Energy Regulatory Office Results of President of URE’s survey on capacity market operation revealed - News -

A summary of the survey on the operation of the state aid mechanism in the form of the capacity market, which was held between February and April 2024, is available on the Energy Regulatory Office’s website.

The document presents only the opinions of the market participants who took part in the survey. It includes neither the position nor comments of the President of URE regarding the presented the assessments and proposals. However, the results of the survey will form the basis for the preparation by the President of URE of an assessment of the functioning of the capacity market in Poland, which will be submitted to the competent minister for energy.

Comprehensive survey of electricity market participants’ opinions

The survey was addressed to all the participants of the electricity market, with both entities that have entered into contracts on the capacity market and the ones that have not participated in auctions taking part. The participants included representatives from the electricity generation sector, aggregators of physical demand side reduction (DSR) units and final consumers, as well as electricity trading companies, electricity storage sector and non-profit organisations involved in the energy transition in Poland.

The survey questionnaire consisted of 25 questions divided into five thematic blocks that covered the following areas:

1. Meeting the stated objectives for the implementation of the capacity mechanism;
2. Organisation and operation of the capacity market in Poland;
3. Impact of the capacity market on the electricity market and its participants;
4. Secondary market;
5. Prospects for the operation of the capacity market in Poland.

The respondents were requested to give reasons supporting their opinions. In addition, they were asked to identify other issues not covered by the questions that they felt were relevant to the subject matter.

Capacity market and security of energy supply

The vast majority of respondents positively assessed the impact of the capacity market mechanism on the condition of the electricity market in Poland. 89 per cent of respondents indicated that the introduction of this mechanism has improved the security of electricity supply in Poland, and 90 per cent believe it has ensured an adequate level of capacity available in the Polish electricity system.

Figure 1. Impact of the capacity market on the improvement of security of electricity supply in Poland

As the main effects of the capacity market, the participants in the survey pointed to investments in new generation sources with a total capacity of about 11 GW, including about 5 GW of gas-fired units, the development of energy storage facilities, as well as the provision of stable revenue streams that enable the modernisation of existing generation units and their continued availability.

At the same time, the respondents pointed out that the improvement in security of supply was of short-lived, and that the current design of the capacity market favours conventional sources and still does not sufficiently support the DSR development, energy storage and renewables.

According to 74 per cent of those participating in the survey, the capacity market supports the energy transition and ensures the development of the electricity market in Poland. The remaining 26 per cent of respondents held the opposite view. On the other hand, 69 per cent of respondents indicated that this support mechanism also ensures energy security from an environmental perspective, with 26 per cent of respondents disagreeing and five per cent taking no position on this issue.

Opinions on the impact of the capacity market on electricity prices and competitiveness of the economy were more diversified. 47 per cent of survey participants indicated that the mechanism had contributed to lower wholesale electricity prices, but 11 per cent of respondents held the opposite view and 42 per cent had no clear opinion on the matter. Also 47 per cent of respondents agreed with the statement that the capacity market has positively influenced the competitiveness of the Polish economy, although at the same time 53 per cent did not have an opinion on the matter.

Capacity market crucial for investments in the energy sector

According to the vast majority of respondents (90 per cent), the introduction of the capacity market has created incentives for investment in new generation capacity and the modernisation of existing energy sources. A similar percentage of respondents (89 per cent) confirmed that the capacity contract is an instrument that makes the closing of project financing easier.

Meanwhile, 63 per cent of all respondents indicated that the implementation of the capacity market reduced the cost of raising investment capital. Eleven per cent of the respondents disagreed with the above statement and 26 per cent did not take a position on it.

Figure 2. Impact of the capacity market on reducing the cost of raising investment capital

84 per cent of those surveyed believed that the capacity market mechanism created economic incentives for the development of demand aggregation and demand side management services. What is more, just over one half (53 per cent) indicated that it creates incentives to shift energy consumption to off-peak hours, although 21 per cent held the opposite view and 26 per cent had no opinion on the matter.

More than half of the participants in the survey (58 per cent) concluded that the secondary market enabled effective management of the risks associated with the performance of contracts on the capacity market and that the regulations provided transparent rules for its operation (53 per cent). On the other hand, the low liquidity of the market and its limitation to intra-group transactions were noted, with the creation of an open platform for secondary market transactions being suggested as the solution to address these problems.

Future and reform of capacity market

In the opinion of the vast majority of participants in the survey, the capacity market should continue to operate at least until 2040. Nearly all respondents (95 per cent) agreed and none of them denied that the capacity mechanism should remain as a permanent addition to the electricity market in Poland. In addition, 63 per cent of those surveyed would not accept the impairment of security of supply should this support scheme be abolished.

At the same time, only 37 per cent of the participants believed that the costs of the capacity market were commensurate with its objectives (16 per cent believe that they were not and 47 per cent did not take a position).

Figure 3. Opinions on the level of support for different technologies within the capacity market

Only 16 per cent of those surveyed indicated that the capacity market mechanism created a level playing field for all technologies, with the remaining 84 per cent being convinced that this was not the case. In the view of most operators, the current rules promote conventional, high-capacity generating units.

However, the respondents were undecided about changes to the operation of the capacity market. The call for separate auctions for different technologies was supported by 42 per cent of those taking part in the survey, while 32 per cent were against. At the same time, only 21 per cent of the respondents favoured the introduction of separate auctions for existing, new and retrofit generating units. Forty-two per cent of the survey participants are against this concept.

According to the participants in the survey, in the years to come and also beyond 2030, the capacity market should primarily support the construction of new generating units, with particular emphasis on low- and zero-emission technologies, as well as investments to ensure the flexibility of the electricity system. They also called for the performance of the capacity market to be monitored more frequently than every 10 years.

The detailed results of the survey, as well as the power industry's recommendations for the continued operation of the capacity market, can be found in a summary report of the President of URE.

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• The capacity market is a regulatory solution that was introduced by the Capacity Market Act of 8 December 2017[1].
• The capacity market aims to prevent electricity shortages in the future by creating investment incentives for the construction of new generating units and the modernisation of existing ones. These solutions are also expected to result in more proactive power consumption management and improved  electricity demand flexibility.
• The introduction of the capacity market transformed the architecture of the electricity market from a single-commodity market to a dual-commodity one, where trading is not limited to the electricity generated but also involves buying and selling the net available capacity, i.e. the readiness to supply energy to the grid.
• The selection of the capacity market units that will offer the new service in exchange for adequate remuneration is made following an auction.
• The first capacity auction was held on 15 November 2018 with the year 2021 being the first year of capacity delivery.

^[1] Capacity Market Act of 8 December 2017 (Dz.U.2020.247 as amended).