Polish model of Capacity Market
The draft regulation of the capacity market in Poland is currently included in the draft bill on capacity market (hereinafter referred to as the “Project“), which was submitted to the Sejm on 6 July 2017.
The draft generally corresponds with the assumptions set forth in the document of the Ministry of Energy named “Functional solutions for capacity market” (document published on 30 September 2016, hereinafter referred to as the “Solutions“), it being also envisaged that the detailed regulations on capacity market will be set forth in the secondary legislation to be issued by the Minister of Energy as well as in the documents and information published by the transmission system operator (the “TSO“) and by the President of Energy Regulatory Office (hereinafter referred to as “ERO“). This alert was prepared based on the assumption that abovementioned secondary legislation will be compliant with the Solutions.
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 installations with stable capacities;
- to secure long-term power supplies to final customers during emergency periods.
Basic assumptions of the Capacity Market:
[Participants of the Capacity Market]
The main participants of the Capacity Market offering their services on the Capacity Market shall be the Capacity Providers – owners of the Capacity Market Units (hereinafter “CMU”), i.e. owners or operators of the:
- physical generating units, including generating units as well as electricity storage facilities capable of supplying power to the system (hereinafter “PGU”), or
- physical demand side response units supplying the power by temporary reduction of the power consumption from the electricity grid (by either actual reduction of power consumption and/or generation of power “behind the measuring systems”; hereinafter “PDSRU”).
[Product traded at the Capacity Market]
The product offered at the Capacity Market shall be the Capacity Obligation, i.e. an obligation to (a) guarantee readiness to deliver certain volume of the power to the system within the delivery period (“Delivery Period”) and (b) actually deliver certain volume of the electric power during the emergency periods (“Emergency Periods”).
Emergency Period shall be defined as any peak demand hours (any full 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 minimum level of the available capacity reserves – provided that the TSO announces on the occurrence of Emergency Period in either Normal (i.e. 8 hour advance) or Urgent (i.e. 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, the TSO and the settlement operator (a joint-stock company Zarządca Rozliczeń S.A., which will be responsible for payment of the remuneration due to the Capacity Provider) for the period of:
- 1 year delivery – in case of the Existing CMU,
- up to 5 years delivery – in case of Modernized CMU, or
- up to 15 years delivery – in case of New CMU.
[Participation in the Capacity Market]
Capacity market is supposed to be technologically neutral, but it should “consider how the parameters of certain technologies contribute to security of supplies”. Capacity Market will not be open to those PGUs, which (a) provide the TSO with the services of a character and manner of remuneration close to the Capacity Obligation (the list of such services will be published by the President of the ERO based on the content of the TSO grid code), (b) benefit from RES incentive schemes (such exemption however being not applicable to multi-fuel combustion units or hybrid units), or (c) are foreign PGU enjoying the cogeneration support system.
Capacity market will be open to foreign PGUs and PDSRUs located in the EU Member States whose power systems are directly connected to the NPG – provided that such PGU / PDSRU purchases the so-called “Ticket” within the so-called “Ticket Auctions” carried out by the TSO in the sixth year preceding the year of delivery. The purchase of a Ticket within the Ticket Auction will entitle foreign PGU / PDSRU to participate in the nearest general certification and – upon fulfillment of the general certification requirements – to be entered into the register of the Capacity Market, and – upon such entry – to offer the Capacity Obligation within the nearest main auction following the registration as well as to participate in the secondary market for a period of time no longer than 12 months (no later than the completion of the next general certification). Ticket purchase is made at the price offered by the operator during the Ticket Auction.
[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 between 15 November and 31 December of the fifth year preceding the Delivery Period, and
- the supplementary auction – carried out in the first quarter of the calendar year preceding the Delivery Period.
As regards the first and the second Delivery Periods envisaged in years 2021-2022, the period between the main auction and the Delivery Period will be shortened as the main auctions for the Delivery Periods in years 2021-2022 will take place in 2018 (similarly to the main auction for the Delivery Period in year 2023). First Ticket Auction will take place in 2019, which means that foreign physical units will be able to participate in general certification no earlier than in 2020 and join the auction for the year 2025.
