Polski Komitet Energii Elektrycznej
Response of the Polish Electricity Association concerning public
consultation on generation adequacy, capacity mechanism
The Polish Electricity Association welcomes the public consultation on generation adequacy, capacity mechanism and internal market as an opportunity to exchange views on the challenges which the European electricity system is currently facing.
We agree that the EU needs a more competitive, integrated as well as liquid energy market and we appreciate how much has been done with this regard so far. In order to achieve this ambitious goal it is important to optimize two different challenges - energy and climate policy on one hand, and to ensure affordable and secure energy supply on the other hand.
We observed that many Member States plan to introduce separate payments to incentivise new generation investments, or have already done so. This is their answer to the challenge which is introduced by rapid development of renewables with priority access to the grid, which are supported by different national schemes. It is perceived as a remedy for the decreasing profit margins of conventional generation capacity due to lowered load factors and electricity prices resulting from increased penetration of RES technologies with no variable costs and foreseen lack of investment in conventional generation.
The situation is getting worse due to current economic crisis and decline of energy consumption in Europe. Energy-only markets are not delivering adequate returns for operators of existing conventional capacity which is needed to insure the security of supply as well as long-term investment signals to provide needed predictability for investors.
Responses to the questions
1) Do you consider that the current market prices prevent investments in
Yes, currently energy prices in Poland have reached a level below the entry price of new capacity in all energy technologies and significantly decreases profitability rates of existing units.
2) Do you consider that support (e.g. direct financial support, priority
dispatch or special network fees) for specific energy sources (renewables, coal, nuclear) undermines investments needed to ensure generation adequacy? If yes, how and to what extent?
In Poland’s case, significant support stimulating investment decisions relates to renewables and partially to cogeneration sources. Conventional generation fossil-fired units (except for CHPs) do not receive any investment or operational support. Support for RES, especially the ones with zero marginal costs (wind), as illustrated below, shifts the merit order curve and causes conventional generation to work less and at lower price. As a result, there is less incentive to invest in conventional generation.
Graph 1 RES merit order effect (illustrative) Market price Hard coal ric p er w o P Power installed Market price ower price P Hard coal Power installed
3) Do you consider that work on the establishment of cross-border day ahead,
intraday and balancing markets will contribute to ensuring security of supply? Within what timeframe do you see this happening?
In our opinion, the main effect of market integration will be the improved efficiency of markets’ operations, with respect to trading activities. It will relate to:
- Price unification – markets convergence, in particular as a result of effective utilization of
interconnectors transmission capacity. One should note that this convergence means price reduction in the markets/countries/areas where they are currently high, and price increase where they are at low levels.
- Lower risk of unexpected energy price changes following trading area expansion.
Geographical expansion of the market causes more resistance to local price fluctuations (system limitations, climate and weather conditions and other accidental circumstances).
The market integration will not eliminate altogether the problem of maintaining the required levels of existing generation capacity and the lack of price signals for investments in new generation units. In addition, in the neighboring countries, situation in the area of capacity balance is similar and sometimes even generates negative effects in the Polish system. Problems connected with decreasing production in Polish conventional units are amplified by un-contracted flow of energy from RES located in Germany (the so-called loop flows). Supply of energy from abroad will have an insignificant effect on the security of supply in Poland for at least several years. However, it can have a negative impact on investments in conventional generation in this timeframe, and deterioration of security of supply in the longer perspective.
4) What additional steps, if any, should be taken at European level to ensure
that internal market rules fully contribute to ensuring generation adequacy and security of supply?
Currently we observe a lack of coherence between different policy objectives of the EU energy policy. Major emphasis is put on achieving climate targets whereas security of supply and affordability is not given adequate attention. The uncontrollable build-up of RES coupled with stagnant demand for electricity caused deterioration of power prices and lack of investment signals for conventional generation that will still be needed for the years to come. . In order to ensure security of supply in the EU we also need to maximise the utilization of domestic energy resources without discriminating between them and where they make most economic sense. Currently, different RES support schemes cause energy market distortions and increase overall costs of development of renewables. Respective RES technologies should be supported at EU-level in the most suitable geographical areas which make most economic sense, e.g. PV in the south of Europe and wind technology at seashores.
