Electricity Markets The Polish Experience Challanges of the Unification

1
Electricity Markets The Polish Experience
Challanges of the Unification

• Tomasz Siewierski, PhD, Wladyslaw Mielczaski,
  Prof.
• The Electricity Market Research Group
• Technical University of Lodz, Poland

2
Contents of the Presentation

• Overview of the Polish power sector
• EU accession consequences of the unification
  market liberalization
• Regulatory framework - historical overview and
  current situation
• Structure and operation of electricity market in
  Poland
• Privatization, ownership model and competition
  enhancement
• Energy and environment
• Renewable energy sources (regulation and finance)
• Environment protection (technical issues and
  financial outcome)
• Cross-border electricity trade in Central Europe
  enabling pan-European market
• Stranded and emerging problems
• PPA and reserve capacity
• Identity problem looking for the proper
  position of TSO, DSO and the Regulator
• Evolution of market design freedom of trade
  (toward real-time efficient central market with
  parallel local markets) and freedom of purchase
  (2007 TPA for household customers)
• Security of supply Polish strategy for the
  energy sector until 2025 in relationship to EU
  policy
• Business opportunities - what we offer and what
  we can do together

3
Overview of Polish Energy Sector
Source PSE-Operator S.A.
4
Overview of Polish Energy Sector
Source PSE-Operator S.A. 2004
5
Polish Energy Sector Pros Cons
6
Polish Energy Sector Pros Cons
7
Production Cost ver. Energy Price
8
Energy Volume Allocation
9
Market Liberalization

• Break of the wall(1989)-beginning of the
  political changes in Poland. Go WestEU access
  as the nation strategic goal for the next 10
  years
• Market Discussions and unsuccessful attempts to
  reform and liberalize power sector (1993-1998)
  within existing regulations.
• Legislation. (Lets do it by book). 10 April
  1997 - Polish parliament votes the first version
  of the Energy Act. Foundation of Energy
  Regulation Office.
• Investments. Starts first entirely private
  investment in the Polish power sector (1998).
  CCGT unit in Nowa Sarzyna commissioned in 2000
  (Enron)
• Privatization March 1999 30 shares of PAK
  power plant acquired by private strategic
  investor
• Market Development and implementation of new
  electricity market design. December 1999 Polish
  market goes live.
• June 2000 Polish Power Exchange starts day ahead
  energy auctions
• Privatization Vattenfall acquires 33 of the
  largest distribution company GZE S.A. (2001)
• Major modifications in the market operation
  2001, 2003 (no changes in the market structure).
• Privatization February 2003 ZE Polaniec power
  plant becomes totally private enterprise
  (Electrabel, Belgium)
• Polish Independent System Operator (PSE-Operator)
  liberalizes access to the cross-border
  transmission capacities (yearly, montly, daily
  auctions) March 2004
• May 2004 - Poland become the EU member state
• November 2005 New electrictity market concept
  curently under discussion, privatization
  continues, and lights stay on

10
Legislation - Milestones

• Directive 96/92/EC concerning common rules for
  the internal market in electricity 19 December
  1996 and Directive 2003/54/EC concerning common
  rules for the internal market in electricity, 26
  June 2003
• Kioto Protocl, 16 February 1997 (16 February
  2005)
• Directive 2001/77/EC on the promotion of
  electricity produced from renewable energy
  sources in the internal electricity market, 27
  September 2001
• Directive 2001/80/EC on the limitation of
  emissions of certain pollutants into the air from
  large combustion plants, 23 October 2001 and
  Directive 2001/81/EC on national emission
  ceilings for certain atmospheric pollutants, 23
  October 2001
• Regulation (EC) No 1228/2003 on conditions for
  access to the network for cross-border exchanges
  in electricity, 26 June 2003
• Directive 2004/101/EC establishing a scheme for
  greenhouse gas emission allowance trading within
  the Community, in respect of the Kyoto Protocols
  project mechanisms, 27 October 2004, (Directive
  2003/87/EC establishing a scheme for greenhouse
  gas emission allowance trading within the
  Community, 13 October 2003, Directive 96/61/EC
  concerning integrated pollution prevention and
  control, 24 September 1996)
• Directive 2004/8/EC on the promotion of
  cogeneration based on a useful heat demand in the
  internal energy market, 11 February 2004

