Energy 9 September, 2022 10:30 am   
Rafał Gawin, prezes Urzędu Regulacji Energetyki. Fot. URE
COMMENTS: Rafał Gawin

Gawin: URE recommends a balanced windfall tax and caps on energy prices (INTERVIEW)


“URE recommends an intervention called a windfall tax. in combination with the introduction of a price cap,” says Rafał Gawin, president of the Energy Regulatory Office (URE) in an interview with “These solutions must find a balance between the interests of consumers and the interests of energy companies and, consequently, the economy, while taking into account and ensuring the possibility of financing such an intervention,” he adds. There are various ideas for regulating energy and heating prices. What is the simplest way to explain these mechanisms?

Rafał Gawin: Many ideas are described at, among others, the European forum. They include measures that administratively reduce the prices of fuels such as natural gas. Such regulations have been implemented in Spain. One of their consequences is a drop in electricity prices on the wholesale market, because natural gas is used to produce electricity in this country. Another category is direct intervention in the pricing mechanism. In this case, the proposals boil down to moving away from the marginal price mechanism, where the most expensive technology sets the price on the market, in favor of the average price. Another category of measures concerns post-market intervention and the redirection of excess profits of energy companies to selected categories of end-users. This mechanism has the characteristics of taxing excess profits and has been implemented in Greece.
In contrast, Poland has already applied a mechanism for consumer protection by imposing a price cap, which means the provider cannot ask for prices higher than the maximum prices specified in legal regulations in settlements with consumers. In the event of a cost gap, the mechanism also guarantees compensation to energy companies to cover the gap. A similar mechanism is being designed in the heating sector.

Energy and gas prices are linked.

Yes. Because natural gas is one of the fuels used to produce heat and electricity. Another fuel, even more widely used in Poland, is coal. Due to restrictions on the supply of Russian gas to the European market, as well as the embargo on coal imports from Russia, introduced systematically in the countries of the European Union and the growth in the European Union of electricity generation from coal, demand for coal fuels shot up. Increased demand has led to a dynamic increase in the price of hard coal imported from other directions than Russia. Hence, there is reason to look for consumer protection mechanisms similar to those already implemented in the gas market. On 2nd September the Sejm discussed a similar mechanism for the heating market.

The prices are extraordinary. Is it possible that they result from more than a simple game of supply and demand?

Prices of the two main energy fuels on the domestic and European markets, gas and coal, have started a steep climb. There are also concerns about their availability and whether it will be enough to meet existing demand. These factors are the main source of problems in the energy markets. As a consequence, energy prices now reflect not only the fundamental cost factors, namely the cost of fuels and CO2 emissions, but also the cost of the risks associated with reduced fuel availability and the dynamics of price changes for these fuels. In order to improve the situation on the energy markets, we are now looking for mechanisms that are of an interventionist nature. The goal is to reduce risk or uncertainty in the energy pricing process, and lower energy demand.

What role do fuel reserves play here? The rules in this regard are being amended.

This is a security issue. We want to make sure that we have enough fuel for a sufficient period of time to be able to generate electricity and heat from the resources that will be located at the generating plants. The existing Act on storing fuel reserves is based on the average production of 30 days from previous years, but now, due to the limited availability of gas in Europe, the production of electricity and heat from coal has increased. Hence the higher consumption of this raw material-the generation sources work with a higher load. The storage obligation should therefore not refer to the data of the past, but to the situation we have now. Moreover, the revised regulation is intended to encourage ongoing fuel contracting, as there is a natural tendency to put it off due to fuel prices. That’s where the amended Act on storing fuel reserves came from.

URE has long campaigned for the efficient use of energy resources. You are calling for austerity. Considering the fact that businesses present crisis plans to the Energy Regulatory Office, based on that information would URE advise to introduce regulations on saving energy resources in Poland?

Austerity is always desirable. The crisis makes such steps even more desirable. My Office as well as other institutions have been suggesting that. I believe that people should be encouraged to take action in this regard. Our society has such a feature, for historical reasons, that if someone forces us to do something, it naturally awakens in us rebellion and resentment. Incentives can be more effective if we present the real economic benefits of a given action, and these are significant.

It looks different in different countries. How does Poland position itself in this debate?

This is a political discussion. We, at the level of energy regulators, conduct all kinds of analyses. There are countries that are looking for mandatory solutions, which have a better chance of success if they are aimed at the public finance sector. An example would be energy saving in public administration buildings.

There are situations in which there is no longer any room for savings, especially in the case of households stricken by energy poverty. What support such cases should receive?

There is no one-size-fits-all solution here. Only a diverse package of solutions will be able to make an impact. There is a group of consumers who are already affected by energy poverty today. These may also be customers who have enough money, but have already achieved the effect of maximum rational use of energy. If we target those who still have the potential to reduce energy demand, these measures should contribute to falling prices in the energy market and, as a consequence, for every consumer.

There is a group of consumers who do much worse with paying their power bills. For them, there is a package of solutions, for example in the form of the energy allowances. There are many solutions.
The next step may be to adjust the pricing mechanism, as the Prime Minister and the President of the European Commission have said recently. A different solution has been applied in Greece where company windfall profits have been taxed. This is a category of activities that do not interfere with the price in the market, but after the market is closed, they allow the transfer of funds from excess profits directly to the final recipients. We are currently looking for solutions that will interfere with the energy markets, so perhaps they are not ideal but the situation justifies them.

Would such a solution be justified in Poland?

