Poland needs 2 GW of new photovoltaic capacity annually - that's why prosumers should be supported

Introduction

In early June 2021 the Ministry of Climate and Environment presented for consultation a draft law [1] changing the rules for the functioning of distributed energy, whose rank has increased greatly in recent years. The recent photovoltaics (PV) boom has created about 35.5 thousand jobs in this industry[2]. Half a million micro-installations are the main source of energy from the sun in our electricity system (3.3 of 4.7 GW[3]). Society started to actively support the energy transition by engaging private capital.

However, due to changing EU regulations and the need for better integration of micro-installations in the energy system, the time has come to revise the system. However, it is important that legal amendments contribute to the further low-emission transformation of the Polish economy and will not undermine changes, but stabilize development of RES. Renewable sources may effectively fill the gap left by coal, provided that we increase flexibility of the energy system. According to Forum Energii estimates in 2050 Poland will need about 72 GW [4] of solar energy, and its systematic development will be necessary to balance the energy supply, taking into account planned phase out of coal capacities. This means that more than 2 GW of new solar capacity should be added each year. In parallel, we need to work on integrating them into the grid.

Why is it important to continue supporting prosumers?

Continued support of prosumer energy is important for several reasons:

• Smog reduction requires, among other things, an increased use of heat pumps (why - we discuss this in other analyses)[5]. The cost of heating with electricity is obviously related to its price. The current system of rebates increases the profitability of investing in heat pumps. A well-functioning system of incentives for investing in photovoltaics will therefore be needed to support electrification of heat.
• Dynamic development of RES in Poland will require a lot of free space, and there is an increasing competition for it. Installing solar panels on roofs allows efficient use of space. It reduces the pressure to occupy land that should be used for agricultural crops, other investments or green areas.
• Distributed energy is complementary to the RES mix. Poland is still only at the beginning of its development path (installed capacity today is about 3.4 GW[6]). In comparison, Germany has 24 GW of PV installations up to 100 kW by 2019. [7]
• The development of prosumerism provides a practical way to involve the public in the energy transition and climate protection and to increase acceptance of necessary changes.

How does the discount system work?

A part of the energy produced by the prosumer is for his own use, the rest is fed into the grid. Depending on the size of the installation, the user later receives 80% (installation up to 10 kW) or 70% (installation up to 50 kW) of this energy at a rebate - without paying the cost of distribution. This cost is covered by the trading company (energy seller). At the same time, it receives 20% or 30% of the energy produced by the prosumer for free and sells it to other consumers.

Change is inevitable

The existing support system and the strategy for micro-installation development need to be rethought due to the entry into force of the Directive on common rules for the internal market for electricity[8]. From the beginning of 2024 prosumers should be billed separately for electricity fed into and taken from the grid. The rebate system is incompatible with this requirement, because the billing for energy used from the grid is directly linked to the discount for energy previously fed in.

What's in the amendment for prosumers?

A number of changes are proposed in the amendment:

1. Change in the way energy production is remunerated.
   The rebate mechanism is to be replaced by an option to sell energy to the energy vendor. The purchase price from the prosumer is to be equal to the average market price for the previous quarter.
    
2. Creation of aggregators.
   Aggregators are companies that can contract multiple prosumers and trade the energy they produce. Aggregators can also use energy storage and be more strategic about selling energy at times of increased demand and higher prices in the short-term market.
    
3. Introduce definitions and principles of citizen energy communities.
   The creation of citizen energy communities is important from the side of balancing local markets, system flexibility and increasing the involvement of different actors in the energy transition. Moreover, similar to aggregators, these communities could, among other things, use energy storage or otherwise optimize energy use and production.

4. Introduction of dynamic tariffs.
   Allow energy to be billed based on its true value over time - higher prices will occur during increased demand in the grid, and lower prices when consumption is low.

Quo vadis?

Some of the changes are necessary and sensible. However, the final effects of these changes on the development of distributed generation are unknown. The Regulatory Impact Assessment (RIA) fails to analyze the impact of the proposed changes on the further growth of prosumer capacity. There are no declarations regarding the desired volumes of such installations and no analysis of the profitability of investments in the new system.

Thus, the proposed changes raise legitimate concerns because economic viability will determine whether or not the microinstallation market will continue to grow.

How changes in the act will affect the profitability of micro-installation

The cost-effectiveness of microinstallation depends on many factors, including:

• Installation size - the larger the installation, the cheaper the installation per kW,
• the cost of the loan - the interest rate,
• grid electricity prices - the more expensive the electricity, the faster the payback period,
• the deductibility and rate of the tax credit for the purchase of the installation,
• grants, such as under the ”MójPrąd” program,
• the level of self-consumption - savings on the electricity bill. The greater the self-consumption - the greater the savings.

