The issue of capacity adequacy, especially after 2025, is a well identified problem in Poland. For that reason, the lack of possibility to support high-carbon units with capacity payments - due to CO2 emission standards – attracted a lot of attention to the previously conducted auction. It decided on investments with a realisation horizon after 2025, i.e. on projects that would change the Polish energy sector. However, interest in the results of the current, seventh auction has clearly waned. Hardly it is surprising - Poland and the whole of Europe are in the midst of the biggest energy crisis in years. Meanwhile, it is in this capacity market auction that the expected diversity of technologies and the first battery storage facilities are emerging.
DSR
DSR won the most contracts in the 7th auction with 1.5 GW, mainly through aggregators. This is the highest value of contracted demand reduction of all auctions to date. DSR has come a very long way in Poland since 2015, when the operator did not have such a tool at the time of the announcement of the controlled load reductions, or in 2017, when - before the introduction of the capacity market in Poland - it contracted 350 MW[1]. Today, it is a well-developed mechanism that plays an important role in the system.
Gas
Among gas-fired capacities, contracts were granted to: a new PGE gas-fired unit in Rybnik (capacity contract for 795 MW) and a cogeneration unit, which is to be built by Veolia in Łódź. It will replace two coal-fired units at the EC4 CHP plant. A 58 MW unit - owned by PGE Energia Ciepła EC Szczecin - will also be modernised and adapted to burn natural gas. The remaining contracted gas-fired capacity (approximately 360 MW) is made up of existing units, led by the gas-steam unit in Włocławek.
Co-firing of biomass with coal
1.1 GW has been contracted in units co-firing biomass with coal. As in the previous auction, these include five 200 MW class units at the Połaniec Power Plant. This time there is an additional modernised unit at Ostrołęka, which will be converted from coal-fired to biomass co-firing. A 9 MW biomass unit at the Białystok CHP plant also won the contract.
Foreign capacities
In the seventh auction, as in the previous year, foreign capacity was again awarded contracts. Of the 550 MW of capacity, 300 MW from Slovakia and 250 MW from Lithuania via the DC line.
Hydroelectric power plants
Among the hydroelectric capacities, 450 MW are existing larger and smaller dams, run-of-river power plants and pumped storage units, while the remaining 140 MW are modernised units, led by the Porąbka-Żar pumped storage power plant (121 MW).
Batteries
The most important news, however, is the appearance - for the first time in the capacity market - of energy storage. Five units of 165 MW in total have been contracted. The largest of these (at the same time one of the largest in Europe and the largest in Poland) will be the Columbus Energy subsidiary's facility of 120 MW and a capacity of 0.5 GWh, which will be built in southern Poland.
OX2's storage facility, which according to press reports is of 50 MW and 0.1 GWh of capacity, has won a 21 MW capacity contract and will be located in the Podkarpackie region. In addition, an energy storage facility of 7.5 MW (reported capacity 6.65 MW)/28 MWh) will be built near Wrocław, whose investors are Hynfra and PKE Pomorze. The other two units are a storage facility owned by Energa (Orlen) at the Bystra wind farm of 4 MW and 9 MW.
Coal
Over the years, the share of supported coal capacity among existing units fell from 82% (7.4 GW) in the 3rd auction (for 2023) to 0. For retrofitted units, the decline was even more pronounced, from 94%-100% in auctions in the first four auctions to 0 in the last one.
Coal-fired units could not compete in the December capacity market auction (as in December 2021), as power plants emitting more than 550 g CO2/kWh cannot receive capacity market support from 1 July 2025. These periods (2026 and 2027) were contracted in the last two auctions.
In summary, in the last main capacity market auction of December 2022, contracts for existing generating units account for the largest share (34%). 29% of the capacity is DSR. About one-fifth is new capacity - all with a carbon footprint below 450 g CO2/kWh. Energy storage appears for the first time. There were also retrofitted capacities (6%) and foreign ones - Lithuanian and Slovak (10%).
However, despite the diversity of technologies in the 7th auction, in the absence of coal participation, it should be recalled that in the capacity contracts for 2027, many of the secured capacities are still coal units. As a result of all previous auctions, a total of 18.7 GW of capacity has been contracted for the 2027 delivery year, of which 7.9 GW is coal capacity.
The situation in which the supply of power will be ensured by coal-fired units, albeit in increasingly smaller volumes, will persist for a long time - until the expiry in 2035 of the last contracts for the 1085 MW unit in Kozienice power plant, Jaworzno III power plant, two 900 MW class units at Opole and the newest lignite unit at Turów. This is a total of 3.6 GW of coal-fired capacity that is likely to remain viable for the next 12 years.
Costs
The closing price of the power market auction was a record high - PLN 406.35/kW/year. Therefore, the bill for all the contracts concluded on it (valid in 2027 and subsequent years) will amount to PLN 10.2 billion (nominally). As much as 65% of this amount will support new gas-fired capacity (PLN 6.7 billion), with the Veolia steam-gas unit accounting for PLN 1.2 billion and the Rybnik power plant PLN 5.5 billion (whose construction and maintenance contract will cost PLN 3.76 billion net[2]). We will support them until 2043. This means that the financing obtained from the power market more than exceeds the costs of the investment in Rybnik, driving up the costs of the transformation. This is the situation we are facing for the second year in a row. The lack of competition in the power market and the limited supply of new projects means that companies will have record revenues from the power market (higher than the value of investments), but at the expense of consumers and the economy as a whole.
