Key global trends

In 2020, the Polish power sector was impacted in the short term by the COVID-19 pandemic and the actions taken by the Polish government and other governments to mitigate its health effects (including lockdowns, mobility restrictions, etc., and the resulting changes in energy supply and demand). The impact of the pandemic was felt especially in the spring of 2020 - after that, its impact on the economy in general and the power system in particular declined. In the short term, market trends (energy, energy raw materials and technology prices) and regulatory amendments affecting the framework where PSE operates play an important role - and will continue to do so. In the medium to long term, technological trends related to the decarbonization of the sector will play a fundamental role in the evolution of the power system and its environment. The renewable energy, energy storage, and electromobility sectors have grown strongly over the past year. The process of testing and introducing new metering technologies that provide opportunities for the use of high frequency and accuracy demand data (HFD) was also underway. In the longer term, hydrogen technologies may become important.

• Technological advancement in the area of data collection and processing will impact the importance of TSOs as HFD owner
  In the modern economy, data acquired with high frequency, showing economic activity on a micro- and macro-scale, play an increasingly important role. With technological advancements in metering, it is increasingly possible to collect and analyze data from the energy, gas, and water and wastewater utilities closest to the real economy. European TSOs, including PSE, make a range of generation, demand and import data publicly available. PSE acts as the Energy Market Information Operator and supervises the establishment and development of the Central Energy Market Information System, which will soon enable the collection and analysis of detailed high-frequency data on the Polish capacity market.

• Technological transformations in the area of energy storage and generation change the structure of generation and the nature of the transmission network and the role of the TSO
  Renewable energy technologies have developed extremely rapidly over the past two decades, and their dissemination in Europe has been supported by fiscal incentives. Initially, these developments primarily included the dissemination of the onshore wind power generation industry. For several years, however, new RES technologies have been gaining ground: offshore wind power generation industry and photovoltaics.
  
  Offshore wind power generation industry reduces the generation uncertainty problem in part because the windiness of sea and ocean areas is greater than that of land, but it is only available to countries with access to the coast. Offshore wind power generation industry development will also force necessary adjustments to the transmission network to receive energy from new sources.
  
  The growth of photovoltaics is primarily based on the development of small, residential prosumer installations and small commercial installations. It was still supported by government investment subsidy programs in 2020. This has contributed to the development of civic power generation industry and the emergence of a group of active individual consumers - energy producers, the so-called prosumers, among households and companies. At the same time, it is increasingly challenging to serve prosumers within the existing distribution and transmission network infrastructure, which is reflected in new regulatory solutions.
  
  A barrier to the development of renewable energy industry is still the problem of energy storage during periods of excessive generation; making it possible to use energy at times when generation from RES sources is not possible, during windless times, at night, etc. Until recently, the lack of effective storage technologies prevented this problem from being solved. In recent years, the commercial use of energy storage has become increasingly common. This is supported by falling component costs, the growth of commercial energy storage facilities for power systems, and the rapid development of information and metering technologies that enable distributed source management. At the same time, other energy storage technologies are developing, particularly power-to-gas and hydrogen electrolysis technologies. Their dissemination is expected to make it possible to use excess RES energy for electrolysis and to store it in the form of gas - e.g. hydrogen - for a long time, although far from being efficient thus far. Hydrogen is increasingly being touted as a future energy storage and transfer technology.
  
  In Poland there is a dynamic development of prosumer energy based on photovoltaics. In 2020, it began to play a noticeable role in the national energy mix. Generation companies are gearing up for off-shore wind power projects. The first commercial energy storage facilities are also under development. As a result of the dissemination of new technologies, it will become necessary to adapt to the new model and spatial allocation of generation both the distribution networks managed by distribution companies (photovoltaics) and the transmission networks managed by PSE.

• The development of the European market and the increase in international trade influence the long-term process of price convergence in Europe
  The development of the European market, supported by successive regulations, results in an increase in the scale of cross-border exchange. The effect of this phenomenon is a progressive equalization of energy prices in Europe. The acceleration of building a common market based on price zones through subsequent regulatory packages affects the process of development of the national transmission network and forces its adaptation to the new scale and directions of cross-border flows. In the medium term, it may also be a source of additional costs for transmission network operators due to the need for more frequent remedial actions taken by transmission operators outside the market, such as redispatching, which is the diversion of energy flows depending on weather conditions.

