Capacity market for review | Analysis of the results of three auctions
The three capacity auctions for 2021-2023 are behind us. What is the result? Has it been possible to encourage manufacturers to make new investments? Does the capacity market support diversification of the mix? How much does the capacity market cost? And finally, do the new EU regulations concerning emission standards mean the end of the capacity market in Poland?
These and other questions we asked ourselves when preparing the report "Capacity market for review. Analysis of three auctions". The new report is an invitation to discuss what is next for the capacity market in Poland.
The capacity market was adopted at the beginning of 2018. This is the most important change in the Polish power sector in recent years. The implementation of this mechanism was supposed to be a cash injection for conventional power plants. Thanks to additional financing, coal-fired power units were be modernised and the legislators hoped that new power plants would also be built.
The introduction of the capacity market divided the experts. Some of them believe that the only source of revenues for producers should be a competitive energy market. Power plants should be increasingly flexible and adapt to the growing share of renewable sources. However, many experts are convinced that without public support power plants will generate more and more losses and will simply be shut down, which may endanger energy security.
Now the European Union is reducing public aid for investments in generation units, which are a source of significant CO2 emissions. Therefore, after more than a year of operation of the capacity market, it is time to take a closer look at the situation. We need to decide what to do next with the capacity market in Poland.
The capacity market, as we know it, is now coming to an end. From 1 July 2025, it will no longer be able to support units emitting more than 550 g CO2/kWh. However, coal-fired power plants will be able to continue to operate on the competitive energy market provided that they meet economic and environmental criteria. By the end of the year at the latest, we must decide what to do next - whether we give up the capacity market or agree to support gas units, DSR and storage facilities. However, it is not certain whether the European Commission will accept such a solution, says Dr Joanna Maćkowiak-Pandera, President of the Forum Energii. Until the elections, the discussion about the capacity market and the model of the Polish energy sector remained stagnant. Now we need a new opening and a deep reform of the energy market - she adds.
At the capacity auctions, which have been organized so far, the capacity contracted was for more than 35 billion PLN. There are almost no new investments here, so the mix will not be diversified. This in turn means that we will neither reduce CO2 emissions nor increase the flexibility of the system - says the author of the report, dr Aleksandra Gawlikowska-Fyk, head of the Power project in the Forum Energii.
What can be seen in the results of the three auctions?
The capacity market has so far consolidated the structure of the energy mix
in Poland. It maintains old units in the system and additionally supports new coal investments, which would generate losses from the very beginning without the capacity market. So far, no new gas projects have been launched. On the other hand, the DSR has gained on the capacity market and energy storage capacities will increase in the future.
Security of supply
The capacity market made it possible to secure capacity in the power system for 2021-2023, which is undoubtedly an advantage of this mechanism. The verification of their actual availability for the transmission system operator will take place only in 2021.
Impulse for new investments
The capacity market has not yet encouraged new investments. With the exception of Ostrołęka power plant, no new projects have appeared in the previous auctions.
Cost of the capacity market
The auction price was set at a higher level than expected, and the cost of liabilities incurred within the capacity market amounts to PLN 35 billion. This will result in an improvement in the financial condition of producers and a strengthening of their position, but this will be paid for by customers.
EU regulations and the 550 gram limit
As of 1 January 2020, the Polish capacity market will be subject to EU CO2 emission limits of 550 g CO2/kWh for new units (for existing units it will be 1 July 2025). This means that this year's auction will be the last one in which coal-fired power plants will receive support.
Decarbonisation; increased flexibility
The dominance of coal in capacity contracts means that the capacity market will not significantly affect either the emission reduction of the Polish power sector or the improvement of its flexibility. This may change after 1 July 2025. The question is whether the capacity market in which gas units, storage facilities and DSR are remunerated is desirable from the perspective of long-term energy policy and what emission reductions such a model may lead to.
Poland needs to diversify its mix, including new, flexible sources, but most of all it needs to discuss the vision of domestic energy development. Until now, decisions could have been prolonged, but now, until the end of the year, it is necessary to decide what to do next. The capacity market is only a tool for changes in the energy sector. Without a vision for the energy sector, it will be difficult to defend the capacity market against energy consumers (especially industry) and in Brussels.
Author of the report:
Aleksandra Gawlikowska-Fyk, PhD - Forum Energii
Jan Rączka, PhD - Alternator
Rafał Macuk - Forum Energii
Date of publication of the report:
22 October 2019 (in Polish)
19 November 2019 (in English)