Division of the energy market

Electricity market in Poland

 

In 1990s Europe a view was popularized perceiving electricity as a commodity which should be accounted for at arm’s length. In Poland, political transformations were accompanied by activities aiming at the construction of a competitive energy market. The pillars of such activities were:

  • demonopolization – application of the so-called unbundling, that is, separation of generation, transmission and trading activities;
  • liberalization – application of the so-called TPA (third party access) principle, that is, free access of third parties’ power grids;
  • privatization – initially, transforming state-owned enterprises into companies wholly owned by the State Treasury, and then selling shares to Polish and foreign investors.

 

An important role in shaping the Polish energy market must be assigned to the Energy Regulatory Office established in 1997 when the Energy Law was adopted. Following the formal accession of Poland to the European Union in 2004, the process of liberalization of the domestic energy market was accelerated. Two directives were implemented in the national law referring to common rules of the internal (European) market in electricity and natural gas (Directive 2003/54/EC and Directive 2003/55/EC). According to the assumptions of the European Commission, on such a common market, consumers, i.e. both households and economic entities, will be free to choose the seller of energy and the energy companies will be able to compete for customers throughout the European Union.

In mid 2007 serious changes occurred when every domestic individual customer (including households) was granted the right to purchase energy from a seller of their own choice with no need to use the services of a company managing the power grid to which they were connected.

 

The model of the electricity market in Poland is in a group of decentralized (scattered) markets. Such market models were implemented with certain modifications, taking local conditions into account, for example in California (USA), partly in Australia, in Scandinavia and Great Britain. The underlying operations of a decentralized energy market are carried out by: power exchange, TSO and commercial and technical operators (CTO).

 

Speaking about objects of trading, the domestic electricity market can be split into:

  • the active electricity market, where turnover refers to active power in terms of quantity, at a specific price, at a specific time and place of supply;
  • the technical market, where the object of turnover is system (regulatory) services necessary for the technical transmission of contracted energy, and in particular electricity produced in specific generating units where generation is forced by technical constraints in the operation of the power system (necessity to ensure stability, reliability and maintenance of adequate electricity quality parameters at specific grid nodes);
  • financial market where financial and derivative instruments (related to financial hedging of trading risk) as well as financial contracts (related to supplying energy at a specific price, in a specific volume and quantity, but without indicating the supplier) are traded.

 

Active electricity market in Poland

 

The Polish active electricity market, in terms of absolute turnover, is split into the wholesale and retail markets.

 

Wholesale market

 

The electricity wholesale market in Poland is quite highly concentrated as a result of the consolidation of power companies owned by the State Treasury – first horizontal and then vertical. PGE Group has the largest share in the generation subsector and Tauron Polska Energia S.A. in the sales market. The three largest entities account for nearly 60% of active electric energy input in the grid.

 

The domestic active electricity wholesale market operates in three segments:

  • contract market (bilateral contracts),
  • power exchange,
  • balancing market.

 

 

Bilateral contracts market

 

The commercial terms of the contract concluded in this segment are determined by the result of negotiations between the parties. Contracts can operate in the day-hour market (so-called scheduling contracts), where the volume of sales is determined per hour of a trading period, with reference to the nearest hours, days, weeks or years. There may also be non-scheduling (traditional) contracts for longer periods, defining at least the amount of energy and prices for the specific month of the contract taking into account peak and off-peak periods and price discounts, if any. Prior to physical performance of the delivery, such contracts must be “scheduled", i.e. specific volumes of energy must be assigned to every hour of the day in the term of the contract, taking into account the technical conditions of the producer and customer. It is the only formula in which TSO is able to provide its services.

 

Power exchange market

 

In Poland energy is traded on a power exchange by Towarowa Giełda Energii S.A. (POLPX). The company was established in 1999 (at that time under the name Giełda Energii S.A.) under the leadership of Elektrim S.A. In 2003, POLPX was the first entity in Poland to obtain a commodity exchange licence from the Polish Securities and Exchange Commission. POLPX is supervised by the Polish Financial Supervision Authority (KNF). The participants of the power exchange can be energy producers, trading companies and customers (according to the TPA principle). The participant can buy and sell energy for every hour, submitting quotes that are aggregated by POLPX. Afterwards, POLPX determines the supply and demand balancing price for every hour of the trading day. POLPX, according to its rules and agreement, works in relation with TSO since it cannot operate without links with the possibility of physical delivery, system constraints and admissible grid flows. POLPX operates the following types of markets connected with electricity, organised as an electronic power exchange:

  • Intraday Market (IDM),
  • Day Ahead Market (DAM),
  • Commodity Derivatives Market (CDM),
  • Property Rights Market (PRM).
  • IDM and DAM are SPOT markets.

