Due to certain doubts notified by auction participants as to the meaning of the term “installed capacity”, information statement No. 44/2016 dated 21 September 2016 has been issued by the President of the Energy Regulatory Office (“ERO”). According to this information statement, the installed capacity of a RES installation is understood as rated power (nominal power, rated capacity or motor rated output) of devices producing power, e.g. solar panels or wind turbine generators, specified in watts (W) by the producer. Moreover, rated power should not be equated with installed capacity of a wind turbine, as according to the ERO, in some cases the capacity of a wind turbine generator specified in operating data is different than the rated power of this generator. Thus, rated power has to be specified explicitly by the producer of the generator in the identification plate, or in individual documents issued for such devices, i.e. documents including specification of the producer, type and serial number of a given device. In case the rated power differs from the installed capacity the auction prequalification certificate should be actualized.
On 10 October 2016, the President of the ERO also published the information statement No. 48/2016 regarding the rules of signing offers submitted to RES Auctions. Pursuant to this statement, it is explained that submitting a valid offer in an auction, or performing actions related to the offer including its modification and withdrawal, requires submitting a qualified electronic signature or through a signature certified by a trusted so-called “ePUAP” profile according to the rules of representation. The offer submitted to auction includes a statement submitted under the pain of criminal liability. Therefore, it should be understood as a statement of knowledge, and not a statement of intent. Consequently, it may only be submitted by a party to the proceedings before the ERO. This may lead to the conclusion that offers at auctions cannot be submitted by attorneys-in-fact, but the whole board should submit an offer, as the Auction system does not limit the number of certified signatures submitted under one offer.
The latest of the statements, No. 49/2016, issued on 10 October 2016, specifies that the parameters of an RES installation to be submitted for a given auction basket require providing specific data concerning such installation, i.e. type, installed capacity, installed capacity utilization factor (e.g., up to or more than 3,504 MWh/MW/year), and CO₂ emissions per MWh (due to the corresponding auction basket). Participants should include this information in their declarations concerning participation at an auction, so that the ERO is able to allocate the installation to a specific auction basket (although auction for specific baskets will be organized subsequently). Regarding the capacity utilization factor, it is important to note that the utilization factor will be measured at the connection point to the public grid, so losses due to internal grid also count. This new requirement is also binding on participants who have already submitted a declaration on participation in an auction, and whose declaration does not include the above mentioned information. Consequently, certificates issued to participate in an auction issued before the introduction of those requirements will not allow participating in an auction as being outdated and not in line with current provisions of law. Hence, certificates should be obtained once again in conformity with the new requirements.
Last week the Steady Committee of the Ministers’ Council accepted the implementation regulations for 2016 auction regarding the reference prices regulation and the auction volume regulation – the auction volume for the basket “other installations up to 1 MW” amounts to 1.5 TWh for 15 years, i.e. approx. 110 MW of 1 MWp PV installations, and the reference price for those installations amounts to approx. 11 eurocents per kWh. The main competitor for PV, small onshore wind turbines, faces a reference price reduced to PLN 300 per MWh (i.e. approx. 7 eurocents per kWh), which due to economics excludes small onshore wind turbines from this auction basket. Still pending is the regulation regarding calculation of granted State aid, which appropriately reduces the reference price for auction for projects which receive State aid other than operational support by feed-in premium. However, public consultation closed on 17 October, so this regulation will soon be forwarded to the government for further discussion. Due to the auction volume, this auction is below the maximum threshold provided by General Block Exemption Regulation 2014-2020, so no notification is required prior to auction. According to governmental sources, the auction for “other installations up to 1 MW” is planned to take place at the end of this year.
In case project finance is required it should be noted that commercial banks require a productivity study for each project prior to auction. According to the Ministry of Energy the net amount of electricity feed-in is basis for settlement for the contract for difference premium, so that productivity of each installation including individual grid losses up to connection point to public grid should be calculated for the amount of bid electricity. Generally, due to current market environment for existing RES installations only a few commercial banks are interested in financing new RES installations, what might be reflected in the expected margin for project finance.
