Key global trends

In 2019, the situation of the Polish power sector was influenced by a number of global and European trends. In particular, the renewable energy and electromobility sector was developing as well as new measurement technologies opening opportunities for the use of high frequency data (HFD) with high accuracy concerning demand. The European regulatory environment had an increasing influence on the sector’s development profile in Poland, as did long-term pricing trends for energy resources and greenhouse gas emission allowances. In addition, Poland’s dynamic development supported a gradual increase in demand for electricity despite a growing energy efficiency of the economy.

• Technological progress in data collection and processing will affect TSOs as HFD holders
  In today’s economy, high frequency data showing economic activity in micro and macro scale play an increasing role. Until recently, such information consisted mainly of financial data (prices of shares and other financial instruments, exchange rates, etc.). With technical progress in measurement, it becomes increasingly possible to collect – and partly make available – data from the real economy (public transport passenger flows, vehicle flows, purchase information from credit cards, etc.). Among the data mentioned above, those originating from electricity and gas suppliers and from water and sewerage utilities, which are the closest to the real economy, are of particular value. New measurement technologies make it increasingly possible to collect, provide and analyse such data. European TSOs, including PSE, already make available to the public a range of data on electricity generation, demand and import. Technical capabilities will soon emerge that will enable PSE to acquire and access more detailed high-frequency data on the PPS operation, supporting the analysis of business processes in near real time.
• Technological changes in the area of electricity storage and generation affect the change of generation structure and nature of the transmission network and the TSO’s role
  The recent two decades have seen a rapid development of RES technologies, and their dissemination in Europe has been supported by fiscal incentives. So far, this development has involved mainly the widespread deployment of onshore wind power. Wind generation costs decreased dramatically, but uncertainty of generation remained an unresolved challenge. For several years, new RES technologies have also been widely deployed: offshore power (the recent development of the technology of large wind turbines has enabled its wider and more cost-effective use) and photovoltaics. Offshore power partly reduces the problem of generation uncertainty, as sea and ocean areas are much windier than land areas, but it is available only to coastal countries. For its part, photovoltaics contributes to the development of community energy and the emergence of active individual producers/consumers of electricity (households and businesses), called prosumers.
  Until recently, what posed a barriers to the development of renewable energy was the problem of electricity storage in periods of its excessive generation for use in periods when RES generation is impossible (no wind, night time, etc.). The lack of an effective storage technology rendered the solution of the problem impossible. However, the recent years have seen a number of technological breakthroughs making the commercial use of renewable energy more viable. Firstly, owing to the development of electromobility, the cost of batteries dropped significantly and the first commercial installations for the purposes of power systems have appeared. Secondly, new ICT and measurement technologies supporting the management of distributed sources offer an opportunity to use the e-vehicle fleet as an electricity buffer.
  At the same time, electricity storage technologies other than chemical cells are being developed. What draws particular attention is the growing interest in the power-to-gas and hydrogen electrolysis technologies. The widespread deployment of those technologies is to enable the use of excess RES energy for electrolysis and its long-term storage (albeit by no means efficient as yet) in the form of gas (e.g. hydrogen).
  In Poland, 2019 saw a very dynamic development of photovoltaics-based prosumer power. Generators are preparing for the implementation of offshore wind power projects. Work is also in progress on the first commercial-scale energy storage facilities. As a result of widespread use of those technologies, it will become necessary to adjust to the new model and spatial allocation of generation both of distribution networks managed by distribution companies (photovoltaics) and transmission networks managed by PSE.
• The development of the European market and increase in international exchange contribute to a long-term price convergence process in Europe
  The development of the Pan-European market has become a major objective of the European energy policy. It is supported by regulations increasing the capacity made available for the purposes of cross-border exchange, such as CEP70. The increase in the scale of exchange results in a progressive convergence of electricity prices in Europe. The acceleration of the development of a common market based on bidding zones through successive regulatory packages contributes to the development of the national transmission network and necessitates its adaptation to the new scale and directions of cross-border flows. In the medium-term, it can also be a source of additional costs for transmission system operators owing to the need for a more frequent use of remedial actions by transmission system operators outside the market, e.g. redispatching.
• The European climate policy increasingly contributes to an increase in the cost of generation from emission sources
  The situation of the Polish Power System, in particular the condition of generators using conventional generation sources (e.g. coal-fired power plants) is also increasingly influenced by the EU climate policy. The basic tool of the policy are ETS emission allowances, the prices of which are determined by the market. The increase in ETS allowance prices witnessed for several years (stabilised at EUR 24-26 per tonne in 2019) causes generation costs in the conventional power sector to grow, reducing its competitiveness vis-à-vis zero-emission sources. Under open market conditions, conventional energy sources will be forced to compete with domestic and foreign RES and with foreign conventional generators. Together with adverse pricing trends in the Polish coal market, this can contribute to accelerating the transformation of the Polish power sector.
  New methods of curbing emissions are discussed increasingly often. There are even proposals for economic growth suppression and degrowth. The implementation of such concepts would undoubtedly have a serious effect on the functioning of power systems.
• The process of weakening coal demand with a growing number of low-cost generators (open-pit mining in Australia, Africa, the Americas) results in a long-term declining tendency in global coal prices. The decrease in gas prices due to the emergence of new mining technologies contributes to a growing competitiveness of gas energy.
  The declines in global coal prices – very distinct in 2019 – reduce the competitiveness of the domestic coal-based power sector, as the prices of domestic fuel are increasingly less correlated with global prices and have been higher than global prices for a long time now. This results from the fact that Polish generators of electricity from coal do not compete in global markets. Together with the factors described in the previous paragraphs (electricity import, EU climate policy), this will be a factor supporting the process of transformation of the Polish power sector. The change process in generation will have a significant impact on the functioning of the PPS. At the same time, the long-term decrease in gas prices (also relative to coal) makes gas-based energy a medium-term alternative to coal-based energy. It has additional benefits, and lower CO2 emission rates of gas-fired units makes the aggregate cost of emission allowances lower (although, taking into account the ethane leakage during extraction and transport, wider environmental benefits are small compared to coal energy). Owing to a greater flexibility of gas units, gas-fired power plants integrate better with an extensive RES sector.

