Poland: European Union’s energy market in the spotlight – EU’s proposal for changes

Krzysztof Cichocki

Sołtysiński Kawecki & Szlęzak, Warsaw

krzysztof.cichocki@skslegal.pl

The EU’s energy market in the spotlight: EU’s proposal for changes

The Russian aggression against Ukraine has significantly changed the global economic situation, causing an energy crisis within EU countries that rely on Russian energy commodities. The increased post-pandemic energy demand and limited supplies of Russian gas, in combination with the sanctions imposed on Russian companies, have adversely affected energy prices in Member States. The Russian invasion has also had a negative impact on supplies of other energy commodities, such as coal and oil products, used in power and heat generation. This has led to an even greater fluctuation in electricity price levels. In this context, various actions have been taken at both the European and Polish levels to counteract surging energy prices.

In the attempt to implement Regulation (EU) 2022/1854 as an emergency intervention to address high energy prices, the Polish Government has introduced two major measures regarding the energy crisis: (1) freezing energy prices for households, micro businesses, small and medium-sized enterprises, and selected public-social sector end-users; and (2) capping market revenues mentioned in Articles 6 and 7 of Regulation 2022/1854. In particular, generators and trading companies are now obliged to transfer any surplus revenues for the period from 1 December 2022 to 31 December 2023 to the public fund in order to finance compensation measures that protect vulnerable consumers. As the said measures are designed to counteract the temporary energy crisis, the EU is now taking a more systemic approach to change the regulations that trouble the EU’s energy market in the long run.

Background for the amendment proposal

The recent energy crisis and the sudden energy price increase have highlighted many shortcomings that EU Member States have been facing, in particular: (1) exposure of traders, consumers and industries to price shocks; (2) the energy market operating, to a vast extent, based on the short-term; and (3) low flexibility in the electricity grid. To address the aforementioned issues, EU institutions have proposed an amendment to Regulations (EU) 2019/943 and (EU) 2019/942, as well as Directives (EU) 2018/2001 and (EU) 2019/944 to improve the EU’s electricity market design. The proposal is aimed at improving the energy market by emphasising longer-term instruments and making fixed-price contracts more available for users. In addition, the EU is proposing energy sharing and improving the flexibility of the system using energy storage and demand response. All this requires significant changes to power purchase agreement (PPA) frameworks both in Poland and other EU Member States.

Changes to the PPA framework

The institutions of the EU hold the view that PPAs (in particular cPPAs) concluded directly between power generators and consumers outside the regulated energy market (over-the-counter or OTC) can significantly contribute to stabilising energy prices and protect the most vulnerable users. However, currently, some consumers wishing to enter a PPA face many barriers.

One is the insufficient credibility of end-users who may potentially purchase power under cPPAs. This impairs the wider use of cPPAs for the purpose of long-term financing. This also results in PPAs being currently available to larger entrepreneurs with a sufficiently high credit rating. According to the EU proposal, some type of governmental guarantee scheme could be implemented in Member States to secure payments made to generators under cPPAs so that more, especially smaller, end-users can enter cPPAs and, in this way, both stabilise energy costs and facilitate the financing of new RES installations. The guarantee scheme should cover only PPAs concluded for power generated in RES installations in line with the EU decarbonisation policy.

Irrespective of the above, increased demand for concluding physical PPAs may impair liquidity and increase price volatility in spot markets, thus endangering the financial stability of suppliers in the case of any sudden energy price increases. Therefore, the European Council proposed that suppliers offering fixed-price contracts must develop a hedging strategy to secure their market positions.

Additionally, some current support schemes are based on the ‘one-way’ contract for difference (sliding feed-in premium) concept that allows generators to rely on a minimum revenue level when electricity is cheap and hence earn from high market prices. To tackle this problem, it is proposed that investment support schemes should be based on the ‘two-way’ contract for a different concept that would secure repayment of any excessive profits by the generator.

Another barrier for contracting cPPAs might be the restriction of the number of active supply contracts for single consumers (power supply point). The EU wants to address this by proposing that all customers are free to purchase electricity from the chosen supplier and have more than one electricity supply contract at the same time. This would potentially allow consumers to rely on different supply contracts and sources, as well as pricing models (subject to the establishment of the single balancing responsible party).

Potential effects of changes on the PPA market in Poland

Support schemes for PPAs with regard to energy generated in RES installations can promote long-term contracts and provide access to relatively cheap green energy for more consumers. In addition, it will allow most vulnerable consumers to secure electricity supplies at stable prices. It can be expected that both consumers and generators will be incentivised to turn to cPPAs and reduce contracting on the day-ahead market.

The higher availability of cPPAs, including virtual cPPAs based on contract for difference, combined with the promotion of long-term contracts may be attractive for renewable energy generators and suppliers, and boost investment in RES. However, on the other hand, this may reduce the availability of RES energy in the Polish energy market and potentially create a scenario in which increasing the number of cPPAs could also create an undesired pressure on prices in the short-term market and further increase the cost of purchasing energy by consumers who have not opted for cPPAs. To address this issue, in the proposal, the European Council has stipulated that the new support schemes for cPPAs should not undermine the efficient, competitive and liquid functioning of electricity markets.

Other new measures proposed by the EU

To improve the functioning of the integrated energy market across the EU, establishing regional virtual hubs that cover several bidding zones (eg, countries) has been proposed. Such hubs, when combined with spread contracts, can increase liquidity within forward markets and thus facilitate hedging for the purpose of fixed-price power supply contracts.

The expected increase in RES investment will require ensuring that electricity generation will not be curtailed due to technical constraints in the distribution system. Therefore, improving grid flexibility by introducing new support schemes for storage and demand-side response has been proposed. A transmission system operator (TSO) should introduce peak saving products that allow it to shift demand and consumption to periods of higher RES generation. In addition, both a distribution system operator and TSO are to clearly share data on available grid capacity and the status of the grid connection application processed by operators. This should encourage operators to conduct efficient connection procedures.

Proposal assessment

The European Council’s proposal provoked heated debate on many matters vital for the energy market. However, it seems that the main role in the EU proposal is assigned to the development of cPPAs, including virtual cPPAs. As it may have a positive impact on price fluctuations, the widespread use of such a solution may raise concerns regarding forecasting and the allocation of unbalanced consumption between several sellers active at the same energy point. Nevertheless, it should be noted that the proposal’s emphasis on PPA-type transactions is an outcome of the recent success of PPAs, the benefits of which should be also available to smaller entities. This would also serve to reduce RES support schemes and accelerate the commercialisation of existing RES generation.