The current capacity market is coming to an end - with two more auctions to go, including the final one next year. In the auctions held between 2018 and 2024, only 7 GW of new low-carbon dispatchable capacity and 1.9 GW of battery storage have been or will be built with support from the market - still not enough given the needs of a dynamically changing energy system. Poland needs low- and zero-carbon new capacity, capable of flexible operation in a RES-based system. We need units that will support sector coupling, i.e. the combination of the power generation and heat sectors, the development of electromobility or the electrification of industry. The new mechanism should be seen as an important part of supporting the investments needed to meet the objectives of the updated National Energy and Climate Plan.

Can these challenges be addressed by a capacity mechanism? Yes, but it needs to be organised differently than it is today. The moment to decide on a fundamental reform of this mechanism is good: the Polish government must review its functioning in 2024.

Investment gap

Poland is threatened by an investment gap: old coal-fired power plants will be withdrawn from the system due to their age, unsuitability for operation under conditions of high RES shares, failure rate and for economic reasons - their maintenance and operation are becoming more and more expensive. At the same time, there are still not enough new projects capable of filling the post-coal gap. PSE estimates that by 2035 - the year when the last contracts for coal in the capacity market expire - an additional 12 GW¹ (cf. chart below). The effects of a lack of investment will start to be felt after 2028, at which point three quarters of coal units will lose support and generate losses for utilities. This is confirmed by the ENTSO-E modelling results: according to the European Resource Adequacy Assessment, Poland has an unfavorable adequacy balance that will persist after 2030.²

Meanwhile, opportunities for financial support for coal-fired power plants are running out. Under EU state aid rules, the Commission has authorised the operation of a capacity market for 10 years, i.e. auctions that secure capacity in the system from 2021 onwards. (cf. next graph). The last capacity market auction - at which capacity for 2030 (and beyond, as capacity contracts can be as long as 17 years) will be contracted - will take place in December 2025.

Poland is currently negotiating additional changes to the current mechanism with the European Commission. The basis for this is the EU regulation on the internal electricity market, amended this year³. It will allow coal to be supported for a while longer - until the end of 2028 at the maximum. Although the extension of the capacity market - the so-called coal derogation - is discussed in the context of the stability of the Polish system and it is this topic that dominated the discussion, at the same time it proves that the current mechanism has not fulfilled its task. The extension of the capacity market for coal - from the perspective of the investment gap and the needs of the system - does not solve the problem, but only postpones it and leads to a bad allocation of money.

What is the Polish power market like?

In theory, the capacity market was supposed to support new investment in generation capacity, which was and still is in short supply in Poland. However, it was designed in such a way that all power plants - new, old, modernised, as well as customers who do not supply power to the system, but can reduce demand - were literally thrown into one basket. This is because the European Commission considered that the capacity market was to be technology-neutral, i.e. to create a level playing field for all technologies. As a result, during the first years, the capacity market mainly supported (as many as 80% of the contracts) coal-fired power plants already in the system.

With the support of the capacity market, around 10 GW of new generation capacity and 1.9 GW of storage have been or will be built. However, this should include coal-fired units (Jaworzno, Opole and Turów, close to 3 GW) whose construction was already underway when the capacity market became operational. They were given support because it was clear that they would not earn for themselves.

The majority of new low-carbon investments only appeared in the capacity market auctions after the emissions cap of 550 g CO₂/kWh came into force, effective from 1 July 2025. It restricted coal-fired power plants from competing in an auction held in December 2020. (i.e. from the year of supply 2025). There are 7.2 GW of new capacity, with emissions below 450 g CO₂/kWh 4. The capacity market has also created financial incentives for 10 existing units to switch from coal fuel: seven, with a total capacity of 500 MW, will switch to gas and three (with a capacity of around 600 MW) to biomass co-firing. This will not fill the investment gap.

What next?

The capacity market has an increasingly important place in EU electricity markets. Treated initially as an exception, it is being applied by more and more countries: in Belgium, France, Italy, the UK (already outside the EU), on whose experience we Polish mechanism was modelled. Even Germany, which has always opposed mechanisms to reward capacity, has announced the introduction of a capacity market by 2028 to support new gas-fired units to replace coal and, in the future, to use hydrogen. This year's changes to the EU's Electricity Market Design regulation reflect an evolving approach to capacity support markets: no longer something unique, have become firmly established in the structure of the European market, with an easier path to acceptance by the European Commission.

However, the fact that the capacity mechanisms has gained EU approval does not mean that the Polish version of this mechanism will be allowed to operate as it has done so far. The capacity market is supposed to ensure the availability of dispatchable capacity, but under conditions of energy transition and reaching a climate-neutral system.

The capacity market is expensive and we all pay for it - households and industry alike. Every year it is an average of PLN 5.7 billion⁵. In the electricity bills of an average household in 2025 this will be an additional PLN 137 (net) .⁶

In return, industry, for which the capacity fee depends on electricity consumption, will pay a surcharge of PLN 141.2 next year for each megawatt hour consumed, 11% more than this year.

And if only because of the costs to energy consumers, the capacity market should be planned in such a way as to support future technologies designed for a new, low-carbon energy system. Contracts concluded under the capacity market are valid for up to 17 years. And this means that if Poland extends this mechanism for another decade, the contract concluded from 2040 will be in force... until the end of 2056. Yes, in the coming months we will be deciding on the financial obligations borne by future generations. And about the shape of the market in the 2050s. 

