Analysis: Cuts to capacity payments to weigh on Polish prices

As the Calendar 2015 contract falls to a three-month low on the Polish electricity market, traders predict further losses ahead of the final decision on cuts to reserve capacity payments to be reached next week.

This is because traders expect generators to start selling much more of their output into the market after the decision. They believe the regulator is likely to slash the payments so much that companies can make more money selling to over-the-counter buyers, and the extra supply is set to weigh on prices.

On 7 October, the Calendar 2015 Baseload contract fell to its lowest level since 23 June, on the Polish electricity over-the-counter (OTC) market, closing at Zlotych (Zl) 169.00/MWh (€40.39/MWh).

Market anticipation of a final decision on reductions to payments for producing power reserves, expected next week, were seen as the main factor pushing down prices for long-term deliveries.

Traders have already shied away from buying while this decision is still unknown, which resulted in a 2.5% drop in comparison to the an average value for the Cal’15 last month. Most traders expect further losses, saying the contract is likely to drop to Zl 160.00/MWh by the end of next week, as more plants starts to feed power into the wholesale market instead of acting as reserve capacity.

One trader even went as far as suggesting that Zl 150.00/MWh is a fair level for the front year, considering that the German equivalent contract is trading at a discount of roughly€6.00/MWh to Poland.

Softer carbon allowance prices in recent sessions added more downward pressure, as the cost of matching CO2 emissions with allowances under the EU emissions trading system (EU ETS) play a significant role in Poland, where 90% of electricity generation come from coal-fired power plants.

Payment changes

In July, Poland’s transmission system operator PSE proposed to pay generators less for producing electricity during the peak hours. The reason was that these payments have cost more than forecast and caused the grid operator to post financial losses.

PSE proposed to more than halve the payments from Polish zloty (Zl) 37.13/MWh (€8.87/MWh) to Zl17.03/MWh.

The change was planned to come into force from September but Poland’s biggest energy companies have hit out against proposals ahead of a final approval from the country’s energy regulator ( see EDEM 22 August 2014 ).

The peak reserve payments has proved controversial and market-moving before. In November last year, proposals for an increase of payments for generators which produce power during peak times was the predominant factor behind gains on the far curve electricity contracts ( see EDEM 26 November 2014 ). Karolina Zagrodna and Irina Peltegova