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Capacity market fee - booster for energy transition


From 1st January 2021 (not as previously declared from 1st October 2020) electricity consumers in Poland will become CAPACITY MARKET FEE payers. Who it concerns, what it means, how it will be calculated and whether it can be avoided - the first in a series of articles on the capacity fee.

 

Companies affected by the COVID-19 face a new challenge. Most likely, from 1/1/2021, the costs of electricity distribution services in Poland will increase significantly. The decision of the President of the Energy Regulatory Office (ERO), which is to be taken by 30th November 2020, will explain a lot. Until then, the President of ERO is to inform which capacity market fee rates will apply in selected hours of the day falling within the hours of peak power demand. The rates are to be differentiated for the quarters of the 2021 delivery year. On the top, today, 30th September 2020, on the Government Legislation Center website, a draft regulation of the Minister of Climate on the detailed method of charging the capacity market fee has been published.

 

What is the capacity market fee?

 

The capacity market fee is the cost for the available capacity to be paid by all electricity consumers in Poland. For many years in Poland we have been dangerously approaching (and sometimes exceeding) the upper limit of available capacity in the power system. The solution to solve the problem of insufficient capacity in the system is an additional payment for new and modernization of existing generation units. These sources receive remuneration in return for the power they put at the disposal of PSE (Polskie Sieci Elektroenergetyczne – grid operator). By means of a tender, PSE contracts the electricity capacity required for the reserves, and the related cost is divided among all electricity consumers. These costs will be calculated by PSE and transferred in the DSO distribution tariff to the end user as the capacity market fee. It will appear on the bill issued by the DSO as a component of the distribution service for each end user.

How to calculate the cost of the capacity fee for your company?

Every year, the President of the ERO will set and publish not only the capacity market fee rates for the following year, but also the peak power demand hours in the system.

 

The breakdown will be separate for each quarter of the delivery year as the peak hours change in each quarter; this is especially related to the afternoon rush hours.

 

Art. 70. 1. of the Capacity Market Act states that the capacity market fee rates are set separately for various types of end-users:

 

  • for households - as a monthly rate, depending on the annual electricity consumption,
  • for other end users - the rate at selected hours of the day.

For 2021, the President of ERO will publish the rates and selected hours of the day for the hours of peak power demand in the system, designated separately for the quarters of the supply year until November 30, 2020. This is very late, considering the fact that already now many companies are budgeting energy at least for next year. According to the draft regulation, the President of the ERO for the following years is to publish this information in the Bulletin of the Energy Regulatory Office by 30 September each year.

 

As for the rates, already in 2019 the Ministry of Entrepreneurship and Technology announced that the average rate of the capacity market fee is estimated at 45 PLN/MWh. Probably the fee will be different in individual hours of the day. Thus, in the case of companies producing mainly during peak hours, this fee will be much higher during these hours.

There were discussed two variants for peak hours:

1. From the Ordinance of the Minister of Energy of July 18, 2018 on the performance of the capacity obligation, its settlement and demonstration, and concluding transactions on the secondary market (http://isap.sejm.gov.pl/isap.nsf/download.xsp/WDU20180001455 /O/D20181455.pdf) that the Period of Danger is 07:00 - 22:00.

 

2. Peak hours in line with the DSO tariff (e.g. PGE Dystrybucja /Warszawa-Teren ) for a B23 tariff.

The draft ordinacne on the detailed method of charging the capacity market fee published by the Government Legislation Center confirms that the option 1 is valid and the period of danger may last up to 15 hours a day.
  • Hours: 7:00 – 22:00.
  • Average capacity market fee: 45 PLN/MWh.
  • Since the capacity market fee in the off-peak hours is PLN 0, the average rate between 7:00 and 22:00 may be 72 PLN/MWh.
Let's see the cost and the actual average price of the capacity market fee for a company that consumes 37.5 GWh of electricity annually at the "peak" profile.

