 January 2015 will increase to 55%.  The obligation to sell gas on the power exchange was intended to create gas liquidity and thus one of the conditions for the withdrawal of the tariff obligation on the retail market. 

The only entity obliged to fulfill the obligation in 2013 was the major Polish oil and gas company, PGNiG. However, PGNiG failed to meet the required level and the volumes traded on the power exchange reached the level of ca. 4.5 % only, which entitles the Polish Energy Regulatory Authority to impose a penalty on PGNiG.  Moreover, it is also doubtful whether PGNiG will be able to meet its obligation in 2014.

PGNiG retail

Thus, in order to meet the obligation, PGNiG has decided to influence the demand side. PGNiG plans to spin off the majority of its retail business so that the principal company (PGNiG) will sell gas to the retail company (PGNiG Retail) on the power exchange and thus fulfill the statutory obligation. The new company is supposed to take over the sale of gas to all customers with an annual consumption of less than 25 mln m3. The remaining small group of the largest customers shall remain with PGNiG.

However, there was a problem with such a solution, as PGNiG is a party to millions of contracts with customers. Spinning-off the retail business to a separate company may have entailed the need to transfer the existing agreements to the new company with the express consent of all existing off-takers, which would not be feasible.

Amendment to the Energy Law

The new law shall help PGNiG to solve the problem referred to above and thus help to meet PGNiG’s obligation to trade gas on the power exchange. PGNiG and PGNiG Retail will be jointly and severally liable for meeting the obligations under the transferred gas sale agreements. PGNiG will be obliged to inform its customers about the spin-off within 3 months and the off-takers will then be entitled to terminate their agreements within 30 days of the day they received the relevant information. As regards settlements with its new customers, PGNiG Retail will use PGNiG’s existing tariff until a new tariff for PGNiG Retail is approved by the Regulator.

The amendment referred to above is supposed to increase the transparency of the wholesale market in general and the liquidity of the power exchange market, thus making the market price more credible.