Rules of the Capacity Market is to be prepared by TSO until the 31 October 2017 and approved by the President of ERO until 29 December 2017. The certification for the main auction for Delivery Periods in years 2021-2023 may be carried out jointly.
According to the Solutions, the main auctions related to the Capacity Market should be carried out within the period of at least 10 years. The Project does not provide for any limitation to functioning of the Capacity Market but it states that the Council of Ministers shall assess the functioning of Capacity Market by the end of 2024 and shall submit to the Parliament a proposal for amendments and/or elimination of the Capacity Market.
[Certification preceding auctions]
Formation of the CMU, which would be allowed to participate in the auctions, will occur in the following stages:
| General certification | Certifications to the main and supplementary auctions |
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Certification may be granted to the PGUs and PDSRUs with gross achievable capacity not lower than 2 MW, as well as groups of such units aggregated in CMU with combined gross achievable capacity between 2 and 50 MW. The achievable capacity of a single PGU included in the aggregated CMU may not exceed 10 MW. It is also not allowed to aggregate PGU and PDSRU in one CMU.
The certificate may not be issued if the PGU:
- provides the TSO with the services of a character and manner of remuneration similar to the Capacity Obligation (the list of such services will be published by the President of the ERO),
- benefits from RES incentive scheme and at the same time is not a multi-fuel combustion unit or a hybrid unit,
- benefits from the CHP incentive scheme as a foreign PGU.
[Rules pertaining to the auctions]
Auctions shall be carried out for the entire area of the NPG with use of the electronic platform.
The available capacity offered in the main auction by single CMU shall be 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, calculated on the basis of the historical data for such technology for the last 5 years, taking into account planned and unplanned losses of capacity (in the initial 3 main auctions this co-efficient will amount to 1).
In case of 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, maximum offer prices, number of rounds of auction) based of the proposal prepared by the TSO. As regards the New CMU and Modernized CMU, the auction parameters will include also the so-called “attributes” described as the necessary requirements for particular technology groups, i.e. unit cost of investment outlays; efficiency of the PGU; unit carbon dioxide and environmentally harmful substances emission (Sox, NOx, dust); the technical minimum of the PGU, minimum load changes as well as the requirements related to the characteristics of the start-up.
The Minister of Energy may also introduce additional parameters which will enable to conduct the auctions with respect to the New CMU or Modernized CMU separately. In such case the Minister of Energy will present the expected capacity which must be covered by the New CMU or Modernized CMU and the maximum price for purchase of capacity in those units.
Auction parameters will be accepted by the Minister of Energy not later than 25 weeks before commencement of auctions.
During the auction it will be possible to amend the declared validity period of the Capacity Agreement, however it will not be allowed to make any changes to yearly volumes of the available capacity.
In case the auction was carried out in breach of the law or against the conditions of the auction or if the participant of the auction behaved contrary to the law or to the regulation of the Capacity Market, the Minister of Energy and the President of ERO will be entitled to annul an auction by way of decision made within 14 days from the completion of the auction.
[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). If there are separate auction parameters for the New CMU and/or Modernized CMU, the price for capacity delivered by the New CMU and/or Modernized CMU will be established separately and may not be lower than the price established for the existing CMU’s.
[Capacity Agreement]
It is expected that the Capacity Agreements will be concluded in an electronic form, for each CMU separately, as of, respectively: (i) TSO’s announcement on the preliminary outcome of the auction under the condition precedent of announcing the final outcome of the auction – in case of conclusion of the Capacity Agreement as a result of an auction, or (ii) entry made in the register of the Capacity Market – in case of transactions at secondary market. The template of the Capacity Agreement will be attached to the Rules of the Capacity Market prepared by the TSO.
