Poland Watchdog Urges Paying Utilities to Avoid Blackouts

Poland needs measures to encourage power station operators to build plants and prevent them from closing existing ones to avoid blackouts, according to the country’s energy market watchdog.

The work on introducing a law for a capacity mechanism, which guarantees producers a price for generating backup electricity, may start in the first quarter, Marek Woszczyk, the head of Urzad Regulacji Energetyki, said in Warsaw. As an interim measure, the regulator may offer from January an operational reserve that would encourage utilities not to close plants, he said.

Poland’s power shortfall may be as much as 1,100 megawatts at peak demand times in 2017, enough to supply more than 2 million European homes, the Economy Ministry said in July. Prime Minister Donald Tusk’s government has pushed for new installations such as the 1,800-megawatt coal-fed Opole plant, a 11.6 billion-zloty ($3.7 billion) project revived by state-owned utility PGE SA in June after canceling it two months earlier because it was unprofitable.

“We need to protect the market from premature idling of generation units and from the lack of investments,” Woszczyk said in an Oct. 3 interview. “Time is running out as 2016 and 2017 are critical in terms of potential capacity shortages.”

Poland is preparing regulations similar to those drafted in the U.K., which would pay operators to run plants when prices don’t cover costs. Legislation drafted in Britain includes plans for capacity auctions, which would offer payments for making units available during times of peak demand.

Prices Plummet

“I like the path chosen by Britain,” Woszczyk said. “It’s a market-driven approach.”

Polish electricity prices for next-year delivery averaged about 160.85 zloty a megawatt-hour in the past 12 months, about 20 percent less than a year earlier, according to broker data compiled by Bloomberg. The contract gained 0.2 percent to 156.30 zloty a megawatt-hour at 1 p.m. in Warsaw.

A capacity market is necessary to build Opole and prices would have to rise at least 43 percent for the investment to pay off, PGE Chief Executive Officer Krzysztof Kilian was cited by Bloomberg Businessweek Polska as saying on Sept. 2.

Poland will find “means and ways” for PGE to build the project, Prime Minister Donald Tusk said in June.

“Investors in electricity generation need to trust the market to be able to recoup the money they spent,” Woszczyk said. “Capacity remuneration mechanisms, or CRM, can reduce the investment risk” and “stabilize future revenue” from the projects, he said.

Operational Reserve

Until that legislation is in place, the operational reserve should encourage power generators not to shutter unprofitable units, according to Woszczyk. The standard capacity margin that the country should keep in reserve is 18 percent of average peak demand, he said.

PSE Operator SA, the country’s grid operator, will have 300 million to 500 million zloty at its disposal to pay utilities in its first year, he said.

“The amount may increase in following years if it turns out it’s not enough to keep an adequate capacity reserve,” Woszczyk said.

Earlier this year, PGE wrote down almost the entire value, or 1.49 billion zloty, of its 1,500-megawatt coal-fed Dolna Odra power plant, saying it’s not profitable.

Dolna Odra’s share in the operational reserve budget will be “significant,” Waldemar Szulc, the deputy CEO of PGE’s generation unit, told reporters in Warsaw on Oct. 3.

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net

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