Below is the result of an analysis comparing the cost-effectiveness of owning a microinstallation by two different households with different income levels under the current system of rebates and the proposed system. The analysis does not take into account the subsidy from the Mój Prąd program due to the uncertainty of future support conditions, but does take into account the thermo-modernization tax rebate.

The analysis shows that the government proposal is less attractive than the rebates system due to the low rate at which the prosumer would sell energy. For comparison: in the last quarter of 2020, the price from the competitive market was less than 26 gr/kWh[9]. Under the rebates system, the value of recovering energy would be about 20 gr higher.

It is also uncertain how aggregators will perform in their new role.

How not to throw the baby out with the bathwater?

Assuming that the purpose of the changes introduced is the stable development of prosumer energy and the improvement of conditions for the integration of renewable variable sources in the grid, a system is needed that will simultaneously:

• encourage demand reduction during peak hours,
• guarantee a return on investment within 5-8 years.

The following are recommendations in both respects.

Three (different) ways to build a sustainable support system:

1. Fixed purchase price.
   1. For each unit of energy (kWh) fed into the grid, the prosumer receives a predetermined amount that does not change for in e.g.  15 years. After that period, the owner could sell excess energy at market price or to aggregators.
   2. The system is simple - you can easily calculate the payback period and set rates to encourage investment.
   3. The energy purchase rates for new installations in subsequent years may be adjusted to the market situation - with decreasing installation prices they may be lowered. It is important that the rates are consulted and set at least for several years ahead.
   4. A well-timed tariff can eliminate the need for tax rebates or running additional subsidy programs such as “Mój Prąd”, while reducing additional administrative costs.
   5. The system of fixed purchase prices already exists in Polish law - it is used to support biogas and hydroelectric power plants.
       
2. 100%+ - a modification to the government proposal.
   1. In order to maintain the level of incentive offered by the system of rebates, the amendment should offer a higher multiplier of the quarterly price at which energy would be purchased.
   2. As with the fixed purchase price, the difference between the market prices and the prosumer rate would be given back to the energy vendor from “Zarządca rozliczeń”, who manages funds accrued from the RES surcharge.
   3. The multiplier should be reviewed as the market develops and installation prices decline.
   4. An appropriately selected multiplier can eliminate the need to duplicate support schemes with subsidies or tax rebates.
   5. Eligibility for the increased multiplier should be time limited, such as for 15 years.
   6. A drawback of the proposed system is still the lack of predictability of energy prices to which the multiplier would refer. This creates unnecessary risk on the part of prosumers, which on the other hand is not there for professional investors using a fixed purchase price or contracts for difference after winning auctions.
       
3. 100% with the Mój Prąd program and tax rebate.
   If the government proposal were to enter into force without changes, it would be necessary to maintain the "Mój Prąd" program and the thermomodernization tax rebate at the same time. Lack of profitability in the surplus purchase system should be compensated by investment support. However, it needs to be modified.
   1. The MójPrąd program should set annual budgets and subsidy levels for installations at least 3 years ahead. This will also determine the number and capacity of installations that would be built, providing certainty and direction for market development.
   2. The intensity of support could be reduced from year to year to follow market development.
   3. There should be no breaks between enrollments to maintain continuity and not cause market shocks.
   4. However, maintaining several support schemes would still be suboptimal due to administrative costs and process complexity that may discourage prosumers from investing.

All three options can also be implemented with differentiation for installation size and prosumer type - depending on whether they are a business or household. The new system should not allow for excessive support.

Two ways to make the system more flexible

One of the challenges of prosumer energy development is the integration of sources into the power system. Flexibility is key here, as discussed in other reports[10]. This can be achieved, among other things, by requiring prosumers to use dynamic tariffs and by wider use of energy storage.

1) As prosumers are more informed than the average energy consumer they could be required to use dynamic tariffs, which are  to be introduced with the proposed regulatory amendment. Price incentives for energy consumed will encourage the use of energy intensive electrical appliances at times of lower rates or self-generation. This will reduce peak demand. Energy returned to the grid would be accounted for under the terms of the support system.

2) Upgrading the low voltage network by installing energy storage can facilitate further integration of distributed sources. While prosumers have the ability to invest in their own energy storage devices, it is much cheaper to invest in larger installations at the local level[11].

Keeping distribution networks in a state that enables energy transition is a public service. Therefore, as a priority, it is the distribution network operators who should be encouraged to invest in solutions that will enable further capacity growth on the prosumer side.

Conclusions

Changes in the rebates system are necessary, the first step should be a clear declaration of the government regarding the desired deployment of installations in the future. Solar energy has quickly become an important branch of the Polish economy. It is important to carefully assess the impact of the proposed regulation. Limiting the profitability of investments in household installations would have much broader consequences than just shrinking the industry and depriving would-be prosumers of opportunity. It would demolish one of the pillars of the Polish energy transformation.

Author: Tobiasz Adamczewski, Head of Renewables, Forum Energii  
Date of publication: June 23, 2021