• European climate policy increasingly driving up the cost of generation from emitting sources
  The situation of the national power system, and especially the condition of generators using conventional generation sources, is increasingly affected by EU climate policy. The primary tool of this policy is the so-called ETS - emission allowances, the prices of which are determined by the market. The increase in ETS prices observed for several years accelerated in late 2020, after a periodic decline in the spring (pandemic-induced demand collapse). In the first half of 2021, the ETS CO₂ prices exceeded 50 Euro, increasingly affecting the prices of energy produced from emission sources. As a result, the competitiveness of conventional power generation relative to non-carbon sources drops significantly. In an open market, conventional energy sources will be forced to compete with domestic and foreign RES and with foreign conventional generators. This may contribute to accelerating the transformation of the Polish power generation industry.

• Increased demand for coal in the second half of 2020 and the first half of 2021 stopped the long-term trend of declining prices. However, this did not affect the intensification of investment processes in the industry.
  
  Globally, coal is seen as a commodity for which demand will decline. New regulations adopted by EU countries and many countries around the world increase the risk of stranded costs in new investments in coal-fired power generation, resulting in very limited access to credit for these investments.
  
  Due to the rising costs of emission allowances, gas-fired power generation is becoming the medium-term alternative to coal-fired power generation. Greater flexibility of gas-fired units makes gas-fired plants work better than coal-fired plants with an expanded RES sector. This results in a rapid increase in natural gas prices (due to increased demand in both Europe and Asia).
  
  The growing importance of gas-fired power generation in the energy mix of Poland and the EU will have a negative impact on energy independence in the short and medium term. Later, the development of RES technology can help restore it.

In order to adapt the NPS to the new shape of markets and new technologies, PSE has consistently engaged in new technology development and cybersecurity collaboration across the entire power industry. We actively participate in the preparation of new market solutions to ensure the integration of the European electricity market, including through the development and implementation of standardized market mechanisms and products required by European regulations. An example of such activities is the involvement of our organization in the design and development of capacity allocation methods based on Market Coupling and Flow-Basedmethodologies. Another example is the involvement in the process of establishing European platforms, such as the common allocation platform for long-term transmission rights and the European platforms for balancing energy exchange.

We take part in the implementation of modern solutions. Our activities involve participation in the development of competitive mechanisms of the electricity market in Poland and the European Union and cover the following market segments:

• Forward Market;
• Day Ahead Market;
• Intra-Day Market;
• Cross-Border Balancing Market.

We are an active participant in innovative research projects. We engage in efforts to develop solutions to actually implement new technologies to the market and to the power system, including:

• EU-SysFlex – a research project to develop solutions and tools for integrating large volumes of renewable energy into the power system;
• OneNet (One Network for Europe) – a project intended to develop effective methods for TSOs and DSOs to obtain and use the flexibility resources connected to the distribution network. The project is funded under the EU's eighth framework program Horizon 2020;
• Pilot demonstration project for the implementation of a system supporting safety of the NPS operation under conditions of a large share of generation from wind sources based on the Special Protection Scheme (SPS) and battery-powered hybrid electricity storage.

In the context of the planned process of integration of national electricity markets, the most important implementation activities are focused on the implementation of a common market in terms of day-ahead and intra-day markets. We actively participate in all processes related to the implementation of Market Coupling on all Polish cross-border interconnections, with particular emphasis on synchronous connections.

The central segment of the European electricity market model is to be a Day-Ahead Market based on the Market Coupling (MC) process, with a trading gate at 12:00 p.m. This is a mechanism whereby exchange prices for each market area in Europe are to be determined in a coordinated manner, in a common process, and with a single calculation point. Transmission capacity allocation is to be based on the price differential between market areas. It is therefore an implicit auction model, i.e. combining trading of transmission rights and electricity. Market participants do not book transmission capacities to execute their cross-border transactions, but only to buy/sell energy in the market to which they are geographically assigned (in some simplification). The allocation of capacity by the MC mechanism takes place automatically when energy is traded, in a way that maximizes the total market surplus. A graphic illustration of Market Coupling can be found below.

