The eighth auction of the Polish capacity market took place on December 14, 2023, which is the same moment when the months-long negotiations of the EU electricity market reform were finalised in Brussels. EU institutions agreed on the final wording of the electricity market design regulations, among which were conditions for longer operation of power plants emitting more than 550g CO₂/kWh. This was sought by Poland as it applies in practice to coal-fired power plants. Ultimately, Poland was given an additional three years, until the end of 2028, to use coal in the power market. This is a gift to the new government, but the derogation does not relieve the state of its responsibility to secure the stability of the system beyond 2028.

The most recent capacity market auction concerned the provision of capacity for 2028, the next one will already cover 2029. Thus, all the main auctions covering the newly negotiated derogation period for coal capacity (2025-2028) have already taken place, and we are now facing a capacity adequacy assessment process to verify whether there is enough capacity in the Polish system to meet demand in 2025-2028. If it turns out that there is not enough, and coal capacity will still have to be used, then conditionally, with the Commission’s approval—there could be an additional auction (or some other way of selecting the cheapest capacity in a competitive manner) dedicated exclusively to this high-carbon capacity.

In the meantime, the results of the 2028 auction are worth watching, as they show that the domestic capacity market, although it has mainly supported coal and gas over the past few years, can give a boost to clean investment, at a competitive price, and there is more capacity on offer than PSE’s (TSO) reported demand for it. These are good signs, but nevertheless the current auction does not bring investments in new generating units that would be able to sufficiently support the national power system in the long term, that is, even after the capacity market expires. Indeed, the eighth auction settled mainly on storage, DSR, and modernisation of existing power plants.

Not (fully) expected results

In the eighth auction, PSE’s reported power demand was 5791 MW. As a result of the concluded contracts, more was contracted: 7070.951 MW. The additional approximately 1,280 MW over and above what was based on PSE’s analysis of the necessary minimum to maintain system security is due to the excess power offered in this auction by its participants and competitive pricing. In total, taking into account auctions held in previous years, more than 21 GW of power has been secured for 2028.

In the latest (8^th) auction, energy storage collected the most contracts, with more than 1.7 GW of capacity. This is 10 times more than in the seventh auction, where they first appeared; 165 MW of energy storage capacity was contracted then. As for generating units (power plants), in energy storage the capacity market will be only one of several sources of revenue. Already now, energy storage owners can earn revenues from price arbitrage (charging storage when the price is low and unloading when the price rises), and from June 2024 from participation in the balancing market. In the future, storages should also be rewarded for providing system services (e.g., frequency, voltage regulation) and flexibility. They may also benefit from subsidies.

Such high interest in storage in the latest auction is a positive signal from the market. However, as with all other new and upgraded investments, the verification of this potential will be the realisation of the investments within the assumed timeframe to support energy security in 2028 (there are known examples of delaying investments that are built with the support of the power market: e.g., two units of the Dolna Odra power plant were supposed to provide power services from the beginning of 2024, but they implementation has been postponed to the end of April 2024). From the perspective of investors, reforms to the energy market in terms of system services, flexibility services, or the shape of the Polish energy market itself will be important. This is because there is a risk that by calculating the minimum revenues from the capacity market in preparation for the auction, investors have made a bet on the future level of revenues from other directions: the balancing market, flexibility, or system services. Unfavourable regulations establishing these new revenue streams, limiting their size for energy storage, could hinder the emergence of the investments contracted in December 2023.

Among other winners of the December auction, a wide variety of technologies can be seen. Hydroelectric power plants have contracted for 1158 MW, most of which are existing and upgraded pumped storage plants (956 MW). A similar volume—1,079 MW—will be supplied by foreign units: Swedish (hydro, 451 MW), Slovak (nuclear, 198 MW, and gas, 240 MW) and Czech (gas, 190 MW). Other capacities include coal-biomass co-firing plants (1004 MW; five modernised units of the Połaniec Power Plant), 882 MW of modernised and existing gas units, and 231 MW of biomass units (units in Połaniec and Konin). DSR this time recorded a lower volume (981 MW), but thanks to the publication of detailed data by the Energy Regulatory Office (which happened for the first time), it is known that a total of 20 MW under DSR will be provided by heat pumps. It is worth noting, however, that there is no new generation capacity in this auction.