 The cost of the capacity market fee: 1,98 million PLN

Average 24/7 capacity market fee: 53 PLN/MWh

Electricity price comparison for enterprises in Poland and Germany
What can the electricity bill of companies using more than 10 and within 100 GWh per year look like compared to German companies? Taking into account possible exemptions and discounts, the estimated price for 2021 may be as follows:
The average capacity market fee rate of PLN 45/MWh for the electricity distribution bill will significantly change the picture:
The cost of the capacity market fee for enterprises is very high. In the next article written with Piotr Kolasa, we will present:
  • the legal issue of the capacity market fee. We will answer the question whether it is possible to obtain an exemption from this fee.
  • What are the possibilities of limiting the impact of the capacity market fee on entrepreneurs?
Have you already set up the capacity market fee in your company's budget for Poland for 2021?
Pursuant to the amendment to the Act of December 8, 2017 on the capacity market (i.e. Journal of Laws of 2020, item 247, as amended), a new obligation enters into force on January 1, 2021. The capacity market fee will be an additional cost on your electricity bill. From the point of view of electricity consumers, the most important element is how much the fees for electricity consumption will be increased. Moreover, with the assumptions for the Polish capacity market, it was planned to implement exemption for industrial consumers and such a solution was included in the act. Almost three years after the adoption of the Act on the Capacity Market, Poland has still not received a notification from the European Commission regarding a possible reduction in the capacity fee.

What about the reductions in the capacity fee for companies?

The capacity market mechanism itself was notified by the decision of the European Commission on February 7, 2018 on the compatibility of state aid with the EU internal market, which is related to the remuneration provided for in the Capacity Market Act for the performance of the capacity obligation. However, the capacity fee reduction mechanism was split into a separate notification procedure. Such a request was submitted by Poland at the stage of talks with the European Commission, as a result of which, in April 2020, the Polish government received information from the EU Competition Commissioner Margrethe Vestager that the European Commission would not accept the proposed solution in the form of a capacity fee reduction for industrial recipients . One of the arguments of the European Commission was parameters for the capacity market fee reduction. And this was the biggest concern. As a reminder, in the current wording of the Act, industrial customers will be able to take advantage of the following discounts:
  • 80% - if the electricity consumption intensity factor is not less than 3% and not more than 20%;
  • 60% - if the intensity of electricity consumption is more than 20% and not more than 40% - it is 60%;
  • 15% - if the intensity of electricity consumption is more than 40%.

The above mechanism is a reflection of the reduction for industrial recipients applied in the Act of February 20, 2015 on renewable energy sources (Journal of Laws of 2020, item 261).

 

For many companies which could take advantage of the capacity fee reduction, the lack of notification is a huge problem. The operating costs of industrial plants will increase several times, which will reduce the competitiveness of Polish industrial plants on the European and global market. Therefore, Polish entrepreneurs hope to change the parameters of the capacity reduction so that its new shape will be approved by the European Commission.

What does the lack of notification by the European Commission mean for industrial energy consumers?

From a legal point of view, Art. 104 of the Capacity Market Act is the so-called the stand still clause, which means that a certain part of the provisions does not apply until the decision by the European Commission is issued. This also applies to the provisions on capacity fee exemption.

 

What if the European Commission does not approve Poland's proposal to change parameters of the capacity market fee exemption? In our opinion, there are several solutions that, in accordance with applicable law, allow to reduce the financial burden with the capacity market fee. Below, we present the mechanisms the implementation of which will guarantee a reduction in the fees related to the capacity market fee.

 

 It is worth recalling that in March 2019, the British company Tempus Energy appealed against the decision of the European Commission regarding the approval of the capacity market mechanism in Poland. It is true that the Polish Electricity Association, which defends the Polish solution, points out that the complainant's allegations are unfounded. However, it cannot be guaranteed that the EU Court of First Instance will share its position. From the information we have, the capacity market is not at risk. However, from a legal point of view, the revocation of the notification of the European Commission regarding the capacity market mechanism in Poland may lead to a situation that collecting the capacity market fee will be unfounded, because the capacity market fee is to be used to remuneration for the performance of the capacity obligation, which may be suspended.

