PKEE: Polish capacity market is designed for low-carbon electricity

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Due to missing money and missing capacity concerns, capacity mechanisms are becoming an indispensable part of the European internal electricity market, says Maciej Burny. [Chris Hunkeler / Flickr]

This article is part of our special report Electricity market reform: A European tour.

The capacity market in Poland has a so-called “green bonus”, which allows a two-year extension of the multiannual capacity contracts provided that a 450 kg CO2/MWh emission performance standard is met, says Maciej Burny.

Maciej Burny is Director for International Relations for Polish energy company PGE. He spoke on behalf of PKEE, the Polish Electricity Association.

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The European Commission wants to reform capacity markets, arguing they slow down the transition to clean electricity in countries like Poland, which are heavily reliant on coal. However, the electricity sector in Poland has objected to the proposed reform. Why?

First of all, we are not against a market reform as a such. We see several opportunities in empowering consumers, codification of the EU state aid rules concerning the functioning of the capacity mechanisms, enhancing cooperation between DSOs and market-based renewables integration.

However, the revised Electricity Market Regulation should address not only future ambitions but the already existing pre-conditions as well. Therefore, we should find a fair balance between security of supply and environmental objectives. After a nearly two-year long notification process, the Commission has confirmed serious adequacy concerns which are expected to occur in the Polish energy system in the long-term perspective.

The adequate measure to address these concerns is a market-based and technology-neutral capacity market. Therefore, our concerns with the capacity markets reform are connected with three main issues.

  • The first one is to treat all capacity mechanisms on equal basis – no exemptions and special treatment for strategic reserves in terms of the EPS 550 measure.
  • The second key issue is to recognise the protection of the legitimate expectations, which means to exempt from the new Regulation contracts concluded before the entry into force of the new legislation.
  • Last but not least, we would like to introduce an adequate transitional period for existing conventional assets –if the final investment decision was made before the entry into force of the Regulation an adequate 10-year transitional period should be applied. Our concerns are based on well-known legal principles such as non-discriminatory treatment of all capacity mechanisms and the legal certainty for investors.

Similar concerns were expressed by six other member states, namely: France, Italy, United Kingdom, Ireland, Hungary and Greece, which are applying various types of capacity mechanisms or are intending to do so.  Thus, we are not the only ones, who see that further negotiations need to find a fair and balanced compromise.

Are capacity markets in Poland designed to support coal power generation? 

The capacity market in Poland is designed in a technology-neutral, non-discriminatory way. The mechanism is open to all generation technologies, including Renewable Energy Sources (RES) and Demand-Side Response (DSR) technology.

Actually, technologies with lower emissions are given a preferential treatment. Due to our energy mix historically based on coal, support will also go to this form of generation to ensure security of supply, but we should avoid a stereotype that this mechanism is a subsidy dedicated to coal.

Can capacity markets in Poland help reduce greenhouse gas emissions?  

One of the key principles of the Polish capacity market design is to incentivise investments in new low-emission capacity. This is implemented not only by the OCGT-based benchmark, but also by the so-called “green bonus”. This “green-bonus” allows a two-year extension of the multiannual capacity contract provided that a 450 kg CO2/MWh emission performance standard is met.

This means that under the Polish capacity market, there is an additional incentive to invest in low-emitting assets such as the most efficient combined-cycle gas turbines (CCGT) power plants and renewables. This is way the capacity market in Poland provides energy utilities with funds to facilitate a smooth low-emission transition.

The Commission wants to encourage cross-border trade and electricity interconnections, saying more power trading will prevent countries from building unnecessary additional capacity. Does the Polish electricity sector support this objective?

In principle, we see that well-placed interconnectors may help to address some adequacy concerns.

However, the key issue is to first manage already existing congestions and the so-called loop-flows to increase tradable capacity on the existing interconnectors. Secondly, I would like to point out that there is no guarantee that the neighbouring countries would be able to provide supplies in the case of a regional system stress and that additional capacities will be available at any given time.

So there is a limit to reliance in electricity imports in times of scarcity.

Finally, we need to keep in mind that the Polish capacity market legislation provides specific rules for cross-border participation in the Polish capacity market.

Can capacity markets play a supporting role in the transition to a more European market for electricity? Or do they hinder this objective?

I would like to point out that a vast majority of the member states is already applying some sort of capacity mechanism. Some of them are applying multiple capacity mechanisms to address the same adequacy concern. For example, there are four support schemes addressing directly or indirectly adequacy concerns in Germany. Therefore, the capacity mechanisms are becoming more common than may be expected by external observers.

I would like to say that due to the common missing money and missing capacity concerns the capacity mechanisms are becoming an indispensable part of the European internal electricity market.

The key is to synchronise the way these mechanisms are designed to minimise possible distortion of competition between different European markets and this trend is visible in the new Electricity Market Design.

Also, introduction of scarcity pricing will be a key component which will help to integrate the EU market by minimising the extent to which capacity mechanisms will be indispensable.

The Polish electricity sector has complained about “double standards” when it comes to capacity markets in Europe, saying Germany in particular has benefitted from special treatment. Can you explain why?

The strategic reserve gains in the final text of the ITRE Committee opinion some regulatory preferences including exclusion from the emission performance standard at the level of 550 CO2 g/kWh. The 200 kg/kW per year emissions standard is not a real constraint for the already functioning, i.e. coal-based strategic reserves.

In simple terms, a lignite-fired plant in Germany may be supported, but the same plant in Poland may not – this is difficult to explain rationally from a climate protection perspective.

The board or Energa met on 3 September to decide on the fate of the Ostrołęka C coal plant project, often branded as Poland’s “last coal plant”. By the company’s own admission, the project is highly dependent on capacity mechanisms. What’s the status? Is Ostrołęka C still happening? Can a final decision be made before the reform of the EU electricity market is agreed?

The Polish Electricity Association does not comment on this specific project. For any information please refer directly to ENEA S.A. and ENERGA S.A. which are responsible for its development.

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