The risk of a significant increase in electricity prices due to rise in CO2 emission allowance costs rested upon the economy for years. It has materialised this year. In addition, it coincided with the increase in coal prices. It will be definitely more expensive. How shall we live? - ask Polish industry representatives.
Domestic power production industry was and still is dominated by coal-fired power plants. According to PSE, hard coal-fired power plants in 2017 had more than 48 percent of share in the domestic power production industry, and brown coal-fired power plants had more than 31 percent. Such an energy mix translates into high CO2 emissions, and this costs money.
No reduced tariff
Power plants covered by the EU Emissions Trading System (EU ETS) must annually surrender CO2 emission allowances corresponding to their actual emissions. Until now, Polish conventional energy has benefited from the constantly declining number of free emission allowances. It is estimated that next year, as pointed out by the Jagiellonian Institute in this year's analysis of energy prices, this system will be exhausted.
The average production emission in Poland, according to the Jagiellonian Institute, is about 770 kg of CO2. In comparison, it is about 450 kg in the Czech Republic and 420 kg in Germany; these countries simply have lower carbon power generation sources than Poland.
The domestic energy mix did not have a negative impact on electricity prices for a relatively long time. Not only because power plants received a lot of CO2 emission allowances for free, but also because these allowances were cheap. Low CO2 prices did not encourage power industry to invest in low-emission energy sources. Therefore, Brussels started to seek changes in the EU ETS with an aim to increase the price of CO2 emission allowances.
A few amendments have been recently introduced to the directive on the EU emissions trading scheme. The emission reduction rate was raised from 1.74 percent annually in the years 2013-2020 to 2.2 percent annually from 2021. The volume of allowances addressed to the so-called IAS reserves in 2019-2023 (from 12 percent to 24 percent) has doubled, which resulted in a decrease in the supply of allowances.
CO2 prices began to grow following the release of an announcement of these changes. This year, the price has temporarily exceeded 25 euros. Bank Credit Agricole indicates that the price of these allowances on the European Energy Exchange (EEX) in September of this year amounted to 21.42 euros per tonne of CO2, which means an increase of 215.3 percent as compared to last year.
There are voices asserting that the sharp increase in CO2 prices may be the result of a speculative game, which provoked the transformation of emission allowances into a financial instrument (the effect of the MiFID II directive).
– We suspect that this has led financial institutions to enter this market on a large scale. The prices of emission allowances are rising as a result of speculation – said Boguslaw Regulski, vice-president of the management board of the Polish District Heating Chamber of Commerce (IGCP), in September.
The Chamber sent letters to the Polish Financial Supervision Authority and to the European Securities Markets Authority, which in fact were an application to examine the correctness of CO2 emission allowances quotations on European stock exchanges.
The sharp rise in the price of allowances coincided with the increase in hard coal prices, which in turn is a derivative of, among others, global business conditions for this fuel. In the first half of 2018, the average price of thermal coal in Poland was 14.3 percent higher than in the corresponding period of 2017 (according to LW Bogdanka's information).
– From the beginning of 2018, we can observe a strong increase in wholesale prices in the Polish electricity market. The average price of the next day energy supply contract (BASE) on the Polish Power Exchange amounted to PLN 276.24/MWh (+60.2 percent y/y). On the other hand, the price of the next year energy supply contract (BASE_Y-19) amounted to PLN 285.53/MWh (+71.5 percent y/y) - as indicated in the October analysis of economists from Credit Agricole.
There were also opinions that the increase in wholesale electricity prices was not only a result of external factors. At least a few experts believe that the reason for the increase in electricity prices in Poland is the model of domestic energy market.
– In my opinion the conditions of low liquidity of electricity trading at TGE forced the power industry to use the volatility of energy prices caused by the increase in prices of CO2 emission allowances to maximize prices and received margins. This is how I perceive the difference between the increase in energy production costs resulting from our analyses and the increase in prices on the stock exchange – said Henryk Kalis, chairman of Forum Odbiorcow Energii Elektrycznej i Gazu.
This year's increase in wholesale electricity prices is considered an earthquake and there have been numerous aftershocks.
The group of energy sellers has gotten really thin, the work to partially change the energy market model is underway, new mechanisms supporting energy-intensive users have been announced, the return of RES investments has improved. The increase in wholesale prices will be followed by an increase in retail prices, which may be an impulse for the development of the market for energy efficiency services.
