Active participation in the development of the electricity market

One of the company's primary responsibilities as a TSO is to ensure the operational security of the power system. This objective is supported by the implementation of a capacity mechanism, i.e. a capacity market, which should guarantee generation adequacy in the medium and long term. The capacity market should also provide the available capacity for further development of RES without adversely affecting the security of electricity supplies to end users.

The capacity market is an important part of the power industry transformation. Its operation can generate investment incentives to support the construction of new generating units, the replacement of decommissioned units and the modernization of existing units. It should also allow the implementation of an effective and competitive mechanism to coordinate the construction and decommissioning of generating units and the development of demand side response services, while ensuring that the costs to end users are minimized.

The capacity market in Poland was introduced by the Act of December 8, 2017 on the capacity market (Journal of Laws of 2020, item 247 as amended, hereinafter: the Act), which entered into force on January 18, 2018. Pursuant to the Act, PSE:

• has developed the Capacity Market Rules which - following the ERO President's approval and in consultation with the minister competent in energy - set forth the detailed terms and conditions of cooperation between the operator and other capacity market participants,
• performs the role of a capacity market operator (organizer),
• maintains the capacity market register (hereinafter: the register), which is an electronic platform for collecting, processing and exchanging trading, settlement and technical data in the capacity market.

In 2020 PSE amended the Capacity Market Rules twice (update sheet No. RRM/Z/1/2020 and RRM/Z/2/2020), bringing the Rules into line with the provisions of Regulation (EU) 2019/943 of the European Parliament and of the Council of June 5, 2019 (hereinafter: Regulation 943/2019) and to the provisions of the Regulations of the Minister of Energy issued under Articles 51 and 68 of the Act.

On July 2, 2020 PSE commenced consultations on amendments to the Capacity Market Rules resulting from draft update sheet No. RRM/Z/1/2020. The amendments included in the update sheet were to bring the rules into compliance with Regulation 943/2019 regarding the provisions of Article 22 sec. 4 and 5. This Regulation limited participation in capacity mechanisms in European Union states only to generating capacities (generating units) with emissions of no more than 550 g of CO₂ in fossil fuel per 1 kWh of net electricity generated for units that began commercial generation on July 4, 2019 or later, and generating units emitting more than 550 g of C)₂ in fossil fuel per 1 kWh of net electricity generated that began commercial production no later than on July 3, 2019 and have annual average emissions of no more than 350 kg of CO₂ in fossil fuel per 1 kW of installed electric capacity. The amendments to the Capacity Market Rules set forth in update sheet No. RRM/Z/1/2020 were approved by Decision of the President of the ERO dated September 4, 2020.

On October 8, 2020 PSE commenced further consultations on amendments to the Capacity Market Rules resulting from draft update sheet No. RRM/Z/2/2020. The amendments included in the Update sheet consisted in clarifying the provisions and explaining doubts of interpretation related to the following processes: general certification, auction certification, replacement of scheduled demand side response units, capacity contracts monitoring, performance of the capacity obligation, and settlements in the capacity market. The scope of the amendments introduced under the Update Sheet also included the adjustment of the Rules to the provisions of the Ordinance of the Minister of Energy of September 3, 2018 on the financial security provided by capacity providers and participants in preliminary auctions and the Ordinance of the Minister of Energy of July 18, 2018 on the execution of the capacity obligation, its settlement and demonstration and conclusion of transactions on the secondary market. The amendments to the Capacity Market Rules set forth in update sheet No. RRM/Z/2/2020 were approved by Decision of the President of the ERO dated December 30, 2020.

All capacity market processes are conducted in electronic form only, using the capacity market registry. Successively, as more processes are implemented, this registry is expanded to include the necessary new functionalities. In 2020 PSE created a register of functionalities to support the processes of replacement of demand side response units, system stress events (and test system stress events), performance of capacity obligations, conducting settlements in the capacity market, and importing and handling metering and settlement data.

PSE is responsible for running the capacity market processes. Since the beginning of 2020, we have carried out a number of processes to enable the conclusion and execution of capacity agreements.

In 2020, the implementation of the capacity market processes began with the general certification, conducted between January 2 and March 6. Participation in the general certification is mandatory for all existing physical generating units with a gross generating capacity of not less than 2 MW, and compliance with this obligation is monitored by the President of ERO. A physical unit which has successfully completed the general certification process is entered into the registry. Participation of scheduled physical generating units, physical demand side response units, and scheduled physical demand side response units is optional, but is a condition (prerequisite) for subsequent participation in certification for auction.

For the 2020 general certification, applicants submitted 1,210 applications for entry into the register. A total of 1,188 units were successfully verified and subsequently entered into the register, including 1,019 physical generating units and 169 demand side response units. In Tab. 1 a summary of the 2020 general certification is presented.

