On 4 July 2016, the Ministry of Energy commenced consultations on the assumptions for operation of the Capacity Market, based on a document called “CAPACITY MARKET – scheme of functional solutions” (hereinafter: “Project”). At the same time, the Minister of Energy announced that a draft bill regulating Polish Capacity Market will be ready in September 2016 and it shall be promptly notified to the European Commission, while the new regulation will come into force at the beginning of 2017.
According to the authors of the Project, the primary aims of the Polish Capacity Market are:
- to introduce incentives for construction of new generation capacities, as well as modernization and longer operation of the existing capacities;
- to promote the services related to the demand side response (DSR);
- to secure development of unstable RES with stable capacities;
- to secure power supplies to final customers during vulnerability periods.
Basic assumptions of the Capacity Market:
[Players at the Capacity Market]The main entities active at the Capacity Market shall be the “Capacity Provides” offering the available capacity as either owners or operators of the Capacity Market Units (hereinafter “CMU”), i.e.:
- units (groups of units) which generate electricity (hereinafter “CMU G”), or
- units (groups of units) which declare reduction of power consumption (including actual reduction of power consumption and/or generation of power “behind the electricity meters”; hereinafter “CMU DSR”).
[Product traded at the Capacity Market]The product offered at the Capacity Market shall be the Capacity Obligation, i.e. an obligation to stay ready to deliver certain volume of the net available capacity – either in form of generation or reduction of consumption – during the so-called Vulnerability Periods occurring within the Delivery Periods.
Vulnerability Period shall be defined as any peak demand hours (i.e. any hour from 7:00 am until 10:00 pm on working days) during which the planned reserves of the available capacity being at disposal of the TSO (Transmission System Operator) in excess of the planned demand of the NPG (National Power Grid) are determined within the daily planning process to be lower than the required level of the available capacity reserves – provided that the TSO announces on the occurrence of Vulnerability Period in either Normal (8 hour advance) or Urgent (4 hour advance) mode.
Capacity Obligation shall be offered with respect to the following Delivery Periods:
- calendar year – during the main auction, or
- calendar quarter – during supplementary auctions.
Capacity Obligation shall be specified in the Capacity Agreement concluded upon the auction between the Capacity Provider and the TSO for the period of:
- 1 year delivery – in case of the existing CMU G and CMU DSR,
- up to 5 years delivery – in case of Modernized CMU G, or
- up to 15 years delivery – in case of New CMU G.
[Participation in the Capacity Market] According to the authors of the Project, capacity market is supposed to be technologically neutral, but it should “consider the parameters of certain technologies contribute to security of supplies”. Capacity Market will not be open to those volumes of available capacity which benefit from other support systems (including support for energy from RES or high-efficiency CHP). It is also planned that the generation capacity located outside of Poland shall not be allowed to participate in the Capacity Market during the first years of its functioning.
[Timeframes]It is expected that the capacities necessary to cover the peak electricity demand in a given year shall be contracted within:
- the main auction – carried out four years in advance, and
- the supplementary auction – carried out a year in advance.
It is also expected that the first support under the Capacity Market will be granted in 2021, thus the main auction for capacity delivered within the first year of the functioning of the support system, should occur in 2017.
[Certification preceding auctions]Only certified CMUs („CCMU”) shall be allowed to participate in the auctions. Certification will occur in the following stages:
| General certification | Main auction certification | Supplementary auction certification |
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Certification can be granted to CMUs with gross achievable power not lower than 2 MW, however, the CMUs representing the aggregated CMU G and/or aggregated CMU DSRs should represent gross achievable capacity between 2 and 50 MW.
[Rules pertaining to the auctions] Auctions shall be carried out for the entire area of the NPG through the use of electronic platform.
Available Capacity offered in the main auction is equal to the product of:
- the net achievable capacity of the CMU, and
- the availability correction co-efficient which reflects the actual average availability of the capacity of given type/technology, taking into account planned and unplanned losses of capacity.
For CMUs aggregating capacity sources with different availability correction co-efficient, the lowest co-efficient will apply.
