Current market failures are well identified in the Winter Package. However, we feel that some of the proposals do not match the reality, Maciej Burny told EURACTIV Slovakia.
Maciej Burny is the Secretary of the Polish Electricity Association (Polski Komitet Energii Elektrycznej – PKEE), association of the electrical power sector in Poland.
Burny spoke to EURACTIV Czech Republic’s Adéla Denková at the SET Plan – Central European Energy Conference 2016 in Bratislava.
What is the general view of the Polish Electricity Association (PKEE) on the Winter Package presented by the European Commission last week?
In our opinion, the solutions presented in the Winter Package are following the right direction. If the EU aims to integrate its power market, it is necessary to have a look at market failures, which are present in the current system. One of them is the lack of market signals for investors caused by the impact of renewable sources development on electricity prices. Today, the wholesale price of electricity does not cover operational costs of conventional power generation, not even mentioning the capital costs needed for new investments. That puts the security of supplies into question.
We also welcome that the proposals indicate an effort to move support schemes for renewable sources closer to the market principles and remove the priority dispatch of renewables. If we are talking about giving more space to the market, indeed, we have to phase-out preferential treatment of certain technologies.
We think that the current problems are well identified in the Winter Package. However, we feel that some of the proposals do not match the actual development of interconnection capacities. We are also concerned about the problem of mutual scarcity – that means, what will happen if there is, for example, a shortage of generation capacity both in Germany and Poland? Can we fully count on our neighbours to supply energy across the border? According to the draft electricity market regulation they will be obliged to do that, but the national transmission operators in each country are motivated to dispatch the available power within their own territory.
In the future, the market, based on scarcity pricing rather than capacity payments, should drive investment in energy generation capacities. Do you think this is a realistic idea?
I do not think so and in my opinion, the Commission does not think so either. That is why they have developed a relatively robust system of control over the so-called capacity mechanisms, instead of identifying the energy-only market as the only solution. There are at least a dozen member states who have already introduced some form of capacity mechanism or are planning do to so. Therefore, it will be important to ensure that the schemes are developed in compliance with market rules, they are open to all technologies, do not discriminate cross-border generation etc.
At PKEE we have prepared a report assessing whether the energy-only market will work if we remove prices caps and introduce scarcity pricing. We believe this solution would not fully ensure the security of supplies. Therefore we think that the capacity mechanisms will be the only way to provide necessary revenues for the existing generation capacities and certain predictability needed for investments into new installations.
If I understand it, this means that even though the capacity mechanism should be a bridging solution between the current situation and the energy-only market, you say that we will not be able to get rid of them for decades?
If you look at the current development, wholesale electricity prices have been steadily going down. Renewable sources are driving conventional capacities out of the so-called merit order. The more renewables we have on the market, the lower the wholesale prices will be. The problem is also that with more renewables you need more backup capacities for situations when the wind does not blow and the sun does not shine, because electricity storage facilities are still not available on a commercial basis.
For these backup capacities you need a long-term perspective of a predictable return rate for investments. If a company invests billions of euros in gas- or coal-fired power plants, they need to be sure that these will not become stranded assets. The decisions that utilities make are a very long term ones. The lifetime of gas-fired power plants is about 30 years, for coal, it is approximately 40 years. We do not think that scarcity pricing would ensure such long-term certainty.
On the other hand, the reform of the electricity market aims to ensure that the whole environment will be more predictable and the system will function. It is actually the main goal of the proposal – to give investors more certainty.
The Commission has indeed identified this problem of missing backup capacity. In their view, the answer is to have better interconnectivity, proceed with market coupling and common bidding zones etc. At the end of the day, the solution should be provided by an EU-wide super grid, which should ensure that in a case of shortage in one member state or region, you would be able to import electricity from another country or region.
But as I have already said, this is a slightly utopian vision. Are we ready to hand over control over the security of supply to other member states? Can we fully count on supplies of energy at the moment of mutual scarcity? With the current state of interconnections and the differences between contracted capacities and actual physical flows between member states, it is hard to determine whether an EU-wide adequacy assessment will work and whether electricity can be really delivered at the requested moment. The lifetime of the capacity mechanism will depend heavily on how long it will take to really integrate the market.
At what stage is the preparation of the capacity mechanism in Poland?
Three months ago, the ministry of energy published a general concept of the capacity mechanism, which should be based on the example of capacity mechanism developed in the United Kingdom. This general approach was submitted to public consultation this week. The ministry published a draft-dedicated act, which would introduce the whole system. This will be again subject to public consultation. In parallel, detailed consultations with the European Commission about certain aspects of the mechanism are under way.
According to the Commission, capacity mechanisms should be the last option when addressing market failures. Are there no other options to ensure the security of supplies in Poland?
In Poland, we are talking about 28 GW of capacity, which will need to be involved in the capacity mechanism to ensure the security of supplies. It consists of conventional power plants. The rest of the approximately 35 GW of generation capacity in Poland is mainly provided by renewable sources and hydropower plants.
The draft EU electricity market regulation includes the so-called emission performance standard. According to this proposal, capacity mechanisms should not be accessible to newly built power plants exceeding a benchmark of 550 grams of CO2 per produced kWh. For existing power plants, a transitional period of 5 years after the regulation’s entry into force should be established. That would mean coal-fired or older gas-fired generation capacities could not take part in the support schemes. So, in this situation, we would not be able to keep that 28 GW conventional capacity online. Physically, we are only able to import 3 GW through our interconnections with neighbours. This would lead us to a missing capacity of 25 GW, which is needed to satisfy demand in Poland.
Talking about the emission performance standard, you already said the capacities emitting 550 gr CO2/kWh or more will still be able to participate in capacity mechanisms for a period of 5 years after regulation comes into force. This means that there would be some time during which the conditions on the market could improve. But according to what you say, more time will be needed.
As I have already said, we do not believe that with the current limitations of market integration it is possible to solve the problems by 2025. It will depend on a political will to have a speedy integration which is a complicated process, both politically and socially and concerns also issues like land property rights. It is difficult to say how long it can take, but it is not reasonable to expect results around 2025.
You also mentioned the problem of interconnectivity. Maybe one of the solutions for Poland would be to develop more robust interconnections so that you are able to import more electricity in the future.
I do not think that the interconnection capacity itself is a big problem. According to the EU legislation, a target of 10% interconnectivity should be reached until 2020 in each member state. If you take into consideration that there is an installed capacity of 35 GW in Poland – which means that in 2020 we should have about 3.5 GW in interconnection capacity – and the current interconnectivity is around 3 GW, we are not lagging behind.
Another problem is that the current interconnection capacity is being blocked by unregulated circular flows of electricity from northern Germany, which is a problem that the Czech Republic is also facing. That means there are big differences between the contracted capacities and actual physical flows between Germany and Poland. While the contracted capacity was at about 170 GWh in 2015, actual physical flows reached over 10,000 GWh. Besides other problems, this also hinders cross-border trade with electricity.