How to act in terms of reducing the impact of the capacity fee on our costs?

If there is no intervention by the Polish government, the costs of purchasing electricity in peak hours between 7:00 a.m. and 10:00 p.m. from January 1, 2021 will increase significantly. This should be an incentive to change the energy consumption profile of end users.

 

Below are some basic actions that we can take to better prepare to limit the impact of the capacity fee on our budgets:

 

Below we have listed some options that can be considered to reduce the impact of capacity market fee on our budgets:

1. Energy efficiency audit and review of all important processes in the company in terms of the possibility of reducing consumption in peak hours.

 

2. In the long term, it is certainly worth analyzing the possibility of installing an alternative energy source that will allow us to reduce energy consumption from the grid during peak hours. Here I mean investment in photovoltaic panels on the roofs, walls of our buildings or a PV farm on the owned land. Investments in onshore wind farms are effectively reduced by legal issues, but this may change. It is worth acting optimally, but also strategically. I recommend to prepare economical analysis - whether to buy the installation yourself or use solutions such as on-site corporate Power Purchase Agreement (cPPA) or Power Lease Agreement (cPLA). In the case of cPPA or cPLA, I especially recommend obtaining external support. Developers often want to talk to companies that know all aspects of this type of solutions well - it saves time both for the developer and the end consumer, and above all, a much higher level of understanding of a subject that is quite complicated in terms of legal, technical and procurement point of view.

 

3. Calculation of the profitability of building an energy storage in order to reduce the ordered capacity ("peak shaving") and consumption in peak hours. Higher energy costs during peak hours will make the difference between daytime and night-time prices even greater. The greater amplitude of price fluctuations between day and night can significantly improve the profitability of such projects.

 

4. Cogeneration systems can be an excellent alternative to energy from the grid. All the more so as Poland's energy transformation will still take time and the impact of the prices of CO2 emission allowances is inevitable. In your business cases, you should definitely take into account the volatility of natural gas prices. Currently they are at very attractive levels, but this may change. CAPEX and OPEX subsidies - subsidies and a system of 15-year guaranteed FiT and FiP tariffs also speak for themselves.

 

5. DSR - Demand Side Response solutions - is an additional opportunity to generate income that reduces the capacity market fee effect. DSR may be interesting for companies who can temporarily limit capacity from the grid, e.g. by replacing electricity consumption from the grid with their own generation source during a call to limit consumption from the grid, or by shifting power consumption to other hours of the day.

 

6. When we are looking for savings on energy costs, do not forget to implement procurement and energy consumption management systems. Good consumption monitoring will tell us which devices require optimization (especially those operating at peak hours). However, this is only one side of the coin. Consumption management systems supplemented with energy price control will allow you to take full advantage of market opportunities and budget predictability for the coming years. In the future, such a combination will allow us to dynamically manage the change of energy supply sources: when energy from the grid is cheap, we will buy from the grid, while expensive - we will use our storage facility or cogeneration.

If we don't know which solution is best for our company, let's look for companies that offer a technology overview. You will then learn what it is worth investing in in your specific case, taking into account technical, economic and legal aspects. Company's goals will be very important here, so it is worth thinking about creating a long-term strategy, taking into account the procurement aspect as well as the sustainability (Europe's climate goals until 2050).

 

We will see, if the Capacity Market Act which in this form was undoubtedly developed in order to directly support large stable and centralized generation units (indirectly the coal mining sector in Poland), will have a positive side effect in the form of the development of a decentralized system based on local sources of production and energy storage units.

 

We will observe the market and now we encourage you to conduct individual analyses and reliable calculations and assess whether it is worth investing in your own source or entering into a relationship with companies offering other interesting solutions ensuring competitiveness for our company.

Authors: 

 

Piotr Kolasa 

 

Bartosz Palusiński 

Photo by Max Lederer on Unsplash