 

 

The Intraday Market (IDM) gives POLPX members a possibility to adjust the contract position as at the day before and during the day of energy supplies, three hours before the physical delivery. POLPX reports IDM transactions to the TSO between  5:00 PM and 6:00 PM on the day before the day of delivery, and cyclically, every hour from  7:30 AM to 3:00 PM on the day of delivery, with regard to a term for which the revision period has expired.

 

The Day Ahead Market (DAM) was the first market put into operation in the Polish power exchange (June 2000). DAM consists of 24-hour markets quoting one type of hourly contract each. In addition, the DAM market quotes three block contracts:

  • BASE – contract with delivery of 1 MWh of power in every hour of the 24h day;
  • PEAK – contract with delivery of 1 MWh of power in every peak hour from 7:00 AM to 10:00 PM;
  • Offpeak – contract with delivery of 1 MWh of power in the low demand hours from 00:00 to 7:00 AM and from 10:00 PM to 00:00;

 

POLPX also offers DAM participants an option to place and clear OTC transactions based on standard contracts traded in the DAM exchange session. The trading accuracy is PLN 0.01/MWh. The minimum order volume is 100 kWh. Trading takes place every day, also on holidays.

 

Commodity Derivatives Market (CDM) makes it possible to conclude transactions regarding supplies of electricity in a uniform amount at every hour of contract performance. Possible contract types:

  • annual BASE contract – delivery of a fixed amount of energy over a full 24 hours in the specific period,
  • annual EURO PEAK contracts – from 8.00 AM to 10.00 PM inclusive, on weekdays.

 

The EURO PEAK price reflects the price of energy during hours of peak demand of electricity in NES, whereas the BASE price is a price of fixed amount of energy received every hour of a 24h day. Energy consumed at peak hours is more expensive and it is cheaper off the peak. The final price paid by the customer is a certain resultant of prices determined in BASE and EURO PEAK contracts.

 

The Property Rights Market (PRM) is connected with mechanisms operating under systems supporting the promoted activities related to the use of energy (generation in high-duty renewable sources, improved effectiveness etc.). PRM was put into operation on POLPX on 28 December 2005 in connection with trading in certificates of origin for electricity generated in renewable sources (RES). Thus, it became the foundation of the system for supporting RES energy producers being set up in Poland. On 28 December 2007 in addition trading in two types of property rights was launched – to certificates of origin of electricity generated in high-duty cogeneration plants.

 

Participating in the PRM producers of electricity from RES and cogeneration can sell their property rights at a profit, and energy companies obliged to buy such rights will be able fulfil their obligation. Also, rights following from the system of white certificates connected with mechanisms supporting activities aimed to improve energy efficiency can be traded.

 

Balancing market (BM)

 

BM is a market operated by PSE S.A. acting as a TSO. Thanks to its mechanisms, it finally balances production and requirement, taking into account transactions concluded in other market segments, complex balancing bids and technical constraints of the power system. The TSO is a party to transactions in this market, at the same time being an inactive trading party since the fixed prices are the weighted average values of submitted bids. An entity who signed a transmission agreement with a TSO with regard to BM participation and who meets specific technical requirements of its scheduling units and has a proper measurement and billing system can be a BM participant. Thus, the following can be BM participants:

electricity producers and customers whose units are connected to the transmission grid, and in particular distribution companies and major customers; trading enterprises; power exchanges.

The obligation to submit balancing bids rests with centrally dispatched generating units (CDGU). There are two types of bids, depending on the scheduling generating unit type:

  • active units with energy production offers exceeding the volume planned in Daily Coordination Plans (DCP) having an impact on balancing of the electric power system resources;
  • passive units with decrement bids that quote their energy volume from concluded contracts in other market segments  with the price they are ready to pay to the TSO if the TSO took over the performance of such contracts.

Thus, the offers refer to reduction of the previously planned production of electricity.

 

BM is a closure to other segments and it does not limit the freedom of transactions. In Poland energy generation is forced by grid constraints and electricity is produced in cogeneration, which can limit the possibility to optimize BM contract positions resulting from incremental offers and decrement bids.

