ICIS Power Perspective: Polish Energy Ministry published parameters of the capacity market auctions

09 August 2018 09:33 Source:ICIS

This story has originally been published for ICIS Power Perspective subscribers on 17:52 CET at 08 August 2018.

The Polish energy ministry has published in early August a draft proposal outlining the parameters of the first three auctions in the country’s capacity market that will take place in November-December 2018. The draft outlines the amount of capacity bidders will compete to supply as well as the maximum prices that will be paid for it.

Background

  • One of the key aims of the Polish capacity mechanism is to stimulate investment in new generation, protecting Poland from any potential power shortage after 2020, when the Polish market is expected to face phasing out of ageing generation assets
  • The legal framework of the market is the Act on the Polish Power Capacity Market, adopted in late 2017
  • The auctions, the first of which is scheduled to be held in November 2018, are to supply power for delivery 2021-2023
  • There will be three main auctions for these delivery periods in 2018, with auctions for additional capacity on a quarterly basis likely to follow in 2019
  • After this, auctions will follow a sequence of delivery year minus five years; so the main auction in 2019 will be for the delivery year of 2024
  • The ministry draft outlines capacities in MW to be purchased in the 2018 auction (see Table 1 below)
  • The auctioned capacities do not distinguish between existing and new installations
  • Awarded contracts
  • If successful at the auctions, Capacity Market Units (CMUs) will be awarded a capacity agreement at the clearing price
  • Successful bidders will receive a steady payment during the duration of the capacity agreement in return for a commitment to delivering capacity at times of system stress called on by the transmission system operator
  • The length of available capacity agreements will vary depending on the capital expenditure (CAPEX) which CMUs have to incur to deliver their capacity
    • Mainly existing capacities that do not undertake any particular CAPEX will be granted one year contracts
    • New and existing generating or demand side response CMUs undertaking CAPEX above a 0.5 million PLN/MW threshold will receive 5-year capacity agreements
    • New generating CMUs undertaking CAPEX above 3 million PLN/MW will receive 15-year capacity agreements
    • According to the information provided by the Polish authorities to the European Commission, 15-year contracts will be accessible to most new-build coal-fired plants, CCGTs, biomass and CHP units
  • General certification for the auctions
  • The Polish transmission system operator PSE accomplished first general certification for the capacity auctions by June 2018 (link to the TSO page)
  • This stage of certification was mandatory for all existing generating units located in Poland with a gross capacity equal to or higher than 2 MW, regardless of their participation in the capacity market
  • 1,196 applications for entry into the register were submitted; out of them 1,167 units were entered in the Capacity Market Registry, including existing and planned units, of which:
    • 1,004 physical generating and energy storage units
    • 163 demand side response units
  • Existing units vs planned units (Table 2 below):
    • 885 existing physical generating units, including: 619 RES units, 248 conventional units and 18 electricity storage units
    • 119 planned physical generating units, including: 48 RES units, 56 conventional units and 15 electricity storage units.

Analysis

  • Future capacity developments in Poland
    • Our prognosis shows that from early 2020s, Poland will start mothballing and phasing-out of old fossil-fuel power units
    • The Polish coal and lignite sector has increasingly been facing difficulties because of the rising carbon prices and necessity to comply with the industrial emission standards set on the EU level
    • The future of the existing lignite power plants is closely related to the lignite mines in Poland, some of which are nearing exhaustion
    • Even if an existing unit gets accepted in the capacity market, it would receive payments only for a year, and in cases of modernisation – five years
    • Based on our assumptions, by 2025 around a half of the existing Polish coal capacities may be closed down because of the requirements in the Industrial Emissions Directive, unless they get modernised
    • That would be roughly equal or the whole amount of planned installations that the TSO added to the Capacity Market Registry in June
  • Impact of the carbon price
  • Because of the recent increase in carbon prices, coal and lignite based technologies will be especially impacted in the forthcoming capacity auctions
    • Since December 2017, when the capacity market act was adopted, the benchmark EU contract price more than doubled from €7-8/tCO2e to €17-18/tCO2e
    • The ICIS carbon model foresees EUA prices to climb towards the €20/tCO2e level by the end of 2018, and to reach €40/tCO2e in 2023 and 2024
    • Bullish carbon prices do not have a direct impact on the CAPEX of a power plant, but contains a downside risk and reduces bankability of coal and lignite power plants as opposed to cleaner technologies
    • Carbon prices will also influence bid prices in the auctions, as planned installations will attempt to recoup both their fixed and at least part of their variable costs
    • However, the experience of recent UK capacity market auctions has been for new-build projects to struggle to bid low enough to beat out existing units – we expect the same pattern to be seen in the initial Polish auctions

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

Ellie Chambers is Senior Market Reporter at ICIS. She can be reached at Ellie.Chambers@icis.com

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By Staff Reporter