In our opinion, improvement of security of supply requires implementation of capacity mechanisms. Development and implementation of effective capacity mechanisms would pose greater challenge without some form of coordination and harmonization of activities at the EU level. Therefore, we
believe that the European Commission should be engaged in this process, while leaving it up to respective Member States to develop their market-specific detailed market capacity models.
While European level guidance should start being prepared, all Member States should be entitled to implement individual capacity mechanisms to ensure their security of supply. We think that it is possible to implement it without hindering the process of internal energy market creation.
5) What additional steps could Member States take to support the
effectiveness of the internal market in delivering generation adequacy?
Harmonization of RES support schemes that would take into account differences between Member States with regard to economic effectiveness of various RES technologies would greatly contribute to improving the internal market and will maximise the cost-effectiveness of their development.
6) How should public authorities reflect the preferences of consumers in
relation to security of supply? How can they reflect preferences for lower standards on the part of some consumers?
Currently, technological solutions enable consumers’ active participation in the balancing of the system by regulating consumption for a defined period of time. Legal regulations should account for the functioning of such consumers in the system. Public authorities should work to enable more demand response mechanisms to function in the context of regulated rules of network operators.
7) Do you consider that there is a need for review of how generation
adequacy assessments are carried out in the internal market? In particular, is there a need for more in depth generation adequacy reviews at:
a. National level b. Regional Level c. European Level
The review is required primarily at the level of individual power systems. Transmission System Operators (TSOs) in collaboration with Distribution System Operators (DSOs) should be required to develop generation adequacy outlooks after considering plans of generation units which are connected to the grid. National regulations should facilitate gathering appropriate data, plans and information. Currently, this issue is not fully regulated in individual Member States.
At the regional level, more reviews of generation adequacy forecasts and balancing in individual systems, coordination as well as optimization of outlooks and balances for the entire region should be conducted. Furthermore, more attention should be paid to energy flow problems.
8) Looking forward, is the generation adequacy outlook produced by ENTSO-
a. Is there a need for a regional or European assessment of the
b. Are there other areas where this generation adequacy assessment
In terms of quantity, the level of detail of generation capacity outlooks developed by ENTSO-E is sufficient. Still, it should be strengthened as regards capacity structure. In addition, considerable discrepancies are possible due to incomplete data sources. Outlooks are based on the data received from individual TSOs. TSOs do not have access to full data and outlooks of consumers and generators in some Member States. Development of distributed generation escalates this situation.
In addition, future generation capacity outlooks will be based on non-binding information provided by energy generators. Without contractual obligations, they may decommission their generation units earlier. Revision of plans for individual systems/countries should account for the probability of such capacity inadequacy depending on: pace of demand growth, flexibility of power reserve, regulatory and market conditions. In addition, data should be published on the structure of peak hour capacity as well as on the ability to back up photovoltaic and wind generated capacity at the time of unexpected change in generated volumes.
9) Do you consider the Electricity Security of Supply Directive to be adequate?
If it should be revised, on which points?
In our opinion, the provisions of the Electricity Security of Supply Directive are adequate and there is no need for its revision.
Would you support the introduction of mandatory risk assessments
or generation adequacy plans at national and regional level similar to those required under the Gas Security of Supply Regulation?
Yes, direct regulations by the appropriate Regulation should ensure standardization of data and analysis methods, and hence, improved reliability of generation adequacy outlooks.
Should generation adequacy standards be harmonized across the
EU? What should be that standard or how could it be developed taking into account potentially diverging preference regarding security of supply?
Some degree of unification of generation adequacy standards, by the way of EC recommendations, could be beneficial in the context of the internal market. This also concerns generation adequacy assessments.
Do you consider that capacity mechanisms should be introduced
only if and when steps to improve market functioning are clearly insufficient?
Having analyzed energy market situation in Poland and in other EU countries, we believe that current energy market circumstances justify the decision to implement capacity mechanisms. We do not see any possibility for these circumstances to change quickly.
Demand response and energy efficiency mechanisms will not be enough to secure generation adequacy in the long term.
This means that the prerequisite conditions for the implementation of capacity mechanisms have already materialized. Security of supply will be under threat in the next few years which requires taking appropriate actions as quickly as possible.
Under what circumstances would you consider market functioning
a. to ensure that new flexible resources are delivered? b. to ensure sufficient capacity is available to meet demand on the
system at times of highest system stress?