[Secondary market and capacity relocation]
It is expected that CMU will be allowed to transfer the Capacity Obligation on a secondary market to another CMU, based on an ex-ante principle – starting from the date of completion of the supplementary auction (i.e. auction launched with respect to quarters) until the end of a given delivery year, it being specified that trades on the secondary market must cover exclusively the entire period following the transaction made at the secondary market (either entire or part of the delivery period). However, it will be not allowed to transfer the Capacity Obligation in relation to (a) the first year of operation of the New CMU and/or (b) CMU burdened with penalties which have not been paid.
Furthermore, if – during an Emergency 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 CMU 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, has to be notified to the registry of the capacity market at appropriate dates (transactions on secondary market at least one day prior to the start of the period covered by the transaction, while capacity relocation on the 5th day after the Emergency Period at the latest) and will be controlled by the TSO.
[Register of Capacity Market]
TSO will establish and operate the register of capacity market which will constitute an electronic platform for collecting, processing and exchange of the data and will enable the participants of Capacity Market to make statements of will. ThepRegister will enjoy a presumption of conformity of the entry with factual status and the date of registration of given statement will be deemed as a date of such statement. The register will be established within 3 months from the date on which the Project enters into force.
[Control of investments in New and Modernized PGU]
New PGU will be required to present – before joining the auction – a financial collateral for an amount proportional to the declared available capacity (subject to the exemption from this obligation applicable to the entities having financial rating at the level specified in the Regulation of the Minister of Energy). The collaterals will be released provided that the Capacity Provider proves:
- that certain part (according to the Solutions – minimum 10%) of the total planned investment expenditures were actually incurred and the investment agreements covering 20% of the total planned investment expenditures were entered into – such evidence to be provided within 12 months from the end of main auction;
- ability to demonstrate at least one-hour generation at the level of at least 95 % of Capacity Obligation established on the basis of corrective availability co-efficient – such evidence to be provided before the commencement of the Delivery Period.
In case the conditions set in points (i) or (ii) above are not met:
- in case of a New CMU – the Capacity Agreement will be terminated, it being specified that if the default refers to condition mentioned in point (ii) above, termination occurs if such condition is not met by the end of third Delivery Period (year);
- in case of a Modernized CMU – the validity period of the Capacity Agreement will be reduced to 1 year without reduction of the Capacity Obligation (which will force purchases at the secondary market); the Modernized CMU will also not be able to obtain the certificate in the following two certification procedures preceding the main auctions.
[Control of the ability of PDSRU to reduce capacity demand]
PDSRU are obligated to obtain – not later than 1 month before the year of delivery – a so-called demand-side reduction test certificate (hereinafter, the “DSR Test Certificate”) confirming their ability to reduce power consumption. Issuance of the DSR Test Certificate will require provision (reduction) of capacity during the test on the level of at least 80%, or – in case the Capacity Provider requests so – on the level of 50% (in the latter case the available capacity is reduced and TSO avails of the proportional part of the collateral). If a DSR Test Certificate has not been obtained before the certification stage, PDSRU are obligated to present a collateral, which will be released after the auction provided that PDSRU receives a DSR Test Certificate not later than 1 month before Delivery Period.
[Performance of Capacity Obligation]
Capacity Obligation will be performed during Delivery Periods (as regards obligation to guarantee readiness to supply power to the system) and the Emergency Periods (as regards supplying power to the system), whereas Emergency Periods shall be defined as the hours set forth in the secondary legislation (according to the draft of the implementing acts – these will be demand peak hours, i.e. any full 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 Emergency Period in either Normal (8 hour advance) or Urgent (4 hour advance) mode.
The Capacity Obligation for a given time period may be subject to the so-called Justified Corrections (reduction) in case of: (i) the overhaul of the CMU agreed with the TSO at least 3-months in advance for the period no longer than 5% of the Delivery Period, (ii) restrictions to power off-take due to reasons attributable to TSO/Distribution System Operator (“DSO”) (congestion) (iii) characteristics of the start-up process preventing fast activation of generation – in case of unavailability of the power plant due to the characteristics of the start-up process agreed with the TSO during certification process, as well as (iv) utilization, in the course of the previous Emergency Periods, of the entire operation limits set forth for a given year in environmental permit – in case such operation limits were presented and agreed during the certification 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 CHP units), fuel shortages, other technological issues, force majeure.