11
Directives 96/92/EC 2003/54/EC

• The member states have to ensure that the power
  companies operate in accordance with the
  principles of this Directive (the electricity
  market essentials).
• This means that the member states have to adopt
  the principles of the Directive to their national
  regulations, such as Energy Laws and ordinances
  and other regulations.
• Because of the Directive, the member state may
  impose on the power companies certain obligations
  in the general economic interest and public
  obligations which may relate to security of
  supply quality and the prices of energy, as well
  as to environmental protection.
• The legal regulation in the European Community
  countries should allow for and guarantee equality
  of access for EU electricity companies to
  national consumers.
• The main principle of the electricity market is
  the separation of the electricity trade, which
  can be carried out in a competitive market from
  electricity transport, which due to a natural
  monopoly and remains under the regulation of the
  Energy Regulatory Authority or a similar body.
• The arrangement of two separate agreements and
  the discussion with energy traders and a local
  distribution monopoly to enter into an agreement
  for energy transport could be a difficult task
  for many customers, hence they would decline to
  enter the electricity market.
• Two main levels of energy trade comprise
  wholesale and retail markets.
• The wholesale market includes power producers,
  energy traders, power exchanges and the balancing
  market operated by the Transmission System
  Operator (TSO).
• The retail market comprises the Distribution
  System Operators (DSO) selling energy to tariff
  (T) and TPA customers.
• Energy traders have direct access to energy
  producers and TPA customers.
• From 1 July 2007 DSOs should not be involved in
  electricity trade.

12
Market Structure and Operation
13
Privatization and Consolidation
Ongoing privatization. Installed power 1742 MW.
Up to 85 shares for strategic investor, 15 for
employees. Endding 12.2005
Power Producers
Ongoing privatization. Installed power 647 MW.
Up to 85 shares for strategic investor, 15 for
employees. Endding 12.2005
Partially privatized (1999, 40, Elektrim S.A).
Installed Power 2323 MW. The Treasury is looking
for a new strategic investor to sell another 50
Ongoing privatization. Installed power 2820 MW.
Up to 40 for strategic investor , 40 public
offer. I Stage up to 50.Endding 02.2006.
Entirely privatized.(2000,25, 2003 100,
Electrabel). Installed power 1800 MW.
14
Privatization and Consolidation
Consolidated (8). Market share 16 (16.1 TWh).
Privatization method is not decided. Possible
vertical integration with BOT holding group
Distribution companies
Consolidated (5). Market share 14 (14.1TWh).
Privatization metod is not decided. Probable
public offer (share
Partially privatized without consolidation (85,
2002 RWE Plus). Market share 5.3 (5.3 TWh).
Ongoing consolidation (6-1). Market share 19 (19
TWh). Privatization metod is not decided. One
DisCo left the group for veritcal integration
Not consolidated. Market share 7.2 (6.5 TWh).
Privatization method is not decided. Possible
vertical integration with BOT holding group
Consolidated (5). Market share 13.1 (13.3 TWh).
Privatization metod is not decided
Partially privatized without consolidation (33,
2000, 75,2003, Vattenfall). Market share 11.3
(11.5TWh). The Treasury is going to sell
remaining shares to Vattenfall soon
Consolidated (5). Market share 14.5 (14.7TWh).
Privatization method is not decided. Possible
veritcal integration with PKE holding group
15
Directive 2001/77/EC Target 2010
Fulfillment 1.3
16
Renewable Resources in Poland
17
Renewable Supporting Scheme