In 2020, the trends described above continued until the outbreak of the COVID-19 pandemic which affected some of them. In particular:

• The uncertainty of investment funding in the power sector has increased. Currently, aid schemes (at national and European level) provide for an increase support for energy transition towards RES development;
• Demand for energy in Europe, including Poland (due to the lockdown and the following recession) decreased significantly in Q2 2020. This contributed to a decrease in prices in Poland.
• It was accompanied by a decline in demand for CO₂ emission allowances in Europe, which resulted in a brief downturn of ETS prices. Under the ETS, prices returned to the pre-pandemic levels in June 2020, but forecasting their future level is difficult because it will be affected by the economic situation in Europe.
• The global coal prices remain at very low levels and coal prices in Poland are stable (while the price in EUR has decreased slightly due to the weakening of the zloty). The competitiveness of the Polish conventional energy sector remains low under these conditions.

In order to adjust the PPS to the new market design and new technologies, PSE has consistently engaged in the development of new technologies and cooperation on cybersecurity within the entire power sector. We actively participate in preparing new market solutions aimed to ensure integration of the European electricity market, through activities including the development and implementation of harmonised market mechanisms and products required by European regulations. One example of such activities is PSE’s involvement in work on the preparation and development of a method of capacity allocation based on the Market Coupling mechanism and the Flow-Based methodology. Another example is the involvement in the process of creating European platforms, such as the Single Allocation Platform for long-term transmission rights and the European platforms for balancing energy exchange.

We take part in the implementation of modern solutions. Our activities involve the participation in developing competitive mechanisms of electricity market operation in Poland and the European Union, covering the following market segments:

• Forward Market;
• Day-Ahead Market;
• Intraday Market;
• Cross-Border Balancing Market.

We are an active participant of innovative research projects. The projects in which we engage are aimed to develop solutions that allow new technologies to be actually implemented in the market and in the power system. These include:

• EU - SysFlex – a project aimed to develop tools for the integration of large volumes of renewable energy in the power system;
• OneNet – TSO – DSO – Consumer: Large-scale demonstrations of innovative grid services through demand response, storage and small-scale (RES) generation – a project aimed at developing efficient methods for the use of common resources by the TSO and DSOs for the acquisition of ancillary services;
• A pilot demonstration project for the implementation of a system supporting the operational security of the PPS under conditions of a high share of generation from wind sources based on the Special Protection Scheme (SPS) and hybrid battery electricity storage.

In the context of the planned integration of the national electricity markets, the main implementation measures are centred around the implementation of the common market encompassing the day-ahead and intraday markets. We actively participate in all processes related to the implementation of Flow-Based Market Coupling on all cross-border interconnections from Poland, with a special focus on synchronous connections.