The actual level of support, as well as the functioning of Capacity Market will be regulated on an ongoing basis by the Minister of Energy who will determine the auction parameters (including: demand for the available capacity, level of investments for new and modernized generation units, maximum offer prices, number of rounds of auction) based of the proposal prepared by the TSO. Auction parameters will be accepted by the Minister of Energy not later than 24 weeks before commencement of auctions. Change of the auction parameters will be possible not later than 3 weeks before the commencement of auctions, however every change will allow the CMU to resign from the auction.
During the auction it will be possible to amend the declared validity term of the Capacity Agreement, however it will not be allowed to make any changes to yearly volumes of the available capacity.
[Setting the auction prices]The Capacity Market will be based on the Dutch auction system, i.e. the closing price – the price of balance between demand and supply for capacity, specified as a result of subsequent rounds of auction – will be uniform for every CMU winning the auction (“pay as clear” auction).
[Capacity Agreement] It is expected that the Capacity Agreements will be concluded in an electronic form at the moment they are deemed registered in the registry of the Capacity Market, which will occur upon, respectively: (i) an announcement of the outcome of auctions by the President of Energy Regulatory Office – in case of conclusion of the Capacity Agreement as a result of an auction, or (ii) after the TSO gives its consent to the transaction – in case of transactions at secondary market. Draft Capacity Agreement will be prepared by the TSO.
[Secondary market and capacity relocation]It is expected that CCMUs will be allowed to transfer the Capacity Obligation on a secondary market to another CCMUs, based on an ex-ante principle – starting from the date of completion of the supplementary auction (with respect to quarters) until the end of a given delivery year, provided that the secondary market trading will pertain to the entire Delivery
Period remaining after the conclusion of the transaction at the secondary market. Transfer of the Capacity Obligation related to the first year of operation of the New CMU shall not be allowed.
Furthermore, if – during a Vulnerability Period – there is an excess of the Performed Corrected Capacity Obligation over the Corrected Capacity Obligation (see comments below), it will be allowed to transfer such excess to another entity in a form of the Relocation Volume based on ex post principle (i.e. after the Capacity Obligation has been performed in excess).
Secondary market activities, as well as capacity relocation, will be controlled by the TSO.
[Control of investments in New and Modernized CMUs]New and Modernized CMUs will be required to present – before joining the auction – a financial collateral for an amount proportional to the declared available capacity. The collaterals will be released under the condition that a so-called Financial Milestone is reached (at least 10% of the planned expenditures are incurred and the investment agreements cover at least 20% of the planned expenditures) in the first 12 months following the conclusion of main auction and commencement of the Capacity Agreement. If the Financial Milestone is not reached within 12 months from the conclusion of the main auction, then the collateral will be utilized by TSO and:
- in case of a New CMU – the Capacity Agreement will be terminated; while
- in case of a Modernized CMU – the term of the Capacity Agreement will be reduced to 1 year without reduction of the capacity obligation (which will force purchases at the secondary market).
Except for the above, New and Modernized CMUs will be verified with respect to achievement of the so-called Operational Milestones, i.e. whether they comply with respective performance and financial schedule (verification will be based on the report on execution of the performance and financial schedule, sent to TSO every 6 months), as well as the ability to provide capacity on the level of at least 95% of the capacity obligation. If the Operational Milestone is not reached a financial penalty will be imposed, as well as:
- in case of a New CMU – Capacity Agreement will be terminated; while
- in case of a Modernized CMU – the term of the Capacity Agreement will be reduced to 1 year without reduction of the capacity obligation.
[Control of the ability of CMU DSR to reduce capacity demand] CMU DSR are obligated to obtain – not later than 1 month before the year of delivery – a so-called DSR Test Certificate confirming their ability to reduce power consumption. If a DSR Test Certificate has not been obtained before the certification stage, CMU DSR are obligated to present a collateral, which will be released after the auction provided that CMU DSR receives a DSR Test Certificate not later than 1 month before delivery year.