The implementation of the European Market Coupling takes place through regional projects, which are then combined into a pan-European project. These projects include:

• MRC (Multi-Regional Coupling) – the main initiative of Market Coupling in Europe, as part of which the allocation of capacity on SwePol Link and LitPol Link takes place;
• CORE FB MC – project of the market coupling implementation based on Flow-Based capacity allocation methodology for the CEE region, including synchronous NPS borders;
• 4M MC – NTC-based Market Coupling provisional operating area covering the Czech Republic, Slovakia, Hungary and Romania;
• DE-AT-PL-4M Market Coupling (Interim Market Coupling).

On June 17, 2021, the Interim Market Coupling project was launched operationally. The project connected the day-ahead capacity markets in Poland and 4M MC countries (Czech Republic, Slovakia, Hungary, Romania) with Europe's largest MRC market by introducing implicit capacity allocation on six borders (PL-DE, PL-CZ, PL-SK, CZ-DE, CZ-AT, HU-AT). The Interim MC project did not introduce any changes to the manner of determination of inter-area transmission capacities, which are still determined by the TSO using the NTC (Net Transfer Capacity) method, but changed their allocation method. The implementation of the Interim MC project led to the implementation of Single Day-Ahead Coupling almost across Europe. This implies the introduction of a single common auction on the power exchanges for market participants in all countries covered by the MRC and 4M MC areas as part of the day-ahead market coupling mechanism. Thanks to the Interim MC project, Poland is fully integrated in the European mechanism for day-ahead market coupling.

Price Coupling of Regions (PCR) is an initiative of European power exchanges to create a single market coupling solution for electricity pricing across Europe and the allocation of cross-border day-ahead capacity. Such an integrated European electricity market is expected to provide increased liquidity and efficiency of trade and increased social welfare.

The power exchange initiative originally included day-ahead markets in: Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Italy, Latvia, Lithuania, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and United Kingdom. The initiative itself was established in 2009 and the PCR parties signed a cooperation agreement in June 2012. It is open to other European power exchanges that want to join. In 2016, the Polish Power Exchange joined the PCR.

PCR is based on three main principles:

1. One common algorithm. A common algorithm ensures transparent determination of day-ahead electricity prices across Europe and allocates cross-border capacity. The algorithm has been developed with respect to the specifics of individual energy markets in Europe. This leads to optimized social welfare and increased transparency.
2. Reliable performance of the algorithm. The PCR process relies on decentralized data exchange for reliable and flexible operation.
3. Individual responsibility of the power exchange. The PCR Matcher Broker (PMB) tool allows exchanges to exchange anonymized order books and cross-border capacity to determine reference prices and energy transmission volumes between all participating market areas.

The operational joining of the Polish market area to the Single Intra-Day Coupling (SIDC) mechanism took place on November 19, 2019. Thus, the obligation set out in the CACM Regulation (Commission Regulation (EU) 2015/1222 of July 24, 2015 laying down guidelines for capacity allocation and congestion management) to implement a solution for the uniform coupling of intra-day markets (in terms of the Intra-Day Market) with European reach has been fulfilled.

Activities currently underway are intended to ensure proper operational performance and proper development of the SIDC. These activities include initiatives with a European reach. In parallel, local initiatives are underway with the primary goal of expanding SIDC's reach into additional market areas.

• European initiatives
  PSE are involved in this stream through participation in steering committees and SIDC expert groups. Major SIDC development initiatives over the horizon of the next few years include:
  • the introduction of Intra-Day auctions, whereby prices will be set for each market area as a basis for determining congestion rent for each border,
  • the implementation of 15-minute market products,
  • the implementation of a solution to automatically account for transmission losses on HVDC connections, and
  • the implementation of a flow-based method.
• Local initiatives
  Italy was included in the SIDC mechanism in September 2021. Greece (under the so-called fourth wave of implementation) and Slovakia (under the so-called fifth wave of implementation) are planned to join the SIDC mechanism in 2022.
  
  Joining the Slovakian market area to SIDC will mean that the PL-SK border will be added to the four Polish borders (CZ-PL, DE-PL, LT-PL, PL-SE) currently covered by the SIDC mechanism, thus ending the temporary solution for the Intra-Day Market based on the explicit auction mechanism. The operational integration of the PL-SK border into SIDC is planned for the first half of 2023.

Fig. Evolution of coupling individual market areas to the SIDC mechanism.