The following charts show the structure of the physical generating units entered into the register in the 2020 general certification by primary energy source used.

Within 14 days of completion of the general certification, PSE submitted a detailed report summarizing the general certification to the Minister responsible for energy and to the President of ERO. Furthermore, within 28 days of the completion of the general certification, PSE prepared a proposal for the parameters of the main auction for the delivery year 2025 and the parameters of the supplementary auctions for individual quarters of the delivery year 2022 and also submitted it to the President of ERO and the Minister responsible for energy.

The final values of the parameters were published in the Ordinance of the Minister of Climate dated August 6, 2020 on the parameters of the main auction for the delivery year 2025 and the parameters of the supplementary auctions for the delivery year 2022.

On February 19, 2020, certification for supplemental auctions ended for individual quarters of the delivery year 2021 that began back in 2019 (November 25, 2019). As part of the certification for the supplementary auctions, 48 certification applications were submitted by capacity providers. As a result of the verification, PSE issued 47 certificates allowing capacity market units to participate in the capacity auction or secondary market. Tab. 2 includes detailed information on the number of certificates issued.

On March 18, 2020 PSE conducted the first supplementary auctions. CFour supplementary auctions for individual quarters of delivery year 2021 were held simultaneously.

In the capacity market, auctions are conducted in the Dutch form; with a uniform closing price for all capacity market units that win the auction. They consist of a set number of rounds during which participants can make an exit bid. Failure to submit a statement that is an exit bid is considered acceptance of the next round starting price. Capacity market units that win a given auction conclude capacity contracts.

The supplementary auctions for the individual quarters of delivery year 2021 resulted in a total of 54 capacity agreements. In Tab. 3 a summary of the supplementary auctions conducted is presented.

Immediately after the announcement of the preliminary results of the supplementary auctions for individual quarters of the delivery year 2021, PSE launched the possibility of reporting in the register of secondary trading transactions concerning the delivery year 2021 (implementation of the provisions of Article 48(1)(1) of the Act). Each secondary trading transaction must be reported to the PSE for verification for compliance with the requirements of Article 48(2) of the Act. The minimum volume of the transferred capacity obligation covered by a single transaction is 0.001 MW and the minimum duration is one hour from 7:00 a.m. to 10:00 p.m. on business days. A transaction conducted in secondary trading must be reported no later than 24 hours before the start of the period to which it relates.

At the same time, PSE carried out the process of replacing scheduled demand side response units. for the first time. This process is conducted in cooperation with the DSO and is intended to obtain information on physical demand side response units replacing the scheduled demand side response units and to enter these units into the register. Capacity suppliers may submit replacement requests no later than 3 months prior to the start of the delivery period for which the capacity agreement was entered into, or 3 months prior to the start of the last quarter of the delivery year specified in the certificate - for units not covered by the capacity agreement. Ultimately, 14 scheduled demand side response units were replaced.

After the replacement process was completed, PSE proceeded with testing of demand side response units for unconfirmed demand side response units of the capacity market. For unconfirmed demand side response units of the capacity market that do not receive a confirmed demand side response capacity test before the start of the delivery period specified in the capacity agreement, the capacity agreement is terminated. Demand side response tests are conducted at the request of the capacity supplier submitted through the registry. Capacity delivered of at least 80% of the product of the net available capacity and the corrective availability factor is considered a positive test result. By the end of June 2021, 17 units had received a positive result and changed status to a confirmed demand side response unit.

On August 24, 2020 PSE conducted the first initial auction through the Capacity Market Participant Portal. The auction concerned the admission of foreign physical units located in the territory of the Republic of Lithuania to participate in the main auction for the delivery year 2025. The initial auction ended with one bid accepted. Within 21 days from the end of the preliminary auction, PSE has submitted a detailed report summarizing the auction process to the competent minister for energy and the President of ERO.

Foreign physical units located in countries where power system is directly connected to the NPS may participate in the preliminary auction. The Act allows units located in three areas to participate: in the synchronous profile zone (part of the transmission system of the Federal Republic of Germany, the transmission system of the Czech Republic and the transmission system of the Slovak Republic), in Lithuania and in Sweden. The preliminary auctions are carried out for each zone separately and the maximum volume of capacity obligations for a given zone is determined under the ordinance of the minister responsible for energy issued pursuant to Article 34 of the Act. In a preliminary auction, bids are accepted starting with those with the lowest price until the maximum volume in a zone is reached. The bids selected in the preliminary auction are then replaced with capacity market units in the auction certification.

