The meaning of the EC decision on Polish capacity mechanism

Works on the Capacity Market Act progressed smoothly and in line with the announced plan and good practice in drafting legislation. The Act was signed by the President. The auction rules are currently being consulted and three auctions will be organized by the end of the year. It is evident that there is some rush in this area. Power companies have been waiting eagerly for the notification of the mechanism by the European Commission. Without notification, the power auctions could not start, because there was a risk that the power contract would be considered as illegal state aid. The European Commission could declare power contracts illegal and order power companies to repay the money. This is too much of a risk for the businesses.

Decision of the European Commission

Today, the European Commission accepted the solution proposed by Poland, despite the fact that in the European Parliament negotiations are being conducted on the final shape of the Regulation concerning the common energy market. ¹ Apart from Poland, another 5 countries obtained the consent to different types of power mechanisms. However, in the case of Poland, the course of negotiations in the Parliament is particularly important, because the regulation contains the sensitive issue of CO2 emission limit and the issue of how long and in what form coal as a fuel in power plants can be supported. The European Parliament has always paid more attention to environmental issues, so it can be expected that these standards will be tightened.

Today's EC decision can be seen as an example of a pragmatic compromise.

• The Polish government accepted most of the EC suggestions concerning the shape of the power mechanism.
• The European Commission has compromised and accelerated notification unprecedentedly without waiting for the European Parliament to complete its work.

The race against time is on. This is evident in the Poland's planned auction schedule for this year. According to the current proposals of the European Council of December 2017, units emitting more than 550 g/kWh (which have emissions that are characteristic for all coal-fired power plants), the construction of which began after the date of the regulation coming into force, will not be able to benefit from the support system after 2025.

Older projects started before the entry into force of the Regulation will be eligible for support until 2030 at the latest. The last power contract before 2030 can be concluded for a maximum of 5 years. This means that coal-fired power plants could be supported until 2035 at the latest. However, the European Parliament can tighten the regulations.

Long-term strategy

The European Commission is most interested in ensuring that Poland does not promote new coal projects on the power market, and, in return, it was ready to compromise. Moreover, in Poland, the belief that coal is the only option for the future is diminishing. Without diversification of generation sources, electricity prices, especially for industry, will become less competitive in the long run. In addition, by maintaining the status quo in the power sector until 2030, we are not able to reduce CO2 emissions at all. However, there is still no declaration of the government concerning the energy strategy. Therefore, there are two safety valves in the regulations:

1. The regional assessment of resource adequacy carried out according to the European methodology is important. If it shows that there is a surplus of electricity available in the neighbouring system, then the power mechanism will have to be phased out, although probably with respect to the rights already acquired (in the form of a power contract).
2. The European Commission leaves a door open, which is important in view of the objective of reducing emission by 40% by 2030. In the event that the auction results differ from the final shape of the winter package (after the completion of work in the European Parliament and the trialogues), the Polish act will need to be amended accordingly.

So what does the today's decision mean in practice? Poland wins a dozen or so years of supporting coal-fired power plants until the mid-2030s. The arguments of the Polish side about the low level of reserves turned out to be convincing. However, now is the time to show a broader strategy concerning what we are going to do about it, because today's decision also outlines the horizon of the coal-fired power sector functioning in Poland.

Author: dr Joanna Maćkowiak-Pandera
Date of publication: 7 February 2018