The EU Commission may question the current structure of the Polish auction system as enacted on 1 July 2016. So, a delay with the notification, although not intended by relevant administrative bodies, is possible, and an auction before mid 2017 becomes unlikely. Generally, the concept of energy clusters and energy cooperatives needs further elaboration, so it is unlikely that those auctions baskets will take part in 2017 auction. Furthermore, it is generally required by the EU Commission that auction baskets will face competition. Therefore, the Minister of Energy is currently collecting sector information concerning projects ready for 2017 auction. Generally, competition with projects other than onshore wind, PV ground-mounted installations and small biogas projects is very limited. So, in case auction baskets will not be utilized due to lack of competition the EU Commission may require that at least a certain percentage of projects in auction baskets with little or no competition fall by the wayside as in other auction systems.
On behalf of the EU Commission, the RES National Action Plan from 2010 should be still the binding document for the auction system to achieve 2020 targets, whereas according to this plan hydropower should produce 2.9 TWh in 2020 (currently less than 2 TWh), wind energy 15.2 TWh (currently between 11 and 12 TWh), and biomass/biogas 14.2 TWh (currently 10 TWh, however, with decreasing production due to the recent crash of the green certificate market). Generally, the NAP should be updated every two years to ensure transparency, however, Poland has not yet fulfilled its obligation, and also currently there is no political will within the Ministry of Energy to update the NAP – hopefully the Climate and Energy Plan 2030 to be agreed with the EU Commission in 2017/2018 will be the trigger to update the NAP and provide more transparency to the market. Poland might be obliged to justify in which way the basket for technologies with more than 40% capacity factor influences the stability of the Polish grid system – according to ENTSO-E and Polish TSO data, by 2020 the grid is to be fit for 8.9 GW of onshore wind (with currently 5.6 GW installed).
Regarding the obligation for biomass installations to make use of local agricultural biomass it must be considered that this may affect the principles of the inner market and WTO rules. So, even in case the EU Commission accepts the local agricultural biomass restriction (within a radius of 300 km, no continuing limitation of the radius should be approved), further limitation for forest biomass will not be approved.
A leaked version of the impact assessment of the new energy market design of the European Union was recently made available to stakeholders. The 250-page document provides a comprehensive overview of what to expect from the winter package of directives and regulations strengthening the Energy Union starting from 2020, which should be rolled out during the coming months. The impact assessment is based on 28 research studies performed during the last three years on major challenges for new energy market design and identifies four problem areas:
Drivers for problem area (1) are that short-term markets and balancing markets are not effectively organized, exemptions have been developed from fundamental market principles, mainly for RES, distorting the electricity market, consumers do not actively engage in the market and already existing demand response potential with consumer markets remains largely untapped, and that DSOs are not incentivized to actively manage their networks. The preferred scenario of DG Energy pulls all flexible distributed resources concerning generation, demand and storage, into the market via proper incentives and a market framework better adapted to them, based on active aggregators, roll-out of smart-metering and time-of-use supply tariffs linked to the wholesale prices.
This subscenario (1c) complements subscenario (1a), which retains a more national status of the electricity markets and subscenario (1b), which also moves to more regionally coordinated markets. According to this scenario, EU regulatory action to enhance market flexibility is required. This option would abolish priority dispatch and priority access, i.e. generally require full merit order dispatch for all technologies, including RES, indigenous fuel such as coal or gas and CHP, to ensure a level playing field, including a strong carbon price signal through a strengthened ETS (e.g., EURELECTRIC aims to achieve a price level of EUR 30 per ton/CO2, and leading international energy consultants, such as Barringa, currently forecast average wholesale prices in Poland amounting to EUR 55 mid next decade). For example, the market will create incentives for the use of heat storage combined with CHP, use of biomass generation in periods of peak demand rather than as base-load, and using demand response or storage where it is more efficient than generation. However, DG Energy recommends maintaining priority dispatch and/or priority access for small plants (below 500 kW) and emerging RES technologies, e.g. offshore, but it could also include emerging conventional technologies, such as CCS or very small CHP. These technologies should also be excluded from balancing responsibility, as already provided by the EEAG 2014 -2020 guidelines.