The next capacity market process conducted in 2020 was certification for the main auction nfor the 2025 delivery year. Participation in the certification for the auction is not mandatory, but is necessary to set up the capacity market units and allow them to participate in the auction or in the secondary market for a given delivery period. As a result of successful verification of the applications, PSE issued certificates authorizing the capacity market units to participate in the above mentioned processes. Following the certification, PSE submitted a detailed report summarizing this certification to the minister competent for energy and the President of ERO for the auction.

The main auction for the delivery year 2025 was also conducted in 2020. It was the fifth main auction on the Polish capacity market. It was held on December 14, 2020 and covered the delivery year 2025. It resulted in a total of 55 capacity agreements for 1, 7 and 15 delivery periods and 6 capacity agreements expiring on June 30, 2025. In Tab. 4 a summary of the conducted main auction is presented.

ZThe rules for conducting main auctions are similar to the rules used for supplementary auctions. Unlike the supplementary auctions, however, in the main auctions, capacity market units may - depending on the type of capacity market unit and the duration of the capacity obligation offered by the unit - enter into multi-year capacity agreements. Existing generating capacity market units may offer capacity obligations for only one delivery period. Retrofitted generating capacity market units and demand side response capacity market units that declare that they will make the investment and meet the unit capital expenditure levels specified in the Ordinance may offer the obligation for no more than 5 delivery periods. Whereas, new generating capacity market units declaring to meet the unit capital expenditure levels from the Ordinance for no more than 15 delivery periods. In addition, it is possible to extend the term of the capacity agreement by an additional 2 years for low-carbon generating capacity market units (the so-called green bonus).

Tab. 5 presents a breakdown of capacity agreements by the duration of capacity obligations.

The capacity auction for the delivery year 2025 resulted in capacity agreements with a reduced term to June 30, 2025. This applied to capacity market units for which no statement was made in the application for certification that the emission limit was planned to be met in the delivery year or that the volume of emissions was met by all generating units comprising the physical units making up the capacity market unit. While meeting the statutory time limit of 3 business days after the end of the capacity auction, PSE published the preliminary results of the auction in the register and made them public. Subsequently, a detailed report summarizing the auction process was submitted to the competent minister for energy and the President of ERO. The final results of the main auction were announced by the President of ERO in the Public Information Bulletin on January 5, 2021. As a result of the concluded capacity agreements, capacity obligations were contracted for the years 2025-2039.

The Act provides for main auctions for subsequent delivery periods to be held between December 1 and December 22 of the fifth year prior to the delivery period. The next main auction for the delivery period in 2026 will be held on December 16, 2021.

In 2020, works continued on monitoring the performance of capacity agreements. Under the Act, a capacity supplier that has entered into a capacity agreement for a new or retrofitted capacity market unit as a result of the main auction is required, no later than 12 months from the date of announcement of the final results of the main auction, to demonstrate that the unit owned has reached the so-called Financial Commitment Milestone (hereinafter: FCM). The FCM is achieved by demonstrating that investment outlays of at least 10 percent of the total investment outlays have been incurred and investment contracts with a total value of at least 20 percent of the total financial outlays have been entered into (Article 52(1)(1) and (2) of the Act). In order to comply with these requirements, capacity suppliers that entered into capacity agreements as a result of the main auction for the delivery year 2024 provided statements through the registry confirming compliance with the FCM. In 2020 PSE verified statements on FCM with respect to 30 capacity market units, while in H1 2021 - 4 FCM statements.

According to the Act, a capacity supplier that has entered into a capacity agreement for more than 1 delivery year as a result of the main auction is required to demonstrate - no later than before the beginning of the first delivery period, and in the case of a new capacity market unit no later than before the end of the third delivery year or before the end of the term of the capacity agreement if it has been entered into for less than three delivery years - that the capacity market unit owned has reached the so-called Substantial Commitment Milestone (hereinafter: SCM). The SCM is achieved by presenting documents confirming: realization of the substantial scope of investment and planned capital expenditures and the ability of the unit to deliver capacity in an amount not less than 95 percent of the product of the unit's net capacity and the availability factor, as specified in the certificate, with continuous operation of the unit for at least one hour (Article 52 (2) (1) and (2) of the Act). In addition, an independent expert report must be submitted containing information (in accordance with Article 52(2)(3)) and accompanied with information on the amount of state aid granted. In order to comply with these requirements, capacity providers that entered into capacity agreements as a result of the main auction for the delivery year 2021 provided statements through the registry confirming compliance with the SCM. In 2020 PSE positively verified SCM statements for 41 capacity market units.

In addition, as part of the capacity agreement performance monitoring process, the investment progress reports submitted within 10 business days after the end of 6 full months starting from the second calendar year after the main auction were verified to control whether the timely achievement of the SCM is not threatened. In July 2020, 40 reports showing the current investment progress were reviewed, and 6 reports in January 2021.