• Public financial support from the state (grants,
  loans) for small scale projects (private and
  public)
• Renewable energy quota defined for end consumers
  and imposed on trading companies
• Green certificate system in operation
• Special rules for wind power operation in the
  system guaranteed in the Energy Act and written
  in the ISO Transmission System Code
• Wind power provisionally excluded from system
  balancing until 2010 (Energy Act). Detailed
  regulations are still under discussion
• Network connection fee reduced by half

18
Green Certificates
Energy (Energy Market)
ERO
RES
Power Exchange (PolPX)
Central Register (PolPX)
LCP
Trader/DisCo
Power Exchange (PolPX)
Final Customers
Certificates
19
Renewables
20
Renewables - Target 2010
Beginning of green certificate trade. Buy-out
price 240PLZ/MWh
Production from renewable sources in the first
half of 2005 2050MWh (2)
Poland introduces biomass co-firing
21
SO2 Precipitation 1980-2020
2020
22
New Emission Standards for LCP

• Regulations Directive 2001/80/WE very tough
  standards for new plants and tough standards for
  old plants
• In the Accession Treaty Poland negotiated
  derogations for LCPs responsible for 30 of
  annual emission (SO2, NOx) or 2.35 (dust)
• LCPs included in the derogations must satisfy
  total emission limits imposed on the whole group
• LCPs included in the derogations must not work
  more than 20000 hours in the period 2008-2015
• Beyond 2015 there is choice decommissioning or
  to satisfy emission standards as for new plants
• Solution National Emission Reduction Plan
  (KPRE)

23
CO2 Emission
Target Kioto 2012 (- 6)
Reserve (131)
24
SO2 Emission from Power Plants
25
NOx Emission from Power Plants
26
Dust Emission from Power Plants
27
CO2 Emission from Power Plants
28
Carbon Prices Driving Forces
Source Deutsche Bank
Source Deutsche Bank
Alternatives - Hydro
Source UCTE
Source Deutsche Bank
29
Regulation EC No 1228/2003

• Regulation (EC) No 1228/2003 introduces auctions
  to trade the capacity of intersystem connections
  and setting fair rules for cross-border exchanges
  in electricity and in this way to enhance
  competition within the internal electricity
  market.
• This requires the introduction of a compensation
  mechanism for cross-border flows of electricity
  and the implementation of harmonized principles
  on cross-border transmission charges and the
  allocation of available capacity of cross-border
  transmission lines.
• The transmission system operators receive
  compensation for cost resulting from the
  international electricity flow through their
  systems.
• This compensation is paid by the operators of
  national systems from which cross-border flows
  originate and the systems where those flows end.
• The compensation is paid on a regular basis.
  Ex-post adjustments of compensation is also made
  where it is necessary.
• There are auctions led for a period of Year,
  Month , Day (hourly). The best solution is the
  introduction of the coordinated auctions (Poland,
  Czech Republic, Germany).
• The Regulations sets targets for cross-border
  transmission capacity strengthening
• Problem to solve the existing contract
  allocation, cost of dispatch to obtain required
  capacity (export/import constraints).

30
Cross-border capacity and trade
31
Daily Auctions 2005
32
PPX-EEX vs. Cross-Border Trade
33
Network Constraints Must Runs

• In liberalized electricity markets strictly
  economic criteria of generating units dispatch
  would compromise security of the power system
  operation so uneconomic units have to be
  called on to alleviate network constraints and
  maintain system reliability criteria
• There are several methods of constraints
  management that have been more or less
  successfully adopted in the open market. The
  design of Polish market includes two of them
  nodal constraints with Reliability Must Run
  contracts (RMR) and counter flow purchase in the
  balancing market.
• Although the methods are very efficient and
  reliable, but
• they are usually expensive,
• they could results with market abuse using
  local market power,
• they do not create market incentives for the
  construction of new generating units, in
  critical nodes of the network
• they do not stimulate customers behave with
  price signals