To strengthen short-term markets (according to the UCTE framework) DG Energy recommends the establishment of a binding regulation requiring TSOs to use regional platforms (provided by the relevant ENTSO-E region, e.g. Regional Group No. 1 “Continental Europe”, including Austria, Belgium, Czech Republic, Denmark, France, Germany, Hungary, Luxembourg, Netherlands, Poland, Slovakia and Slovenia) for the procurement of balancing services. This foresees the implementation of an optimization process for the allocation of transmission capacity between energy and balancing markets, which then implies procuring reserves only one day ahead of real time – which technically excludes so-called cold strategic reserve mechanisms. However, this concept still relies on the concept of local responsibilities of individual balancing zones, but should provide a significant decrease of remuneration for balancing services. Nevertheless, the creation of regional security coordinators (RSCs) based on existing regional operational centers (such as ROC Freising for Central Europe) taking over some additional functions is required. To remove distortions for liquid short-term markets, a selected harmonization shall be implemented, specifically on issues related to gate closure times and products.
Furthermore, RES must have access to the provision of non-frequency ancillary services, i.e. specialty services and functions provided by the electric grid that facilitate and support the continuous flow of electricity so that supply will continually meet demand, such as frequency control, spinning reserves and operating reserves. Traditionally ancillary services have been provided by conventional generators, however, the integration of intermittent generation and the development of smart grid technologies have prompted a shift in the equipment that can be used to provide ancillary services. DG Energy intends to set out EU rules for a transparent, non-discriminatory and market-based framework to be performed on a local/regional basis, which e.g. should provide increased opportunities for larger storage systems enabling less flexible units, such as coal power plants or cost-effective flexible RES, such as wind farms to generate additional income.
To unlock demand side response it is required to give consumers access to technologies that allow them to participate in price based demand response schemes, i.e. that each consumer has a right to upgrade to a minimum 10-function smart meter (however, no automatic roll-out is planned) and to request a dynamic electricity pricing contract – so, synergy effects between smart-metering and mobile applications are likely be offered soon. Additionally, consumers shall be granted access to electricity markets through their supplier or third parties (e.g. independent aggregators such as virtual-power-plant providers) to trade their flexibility, but also as prosumer potential electricity production and storage, e.g. small storage systems or vehicle-to-grid solutions. This requires the definition of EU-wide principles concerning demand response and flexibility systems.
To allow DSOs to locally manage the challenges of the energy transition each DSO shall be incentivized to acquire flexible services from distributed energy resources. Currently, the regulatory framework creates significant inflexibilities to the system operation, mainly in Poland and South-Eastern Europe. However, upward and downward synchronized reserves by cheap power plants (mainly wind), demand side response and small scale storage and, additionally, large storage systems can provide reserves actually delivered by thermal power plants. So, specific conditions under which DSOs should use flexibility, and ensure the neutrality of (vertically integrated) DSOs when interacting with the market or consumers, shall be established. There shall be clarification of DSOs in specific tasks, such as data management, ownership and operation of local storage and electric vehicle charging infrastructure. Furthermore, a framework for cooperation between TSOs and DSOs shall be established on specific areas, alongside the creation of a single European DSO entity. EU-wide principles and guidance regarding the remuneration of DSOs to ensure fair, dynamic and time-dependent distribution tariffs shall be implemented, including flexibility services in the cost-base and incentivizing efficient operation and planning of grids. Additionally, a regular publishing obligation of key methodology factors shall be put in place to compare performance and fairness of distribution tariffs.
An adapted institutional framework strengthening the role of the European regulatory office ACER shall support the energy transition and address existing and anticipated regulatory gaps. The institutional framework shall apply (qualified) majority decision-making as experience has shown that it will generally be more difficult to achieve ambitious harmonization goals with an institutional framework that grants veto rights to each national regulator or TSO.
Drivers for problem area (2) are, that there is a lack of adequate investment signals due to regulatory failures and imperfections in the electricity market, and that uncoordinated interventions by Member States are implemented to deal with real or perceived capacity problems. However, an assessment by ENTSO-E indicating lack of generation capacity and cross-border markets not expecting to close the gap is a precondition for implementing capacity market mechanisms. Member States would need to introduce resource adequacy targets, which could be diverging. The standards should follow a unique format to become comparable across the EU – as Expected Energy Non Served EENS – and should be derived following a methodology provided by ENTSO-E, which takes into account the value that average customers in each bidding zone (clearly favored is a regional approach) put on energy supplies. To ensure that prices in wholesale markets are not prevented from reflecting scarcity and the value that society places on energy, DG Energy recommends creating an obligation to set price caps taking into account an estimation of the value of lost load (VoLL). So, Member States can implement technical caps provided that they do not prevent prices rising to VoLL.
