The results of the modelling show that the impact of integration on the so-called social well-being will be positive - consumers and the transmission system operator will benefit. Energy producers, on the other hand, will face greater cost pressure.

The report "Options for integration of the Polish energy market within the European Union" was commissioned by Forum Energii and prepared by the Hungarian energy consulting company REKK and the Warsaw Institute of Economic and European Studies - WiseEuropa. Its aim was to better understand the consequences of market integration and to present the impact on Polish consumers and energy producers in the Eastern and Central European region.

Main conclusions of the analysis

The impact of the integration of energy markets on social well-being will be positive, as consumer benefits and additional revenues for the transmission system operator will outweigh the moderate losses for producers. In addition:

1. The higher the price of CO2 allowances, the higher the net benefit of integration. Depending on CO2 prices, the integration in the Western and Baltic variants leads to a reduction of EUR 340-660 million in annual national spending on emission allowances under the ETS in 2030.
2. Potential losses for producers can be reduced by introducing mechanisms to compensate for the surplus worked out.
3. Full implementation of current market coupling plans (i.e. construction of an additional interconnector with Lithuania and 3 interconnectors with Germany) and the expansion of interconnections will increase net imports of energy to around 15% of domestic demand by 2030 (30 TWh).
4. Failure to invest in new interconnections after the completion of phase shifters will result in a 7% share of imports in the domestic market in 2030 (13 TWh).
5. The impact of further market integration on wholesale energy prices will be moderate, causing them to fall by no more than 5 % of the forecasted wholesale price (around EUR 2 per MWh).

As Dr Joanna Maćkowiak Pandera from Forum Energii says - Integration of electricity markets has become one of the most controversial topics of the Energy Union in Poland. There is a significant oversupply of capacity at European level - connecting electricity markets will reduce the costs of the energy system, reduce electricity prices and promote security of supply. However, in view of the growing problems related to the transformation of the energy sector, there is a concern as to whether Polish producers will be able to cope with international competition. Fully integrated with the European market, Polish energy market can be reduced by up to 15%. Our research shows that these are industry and consumers in Poland that can benefit from market coupling. However, for producers this means more competition. One of the biggest challenges for decision-makers is to weigh and reconcile the interests of energy producers and consumers in Poland. Especially as energy prices affect the whole economy and growth in the years to come and have an impact on competitiveness.

As Dr Maciej Bukowski, one of the authors of the analysis, says, the long-term impact of current integration plans is geographically diversified. Investing in interconnections on the Polish-German border leads to a drop in electricity prices in Poland regardless of the shape of our energy mix. This serves consumers, forcing producers to make greater modernisation efforts. However, the potential of these interconnections is for the time being limited due to uncontrolled flows from Germany. This situation will change with investments in so-called phase shifters and organisational changes (division of the German-Austrian energy area). Consumers can be satisfied, but producers must take this into account in their investment plans.

Greater integration with the Baltic States is likely to reduce the revenues of the Polish network operator from the provision of cross-border transmission capacities. However, this integration is beneficial from the point of view of energy security and diversification of supplies - adds Dr. Bukowski.

Recommendations

The analysis of Forum Energii includes a number of recommendations on how to pursue the process of market integration in order to achieve the greatest benefits for Poland:

• The integration of the electricity market within the European Union should continue. In the perspective of the next 10 years, when Poland may face the problem of insufficient capacity, the possibility of importing electricity at certain moments of the year will be a significant strengthening of the energy security of the system.
• In the short term, the focus should be on energy market reform in Poland and the European Union. It will be key to ensuring a fair competitiveness.
• It is urgent to solve the issue of uncontrolled cross-border flows on the Polish-German border in order for Poland to be able to use the existing connections. It will be important to complete the construction of the second phase shifter.
• PSE should examine the potential for additional interconnections (in particular with Denmark and Sweden) and for faster completion of projects already planned in the 10-year network extension plan (TYNDP).
• The problem of the negative impact of integration on Polish energy companies should be addressed as part of a broader reform of the electricity market, which will strengthen the investment incentives created by the single market for energy and, if necessary, introduce additional capacity mechanisms.
• Protecting domestic producers by abandoning integration plans will be economically inefficient, as long-term security of energy supply can be reconciled with operational savings through increased cross-border trade.

Background of the analysis

Energy market integration is one of the priorities of the European Union, as laid down in Article 194 of the Treaty on the Functioning of the European Union. Currently, 75% of European energy markets are fully interconnected through market coupling. Poland is connected to Sweden by a 600 MW DC cable, and at the same time it has a number of connections with different degrees of utilisation. Two 1.5 GW connections with Germany, a connection with the Czech Republic and Slovakia, Ukraine and the recently opened connection with Lithuania.

The creation of a single European energy market is a lengthy process started in 1990. The greatest progress was made after 2005, when it was decided to launch a common energy policy.

Poland is one of the countries with the smallest number of interconnections in Europe. Although the total capacity of existing connections exceeds 12%, only about 5% is used - due to technical problems with transmission and lack of a coordinated market coupling strategy. Poland is currently one of the most isolated energy markets, although in 2020 we should reach 10%. The biggest dilemma of integration is based on differences in energy prices in the wholesale market in Poland and in neighbouring countries. Both in Sweden on the so-called Nordpool market, as well as in Germany and the Czech Republic - electricity is cheaper. The reason for this is the significant share of renewable energy, which has a different financing model, but also the low price of coal, CO2 allowances and more competition.

Methodology of analysis

The effects of integration activities were evaluated by means of economic modelling. The impact of integration on production and wholesale energy prices as well as on social well-being was examined (this indicator includes consumers, producers and the transmission system operator). The modelling results do not include the impact of integration on security of energy supply and investment in new generation capacity. These issues should be considered in the context of a broader discussion on the new energy market model in Poland and Europe.

Title of the study: "Options for integration of the Polish energy market within the European Union".