34
Network Constraints Must Runs

• When now the network constraints problem in is
  solved thanks to high level of PPA, as soon as
  long-term contracts will be terminated or the
  total volume of PPA contracts will gradually
  decline, the problem will bring more troubles to
  all market participants
• The implementation of new approach, Localized
  Marginal Price (LMP) method is now at the stage
  of discussion and consultation. Application of
  LMP would result with dramatic differences in
  transmission prices in rather close localities
  difficult to justify to the final customer

35
Network Constraints Must Runs
36
Ancillary Services

• The acquisition of ancillary services in Polish
  electricity market is based on yearly auctions
  organized by TSO (single-buyer market)
• TSO is (was) responsible for preparation of the
  following services primary reserve, secondary
  reserve, (hourly reserve), restoration reserve,
  long-lasting reserve, voltage and reactive power
  regulation, black start
• Since in normal network conditions the primary
  reserve volume is between 1000 and 1500 MW (when
  3000MW for the wholeUCTE), Polish system plays
  crucial rolein the control of the UCTE area.
• Increasing share of wind power requiresbigger
  volume of reserves of higher qualityand smart
  control
• Single-buyer market rules are in favourof TSO,
  when we come to pricing of ancillary services.
  Short term market and localmarkets should
  improve the situation

37
Long-term PPA Problem

• In the nineties Polish power producers had to
  take credits worth 5 bln to finance the
  modernization and environment protection
  projects, with maturity up to year 2020
• Credits provided by nearly 30 national and
  international banks were secured with long-term
  PPA between producers and the Operator
  (single-buyer)
• All investments has been already successfully
  completed
• Production capacity engaged in PPA endanger
  competitive market benefits (lower supply, price
  capping, low HHI index, prohibited state support)
• Solution compensation for power producers,
  which agree to terminate their PPA
• Consultations in Bermudian triangle
  EC-Government-Power Producers (creditors)
• Major problems amount of compensation and
  payment schedule, time is running out, EC is
  running out of patient, Polish power setor needs
  money for repowering

Polish Government
European Commission
Power Producers
38
Third Part Access

• From 1 July 2007 all electricity users including
  households will be eligible to purchase
  electricity in a competitive market.
• When a customer is entering the electricity
  market he has to arrange two agreements.
• The first one is an agreement on energy purchase
  which can be arranged with any of many energy
  traders.
• The second agreement is to be signed with a local
  DSO and determines the conditions of energy
  delivery through the distribution and
  transmission systems.
• The third action to be taken is the installation
  of an electronic meter allowing for the
  measurement of electricity use in 15 minute
  periods.
• This leads to an additional cost which in many
  case is difficult to cover by bargaining in the
  electricity market.
• The progress in electronic meters will allow
  their installation for a few dozens Euros in
  every households.
• In some countries the administration imposes the
  regulation on power supply companies to equip
  every customer with an electronic electricity
  meter.

39
TPA in Polish Electricity Market

• Nearly 300 licensed traders active in the
  electricity market
• Top 20 traders sold 35 TWh electricity
• 30 large customers active in the market
• Very low level of supplier switching
• Barriers
• long term contracts (PPA, MIE)
• tough market rules (closed position, traders
  cant trade between them)
• tough requirements concerning metering devices
• no general regulations for TPA implementation in
  local markets (balancing and settlement in
  distribution networks)
• cross-subsidising between different tariff
  groups (problem of separation of transmission
  distribution business activities from supply
  trade)
• very complicated switching procedures
• The real test of TPA will be in July 2007 with
  13.3 mln new customers