– I believe that there are fundamental conditions to make reasonable investments in renewable energy, especially in the field of electricity. Business models can be closed without support systems – says Grzegorz Wisniewski, President of the Renewable Energy Institute.
Some of the trading companies could not handle the pressure of the increase of wholesale energy prices and they simply ceased selling energy. Maciej Kowalski, managing director of Enefit Polska, estimates that at least in some cases the issues experienced by energy sellers resulted from the fact that selling energy to customers left large open positions, not secured by wholesale purchases of energy or other energy costs components.
– When the prices increased, they either could no longer afford to purchase energy or they preferred to stop selling than to close positions and suffer losses. During the period of stable prices, some sellers did not pay much attention to how capital-intensive trade really is - emphasizes Maciej Kowalski.
In the first decade of October 2018, the government adopted a draft law that will, among others, increase the so-called exchange obligation. Electricity producers have the obligation to sell 30 percent of generated energy on commodity exchanges and regulated markets, and the law anticipates an increase of this obligation to 100 percent (the draft law is already in the Polish Parliament).
“An increase of the so-called exchange obligation up to 100 percent aims to improve market transparency and reduce sudden increases in electricity prices on the wholesale market. At the same time, due to improved liquidity and transparency on TGE and reduced impact on the price of participants with a strong market position, this solution will improve the position of customers on the domestic electricity market in the long-term perspective” – explained the energy department.
- Given the present ownership structure of the Polish energy market, the lack of an exchange obligation would be extremely dangerous because it could practically prevent independent companies from operating on the market. However, with a 100-percent exchange obligation, we practically kill the bilateral market based on the original manufacturer that generates energy on a large scale, that is all kinds of non-standard contracts – said Arkadiusz Zielezny, president of Polenergia Obrot.
It’s going to hurt
Energy prices are deregulated in the case of industry, and they are still approved by ERO in the case of ex-officio sellers.
– Taking into account the most frequently used energy purchase strategies in Poland, we believe that Polish enterprises will be affected by the increase in electricity prices at the beginning of 2019. According to our estimates, it will most probably increase by 50-70 percent as compared to last year – state economists from Credit Agricole in their analysis, estimating that with the indicated assumption of price increase, the dynamics of sold industrial output prices would increase by 0.9-1.2 percent at the beginning of 2019.
According to the Jagiellonian Institute, in 2018 the competitiveness of the Polish industry deteriorated significantly in comparison to its neighbours. In July, the cost of 1 MWh in Poland was around EUR 69 for a large customer, EUR 57 in the Czech Republic, and only EUR 38 in Germany. The energy-intensive industry itself also sounds the alarm. Perhaps one day, there will be solutions that would equalise the conditions of its operation with EU producers.
The deputy minister of energy, Tadeusz Skobel, in reply to one of the parliamentary questions (September 2018) announced that the government is working on several solutions aimed at preserving the competitiveness of Polish industrial customers. One of them is the introduction of compensation payments to cover the costs of indirect CO2 emission allowances, i.e. the increase in electricity prices resulting from the increase in CO2 prices.
As regards the regulated prices of electricity for households, Maciej Bando, the President of the Energy Regulatory Office, points out that the debate concentrates mainly on electricity prices, and that distribution costs are also an important part of the accounts, and these latter ones will most likely increase in 2019.
– An increase in distribution prices is planned, that's true. Its amount is unknown, because it will result from the applications submitted by distribution companies. A new-old item of the renewable energy charge, which this year still amounts to PLN 0/MWh, will definitely appear. We are calculating it right now, but it will certainly be a few zlotys, I think below PLN 10/MWh. For that reason, distribution prices will increase – said Bando.
The immediate future is therefore quite clear, but due to the lack of a new energy policy, the question that torments the industry remains: what will happen in the next years?
The latest report containing a long-term forecast of wholesale electricity prices in Poland, prepared by the consulting company Enervis Energy Consultants from Berlin and the Warsaw law firm Solivan, shows a steady increase in wholesale prices for the next decade.
In 2017, the Forum prepared a report analysing the economic, social and environmental effects of implementing four different scenarios of change. In each scenario, there was an increase in wholesale electricity prices to even more than 100 euros in 2050 – the lowest price can be seen in the renewable energy scenario.
We should soon find out how the current authorities intend to respond to the challenges of climate and energy policy. After all, that is precisely what the problem of electricity prices (CO2 costs) is about. By the end of this year, the draft of the first national integrated plan for energy and climate should be presented. It will contain, among others, the declared national share of renewables in energy consumption in 2030.
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