Traders’ questions on ‘skewed’ Polish energy law unanswered
The amended Polish energy law comes into force in a matter of weeks, but traders complain that they still do not know what their liabilities might be. The law will ride roughshod over traders' interests, and potentially destroy a thriving power market, if the regulator does not clarify the legal framework over the cancellation of long-term contracts, market participants told ICIS Heren.
The law kicks in on 9 August, and will require power producers to trade at least 15% of their output on the Polish regulated market or on any of the exchanges.
The amendment would have been enforced from 11 March, but was delayed due to an omitted comma in the wording between the terms "internet trade platforms" and "regulated markets", implying only one form of sale an internet trade platform on the regulated market, such as the Polish power exchange or PolPX (see EDEM 23 April 2010).
Traders have protested against this law for some months (see EDEM 9 June 2010), but have failed to gain a clear picture, despite its imminent enforcement.
Forward contracts under threat
The requirement to sell generation on the exchange could affect contracts for future deliveries already concluded, which would have to be renegotiated and re-routed through Polish exchanges.
Trading houses feel threatened that the new obligation might force generators to buy back the capacity already sold to them. Under these circumstances, participants still have no firm guarantees that the delivery of the contracts they have already signed is watertight.
"It is completely possible that, under this new agreement, generators can just cancel the delivery or renegotiate the terms of the agreements," one dealer explained.
Some traders were adamant that the legal vacuum could damage the Polish energy market, while others insisted that traders and regulators would have to settle their disagreements in court.
Tender regulation questions
Traders have also raised questions on whether the process of buying power via tenders is also regulated.
"We received some guidelines on how to buy electricity via the tenders, but it clearly doesn't have the interests of the traders in mind," one source said.
Energy regulator URE responded in a statement: "The procedures will be regulated by a decree issued by the ministry of economy. Right now, the procedure of inter-departmental arrangements is ongoing."
Nearly 85% of generation capacity is reportedly tied up in bilateral long-term contracts in Poland, which results in a deficit of free capacity, and allegedly enables Polish suppliers to dictate spot prices.
But Polish power utility PGE announced last week that it intends to put its entire output on the exchange. Tomasz Zadroga, president of PGE's management board, said that by opting to do this, the company wanted to show that it was committed to transparency: "We also want to show that we do not create a monopoly in the power sector."
One trader, who represented the European Federation of Energy Traders (EFET) at a recent meeting with URE, pointed out another bone of contention.
He said companies that operate centralised hedging strategies but have power plants in Poland are still unclear whether each production unit will have to sell 15% of its output on the market, or whether the figure may apply to the company as a whole.
URE said that current law splits the power sector into two types of generators.
The first group includes six state-owned producers that are obliged to sell their entire output in a transparent way on the competitive market. Other generators are required to sell 15% of the energy produced in a given year either on power exchanges or on the regulated market.
"There is no regulation in the energy law act that would allow generators to cancel/renegotiate the contracts with the suppliers," a spokeswoman for URE said. "If they want to do so, it would have to be in accordance with the valid contracts."
She added that, should any contracts be renegotiated, the Polish treasury would not pay any compensation.
URE maintains that generators that sold or signed forward contracts in bad faith - to avoid regulations before the new law kicks in - will be penalised accordingly.
"This is all just an enormous misunderstanding," one insider said. "The over-the-counter [OTC] market used to have huge numbers and great volumes, while the exchange had very small volumes.
"Someone misled the politicians to believe that the Polish market is illiquid and non-transparent, because only 1% of the power was traded on the exchange and the politicians brought in this law."
Another trader claimed: "Polish traders are sending letters and meeting with the regulator - it's the interpretation by the regulator that's the problem, the ministry is saying that their interpretation is wrong. But it's the regulator that fines the companies, then a company has to go to court to appeal the fine."
He claimed the regulator had unofficially said companies would not be fined for contracts signed for 2010 at a fixed price before the law was brought in because they were acting in good faith, but contracts for delivery further out could pose a problem.
"PGE sold forward all their production until 2016, and the regulator started to look for legal agreements to break up that situation, and all the other companies are caught in the line of fire," he added.
Others were less vocal, claiming that moving trade onto an exchange has the potential to increase liquidity, providing the regulator soothes any teething problems regarding the cancellation of long-term contracts.
Market participants concluded that the legal vacuum that has now beset the Polish power market could have been avoided if the industry had a well-established body to represent its interests.
"What the hell happened to the TOE [Association of Energy Trading]? Where have they been?" a Polish source asked.
"This is a textbook example what happens if a country doesn't have a fast-reacting traders' association.
"This is what happens when you have a lot of committees that actually don't understand anything about the power market."
The TOE was not available for comment, although traders involved with the organisation insisted that they had been actively lobbying.
"It's a real pain - it could ruin the market that we've worked so hard on for the last 18 months," said another participant.
In the meantime, traders pointed to much higher liquidity levels on PolPX for August and Q4 during recent sessions, as companies adapt to the new regime. Several distribution companies have reportedly been buying strongly for the front month and front quarter in recent sessions.
"20MW for the Cal was traded, but it was probably agreed somewhere else," said one source. "It was only on the screen for a very short time." SR/AS/ZD
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