40
Protecting Small Customers

• Domestic customers and small enterprises with
  fewer than 50 employees and with an annual
  turnover not exceeding EUR 10 million should
  enjoy special universal services, that is, the
  right to be supplied with electricity at
  reasonable and easily and clearly comparable
  prices.
• To ensure the provision of the universal
  services the Directive indicates that the member
  state may appoint a supplier of last resort. It
  is not clear what the obligation of a supplier of
  last resort should be and how such companies
  could be appointed.
• For small customers it could be too difficult to
  bargain for low electricity prices and arrange a
  separate agreement for electricity delivery with
  a local distribution monopoly.
• What such small customers really need is a
  supplier who would be able to offer complex
  services i.e. to sell electricity and to arrange,
  on behalf of a customer, an agreement for
  electricity delivery with the owner of the
  network to which the customer is connected.
• A provider of these complex services can be
  licensed by the Energy Regulatory Authority.
• Strong competition in electricity market may
  cause that some electricity traders will declare
  insolvency or one day they will not be able to
  deliver electricity in accordance with the
  agreement.
• In other markets supply can be stopped and the
  customer would be forced to find another vendor.
  However, the electricity market is different. We
  cannot stop electricity supply to customers
  despite them having lost their supplier.
  Customers are connected to a network and still
  consume electricity despite the fact that no one
  sells electricity to them.
• To handle such a situation a Supplier of Last
  Resort is necessary. His duties are to supply
  electricity for some period, for example 3-5
  months, to customers who for any reason, have
  lost their suppliers.

41
TSO and DSO

• TSOs have to be separated from other businesses.
  They should operate as entirely regulated
  businesses which means that their income results
  from transmission tariffs approved by the
  regulation authority.
• The management of the transmission network in
  the market environment requires the development
  of computer software to handle millions of pieces
  of data coming from balancing market
  participants.
• The optimization of commitment and dispatch in
  15 minute periods is a big challenge for many
  operators, as traditionally they operated using
  daily or monthly dispatch.
• The main tasks of DSOs are similar to TSOs, but
  they are not responsible for system security.
• The unbundling of the DSO has to be completed by
  1 July 2007. It will create new structures in the
  distribution systems.
• There will be four categories of energy companies
  operating in a place of the current distribution
  companies Distribution System Operator
  responsible for the maintenance of the grid,
  energy suppliers carrying out electricity trade,
  services company responsible for service of
  energy customers and electricity meter operators.
  
• The growing penetration of Distributed
  Generation is a big challenge, both for TSOs and
  DSOs

42
Market Evolution or Revolution

• The intra-day market decrease volume risk and
  cut system balancing cost
• The energy only market suffers from duality
  problem. Ancillary services have to become part
  of the market.
• The development of Distributed Generation (DG)
  depends on smooth adaptation to the market rules,
  including physical and trade balancing of the
  energy generated.
• The power system operation is driven by market
  rules, which impose the responsibility on each
  party connected to the grid to keep its
  generation or energy consumption due to the
  schedule based on the trade.
• When such rules are directly subjected to DG,
  the cost of DG balancing can be significant.
• The implementation of electricity market rules
  to DG can be achieved by the development of local
  balancing areas, which also become Local
  Balancing Markets (LBM). Such markets using
  adequate rules for trading imbalances reduce the
  cost of DG operation.

43
Security of Supply - Directive

• The Directive tries to address this issue by
  indicating two main procedures for the generating
  capacity construction.
• The first procedure is called an Authorization
  procedure and its duty is to set up transparent
  and non-discriminatory criteria for every one who
  wants to invest in the development of generating
  capacity whose investment satisfies technical and
  environmental criteria.
• The procedure is based on the assumption that
  economic signals will attract investors to the
  power generating industry.
• If the first procedure does not work and the
  security of supply is declining, the national
  authority can call for tenders to construct new
  generating units.
• However the problem is that if there are no
  economic signals to invest in generating
  capacity, so few investors are keen on entering
  the tendering procedure without extra
  encouragement such as special tariffs or the tax
  reduction.
• If such encouragement is given the national
  regulatory authority, which called for tenders,
  brakes the regulations on forbidden state aid and
  the non-discriminatory treatment of new and
  existing power producers.