We consider that market functioning will be sufficient when the market price will cover variable costs and ensure adequate profit margins for conventional generation capacity to ensure security of energy supply and back-up capacity for RES.
a. Do you consider that the introduction of a strategic reserve can
support the transition from a fossil fuel based electricity system or during a nuclear phase out?
b. What risks, if any, to effective competition and the functioning of the
internal market do you consider being associated with the introduction of strategic reserves?
The strategic reserve should not be perceived as an instrument for the transition from a fossil fuel based electricity system or during a nuclear phase out. Its primary function is security of electricity system, and in this context it should be designed in the way which is technologically neutral in relation to base-load and peak-load as well as cost-efficient. Therefore it can – as a side-effect - lead to decommissioning of some capacities that are clearly redundant for such reserve.
The strategic reserve is to ensure energy supply in irregular circumstances, such as extreme weather conditions, or during considerable system disruptions. Implementation of a strategic reserve should reduce the number of generation units maintained in regular system operation, mainly coal-fired.
We consider that the strategic reserve might be a relatively quick solution to the most pressing problems and will not adversely affect the functioning of the internal market provided it will strictly be used as a last resort and there should be no limit to the relevant system price.
In Poland, such reserve would be created for many years by coal-fired units, already earmarked for decommissioning. Implementation of strategic reserve would therefore reduce the number of coal-fired units maintained at regular utilization.
In relation to capacity markets and/or payments:
a. Which models of capacity market and /or payments do you consider
to be most and least distortionary and most compatible with the effective competition and the functioning of the internal market, and why?
b. Which models of capacity market and /or payments do you consider
to be most compatible with ensuring flexibility in a low carbon electricity system?
c. Are there any models of capacity mechanism the introduction of
which would be irreversible, or reversible only with great difficulty?
Further studies are needed in order to determine a detailed mechanism going beyond the strategic reserve solution.
Which models of capacity mechanisms do you consider to have the
have the least impact on costs for final consumers?
The key issue is the possibility to conduct economic analyses at the stage of planning capacity demand in a couple of years, and then conducting capacity purchases on a competitive market. In the short-term, other solutions may be cheaper than the capacity market, however, the lack of analytical-market-type optimization in the mid-term might result in higher inefficiency margin.
To what extent do you consider capacity mechanisms could build on
balancing market regimes to encourage flexibility in all its forms?
Capacity mechanisms could be built on the existing balancing market regimes similar to network congestion management.
Should the Commission set out to provide the blueprint for an EU-
We propose that the activities of the European Commission in cooperation with ENTSO-E are executed in phases, since introduction of capacity mechanisms have already been in progress in some Member States. Due to this, the non-obligatory guidelines with basic principles and criteria should be implemented without unnecessary delay.
Do you consider that the European Commission should develop
detailed criteria to assess the compatibility of capacity mechanisms with the internal energy market?
In some countries capacity mechanisms are already in operation and a few are in advanced stage of preparation for their implementation. Tensions arising from capacity imbalance will accumulate
and then capacity mechanisms will have to be implemented as emergency measures. It would be advisable to avoid such a scenario.
In this situation, the European Commission should introduce basic standardization of existing solutions as a first step. We propose that in this phase non-obligatory standardization criteria will be introduced – they should not be too detailed. This construction will allow Member States for search of the best solution. The implemented capacity mechanisms in individual Member States should serve to practically review various solutions. Detailed criteria, without implementation and analysis of pilot solutions may prevent from achieving the expected effects. It would be far better if such a scenario was avoided.
We propose that it would be best if the European Commission works in phases. In the second phase the European Commission should develop energy market standards of operation including a capacity market.
Do you consider the detailed criteria set out above to be
a. Should any criteria be added to this list? b. Which, if any, criteria should be given most weight?
At this stage, considering that capacity mechanisms have either already been introduced or such plans are being considered in many countries, the Commission should establish an indicative common framework of the capacity mechanism. In our opinion, the criteria contained in the Consultative Document are too detailed.
The presented criteria, while being too detailed, provide a good starting point for the construction of capacity mechanisms. At this stage they should function as non-binding guidelines aiming at facilitating the implementation of mechanisms that would not distort the internal market.
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