I am opposed to interfering with market mechanisms, but I strongly believe that the current crisis justifies such intervention. Its aim will be to spread the energy price changes over time, so that there are no significant consequences for end users and the economy. URE recommends an intervention called the taxation of windfall profits, combined with the introduction of a price cap, i.e. a limited increase in energy prices for customers using regulated tariffs. At the same time, I am convinced that investments are needed in the energy sector, so only the minimum necessary market surplus should return to consumers. These solutions must strike a balance between the interests of consumers and those of energy companies and, consequently, of the economy, while taking into account and ensuring that there is enough money to cover such an intervention.

These solutions should be temporary. Is it possible, at this point, to predict how long the intervention will take to bring the market back into balance?

At present, it is difficult to say what might happen in the market in the next two or three months. The winter will probably be a difficult time, it is already difficult. From a regulatory point of view, I see a justification for introducing mechanisms that are roughly 12 months in length. The crisis is very dynamic, and in particular the crisis caused by geopolitical factors. However, the mechanisms used should be flexible, so that they can possibly be extended without unnecessary obstacles.

The media are reporting that next year power and heating bills will soar by several hundred percent. If you run Excel and look at the situation at the moment, by how many percent would prices rise in tariffs next year?

Each of these areas has different characteristics. As for heat, its price is determined by the cost of purchasing CO2 and coal, as well as gas in case of the section of the heating industry that runs on this fuel. As for gas, its price changes very dynamically over time. For this reason, gas companies have a strong aversion to taking on price risks. Therefore, their offers are based on current gas price quotations and thus have the character of dynamic prices. Add to this the tariff process in which heating tariffs are approved on different days and months of the calendar year. And so – one business will receive an offer to buy gas at a price of PLN 850 or 900 per MWh, and another entrepreneur a month later will receive an offer of PLN 300 higher, so their tariff will be completely different. Coal also does not have a single market price. Domestic suppliers can guarantee lower than imported coal prices for their regular customers. However, a relatively large group of thermal power plants buys coal at prices quoted on world markets, which vary over time as well. At the same time, we are not able to carry out all tariff procedures within one or two months, since there are several hundred regulated enterprises in our country.

Thus, in tariffs approved by URE from January to the end of July this year, for hard coal the average increase was 17 percent, and for gas about 22 percent. By contrast, there are tariffs that have increased by 100 percent and more. It is therefore difficult to determine an average price as well as to predict price increases in subsequent approved tariffs. We can repeat after the Ministry of Climate, that the bills for heating should not increase by more than 40 percent. However, this is also an average value and there may be exceptions.

At the same time, the crisis has shown us that we should move away from fuels that are dependent on geopolitics. However, this is not a zero-sum game and it is not possible to switch from fossil fuels to renewables overnight. That’s not doable. Fossil fuels will be with us for a long time. By increasing the share of renewable energy, we will become increasingly independent of geopolitics. This is very well illustrated by the current crisis. However, in order to integrate more and more renewables into the system, investments in distribution are necessary.

We hear, on the one hand, about the extension of the life of coal-fired power units, and on the other hand, about the nuclear power plant, which we want to prepare this year by creating a financial model that can have an impact on the energy market in Poland. How does URE look at this kind of transformation?

As far as the transformation is concerned, not much has changed. Looking at it systemically, the chosen direction has not changed and we still believe that it is correct. Firstly, it will make it possible to become independent of fuels, which are very strongly linked to geopolitics, while at the same time increasing the share of RES in the energy mix. This will contribute to security and price stabilization. However, a question on the way the transition goals will be achieved arises: is it correct? In my opinion, given the current geopolitical situation, it should be corrected. The European Union has exerted enormous pressure to move quickly away from fossil fuels, but the current situation shows that it is difficult to ensure security of supply and price stability on the basis of a fuel monoculture, especially when the fuels that ensure security of supply come largely from one supply route. Relying on technological or fuel monoculture is very dangerous. Therefore, the dynamics of the transition away from fossil fuels should change and be spread over time. However, it is important for security to ensure technological diversity in energy generation, as well as diversification of directions and sources of supply of these fuels. Such a project has been implemented, for example, in the gas sector in Poland.

Does URE have any comments about the plans to expand the nuclear program?

Atomic energy fits well with the multiculture of fuel technologies for the generation of electricity and heat. Introducing another technology on the domestic market is justified. If there is a crisis in the market for any of the currently used fuels, the atom will give us a chance to replace them. Large-scale nuclear energy projects are long-term and implemented for many years. However, this does not mean that their implementation does not make sense. Many countries have such projects and do not give up on them. There are also those that have withdrawn from nuclear power plants and are now returning to them, such as Japan.

Does the current energy crisis affect the forecast of the energy gap prepared by URE?

Our analysis is based on data we receive from energy companies. The estimated energy gap is the result of such studies. In the near future, this study will be repeated and its results updated.

What about the stability of the coal industry? In the end, it produces 70 percent of our power and for some time, it may generate even more. However, we hear about downtime and problems of new coal units, are the businesses sending a message about uncertainty?

The production unit in Jaworzno is a new block, which has the right to operate with technical interruptions at the initial stage of operation. According to public information provided by the energy company, the problem with the block in Jaworzno is of a technical nature. We have asked the company for clarification, but it is too early for me to assess this particular situation. There are also situations in which the unavailability of production units is due to the operating conditions caused by the current situation on the fuel market.

This winter will be harder, but there will be no apocalypse?

Coal and the fuel balance are beyond our control. Based on publicly available information, it can be concluded that there will be no problem with the availability of coal. For our part, we monitor the maintenance of companies’ mandatory coal reserves. On May 15th this year the situation didn’t look critical. Whereas the regulation on minimum reserves provides for different levels of these stocks at different times of the year. We plan to re-check the level of stocks and examine their condition on September 15. We also monitor these reserves on an ongoing basis, because if they are used, the business is obliged to inform us about it.

Interview by Wojciech Jakóbik