New capacity market

Following an analysis of the current capacity market model and its effects made together with Magnus Energy, the Forum Energii proposes a new look at the capacity market.

New scheme should translate into the construction of new, cost-effective, highly flexible units that will be able to cooperate with variable RES and balance the system after the shutdown of coal-fired power plants. The capacity market must also be viewed in the context of the use of different national resources. Just as the current capacity mechanism has boosted the development of DSR (demand side response), a reformed capacity market should see the heating industry. Indeed, district heating is such a resource for the electricity system, for which participation in the capacity market and the provision of flexible operation services should be a way to decarbonise and generate revenues from the electricity market.

The main objective of the reformed capacity mechanism should be to stimulate investment in generation capacity that is most urgently needed for the Polish power sector: low- and zero-carbon and flexible. A properly designed capacity market should increase technological diversification and support the decarbonisation of the Polish power sector.

But generation adequacy is not the only need for an electricity system that is changing just now. The updated National Energy and Climate Plan shows that in 2030. Poland will produce nearly 60% from RES sources. In the 2030s, the Polish electricity system will undergo a transformation: a dynamic increase in production from variable renewable sources (the construction of which still needs to be accelerated), the setting aside of conventional units, and the growing electrification of various sectors. This means that capacity mechanisms should be adapted to the needs of the system in future, where flexibility will be a key need. New capacity replacing coal will have to operate in an increasingly flexible way.

Strength in diversity

What we are currently buying at auction is a single product: a commitment by the capacity supplier to remain ready to supply a certain amount of power to the system during the supply period and to supply a certain amount of power during emergency periods. Different technologies perform different functions on the system and not every technology offers the same speed or period of power delivery. Therefore, it makes sense to differentiate products for different system needs.

Here is our proposed way of organising the auction under the new power market:

• Firm capacity auctions - i.e. supplied continuously over longer periods; high availability; longer activation times; contracting at annual auctions, in a manner analogous to the current capacity market, e. enabling capital expenditure to be covered through multi-year contracts. These units should support the system at a time when access to wind and solar for longer periods is insufficient to balance the system.
• Flexible capacity auctions - e. characterised by rapid response to network variability (e.g. within minutes); short to medium activation times (hours); availability at specific times rather than around the clock; contracting at auctions held once a year or more frequently, with the possibility of contracting for shorter periods (counted in months). These units should be able to react quickly to changing weather conditions and balance a system with a lot of weather-dependent capacity.

At the same time, it is necessary to maintain technology neutrality, i.e. to allow different technologies to access different auctions. When conducting future auctions, regardless of what product will be purchased in them, other changes are also needed. These concern:

• lowering the minimum capacity for suppliers from 2 to 1 MW in order to make better use of distributed resources could lead to greater technological diversification and increased competition,
• differentiation of penalties for non-delivery of capacity for different suppliers, as high penalties are a lock-in for small market players; in order to treat small and large market players equally, such a system could be designed in a way that increases the penalty proportionally according to power - analogous to a progressive tax scale,
• more frequent auctions (so-called 'rolling auctions'), for example in periods of 5-3-1 years before the year of supply; this would ensure better adaptation to the needs of the system - balancing long-term sufficiency with the need for flexibility and the capacity of power suppliers,
• possibilities to submit hybrid installations to capacity market auctions and to set capacity utilisation factors for the entire technology portfolio; submetering, a more flexible certification process.

Summary

Extending the capacity market for another 10 years cannot be an end in itself. The new capacity mechanism is first and foremost to support new projects, not once again to give illusory hope of prolonging the use of coal. It should be a vehicle to enable the new investments identified in the NECP to safely move away from coal, activate and modernise all resources in the system - especially district heating - and enable the further rapid expansion of renewables and their integration into the system. The solutions we are proposing are primarily pragmatic - their aim is to finally bridge the coal gap in Poland and support the construction of new capacity. Not every capacity market, but only a modern mechanism for supporting new capacity, will be up to the needs and challenges of the Polish power sector.

1. PSE, Draft Development Plan for Meeting Current and Future Electricity Demand for 2025-2034, https://www.pse.pl/documents/20182/21595261/PRSP_2025-2034-dokument_glowny_do_konsultacji.pdf/dc3ab1a8-4554-4e93- 9696- 596f83b3b5fb?safeargs=646f776e6c6f61643d74727565.

2. The negative European assessment of resource adequacy justifies the introduction of a capacity remuneration mechanism. For Poland, it shows that in a decade there will be an adequacy problem in Poland. In the reference scenario, the LOLE indicator in 2033 in Poland is 8.5 hours, and in the scenario assuming faster economic withdrawal of units - 12.5 hours. These are the values after taking into account power contracts already concluded. https://www.entsoe.eu/outlooks/eraa/2023/.

3. Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market in electricity (recast), OJ L 158, 14.6.2019.

4. The capacity figures are given according to the capacity contracts, i.e. with an adjusted availability factor. Their installed capacity will therefore be slightly higher.

5. Own calculations based on URE information on the real annual costs of the power market. Applies to 2021-2025.

6. ERO President publishes power fee rate for 2025. - News - Energy Regulatory Office.