[Performance of capacity obligation]Capacity Obligation will be performed during Vulnerability Periods which shall be defined as any peak hours (i.e. any hour from 7:00 am until 10:00 pm on working days) during which the planned reserves of the available capacity being at disposal of the TSO (Transmission System Operator) in excess of the planned demand of the NPG (National Power Grid) are determined within the daily planning process to be lower than the required level of the available capacity reserves – provided that the TSO announces on the occurrence of Vulnerability Period in either Normal (8 hour advance) or Urgent (4 hour advance) mode.
The scope of the Capacity Obligation for a given time period may be subject to so-called Justified Corrections (reduction) in case of: (i) the overhaul of the CMU agreed by the TSO, (ii) restrictions to power off-take due to reasons attributable to TSO/DSO, as well as (iii) during first four hours of Vulnerability Period announced in Urgent mode – in case of unavailability of the power plant due to characteristics of the start-up process. Capacity Provider incurs the risk of failure to perform the Capacity Obligation due to other reasons, such as: failure, lack of demand for heat (in case of co-generation installations), fuel shortages, other technological issues, force majeure.
Capacity Obligation will be settled within the time units used as basic trading periods for the purpose of the Balancing Market, it being specified that settlements will be based on the Corrected Capacity Obligation (“CCO”) and the Performed Corrected Capacity Obligation (“PCCO”), where:
- the value of CCO for a given CCMU will be the product of:
- the scope of the Capacity Obligation of a given CCMU, and
- quotient of:
- the part of the NPG net capacity demand which has not been covered by production of electricity from sources not participating in the Capacity Market; and
- the sum of the Capacity Obligation of all CCMUs reduced by Justified Corrections of all CCMUs;
- the value of PCCO for a given CCMU will be:
- available capacity of the Centrally Dispatched Power Plant (“CDPP”) at disposal of TSO within the balancing market procedures;
- the amount of the net power generated by non-CDPP;
- capacity notified under a reduction offer by CCMU DSR active on the balancing market;
- actual volume of reduction of CCMU DSR which did not offer a reduction on balancing market,
- in every case increased by Justified Corrections.
If the PCCO (after the allowed relocation of the PCCO) is lower than CCO calculated for a given CCMU in a given Vulnerability Period, the Capacity Provider will be obligated to pay a financial penalty. If PCCO (after the allowed relocation of the PCCO) is higher than CCO calculated for a given CCMU in a given Vulnerability Period, then the Capacity Provider will be entitled to a premium in the amount resulting from redistribution of financial penalties payable for a given Vulnerability Period by entities whose PCCO was lower than CCO.
[Budget] The Ministry of Energy estimates that the yearly budget of the Capacity Market will amount to 2-3 billion PLN. The funds will be gathered from fees payable by final customers (called capacity fees), taken into account in tariffs for transmission and distribution of electricity. The values of capacity fee will be subject to acceptance by the President of Energy Regulatory Office, provided that:
- the household customers without possibility to determine the hourly electricity consumption will pay a flat fee for an electricity meter, depending on the contractual capacity, while
- other final customers will be charged a variable rate, calculated on the basis of the electricity consumed in peak demand hours.
The methodology used for the purpose of the cost allocation between the abovementioned groups of final customers will be approved by the Minister of Energy.
[Legislative process]Despite the declared technological neutrality of the Capacity Market and the minimum threshold of achievable capacity allowing to participate in the auction (2MW) the proposed Capacity Market regulation will not constitute a significant support for installations with an unstable generation characteristic (co-generation installations dependent on demand for heat, RES installations dependent on wind or sun which do not cooperate with energy storages). In reference to the mentioned installations, the obstacles for participation in the Capacity Market will include specifically: (i) prohibition of double support (installations benefitting from separate support schemes, such as RES/CHP will not be allowed to benefit from the Capacity Market), (ii) correction of achievable capacity by a corrective availability co-efficient which – in case of aggregation of different energy technologies (including stable, such as biogas sources, and less stable, such as wind) will be depended on a co-efficient relevant to the aggregated technology with the lowest load factor, (iii) system of fines for failure to perform the Capacity Obligation due to i.a. technological reasons.