June 23. 2024. 1:37

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PGE: We need a fair and well-functioning power market to finance renewables

The context for this power market reform has been formed on one hand by the security concerns, and high energy prices on the other. Do you think that this proposal brings us closer to a more secure power system and lower prices?

Wojciech Dąbrowski, CEO, PGE Polska Grupa Energetyczna: The Commission has proposed a dozen of measures that are working in at least some of the EU member states. For example, two-way contracts for difference (CfDs) will provide financing for our offshore wind farms in Poland. This instrument, together with PPAs can contribute to lowering prices, but only in the long run.

In the short term, we need to ensure a timely delivery of our renewable projects pipeline as they are key in ensuring affordable and secure electricity. To this end, CfDs signed before the market turmoil and the war in Ukraine started should be adjusted to reality. For example, it should be possible for their reference price to be dynamically adjusted and indexed to change the market situation, where the costs of labour, capital, and manufacturing have been increasing at the fastest pace witnessed in the last couple of decades.

It will take time to develop PPA markets across the EU and to build new renewable and nuclear power plants. People in the Commission understand it very well, and I appreciate, that they remained immune to calls for a revolution in the EU power market. We need a well-functioning, fair market, that sends the right price signals to all market participants and ensures the security of supply.

Before the war, offshore wind development has been one of the fastest-growing and most strategic energy sectors in Europe. Since then, the investment climate has significantly deteriorated, which calls for urgent action from the Commission to facilitate the timely delivery of projects. Especially because the Baltic region’s commitment in the Marienborg Declaration to achieve ca. 20 GW of installed capacity in offshore wind energy by 2030 will require speeding up the development of new projects, as currently the total installed offshore wind capacity on the Baltic Sea is ca. 2.8 GW.

With a potential of at least 7.1 GW of offshore wind projects, PGE can certainly play an important regional role in ensuring Europe’s security of supply. But, to make this happen we need to be working hand in hand with the Commission. These projects are not only capital-intensive but also require strengthened grids. As lowering the electricity bills for consumers becomes more important than ever before we need to look at the transition costs from the holistic system perspective. This is why we believe that the excess profits from CfDs above the reference price should be redirected to finance renewables, storage, and grid development, which is necessary to enable faster deployment of renewables.

With such an ambitious strategy, what is the main obstacle to faster deployment of renewables?

Wojciech Dąbrowski: For example, technical limitations of the grid are the single biggest reason behind the number of refusals to connect renewable installations in Poland, and the number is on the rise: in 2017/18 all grid network operators made more than 200 refusal decisions, in 2021/22 nearly 3,500. Even if almost all of them are related to the PV photovoltaics boom, in most recent months almost 80% of the applications are being refused due to technical limitations of the grid. In total, between 2015 and 2021, operators issued more than 6 000 refusals to connect to the grid installations with a total capacity of 30 GW. This represents almost half of the currently installed generation capacity of all types of sources in Poland.

If technical difficulties to integrate renewables into the grid prevail, the outdated transmission and distribution infrastructure will remain the biggest barrier to accelerated renewables development so the investment incentives here should come from the adequate market design. This is why we call on policymakers to ensure a stable regulatory framework for distribution grids, which guarantees a satisfactory rate of return on grid modernisation and reinforcement investments.

So what should the Parliament and the Council do with this proposal in your opinion?

Wojciech Dąbrowski: First of all we need to ensure, that neither PPAs nor CfDs are transformed by co-legislators into a regulated mandatory instrument that aims first of all to cap revenues of renewable and low-carbon generators, because this would significantly limit investments in the green transition. And by the way, there is not much about the “security of supply” issue in the Commission’s proposal. To a certain extent, the so-called “non-fossil flexibility” services will contribute to the grid stability, but here the Commission’s main intention is to cut prices. We agree, that it makes sense to develop flexibility markets based on demand side response and storage. We understand the Commission’s intention to incentivise this kind of flexibility service to cut the consumption of gas. Nevertheless, DSR and storage is not sufficient to secure an electricity supply, with several weeks in January with very low production from PVs and wind farms. My point is that the electricity market design has to address also investments in and operation of dispatchable generation. Simplified and flexible rules that would allow to prolong the current capacity markets and create new ones in these countries that are interested, would improve the security of supply in the EU.

If implemented in the proposed shape, what would this reform mean for companies like PGE? Will it make your decarbonisation plans easier and faster to implement, or maybe the contrary is true?

Wojciech Dąbrowski: PGE is the major producer of power and heat in Poland. We are eager to engage in the development of PPAs, we already implement very ambitious offshore wind plans, and our distribution company is a co-author of the Polish rooftop solar revolution. This reform can further empower customers with ideas like “energy sharing”, but we need to remember, that in the power system, a balance is inevitable. Not only between supply and demand, but also between the development of generation and development of grid, and between the rights of suppliers and the rights of consumers. CfDs are a good direction is that contracts for difference are to be voluntary, it will be up to the MS to decide whether to use them. The inclusion of nuclear power is also positive.

However, we are against transferring CfD-based revenues to all customers based on their electricity consumption, since this solution is counterproductive in terms of generating price signals for reducing consumption in peak hours. The price agreed in CfDs should be responsive to overall macroeconomic changes. The provision of obligatory CfDs for new RES installations lacks any capacity threshold, which might create difficulties with potential CfDs application for small installations. Also, the relation of the new CfDs provisions to the existing regulatory framework (especially RED and State-aid rules) should be clarified.

Finally, we have some reservations when it comes to mandatory financial hedging for energy suppliers as it is not the only solution to ensure the financial stability of these entities. The introduction of mandatory collateral, in particular with the obligation to use one specific instrument, may negatively affect the competitiveness of energy suppliers and their ability to manage resources and plan investments efficiently. The reduced competition also negatively affects end users and may reduce market liquidity. The introduction of Virtual Hubs in the proposed form for trading on the markets may disrupt long-term markets without solving liquidity problems. It increases risks associated with long-term hedging and its costs.

Some of the commentators lamented, that with the Commission’s proposal, the inframarginal generators would continue to obtain excessive rents in cases of price crises – what is your response to this kind of argument?

Wojciech Dąbrowski: This is a popular misunderstanding. The fact is that the revenues of the power generators have significantly increased last year, but our net profit in 2022 decreased by 16% and EBITDA decreased by 9%. The money paid for expensive electricity bills was not transferred to our pockets, it went to fuel producers and to the EU ETS system. Last year we spent more than EUR 4.2 billion on carbon allowances, more than twice the amount from the previous year. This is not a favourable environment for the accelerated deployment of renewables, which the Commission formally promotes. We are committed to building 3 GW of PVs, 2.5 GW of offshore wind farms, and 1 GW of onshore wind farms by 2030. Therefore, we need a fair, well-functioning power market to finance these plans, any sort of revenue cap can ruin it. I hope, that all stakeholders want companies like ours to invest more in renewables, not less.