The central segment of the European electricity market model is to be the Day-Ahead Market based on the Market Coupling (MC) process, with trading gate closure time at 12:00 hours. It is a mechanism within which exchange prices for each bidding zone in Europe can be calculated in a coordinated manner, in a common process, with a single computational point. Capacity allocation is to be based on the price difference between bidding zones. Thus it is an implicit auction model, i.e. combining transmission rights trading with electricity trading. Market participants do not reserve transmission capacity for the purposes of their cross-border transactions, but only for purchase/sale transactions on the market to which they are geographically assigned (to put it simply). Capacity allocation through the MC mechanism takes place automatically, in the course of energy trading in a manner that maximises the total market surplus. A graphical illustration of Market Coupling is shown below.

Implementation of the European Market Coupling is to take place under regional projects which are then to merge into a pan-European project. Currently, the following projects are being developed:

• MRC (Multi-Regional Coupling) – the basic Market Coupling initiative in Europe, under which capacity allocation is performed on the SwePol Link and LitPol Link interconnectors;
• CORE FB MC – a Flow-Based Market Coupling implementation project for the Central and Eastern Europe region, including the synchronous borders of the PPS;
• 4M MC – an area of temporary Market Coupling operation based on the NTP method, covering the Czech Republic, Slovakia, Hungary and Romania;
• Interim 4M Market Coupling – an initiative which emerged at the end of 2018, aimed to connect the 4M zone and the synchronous borders of Poland to MRC based on the NTC method until the CORE region is covered by the Market Coupling formula based on the Flow-Based method.

Price Coupling of Regions (PCR) is an initiative of European energy exchanges aimed to develop a single price coupling solution to be used to calculate electricity prices across Europe and allocate cross-border capacity on a day-ahead basis. The integrated European electricity market is expected to increase liquidity, efficiency and social welfare.

The initiative of energy exchanges initially involved the day-ahead markets in: Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Italy, Latvia, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. The initiative was established in 2009, and the PCR parties signed a cooperation agreement in June 2012. It is open to other European Power Exchanges wishing to join. In 2016, PCR was joined by the Polish Power Exchange.

PCR is based on three main principles:

1. One single algorithm. The single algorithm ensures transparent calculation of day-ahead electricity prices across Europe and allocates cross-border capacity. The algorithm was developed respecting the specific features of the various power markets across Europe. It optimises social welfare and increases transparency.
2. Reliable operation of the algorithm. The PCR process is based on decentralised sharing of data, ensuring a robust and resilient operation.
3. Individual responsibility of the energy exchange. The PCR Matcher Broker (PMB) allows the exchange of anonymised order books and cross-border transmission capacities among the exchanges to calculate reference prices and electricity transmission volumes between all bidding zones participating in the process.

Operational inclusion of the Polish bidding zone in the Single Intraday Coupling (SIDC) mechanism took place on 19 November 2019. Thereby the obligation to implement a pan-European solution for Single Intraday Coupling was fulfilled as set forth in Commission Regulation (EU) 2015/1222 of 24 July 2015 establishing a guideline on capacity allocation and congestion management (“CACM Regulation”).

SIDC development activities are undertaken:

• elaboration of solutions to ensure the correct operation and development of SIDC.
  PSE is engaged in this strand of activities by participating in steering committees and in SIDC expert groups. The most important initiatives for the development of SIDC in the coming few years include: (i) introduction of intraday auctions in which prices will be set for individual bidding zones, providing a basis for the calculation of the congestion rent for each border, (ii) implementation of 15-minute market products, (iii) implementation of a solution which allows transmission losses on HVDC connections to be automatically taken into account, and (iv) implementation of the flow-based method;
• local activities to expand the SIDC coverage.

In 2021, the following are planned to join the SIDC mechanism:

• the bidding zones of Greece and Italy (as part of the so-called third LIP wave including LIP14);
• the bidding zone of Slovakia (as part of the third LIP wave including LIP17).

The launch of LIP17 will mean that Poland’s four borders ((CZ-PL, DE-PL, LT-PL, PL-SE) currently covered by the SIDC mechanism will be joined by the PL-SK border, which will make it possible to phase-out the temporary Intraday Market solution used on this border so far, based on the explicit auction mechanism.

