Locational market in Poland. Security of supply, costs and the impact on the energy transition
In the latest report Locational market in Poland. Security of supply, costs and impact on the energy transition, Forum Energii recommends changes on the energy market in Poland. It is a response to the emerging problems of the Polish energy transformation - high prices, ageing infrastructure, dominant share of coal. As an example, it presents the functioning of the electricity markets in the United States.
The energy market is in crisis - it does not provide the right economic incentives to encourage the launch of new projects. We need not only investment in new low-carbon power plants, but also in flexibility (DSR), energy storage, energy efficiency and grids. At present, it is difficult to implement any power projects without support. Numerous restrictions on state aid to protect European consumers mean that there will be less and less public funding for power projects. Changes in the functioning of the energy market are necessary, and they should be the driving force behind technological changes in the energy sector. In the new market model, prices should reflect the real condition of the energy system - the cost of producing electricity and sending it to where it is needed.
The authors of the report, Dr Joanna Maćkowiak-Pandera and Michael Hogan from the American think tank Regulatory Assistance Project, highlight the current organization of the electricity market in Europe. It is based on large, inflexible and mostly very old power plants and transmission networks, which are too few in number. The market is divided into very large zones where there is a single wholesale price. The costs of transmission and congestion are shared between all market participants, regardless of where the customer is located and what barriers need to be overcome to supply the customer with electricity.
The Forum Energii recommends the introduction of a locational market. To put it simply, it is a market where the price is determined in a specific location of the system - based not only on the cost of production, but also on the cost of supplying electricity to the customer. Locational markets are successfully operating in Canada, Australia and many states in the USA, including the Texas ERCOT market. In Europe, the debate on changes in the energy market is slowly starting, but it is not advanced. Poland has a chance to become a leader in this field in Europe.
As the Polish economy grows, so does the demand for electricity. This involves taking a number of strategic decisions on the location of power plants and networks. It would be good if these decisions resulted in a reduction in costs for Polish consumers. Without the information provided by the locational market, it is difficult to make rational decisions, says Michael Hogan from the Regulatory Assistance Project, author of the analysis.
The biggest advantage of the locational market is that congestion is valued and, to a large extent, removed by entities on market terms. In practice, this means that new investments into generation and transmission will appear where they are most needed. This is an economically efficient solution that will significantly facilitate the integration of renewable energy sources and energy storage in the system. It avoids manual control of the energy system by the transmission system operator - says Dr. Joanna Maćkowiak-Pandera, co-author of the analysis.
Michael Hogan adds - It is becoming widely understood that ‘flexibility’ will be the scarce resource on the power system of the future; what is much less well understood is how much of that valuable flexibility will be driven by locational choices, both in short-term consumption and long-term investment. Without proper locational marginal price information, bad choices will continue to be made, needlessly driving up the cost of electricity to all Polish consumers, as we are already seeing next door Germany.
It is important for us not to discuss the future of the Polish energy sector only at the occasion of rapidly rising energy prices or possible blackouts. We believe that the reform of the electricity market is now a priority. This is a subject that requires broad discussion and courageous decisions. The longer we rely on spontaneous and expensive measures taken by the system operator instead of the market itself, the longer the market will remain stagnant and investments in networks will not keep pace with demand. - adds Maćkowiak-Pandera. This solution can be seen as a philosophy of thinking about its local stakeholders and their specific needs and motivations. By increasing the competitiveness and liquidity of the market, we encourage the use of renewable and alternative sources, promote the most necessary investments and new technologies.
Location market solutions will bring benefits in the future
- Generation sources, but also energy storage facilities and grid investments will be undertaken primarily where they are most needed. This means greater cost efficiency.
- Production and transmission costs will be optimised in a specific location to support the energy transformation and reduce costs.
- When the inhabitants of a region do not see any benefits for themselves, it happens that they protest against investments. Lower electricity prices will motivate people to accept the changes.
- The transmission system operator limits the costly redispatching costs in order to maintain stability of supply, which means that the costs of redispatching are not charged to market participants.
- It will be easier and cheaper to integrate renewable sources, storage facilities and the energy system will be more and more flexible.
Authors of the report:
Dr Joanna Maćkowiak-Pandera, Forum Energii
Michael Hogan, Regulatory Assistance Project
Date of publication: 4 July 2019
Files to download
Energy transition in Poland | Edition 2019
How to ensure that the consumer improves the security of the energy system and benefits from it?
Integrating Variable Renewables in Poland | Eight points on integrating variable renewable energy to the Polish power system
Risk preparedness in an integrated European electricity market