 

Retail market

 

The Polish electricity retail market covers the distribution grid and entities operating in that market are distribution system operators (DSO), trading enterprises (as suppliers), end customers and small producers. A party to the transaction is the end customer buying energy for own use. Customers are categorised into specific tariff groups according to the level of voltage in the grid to which they are connected as well as power intake. Tariff A and tariff B refer to industrial customers connected to MV and UV grids. Tariff C comprises business customers connected to LV grids (energy for economic activity purposes), whereas tariff G is mainly households. Tariff G applies to more than 90% of customers in the retail market (more than 15 million).

 

According to the TPA principle, every customer has the right to choose a supplier of electricity. The end customer enters separately into the electricity sales agreement and electricity distribution services agreement or signs a comprehensive agreement (combining both services to be provided by the same company).

 

Energy prices for such customers are shaped by the market. Customers from tariff group G who did not decide to change the supplier will be billed according to the grid enterprise (so-called supplier of last resort), approved by the President of ERO. At present, there are five suppliers of last resort (energy concerns deriving from the so-called power distribution companies), and, in addition, about 100 other, licensed trading enterprises. Moreover, about 160 suppliers operate within enterprises vertically integrated with the DSO. Since it only became possible to change the electricity supplier (July 2007), by the end of June 2015 the change was implemented by 343 746 households and 144 160 other entities. In 2014 nearly 44% of all electricity supplied via distribution grids to end customers was sold at arm’s length, that is, applying the TPA principle.

 

Technical market

 

The technical market is connected with trading in power reserves and system services (also called regulatory or auxiliary services), as well as energy produced in generating units as grid-constrained generation (the total minimum load of such centrally dispatched units in NES is estimated at 10 GW). Performance of services in this market ensures proper standards for NES operation, connected, among other things, with stability, reliability and safety of the system operation and quality of electricity.

 

In Poland, the market of system services operates at the transmission system level and is connected with the terms of balancing of trading contracts in the wholesale market. By means of system service market and the balancing market, TSO obtains technical resources to balance temporary capacity of the system and settles non-balanced energy in relation to contract positions. The balancing market operates over longer time intervals (applicable in the wholesale market), whereas regulatory system services refer to shorter intervals (minutes and seconds).

 

Currently, in connection with the method of defining regulatory services in Poland, the offer is aimed at a narrow group of potential service providers, which reduces the amount of competition in this market. The catalogue of regulatory services, their description and technical requirements are available in the Terms and Conditions – a document developed by the TSO, and more strictly, in the detailed part of the “Transmission Grid Operation and Maintenance Instruction” (IRiESP).

 

 

Services in the domestic electricity market

 

An energy company operating in the market as a supplier of electricity to end customers must conclude an electricity distribution services agreement with a relevant DSO. In the agreement the supplier must indicate the entity in charge of commercial balancing; in particular, it can perform the balancing on its own. Trade balancing consists in accounting for the collective difference in the amount of electricity between intake by customers and the amount of energy previously reported by the supplier. Thus, the service is connected with reporting to the TSO the electricity supply agreements concluded by the supplier with electricity customers and maintaining collective settlements of the difference in the actual amount of supplied electricity. Thanks to this service, the customer is not involved directly (unless, at the same time, it is an entity responsible for commercial balancing) in the settlements resulting from the need for balancing with the operator because it is done through the supplier.

 

The Commercial Operator service is aimed at electricity producers other than participants of the Balancing Market. Thanks to the third-party commercial operator service, the producers avoid costs related to direct participation in this market. Thus, customers have access to services such as commercial balancing, reporting electricity supplies schedules, according to TSO’s standards (PSE S.A.), as well as within the scope and according to the requirements of the electricity supply agreement. They can also rely on assistance in creating work schedules for their generation source. The commercial operator is POLPX (TGE S.A.) and trading enterprises.

 

The Market Operator service is addressed to suppliers of electricity who have no WIRE/UR (energy market information exchange) system of their own, no adequate IT infrastructure and adequate personnel to operate such a system on a continuous basis (24h), or who want to reduce the risk related to correct performance of the required reports to TSO (PSE S.A.). The service involves disposing of the customer’s scheduling units in electricity trading. Scheduling units will be formulated by the TSO after signing a relevant agreement.

 

In the Measurement Operator service the customer assumes the responsibility for obtaining electricity measurement data from the customer’s measuring and billing systems and for sending it to the TSO or a DSO (with whom the customer settles his accounts) in the required format.

 

 

Prospects for development

 

Currently, to ensure that the domestic electricity market is a correctly operating liberalized competitive market, and at the same time it is open-ended and clear, decisions must be taken to stop regulating the prices for households (i.e. discharge suppliers of last resort from the obligation to present tariffs to the President of ERO for approval). In addition, measures should be undertaken to improve the customers’ awareness of the operation of a competitive energy market and the resultant benefits.