The total cost of the capacity mechanism, as a result of the contracts concluded in all auctions to date, is PLN 74.05 billion, excluding inflation.
Balance of new capacity
Will such a massive funding stream ensure that Poland's power market is balanced amid the drive towards a low-carbon transition?
So far, around 8.4 GW of new generation capacity has been or will be created under the capacity market. Initially, this mechanism supported new coal-fired investments, which without the capacity payments would have generated losses from the first days. Most of the new low-carbon capacity only came on stream after the emissions limit of 550 g CO2/kWh came into force. There are 5.5 GW of these (with emissions below 450 g CO2/kWh). The capacity market has also created financial incentives for 10 existing units to switch from coal: 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.
At the same time, according to the Transmission System Development Plan 2023-2032, PSE's strategic document, the arrival of the above-mentioned new capacity is unlikely to be sufficient to balance the system. PSE estimates that additional dispatchable capacity will be needed to keep the Loss of Load Expectation (LOLE) indicator below 3 hours. Otherwise, this indicator - i.e. the number of hours in which energy may not be delivered - will increase.
The additional capacity required is shown in the chart below[3]. In 2030, an additional 6 GW of capacity is required, while in 2035. - the year of expiry of the last coal contracts in the capacity market - this is already 13.5 GW.
As estimated by PSE, if additional capacity is not built, the LOLE indicator will increase, i.e. the period of power deficit in the system will lengthen. On average, in 2030 it could be 1796 h (about 2.5 months) and in 2035 it could be more than half a year (4559 h).
Conclusions
The ongoing discussion about the dilemmas of how to transform Poland's energy sector in a climate-neutral but uncertain gas market is reflected in the results of the capacity market auctions. It shows how challenging it is to ensure capacity sufficiency in Poland. All this is happening in a situation where energy storage facilities have not yet appeared (this is only the seventh auction to change that), and new RES capacity is developing too slowly and faces many barriers: from the blockage of onshore wind farms by the 10H rule to problems with connections and administrative permits for photovoltaics.
High costs
So far, the capacity market has supported 8.2 GW of new generation capacity with a total value of PLN 40.2 billion. The remaining PLN 34 billion has been earmarked for modernisation (mainly hydropower and coal-fired units, without fuel switching), use of the demand side (DSR), maintenance of existing units, subsidising foreign units and - only in the seventh auction - investment in storage facilities.
The problem of balancing remains
Although the PLN 34 billion spent postpones the risk of power shortages, it will not ensure a sustainable change in the generation structure, which the outdated Polish power system so badly needs. Of this part of the funds, only storage facilities (PLN 1.2 billion) are an investment for years to come, which will permanently improve Poland's energy security.
Despite massive public support, without significant improvements in energy efficiency, in the face of the increasing electrification of heating, transport and a need to produce green hydrogen, will be in an increasingly difficult situation.
More storage needed
The latest power market auction does not change this picture. Of course, the appearance of the awaited energy storages should be appreciated, although their location may be puzzling - the vast majority of power in the south of Poland, while the majority of variable generation (onshore and offshore wind) is planned for the north of our country. The auction winners do not include, for example, PGE's announced large-scale energy storage facility in Żarnowiec[4]. The question then remains whether the scale and location of these investments meet the needs of the grid. As they are urgently needed, the power market should be remodelled to generate more new projects. This also applies to DSR or hybrid RES.
Poland’s electricity system still not reaching out to the heating industry
The results of the 7th power market auction must also be viewed from the perspective of what projects did not appear in the auction. Apart from Veolia and a small unit in EC Szczecin, there are no new cogeneration units (including the 450 MWe gas-steam unit in Gdańsk, which has been announced for a long time). This means that not much will be happening in the district heating transformation, and we are, after all, talking about the perspective of investments ready for 2027.
The capacity market in its current form primarily created financial incentives for capacity, mainly coal-based, to remain in the system. This has postponed both diversification and transformation. Under the crisis conditions in the energy markets, the undefined role of gas in the transformation and the general uncertainty of the direction of the Polish energy sector, only few such projects appeared. New low-carbon capacity is being built in small numbers and costs are rising year on year. We are a long way from ensuring, at a reasonable cost, security of electricity supply - and this is the objective set for the capacity market. This is why we believe that the capacity market needs a reform that leads to support for clean and flexible technologies - DSR, energy storage, hybrid RES or CHP. However, the December action brings harbingers of transformation - the capacity market becomes cleaner afterwards and is supplemented by investments that were not there before. The problems of balancing the system remain unsolved, but - with a proper reform of the capacity mechanism - Poland has a chance for it to become an instrument of the much-needed transformation.
[1] 350 MW was then contracted in the so-called Guaranteed Programme, and a similar but unverified volume in the current programme; Forum Energii, Spring is coming in the DSR, 5.4.2018, https://forum-energii.eu/en/blog/w-dsr-nadchodzi-wiosna
[2] PGE CG, PGE wybuduje blok gazowo-parowy w Rybniku, 12.01.2023, https://www.gkpge.pl/grupa-pge/dla-mediow/komunikaty-prasowe/inne/pge-wybuduje-blok-gazowo-parowy-w-rybniku.
[3] It should be emphasised that these values take into account the capacity market and indicate the amount of capacity above what was contracted. The exception is the last capacity market auction, as this took place after the publication of the PSE development plan.
[4] T. Elżbieciak, Z czym do rynku mocy? Będą kolejne bloki gazowe, 13.12.2022, https://wysokienapiecie.pl/79857-z-czym-do-rynku-mocy-beda-kolejne-bloki-gazowe/.