Capacity Obligation will be settled under the conditions specified in the implementing acts and regulation of the Capacity Market prepared by TSO and approved by the President of ERO, wherein the 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 CMU will be calculated based on:
- the scope of the Capacity Obligation of a given CMU,
- the planned demand in the system during the Emergency Period and planned generation in units not covered by the Capacity Obligation,
- the sum of the Capacity Obligation of all CMUs reduced by Justified Corrections of all CMUs;
- the value of PCCO for a given CMU 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-Centrally Dispatched Power Plant (“non-CDPP”);
- capacity notified under a reduction offer by CMU DSR active on the balancing market;
- actual volume of reduction of CMU DSR which did not offer a reduction on balancing market,in every case increased by Justified Corrections.
The remuneration for complying with the Capacity Obligation is payable monthly and – as regards New and Modernized CMU – is reduced by the amount of investment state aid received by respective CMU prior to the supply year (proportional reduction throughout the entire period). In the case of multi-fuel combustion plants and hybrid systems, the amount of the remunerated Capacity Obligation is also reduced by the generation covered with the certificates of origin actually issued for that installation.
If the PCCO (after the allowed relocation of the PCCO) is lower than CCO calculated for a given CMU in a given Emergency Period, the Capacity Provider will be obligated to pay a financial penalty, corresponding to the scope of the Capacity Obligation which was not fulfilled and the rate of penalty determined in the Regulation of the Minister of Energy. The amount of penalties may not exceed: (i) in a single year – the product of an auction highest closing price for a respective delivery year and double Capacity Obligation of given CMU, (ii) within a month – 1/5 of a yearly limit.
If PCCO (after the allowed relocation of the PCCO) is higher than CCO calculated for a given CMU in a given Emergency Period, then the Capacity Provider will be entitled to a premium, which shall:
- correspond to a contribution of a given CCMU to cover the missing volume to fully perform all CCOs,
- be financed from redistributing financial penalties for given Emergency Period by entities whose PCCO was lower than CCO (profit sharing).
CMUs certified for a respective Delivery Period, which has not entered into Capacity Agreement, but had been supplying power during Emergency Period, will be also entitled to a premium. The specific methods of determining and ascertaining PCCO and the method of redistributing penalties for premium payments will be defined in the Regulation of the Minster of Energy.
[Budget]
The Ministry of Energy estimated in the Solutions that the yearly budget of the Capacity Market will amount to 2-3 billion PLN. The Project and evaluation of its effects do not precise the amount of the budget.
The funds for the budget of the Capacity Market will be gathered from fees payable by final customers, power generators selling the energy to final customers as well as companies distributing electricity and connected to the grid of other DSO (so-called capacity fees), such capacity fees being taken into account in tariffs for transmission and distribution of electricity. The rates of capacity fee will be determined and published yearly by the President of Energy Regulatory Office, provided that:
- the household customers without possibility to determine the hourly electricity consumption will pay a lump-sum fee for an electricity meter, depending on the power consumption, 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 stipulated in the Act. The President of ERO is expected to establish and announce by 30 September 2019 the rates of capacity fee for the period from 1 October 2020 until 31 December 2021.
[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 (CHP units 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, (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.
According to the Project, the performance of the Capacity Agreements will be subject to the European Commission’s consent to introduction of a new aid system on the Capacity Market.
Electricity generated by PGU shall be sold and settled separately at the electricity market, allowing PGU operators to obtain revenues from the existing source, i.e. sale of electricity. Nevertheless, the Capacity Market should result in relative decrease of the electricity price as part of CAPEX related to generation units shall be transferred to end-users via distribution fees.