 

An extensive range and frequent fluctuations of prices in the domestic SPOT market make this market more and more difficult, at the same time inhibiting the development of competition in the retail market. Variability will increase along with the development of renewable energy sources (RES). The growing risk of imbalance and the resultant costs will be transferred to every participant of the market both at the level of NES, the energy companies’ portfolios and customers. The role of managing energy demand and supply will increase to optimize costs. The reduction of the requirement, through improved energy efficiency and shaping, to ensure that they are decreased in the peak period by being shifted off peak, is the main mechanism on the demand side (DSR, Demand Side Response). This is a place for a demand aggregator service whose activities can be beneficial both to the TSO and to customers. At present, the lack of domestic legal regulations delays the development of the DSR market in Poland.

 

Work on the concept and introduction of the power market has continued since 2013. This is a response to signals concerning possible threats to power balancing in the system in the medium- and long-term. They are due to the problem of maintaining the producers’ return on assets owned and reconstructed by them and new investments. Before the power market model is selected and implemented, the participants of the energy market must find solutions for the operating power reserve and emergency DSR service sufficient.

 

PSE promotes load reduction programmes in the form of scattered generation, so-called negawatts, that is, mechanisms excluding groups of customers at the TSO’s request. These activities are regarded as a form of virtual power plants supplying negative power (negawatts). This is management of customers who, against specified consideration, reduce their own consumption of electricity if necessary.

 

According to the Supreme Audit Office, domestic producers declare that in 2014-2028 they will build new conventional generation sources for PLN 54 billion and modernize the existing ones for PLN 12 billion. It is forecasted that a nuclear plant will be put into operation by 2025; however, according to the Supreme Audit Office there is a high risk of another delay or even that the project will not be implemented. By 2020, according to the assumptions of the European energy policy (Directive 2009/28/EC and the National Action Plan) at least 15% of energy should derive from RES.

 

The expected development of renewable energy, and in particular wind turbines (currently accounting for more than 65% of power of all RES in Poland), will be connected with the problem of balancing, especially at night when the demand is low. After sunset the wind may blow stronger, while the solid fuel units predominant in NES cannot reduce generation below the specific minimum technical load.

Temporary shut-down of such power plants is out of the question as it may take more than 8 hours to restart the Polish units. The DSR programme offers a solution to the problem, under smart grids allowing the implementation of variable (dynamic) tariffs in the retail market, reflecting changes in prices in the wholesale intraday market. This will necessitate the implementation of new billing and measuring systems and additional infrastructure at customers' (e.g. equipment programmers with a smart energy meter).

 

The implementation of smart grid technology should make the Polish electricity system more flexible, which is necessary due to reforms initiated by the European Commission, aiming at:

  • generation of electricity for individual needs and for the needs of other consumers (transforming consumers into prosumers);
  • managing individual energy intake, opening up a possibility to provide valuable services to electric power system operators;
  • extending the awareness of energy users making consumer choices based on access to precise information on energy consumption and origin;
  • reducing the impact of the energy industry on the environment, promoting renewable sources.

 

The European Commission, in the European Energy Package of 25 February 2015, notes that the future of the European Union cannot be underlain by obsolete power technologies with low energy effectiveness, based on fossil fuels, their import and an obsolete business model in the power industry characterized by strong corporatism and low competitiveness. The lack of adequate reforms and implementations will expose Polish energy companies to the risk of market loss due to insufficient flexibility of the system while competitors from neighbouring countries will not encounter barriers in implementing generating capacity from RES at competitive prices.

 

Currently, in Poland about 300 000 individual customers produce energy at their own account using RES micro-plants (as prosumers). Normally, these are heat generating units but micro-sources for generating electricity have also become popular.

 

In contrast to other OECD countries, the group of prosumers in Poland is still too small to counterweight large-scale sources based on fossil fuels. The technical potential of micro-plants generating electricity in Poland, estimated by the Institute for Renewable Energy, is 6 million locations with a total capacity of 50 GW (small wind turbines and photovoltaic micro-systems on buildings), and an additional 3 GW from micro-generation in rural land (biogas and biofuel cogeneration). Thus, micro-plants could exceed the present installed power of NES (ca. 33 GW). Hence, there is a need for a national plan of evolution of commercial electric power engineering using innovative solutions based on smart power grid technologies.