Henryk Baranowski: Further strengthening the EU ETS will cost EUR 6 billion to Poland

Henryk Baranowski: Further strengthening the EU ETS will cost EUR 6 billion to Poland

Henryk Baranowski, the President of the Management Board of PGE (joined CEEP in January 2017) and vice-chairman of the board of directors of CEEP says that strengthening of the EU ETS by increasing the Linear Reduction Factor to at least 2.4% and establishing the intake rate of the Market Stability Reserve up to 24% per year would result in a significant increase of wholesale electricity prices – up to 20% in Poland. It is also a serious challenge for other Member States from Central and Eastern Europe – particularly Bulgaria, Croatia, Estonia, Romania.

What do you want to accomplish as a CEEP member?

It is clear that international cooperation between companies from our region is essential to find a well-balanced compromise when adopting the EU’s policies. However, despite major common interests (notably the level of the EU ETS ambition, energy import dependency and the need to co-finance the energy transition from EU sources), utilities from Central and Eastern Europe still have much room for improvement in presenting their joint positions in Brussels. It is much easier to promote our interests by working together and speaking with one voice, as opposed to individual actions. It is necessary to identify not only mutual interests but also to find a common platform through which we could communicate with our partners. Therefore, we cannot underestimate the importance of a strengthened regional cooperation.

We perceive the membership in CEEP as a great opportunity to present our position to the EU institutions at the highest level. Despite the fact that we have some experience in direct cooperation with other utilities from the region within EURELECTRIC, we need to consolidate our regional approach and expand our relations also, inter alia, to transmission system operators from the other Member States. This is why we would like to focus more on cooperation between CEEP members as a tool to improve our relations with other key stakeholders.

Which should be CEEP’s priorities for the next years from your perspective?

The EU ETS revision and the current negotiating process in the Council and the European Parliament is definitely a key priority. The EP ENVI report and EP ITRE opinion substantially modify the Commission’s proposal and also go against some key politically agreed solutions at the European Council back in 2014 – e.g. the level of ambition in emissions reduction is changed. The EP ENVI amendments would make the post-2020 compensatory mechanisms extremely difficult to use for the energy industry from our region, which is highly dependent on indigenous fossil fuels.

Moreover, the strengthening of the EU ETS, which will be made probably by increasing the Linear Reduction Factor to at least 2.4% and establishing the intake rate of the Market Stability Reserve up to 24% per year would cause additional operational costs – referring to the Polish example they would amount to more than EUR 6 billion. We estimate that the overall operational costs would result in a significant increase of wholesale electricity prices – up to 20% in Poland. It is also a serious challenge for other Member States from Central and Eastern Europe – particularly Bulgaria, Croatia, Estonia, Romania.

Therefore, we need to proportionally increase compensatory mechanisms – the CO2 derogation and the Modernisation Fund – and address them to the utilities which are responsible for generating price signals on the electricity market. According to our estimations, increasing the transitional free allocation from 40% up to 60% of national auctioning volumes and the total amount of allowances in the Modernisation Fund from 2% up to 4% of the EU cap would partially compensate our additional costs caused by the strengthening of the EU ETS.

Moreover, we should advocate for the technologically neutral compensatory mechanisms framework. To address only one issue: our first priority will be to remove additional eligibility criteria, such as the Emissions Performance Standard at the 450 g CO2/kWh level, which as a result could increase Poland’s energy dependence on natural gas imports from Russia.

The second biggest priority is related to the energy market reform. Without any doubts – the implementation of the Energy Union is the biggest climate and energy regulatory agenda which has ever been launched.

Therefore, we should prepare our own assessment of key legislative proposals in the “Clean Energy Package” such as the new Renewables Directive, the Energy Union Governance Regulation, the Electricity Regulation and the Electricity Directive.

We will also strongly oppose the discriminatory Emissions Performance Standard, which is proposed for capacity mechanisms, as well as aim at limiting the EU-wide generation adequacy requirements. Also, the concept of the financing platform to support an EU-wide RES generation is unacceptable because it indirectly introduces national RES development obligations, contrary to the political agreement on this issue in the European Council.

Furthermore, we should focus on several state-aid related legislation pieces limiting the RES-biomass support, which has a huge potential in some Member States from the region and should not be discriminated.

The characteristics of the Member States from the region should be addressed by incentives and dedicated investment programs instead of sanctions and limitations, which would force us to become a more energy dependent region.

What are in your opinion the main challenges for the power sector in the EU?

Today, the main focus of discussions on the EU level is on the legislative actions that will shape the power sector in the post-2020 period. The most crucial areas and also challenges, from the perspective of the Energy Union future, include, as I have already mentioned, i.e. EU ETS revision, a proposal for new renewables framework, development of the internal electricity market, security of supply issues.

The key challenge from a market perspective is to ensure incentives for investors to build new generation capacities and modernize the existing ones. The energy only market no longer provides these investment signals for several reasons, but mainly due to a rapid expansion of subsidized low-carbon generation with low variable costs resulting in low wholesale prices, and a proper intervention is needed in the form of capacity mechanisms to address this issue and ensure security of supply.

A new legal framework for the power sector in the EU should not interfere with the Member States’ right to decide on its energy policy and domestic energy mix or with its key competences in relation to ensuring the security of energy supply.

Is an “energy only” market, in which generators’ only revenue comes from what they can sell on the market, a feasible project in the EU?

Currently, there are many countries in the EU where the actual power market design (“energy only market”) does not generate proper signals for generators (investments) and consumers (savings) and does not allow for estimation of the value of generation and transmission assets. Especially, a current low level of wholesale prices does not encourage new generation investments. We should also not forget that RES cannot credibly cope with the supply of electricity without certain amount of stable back-up capacity. Therefore, some countries decided to introduce mechanisms allowing for a capacity remuneration.

I am convinced that even in the case of alleviating some imperfections of “energy only markets” e.g. scarcity pricing, the uncertainty about expected future returns will adversely affect investment decisions and the overall cost of power supply for the society. Thus the “energy only market” will not guarantee sufficient electricity generation capacity.

In case of Poland, the Capacity Remuneration Mechanism is necessary to address the missing capacity problem. Therefore, the work on preparation of the capacity market to be implemented in Poland is underway. This mechanism will be fully in line with EU regulations: market-based, technology-neutral and open to the Demand Side Response.

Henryk Baranowski, President of the Management Board of PGE and vice-chairman of the board of directors of CEEP