In addition to the integration of the Day-Ahead and Intra-Day Market segments, PSE is also actively working on the integration of balancing markets in Europe, as required by Commission Regulation (EU) 2017/2195 of 23 November 2017 establishing a guideline on electricity balancing (hereinafter: EBGL). The EBGL regulation provides for the integration of the European balancing market through the implementation of four platforms:

1. European platform for the exchange of balancing energy from replacement reserves
   • Required activation time: 30 minutes.
   • Implemented under the TERRE project launched on January 15, 2020.
2. European platform for exchange of balancing energy from frequency restoration reserves with non-automatic activation
   • Required activation time: 15 minutes.
   • Implemented as part of the MARI project, scheduled launch in July 2022.
3. European platform for exchange of balancing energy from frequency restoration reserves with automatic activation
   • Activation via automatic controller in up to 5 minutes.
   • Implemented as part of the PICASSO project, with scheduled launch in July 2022.
4. European platform for the imbalance compensation process
   • Based on avoiding activation of balancing energy from automatic reserves in opposite directions by neighboring TSOs.
   • Implemented as part of the IGCC project (operating in Germany and neighboring countries).

PSE actively participates in all implementation projects of European balancing platforms. As part of our work at ENTSO-E, we participate in the preparation of the detailed methodologies required by the EBGL Regulation. As of February 2020, our organization is operationally active in the IGCC project. Joining the TERRE platform is planned for January 2022, and to the MARI and PICASSO platforms for January 2023.

We are actively working with European operators under the TSO Security Cooperation (TSC) initiative. TSC members include 14 operators from Central Europe. The goal of the initiative is to enhance the operational security of the interconnected power systems in the region, including the NPS, by intensifying regional inter-operator cooperation, which currently includes processes for identifying risks and applying appropriate inter-operator countermeasures.

We are a shareholder of TSCNET. We have a representative in the General Meeting and in the Supervisory Board of TSCNET, which currently consists of 5 members. Several PSE representatives are involved in the implementation of activities resulting from the tasks of the TSC decision-making and working structures.

PSE is actively involved in the process of extending the synchronous system of Continental Europe (CE) with the systems of the Baltic states (BS). In October 2018, the Plenary Meeting of the European Network of Transmission System Operators Regional Group Continental Europe (ENTSO-E RGCE Plenary) agreed to launch the relevant extension procedure. At the same time, it set up a working group to coordinate the process, headed by a representative of PSE.

In May 2019, the agreement specifying the conditions for the future synchronous connection of the BS system to the CE system entered into force. The agreement contains a so-called set of requirements, which is a list of detailed technical conditions required to be implemented by TSOs with BSs to ensure secure operation of the systems after synchronization. One of the main infrastructural elements included in the set is the Poland-Lithuania DC submarine link (Harmony Link). In 2021, a number of studies were launched to prepare systems and BS TSOs for synchronization. PSE is the leader of the TSO Consortium established to perform this work.

In December 2019, PSE and LITGRID received €10 million in funding from the EU's Connecting Europe Facility (CEF ) for activities carried out as part of the preparatory phase of this project.

In December 2020, PSE and the BS TSOs signed a grant agreement with the EU's Innovation and Networks Executive Agency (INEA) awarding €719.7 million in funding for Phase II synchronization projects, including €492.5 million for Harmony Link's implementation phase. In May 2021, PSE and LITGRID made positive investment decisions, thus the project moved from the preparation phase to the implementation phase. In July 2021, PSE announced a tender, through competitive dialog, for the selection of a contractor for converter stations in Poland and Lithuania. In August 2021, LITGRID launched a tender to select the HVDC cable contractor.

Currently, BS systems operate under the IPS/UPS system, which geographically covers areas of the former Soviet Union Republics. The synchronization of the BS systems with the CE, scheduled for 2025, is part of the European Energy Union concept and an example of solidarity in the area of energy security. The implementation of the project is critical to completing the integration and increasing the scope of connecting BS system markets to the European system. This is confirmed by the roadmap implementing the synchronization project signed in June 2019 by the President of the European Commission and the Prime Ministers and Presidents of Poland, Lithuania, Latvia and Estonia.

PSE is also involved in a project to expand the system of Continental Europe to include the systems of Ukraine and Moldova. We are a member of the TSO Consortium established to perform additional studies and work to align the technical operating standards of these systems, as well as to comply with applicable EC regulations on running the system operation and market rules. The PSE representative chairs a working group responsible for performing system dynamic analyses.