The role of the President of URE in the process of price and tariff setting in the electricity market
In the last quarter of each year, the regulator undertakes proceedings to approve electricity tariffs for the subsequent year, as calculated and submitted by distribution companies and last resort suppliers (members the PGE, Tauron, Enea and Energa Groups) providing services to the vast majority of electricity consumers in the country.
However, the President of URE also conducts such proceedings when entrepreneurs request a revision of the tariff being in force in a given year. This right has been exercised in recent weeks by three energy suppliers that have applied to the regulator for an adjustment of current prices for electricity supplied to households.
Due to the exceptional geopolitical situation that has continued for several months, energy prices invariably agitate all market participants. Since the President of the Energy Regulatory Authority has a specific and instrumental role in the process of setting electricity prices, the scope of authority granted to the regulator by the law makers should be explained.
Companies calculate costs and design tariffs to be presented to the regulator
Both suppliers (trading companies) and distribution companies calculate their costs and then translate these into electricity prices and charges for the delivery to final consumers. The so-calculated tariffs are submitted to the regulator for approval. This applies both to tariffs for the coming year and to changes to the tariff being currently in force.
-It is up to the companies to decide if and when they apply to the regulator for a revision of the tariffs. All costs taken for the calculation of these tariffs are also determined by the entrepreneurs - points out Rafał Gawin, President of URE.
What are justified costs?
In the course of the tariff proceedings, the President of URE examines whether the tariffs proposed by the entrepreneurs are in line with all legal requirements and reflect justified costs only.
- Justified costs are not the same as costs in accounting terms - explains the Authority's President. - In tariff proceedings, we are always guided by what is happening in the market environment and compare companies with the same business profile.
This means that the regulator, when estimating the reference price, takes into account all the risks, but also the opportunities and possibilities that the company in question had to purchase electricity at a competitive price.
- We analyse each situation case by case and, in the event that a company becomes less efficient, we assess the reasons for this and whether the negative effects were avoidable - notes Rafał Gawin.
The regulator therefore guards the tariff process by ensuring that the final prices paid by consumers reflect only the justified costs of energy companies and are adequate to current market conditions.
Therefore, as long as the President of URE is not convinced that a given tariff level balances the interests of energy companies and consumers, taking into account current market conditions and the economic situation of companies, tariffs cannot be approved.
What are the components of the electricity bill?
The total amount of the electricity bill is made up of the cost of purchase and distribution (transport). The President of URE approves tariffs for both the supply (only for household consumers charged according to the tariffs of the so-called last resort suppliers) and the distribution of electricity (for all consumer groups).
The largest cost item in suppliers’ tariffs is the purchase of electricity (e.g. on Polish Power Exchange or under bilateral contracts). The tariffs also account for the obligations of electricity suppliers with respect to sourcing appropriate quantity of electricity from renewable sources, farm biogas, or the obligation to purchase energy efficiency certificates. Suppliers’ tariffs also cover the justified costs of their business activity related to electricity supply.
The tariffs of electricity distributors (DSOs, distribution system operators), in addition to the costs associated with the maintenance of infrastructure or electricity purchases to make up for transmission losses include charges payable according to separate legal regulations, which are passed on by the distributors.
These include:
- co-generation charge[1] related to a scheme supporting electricity produced in co-generation units;
- capacity charge introduced in 2021. It is applied in accordance with the Capacity Market Act of 2017[2], which provides for a mechanism to compensate power generators for their readiness to supply power to the grid.
- RES charge – this charge is related to the support of electricity generation from renewable energy sources in RES units, and results from mechanisms introduced in Poland[3] with a view to ensuring adequate share of ‘green energy’ in the national energy mix.
- transition charge[4] – a mechanism for raising funds payable to electricity generators to cover so-called stranded costs arising after termination of long-term capacity and power purchase agreement. These contracts were terminated as a prerequisite to the process of liberalising the electricity market in Poland.
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- The tariffs approved by the Regulator for the four last resort suppliers apply to 8.7 million household consumers (or 61 per cent of consumers in the household segment).
- This also means that already 39 per cent of household consumers in our country (more than 5.6 million) purchase electricity on free-market terms, where the approval by the President of URE is not required.
- All prices approved and announced by the Regulator are exclusive of VAT. The VAT rate therefore does not affect the level of the tariff approved by the President of URE.
- Tariffs approved by the President of URE are published in the Industry Reports on Electricity Biuletyny Branżowe Energia elektryczna.
[1] Set in Regulation of the Minister of Climate and the Environment of 28 November 2021 on the rate of the co-generation charge for 2022 (Dz.U.2021.2185).
[2] Capacity Market Act of 8 December 2017 (Dz.U.2020.247 as amended).
[3] Article 96(1) of the Act on Renewable Energy Sources of 20 February 2015 (Dz.U.2021.610, as amended)
[4] Determined on the basis of Article 11b of the Act of 29 June 2007 on the rules governing the covering of costs incurred by generators in connection with the early termination of capacity and power purchase agreements (Dz.U.2019.1874, as amended).