Finally, it’s cheaper and more competitive

Unlike in the previous two years, the last main auction did not end in the first round, but only in the sixth, because there were more takers. More competition means a lower price, thanks to which the rate for the power obligation settled at 244 PLN/kW/year, lower than the maximum, which was 455 PLN/kW in this auction. This was one of the cheaper auctions in terms of the unit cost of acquiring capacity. As a result, costs for consumers will be lower.

Such results, however, do not change the fact that the Polish capacity market is expensive. The contracts concluded so far total nearly PLN 90 billion (in nominal terms). These costs will have to be repaid even until 2044, because that's when the longest, 17-year contracts concluded at the last auction will end.

Every year, the cost of the capacity market is several billion zloty, which are included in Polish electricity bills. Poles are now paying for the capacity market for the fourth year in a row, with more and more each year. For a household consuming an average of 2 MWh of electricity per year, the power fee is 7% of the bill, and for a small business it is as much as 11%. The value of capacity obligations contracted for the current year is PLN 6.1 billion. For an average household, the flat rate of the power fee will be PLN 10.64 per month (in 2021 it was PLN 7.47), while for other consumers it depends on the amount of electricity taken from the grid during selected hours of the day and amounts to PLN 0.1267/kWh (against PLN 0.0762/kWh in 2021). The addition of the capacity fee to bills coincides with high electricity prices, currently still frozen by the government.

What about gas?

For many years, investment in gas was taken for granted for securing new capacity. In previous auctions, new and upgraded gas projects appeared regularly. The 17-year contracts were awarded to, among others, a unit in Warsaw’s Żerań (from 2021), the Dolna Odra Power Plant (from 2024), large investments in Grudziądz, Ostrołęka, or Adamów (from 2026). In 2022, PGE won a contract to invest in Poland’s largest 800 MW gas-steam unit, in Rybnik. In total, the capacity market has supported the creation of 5.4 GW of new gas capacity.

This year, new gas projects have not won any contracts, and as reported by the wysokienapiecie.pl portal such projects have not even been submitted for auction. This is the case with the units in Kozienice (Enea) or Energa’s investment in Gdansk. According to the portal, Kozienice is being prepared to participate in the ninth capacity market auction this December.

Will such blocs have a chance to win in the next two auctions (in 2029 and 2030)? If competition is high, the price—as in the eighth auction—will be lower. This is good for consumers, but investors may not be able to afford the cost of investment in new gas units. At the same time, investment in gas units is complicated by the EU’s taxonomy requirements, which will hinder the ability to raise financing in the market, and by the climate neutrality goal (2050), which effectively means that some sectors, including the electric power industry, will decarbonise faster and faster. If gas-fired power plants win 17-year contracts in upcoming two auctions, Poles will finance them until 2046 when the power industry should already be zero-carbon.

The future of the capacity market

That’s why it’s necessary to consider the future of the capacity market and whether it’s still needed, and if so, which investments it should support. This is all the more so because the gas-fired units that the capacity market has contributed to are large-scale CCGTs, 97% of which are above 100 MW, with an average output of 434 MW. Such units are well-suited to the power system of the past, with a small share of RES, in which the operating profile of controllable units did not have to be adjusted to weather conditions, and therefore did not have to deal with frequent shutdowns and dynamic production changes. In the system of the future, in which renewables will play a dominant role, coal or gas-fired power plants that require base-load operation to maintain profitability will face financial problems. As it stands today, the capacity market favours the creation of units that are as large as possible, benefiting from economies of scale, making their unit cost [PLN/kW] as low as possible, but does not address the challenges of flexibility.

Conclusions

In the first years of the capacity market, the results of the auctions fixed the structure of the generation mix in Poland. Currently, old units in the system have been kept and additionally support newer coal investments, which without the capacity market would have generated losses from the beginning. It is only in recent years that the capacity market has been cleaner and has led to a diversification of the mix, which can be seen especially in the eighth auction. For the first time, it was a competitive auction, with excess capacity and projects that set the price well below its maximum level. A number of projects with storage have emerged, but only their implementation will verify whether suppliers have properly calculated the price. Both in the interests of consumers and to maintain the security of the national power system, it is important that all projects, including storage facilities, be implemented on time and that revenues from a well-functioning electricity market, system services market, or flexibility market generate revenues that allow the implementation of announced investments.

The European Commission in 2017 approved the capacity market support programme for 10 years. This means that there are two more auctions ahead, which will be held under the current rules. According to the Polish law, this year it is necessary to evaluate the mechanism and decide whether it has fulfilled the tasks for which it was established, whether it is still needed, and if so, how to reform it to better meet the challenges of the new, more flexible energy market of the future.