44
Polish Energy Policy unitl 2025

• The primary targets for the whole energy sector
  the sustainable development and the fuel
  diversification (both type of fuel and fuel
  supplier)
• Increasing energy demand should be satisfied by
  domestic power plants, so we need to start the
  repowering
• Hard and brown coal will remain the key fuel,
  but gas firing should increase to meet
  environment protection standards
• Decreasing energy intensity of goods at the
  stages of designing, manufacturing, use, and
  disposal. Increasing the efficiency of energy
  generation. Decreasing energy intensity of
  industrial processes. Implementation of
  management systems for energy demand
• Maintaining the stable support mechanisms for
  the use of renewable energy sources.
• Creation of competitive fuel and energy markets.
  Gradual reduction of the state bodies direct
  influence on the operation of energy companies,
  but maintaining the ownership supervision of the
  State over entities in the possession of
  transmission infrastructure, including
  transmission systems operators (TSO)

45
Security of supply - Demand
46
Security of supply - Repowering
47
Repowering - New Investments
New unit Patnów II 460 MW, lignite
New unit Belchatów 13, 810MW, lignite
New unit Lagisza II, 460 MW, hard coal
48
Primary Resources Use 2025
Source National Energy Policy 2025
49
Conclusions-General

• The electricity market is to show customers the
  real cost of scarce resources (oli,gas, coal) and
  help to optimise their consumption
• The market can not be established without strong
  political support.
• The market requires careful design of the market
  structure and rules.
• The market rules should be introduced by the
  Energy Law and the secondary legislation.
• The market has also technical requirements
• The implementation and the market operation have
  to be monitored
• The market introduction should not compromise the
  security of supply.
• Large market players can abused any market
  rules. The worse is when such a player is a the
  TSO as it is able to favourite its own trade.
• Unbundling is necessary.
• Market monitoring by the Energy Regulatory
  Authority should be in operation.

50
Conclusions-Poland

• The cost of the network constraints is
  socialized and covered by the transmission
  charges. This cost has significantly increased
  when the balancing market started its operation.
• The cost of imbalances is very high impacting the
  development of distributed generation.
• Market monopolization by network operators has
  occurred, exploiting flaws in the Energy Law and
  resulting in a situation in which less than 1 of
  customers changed their suppliers.
• The Power Exchange established in 2000, a year
  before the Balancing Market started its
  operation, has a very small turnover resulting in
  poor liquidity and a lack of the market reference
  price.
• The Polish Power Grid Company as the largest
  player and the transmission system operator
  monopolizes the market
• Polish market design is good, but now market
  participants expect more (freedom).

51
Market Group

• We are one of the leading academic groups in
  Poland with 15 years of experience working in the
  area of electricity market design and modern
  power system operation.
• Profesor Wladyslaw Mielczarski (head of the
  group), Andrzej Kanicki, Tomasz Siewierski,
  Andrzej Wedzik (team leaders and project
  leaders).
• The staff is actively involved in the design and
  implementation of the Polish electricity market,
  proposing market rules and operation procedures
  for commitment and dispatch of generating units
  in the balancing market
• We hold two annual conferences The European
  Electricity Market - Challenge of the
  Unification (www.eem06.p.lodz.pl and The Forum
  on the Application of Information Technology in
  the Power Supply Industry
• The research is carried out with the
  collaboration of the power supply industry
  companies including the Polish Transmission
  System Operator, power producers BOT and PKE and
  Distribution Companies. Many research projects
  are supported by the State Committee for
  Scientific Research and commercial partners. The
  project results have led to the many practical
  implementations allowing for the development of
  the modern applications in the power supply
  industry.

52
Thank you for the attention Questions?

• Tomasz Siewierski
• Institute of Electrical Power Engineering
• Technical Univeristy of Lodz,
• ul. Stefanowskiego 18/22, 90-924 Lodz, Poland
• t.siewierski_at_p.lodz.pl
• Phone [phone]), Fax [phone]