In early 2021, PSE began another general certification, which was conducted between January 5 and March 12, 2021. During the certification, applicants submitted 1,254 applications for entry into the register. A total of 1,223 units were successfully verified and entered into the register, including 1,020 physical generating units and 203 demand side response units. A summary of the number and net generating capacity of units in the register is shown in Tab. 6.

Within 14 days of completion of the general certification, PSE submitted a detailed report summarizing the general certification in 2021 to the Minister responsible for energy and to the President of ERO. Additionally, within 28 days of the completion of the general certification, PSE prepared proposed parameters for the main auctions for the delivery year 2026 and parameters for the supplementary auctions for individual quarters of the delivery year 2023. The proposal of parameters was submitted to the President of ERO and the Minister responsible for energy.

At the same time, between November 24, 2020 and February 16, 2021 PSE conducted certification for supplementary auctions for individual quarters of the delivery year 2022. As in the certification for the main auction, participation in the certification was not mandatory, but was necessary in order to establish the capacity market units and allow them to participate in the supplementary auctions for each quarter of the delivery year 2022 or in the secondary market for that delivery year. As a result of successful verification of the applications, PSE issued certificates authorizing the capacity market units to participate in the above mentioned processes. Following the certification, PSE submitted a detailed report summarizing this certification to the Minister competent for energy and the President of ERO for the supplementary auctions.

The supplementary auctions were conducted for the second time by PSE on March 16, 2021. Four supplementary auctions for individual quarters of delivery year 2022 were held simultaneously. The process resulted in a total of 40 capacity agreements. In Tab. 7 a summary of the supplementary auctions conducted is presented.

The chart below shows the capacity obligations resulting from the agreements concluded during the capacity auctions (main and supplementary) conducted between 2018 and 2021.

While meeting the statutory time limit of 3 business days after the end of the capacity auction, PSE published the preliminary results of the auction in the register and made them public. Subsequently, our organization submitted a detailed report summarizing the auction process to the minister competent for energy and the President of ERO. The final results of the supplementary auctions for the delivery quarters in 2022 were announced by the President of ERO in the Public Information Bulletin on April 6, 2021.

After the announcement of the preliminary results of the supplementary auctions for the individual quarters of the delivery year 2022, implementing the provisions of Article 48 (1) (1) of the Act, PSE launched the possibility of reporting in the register of secondary trading transactions concerning the delivery year 2022. In reporting secondary market transactions, PSE from March 2020 to the end of May 2021 verified and entered 2,107 secondary capacity obligation trading transactions into the registry.

2021 is the first delivery year in the capacity market. As a result, PSE initiated the verification process of the capacity obligation performance by capacity providers, including verification of demonstration statements and conducting test system stress events.

The obligation to demonstrate is incumbent upon the capacity providers that are party to the capacity agreement and consists in demonstrating to the operator, after the end of each quarter in the delivery year, the ability to meet the capacity obligation with respect to each of the capacity market units. This is done according to the rules set forth in the Ordinance of the Minister of Energy of July 18, 2018 on the performance of the capacity obligation, its settlement and demonstration and conclusion of transactions on the secondary market.

In addition to the demonstration, another mechanism to verify the ability of units to meet the capacity obligation is the possibility for PSE to announce test system stress events for selected capacity market units under the capacity obligation. There were 26 test system stress events announced in Q1 and Q2 of 2021. Verification of the performance of the capacity obligation by capacity market units, including the execution of demonstrations and test system stress evens, as well as the determination of remuneration of units receiving support under other schemes, is based on metering and settlement data obtained from dedicated data communications systems.

Starting from 2021, PSE began the process of settlements in the capacity market, including in particular the determination of the amount and payment of remuneration for the performance of the capacity obligation and the calculation of penalties for failure to meet the capacity obligation and the substantial completion milestone.

The upcoming years will bring a number of challenges and tasks for PSE in the context of the capacity market. These include:

• continuation of monitoring processes for concluded capacity agreements,
• continuing to handle secondary market transactions,
• continuation of the process of scheduled demand side response units replacement and conducting demand side response unit tests,
• expanding mechanisms to allow foreign capacities to participate in the capacity market,
• integration with the European capacity market register created by ENTSO-E,
• developing the capacity market settlement model.

In 2020, more capacity market processes were launched. PSE, obligated under the act, conducted the general certification, the first supplementary auction, the first preliminary auction, the first replacement of planned demand side response units, the certification for the main auction, the main auction for the delivery period 2025, and the certification for the supplementary auctions for each quarter of the delivery year 2022. Certifications and auctions are held annually on dates established by the act. In 2021, the next general certification, supplementary auctions for individual quarters of the delivery year 2022 were carried out, the first transactions in the secondary market were approved, and the verification of the performance of capacity obligations is carried out and the settlements of capacity contracts are conducted.