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Energy Infrastructure 29 June, 2017 9:00 am   
Editorial staff

Poland and EC need a compromise on the capacity market. What will it be?

In the summer of 2016 the first consultations on the Polish capacity market took place. Since then almost a year has passed, but the topic is still very up-to-date. The plans are being discussed with the European Commission, but the final shape of the capacity market has not been determined yet. What is the problem?, asks Magdalena Kuffel, BiznesAlert.pl’s associate.

The European Commission is actually very cautious with regard to capacity markets, especially when it comes to states like Poland, where power production is based mostly on “dirty” coal.

On the one hand, the European Union recognizes the significance of the security of power supply which is one of the most important elements of the winter package. The EC is looking at a possible increase in electricity prices, which will motivate companies to invest in new installations (it wants to abandon price caps for electricity, which can be achieved on the exchange, which guarantees stability and predictability of prices). Additionally, it is also considering the participation of Demand Response units (such as energy storages) as plan B. Being quite skeptical and cautious, I think that in the upcoming years, such a scenario will not guarantee better energy security. Renewable energy sources continue to lower electricity prices, so without market price manipulations or an additional capacity market, further functioning of programmable power plants may turn out to be impossible. Demand Side Response is still developing and cannot be compared to the capacity ensured by an average power plant (e.g. a typical 1 MW DR battery cannot provide power for longer than 30 minutes).

On the other hand, the capacity market looks like a subsidy market for conventional power sources, especially those fuelled by coal and gas, which is against the EU’s principle of free competition. From a theoretical point of view, the capacity market does not discriminate against any power producer. However, the requirements that need to be fulfilled by the market participants clearly determine which units stand a chance at winning an auction. Stringent requirements for production, reactivity to an electronic signal and programmability can be fulfilled mostly by coal and gas power plants of the newest generation.

The European Commission analyzed other capacity markets exactly in this context. And so, for instance, the French market has been approved by the EC, which confirmed its compliance with EU’s public help rules. However, France based its capacity market mostly on hydropower and nuclear energy, which does not emit CO2.

The British capacity market (approved by the EC before Brexit), on which many countries (including Poland) based their own markets, confirms the above-mentioned concerns of the EC. In the last additional auction for the 2017/2018 winter season, 40% of the capacity was awarded to combined gas and steam power plants, almost 20% went to coal power plants and 15% to nuclear power plants. To sum up, the traditional power sources won 75% of the market. Other sources will also have a chance to show what they’ve got: 5% was awarded to energy storages. This stresses the fact that “the flexibility of power supply” may be delivered also through alternative energy, but nevertheless this is still a very modest contribution.

One can expect that in Poland it will be the coal-fuelled power plants (which in reality have no serious competition) that will actually win the most on the capacity market auctions and this is a bone of contention in consultations with the Commission. This is definitely not helpful when it comes to the quality of Polish air, but it is worth to believe that the money earned through the auctions will help to modernize the units that participate in the market. This is the most important idea behind the capacity market about which many people forget. Its essence is to help maintain and modernize the existing power plants (or construction of new ones), which ensure electricity at a time of crisis. It is a lot better when a modernized, maybe not entirely clean but at least cleaner, units intervene in case of an emergency. Until a cleaner and more reliable technology is developed this looks like a sensible compromise.