Poland plans for the exclusion of existing lignite and coal capacities from capacity market auctions

This story has originally been published for ICIS Long-Term Power Analytics subscribers on 09 September 2020 at 14:23 CET.

In a recent change to existing regulation, the Polish capacity market auction that will take place in December 2020 for delivery in 2025 will be able to accept existing lignite and coal installations for the entire year, but inefficient plants will have to return payments accrued after 1 July 2025.. After this date, the nearly all existing Polish lignite and coal plants will be ineligible to receive capacity payments under EU rules on emissions standards. We foresee major impact on the Polish capacity market auctions prices as well as investments to be seen from 2026.

Background

• Poland established the capacity market by legislation in 2017 and received an approval by the European Commission in 2018
  • Power plants or demand side response providers wanting to take part in the capacity mechanism enter their bids to be awarded a capacity agreement at a clearing price
  • Auctions then follow a “delivered energy” model: the awarded participants have an obligation to provide capacity during periods of network stress or be subjected to financial penalties
    • Existing capacity and demand side response units are eligible for one year-long capacity contracts
      • Existing capacities bidding for one-year contracts are classified as price takers and cannot bid above certain price thresholds
    • Modernised units are eligible to receive payments from 2 to 5 years
    • New capacity will receive payments for 5-17 years (most often 15 years)
      • Generators that are eligible for longer than one-year capacity agreements are price makers
• Auctions take place in two rounds for each delivery year
  • The main auction is held in the fifth year prior to the delivery period
    • The exception was 2018 when the TSO held auctions for the delivery years 2021-2023
  • An additional set of four auctions carried out one year earlier than the delivery year
  • In the Figure 1 below you can see auctioned capacity for each year in main auctions as well as total committed capacity including the capacity carried over from previous auctions with multi-annual contracts
  • In the 2021-2024 and especially in 2022-2023 auctions the clearing price was close to the price-taker price ceiling

• PSE has planned for the next main capacity market auction for the year of delivery 2025 to take place on 14 December 2020

New changes

• On 4 September, as initiated by the PSE, the Polish energy regulator URE changed the Polish Capacity market Regulation
  • The changes were carried out to comply with the 2019 EU Electricity Market Regulation (part of the Clean Energy Package in 2019)
  • New restrictions on participation in the capacity mechanisms of existing power plants enter into force as of 1 July 2025, but do not apply to capacity contracts concluded before 31 December 2019
  • New power plants, launched after 4 July 2019, which do not meet CO2 emission limits as defined in the Electricity Market Regulation cannot participate in the capacity market auctions
  • Existing power plants that were launched before 4 July 2019 can take part in the full 2025 auction year, but when they exceed the emission limit, they must return the remuneration for the performance of the capacity obligation for the second half of 2025

Analysis

EU emission limits

• EU policy makers adopted the Electricity Market Regulation after Poland’s capacity mechanism law of 2018, and the latest changes in Warsaw were to formally comply with the EU rules
• Poland’s compliance with the EU legislation means that existing coal and lignite power plants will no longer be able to receive payments for participation in the capacity market as of 2026 (auction in 2021) but may still receive payments in the first half of 2025
• This applies to all existing plants that had not already secured a contract for any period after July 2025 before the EU legislation came into force in 2019
  • According to the EU regulation, existing power plants that emit more than 550 gr CO2 of fossil fuel origin per kWh of electricity and more than 350 kg CO2 of fossil fuel origin on average per year per installed kWe cannot be receive payments or commitments for future payments under the capacity mechanism as of 1 July 2025
    • The above limits mainly exclude Poland’s lignite and coal fleet as well as potentially some less-efficient gas installations from the capacity market payments
    • According to ICIS long-term analytics, Poland’s coal and lignite fleet is over 30GW, making up nearly 70% of all generation capacity in the country

Impact on the auction results

• We do not foresee particularly bullish effect on the 2025 capacity market price outcomes caused by the latest change in the Polish capacity market regulation with a stronger impact in the auctions for later years
• Existing capacity units bidding for 1-year contracts are generally price takers and push the clearing price down
• However, the new wording does not clearly exclude existing lignite and coal units from participating at all in the 2025 auction
  • Even if discourages those units from participation due to the need to return the payments for the second half of 2025, only a small capacity will be covered in the 2025 auction
    • According to our estimates the majority of usually auctioned annual capacity (19.2GW) has already been awarded with multiple year contracts in the previous capacity market auctions (Figure 2 below)
    • The Polish climate minister already issued 2025 auction parameters, and only 2.5GW will be auctioned

• A stronger bullish effect will be seen on the 2026-2027 auctions when existing lignite and coal units cannot participate in them and we expect price makers, which will attempt to recuperate future investments, to bid in them
• We expect mainly highly efficient gas to bid and have already included potential future gas capacities in our long-term modelling assumptions

Vija Pakalkaite is Analyst – EU Carbon & Power Markets at ICIS. She can be reached at powerperspective@icis.com

David Battista is Market Reporter at ICIS. He can be reached at David.Battista@icis.com

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