Apart from integration of segments of the Day-Ahead and Intraday Market, PSZE has also been working actively on the integration of balancing markets in Europe in accordance with the requirements of Commission Regulation (EU) 2017/2195 of 23 November 2017 establishing a guideline on electricity balancing (hereinafter: EBGL. The EBGL Regulation provides for integration of the European balancing market through the implementation of four platforms:

1. European platform for the exchange of balancing energy from replacement reserves
   • Required activation time: 30 minutes.
   • Implemented under the TERRE project launched on 15 January 2020.
2. European platform for the exchange of balancing energy from frequency restoration reserves with manual activation
   • Required activation time: 15 minutes.
   • Implemented under the MARO project; planned launch in July 2022.
3. European platform for the exchange of balancing energy from frequency restoration reserves with automatic activation
   • Activation via an automatic controller in up to 5 minutes.
   • Implemented under the PICASSO project; planned launch in July 2022.
4. European platform for the imbalance netting process
   • Based on avoiding the activation of balancing energy from automatic reserves in opposite directions by neighbouring TSOs.
   • Implemented under the IGCC project (operating in Germany and the neighbouring countries).

PSE actively participates in all implementation projects of European balancing platforms. Within the framework of work conducted at ENTSO-E, PSE participates in the preparation of detailed methodologies required by the EBGL Regulation. Since February 2020, our organisation has been involved operationally in the IGCC project. Connection to the TERRE platform is scheduled for January 2022, and to the MARI and PICASSO platforms in January 2023.

We actively cooperate with European operators under the TSO Security Cooperation (TSC) initiative. The members of the TSC are 14 operators from Central Europe. The objective of the initiative is to increase the operational security of interconnected power systems in the region, including PSE, through the intensification of regional inter-TSO cooperation, which currently involves threat identification processes and the use of relevant inter-TSO remedial measures.

The key issues concerning the TSC initiative, including the strategy and directions of development of TSC cooperation and activities, are decided upon by the TSC Cooperation Board. Technical operational matters and the elaboration of system solutions, including the definition of services to be supplied by TSCNET under service contracts – the responsible body is the TSC Advisory Operational Board. Several representatives of PSE are involved in activities resulting from the ESC decision-making and working structures.

We are a shareholder of TSCNET. We have our representative in the Shareholders’ Meeting and in the Supervisory Board of TSCNET, which is currently composed of 5 members.

PSE is actively engaged in the process of expanding the synchronous system of Continental Europe (CE) by the systems of the Baltic States (BS). In October 2018, the ENTSO-E Regional Group Continental Europe Plenary (ENTSO-E RGCE Plenary) approved the commencement of the relevant extension procedure. For the coordination of the process, a working group was appointed, which is headed by a representative of PSE.

In May 2019, an agreement entered into force, setting forth the terms and conditions of the synchronous connection of the BS system to the CE system. The agreement contains a set of requirements which is a list of detailed technical conditions for implementation by the Baltic TSOs, which are to ensure the secure operation of systems after synchronisation. One of the main infrastructural elements included in the set is the Poland-Lithuania submarine DC interconnector (Harmony Link). In December 2019, PSE and LITGRID received EUR 10 million in co-financing from the Connecting Europe Facility (CEF) for measures implemented as part of the preparatory stage of the project. In April 2020, energy market regulators from Poland, Lithuania, Latvia and Estonia signed Cross Border Cost Allocation Agreement under which they agreed to implement projects forming part of synchronisation phase II including the construction of the Harmony Link. In May 2020, PSE and three Baltic TSOs submitted a joint application for funding of Phase II of the Baltic Synchronisation Project from the CEF. On 1 October 2020, the CEF Steering Committee took a decision to grant funding in the amount of EUR 719.7 m.

Currently, the BS systems operate within the IPS/UPS system which geographically covers the former Soviet Union territory. The synchronisation of the BS systems with CE planned for 2025 is a part of the European Energy Union concept and an example of solidarity in energy security. The implementation of the project is of key significance to the completion of integration of the BS systems with the European system. This is confirmed by a roadmap signed in June 2020 by the President of the European Commission and the Prime Ministers and Presidents of Poland, Lithuania and Estonia, implementing the synchronisation project.

PSE is also actively engaged in the process of expanding the Continental Europe (CE) system by the systems of the Ukraine and Moldova. We are a member of a TSO Consortium set up to carry out additional studies and work aimed to adjust the technical operational standards of those systems and to ensure compliance with relevant EC regulations on operation management and market rules. A representative of PSE chairs the working group responsible for performing dynamic system analyses.