To have a robust process in place for deciding on the structure of locational price signals for investment and dispatch decisions in the EU wholesale market, according to DG Energy, it is required to improve the currently existing CACM guideline (Capacity Allocation and Congestion Management guideline published by ENTSO-E in 2015) procedures for reviewing bidding zones and introducing supranational decision-making, e.g. through ACER, to avoid a reduction of cross-zonal capacity. To strengthen cross-zonal capacity clearer principles for transmission tariffs and related charges shall be implemented as an implementation regulation. Generally, the objective is that congestion income shall be spent to increase cross-border capacity, which requires a stronger role of ACER. To improve generation adequacy methodology binding EU rules shall be implemented requiring ENTSO-E to carry out a single generation adequacy assessment for the EU, whereas Member States have to rely exclusively on this assessment when implementing capacity market mechanisms. A harmonized EU framework setting out procedures, including roles and responsibilities for the involved parties (e.g. resource providers, regulators, TSOs), with a view to creating an effective cross-border participation scheme shall be implemented. Additionally, it is discussed whether to harmonize the main features of capacity mechanisms.
Drivers for problem area (3) are that plans and actions to deal with electricity crisis situations mainly focus on the national context only; there is a lack of information-sharing and transparency, and a lack of a common approach identifying and assessing risks. Common minimum EU rules and additional regional cooperation is required. A common methodology shall be followed for short-term risk assessments, i.e. ENTSO-E Seasonal Outlooks and week-ahead assessments of the RSCs (Regional Security Coordinators). Risk Preparedness Plans, including a national and a regional plan, shall be mandatory. Cooperation and assistance in crisis between Member States shall be agreed ex-ante, also agreements will be needed regarding financial compensation.
Drivers for problem area (4) are that there is generally a low level of competition on retail markets, there are possible conflicts of interest between market actors that manage and handle data, i.e. vertically integrated utilities and new market players, and there are low levels of consumer engagement. Firstly, monitoring energy poverty and strengthening disconnection safeguards for all consumers based on an EU framework is required. However, a generic description of the term energy poverty in all Member States legislations should accompany those efforts. Secondly, market distortions shall be removed by a phase-out of supply price regulation for all customers by an end date provided by EU legislation. The phase out of price regulations for households shall start with prices below cost, while allowing transitional, targeted price regulation for vulnerable customers (e.g. in the form of social tariffs). A level playing field for the access to date shall be created. EU legislation shall define responsibilities in data handling, define criteria and set out principles to ensure non-discriminatory behavior of entities involved in data handling, and implement a standardized data format at national level. Generally, the legislation shall define and outlaw all fees to household consumers associated with switching suppliers, apart from fixed-term contracts and fees associated with energy efficiency or other bundled energy services – those exit fees must be cost-based. Furthermore, legislation shall ensure that every Member State has at least one certified comparison tool that complies with pre-certified criteria on reliability and impartiality. Finally, it shall also deal with key information to be included in consumer bills for electricity consumption. DG Energy generally aims to reduce market barriers for new entrants and provide them with a stable operating framework. This is particularly important for start-ups and SMEs who typically offer innovative energy services and products.
DG Energy expects that implementation of new energy market design shall provide to the following base scenario an energy generation mix in region 1 by 2030: variable RES generation – 27%, hydro – 10%, biomass, waste and other RES – 5%, gas – 9%, oil – 0%, solids (including coal) – 21%, nuclear – 27%. The projected total energy generation capacity for Poland in 2030 amounts to approx. 45 GW, whereas slightly more than 20 GW is allocated to solids (i.e. coal fired power plants, currently 30 GW with another 3 units with 3.8 GW to be connected by 2020, so about 12 GW of exits are expected by 2030 – by that Poland will have the second largest fleet of coal power plants behind Germany with approx. 35 GW installed capacity and ahead of Czech Republic with approx. 10 GW installed capacity), approx. 20 GW is allocated to variable RES generation (currently less than 6 GW, so another 14 GW is expected to be commissioned by 2030), and approx. 5 GW is allocated in equal shares to (i) biomass, waste and other RES, (ii) gas and (iii) hydro (i.e. DG Energy does expect a replacement of approx. 2 GW of existing biomass/biogas plants by more flexible units, but no further significant investment in gas power plants and hydro power plants).
Partner, Radca prawny
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