Electricity market

A thorough overview of the Electricity sector, covering the following areas:

Key Market Characteristics

Background

The sub-sectors:

- Generation

- Distribution

- Transmission

Legal and Regulatory Structure

Market Structure

Future Changes





THE ELECTRICITY MARKET

Introduction

Until the 1990s, all aspects of the electricity sector in Poland were directly or indirectly controlled by the state. There was a wide range of hidden subsidies, electricity was sold at below economic cost and it was not possible to develop a flexible financial system to meet the requirements of the sector. During 1989 and 1990 the first indications of long term reforms appeared with the objective of introducing decentralisation, increased productivity, promotion of competition, privatisation and deregulation. A key aim of the reforms was to open the sector to the capital markets.

The reforms started with the disbanding of the so-called Amalgamated Power and Lignite Industry enterprises and five large Power Engineering Regions, as well as the divesting of some associated industries. This laid the groundwork for the preparation of the process of commercialising power industry enterprises: the generation enterprises were transformed into joint stock companies, a separate transmission company was established and regional distribution companies were set up.

Privatisation of the generation and distribution companies is underway, although it remains unclear when the process will be completed. There are 17 system plants, 19 combined heat and power (CHP) plants and 33 regional distribution companies.


Key characteristics

The following characteristics of the power sector in Poland should be noted:

• over-capacity of electricity generation;
• much of the plant is old and inefficient;
• the overwhelming majority of electricity and heat generation is fuelled by domestic coal;
• significant environmental problems;
• electricity prices are controlled by an independent regulatory authority;
• lack of available state finance;
• privatisation of the sector is underway; and
• liberalisation of the market has yet to take effect.

From the point of view of generation capacity, there is no current need for Poland to build new power plants. This is primarily due to the number of power plants built in the 1970s and to the fact that demand dropped during early 1990s after the economic policies of shock therapy were introduced. Total end-user electricity consumption dropped by 18% from 1989 to 1992. Industrial use went down by approximately 30% during this period, whereas domestic use remained the same. In 1993, the demand for electricity amounted to 70% of the 33 GW installed capacity. Demand started rising again in 1993, but capacity still exceeds demand by 25 to 30%. Demand is, however, now expected to increase: one semi-official estimate is that the consumption of electricity will rise from its current level of 140 TWh to between 200 and 236 TWh by 2020.

Under the centrally planned economy there was limited retirement of ageing plants and little attention was given to maintenance and upgrading. Due to a programme of rapid capacity expansion, the 1970s saw an annual growth in capacity of 1,150 MW, which was twice the rate of growth in the 1960s. During the 1980s the figure reverted to the 1960s level. The result is that more than half of Poland's capacity was built in the 1970s and many of the plants from this period operate in a very inefficient manner.

The Polish Power Grid Company (Polskie Sieci Elektroenergetyczne S.A.) (PSE) has estimated that 20 GW of the total installed capacity of 33 GW is in need of modernisation and that 2.8 GW should be retired before the year 2005.

Power generation in Poland relies to a large extent on coal. Statistics for the 1990s are set out in this table:

Power generation in Poland

There is no nuclear power in Poland. The construction of a nuclear plant that had started in the 1980s (located at Żarnowiec) was stopped in 1991. Approximately 96% of electricity therefore continues to be generated from solid fuels.

There is very little energy produced from renewable sources although there are a number of projects currently under consideration. In addition, there exist obligations under Polish legislation promoting the purchase by energy traders of renewable energy.

The use of coal and lignite is a major cause of environmental problems in Poland and the electricity generation sector is responsible for much of the air pollution, with emissions of sulphur dioxide (SO2), nitrous oxide (NOx) and particulates (fly ash). The resulting air pollution levels are substantially higher than those in the countries of Western Europe.

The Energy Regulatory Agency (Urząd Regulacji Energetyki) (URE) currently approves tariffs and thereby effectively controls the price of electricity and heat. Before the introduction of the shock therapy programme in 1990, prices bore no relation to the cost of supply. The programme increased prices by three and a half times for industry and four times for domestic users. However, this has not been maintained, and during the 1990s the increases have merely tracked inflation or have been less than the inflation rate.

Estimates vary as to how much needs to be spent on the sector over the next few years but recent estimates put the figure at between $15 and 20 billion. The finance will be found from the domestic banking sector and the international markets. It is highly unlikely that state finance or guarantees will be involved. An important issue which has a significant impact on the question of finance is the existence of the long and medium term power purchase agreements. Receivables under these agreements have provided the security for most of the financing in the sector to date. The power purchase agreements were signed between the generating companies and PSE. It is the intention of the government to replace the current regime of the power purchase agreements in order to promote a competitive electricity market (see section on "Market Structure" below).


MAIN INDUSTRY PARTICIPANTS

The power sector is divided into three sub-sectors dealing with generation, transmission and distribution respectively. These sub-sectors are independent in the administrative as well as in the economic sense.


Generation

The generation sub-sector comprisesd of 17 system power plants or groups of such plants and the 19 combined heat and power (CHP) plants. The power plants and CHPs are joint stock companies wholly owned by the State Treasury, except for those which have already been subject to the privatisation process. As at January 2003, these include the following:

• EC Krakow-Łęg heat and power plant: 55% of its share capital acquired by the French company, EDF, for the sum of $79.75m; a further $5m was committed in a five year investment plan;
• Będzin CHP plant: 25% of its share capital floated on the Stock Exchange, 52.5% having been acquired by MEAG of Germany for $33.9m;
• Elektrownia Patnów-Adamów-Konin S.A.; 20% acquired by the Polish telecoms and power conglomerate, Elektrim S.A., for $88m plus a capital investment commitment of US$100 million in the first year and then $1 billion over the next ten years;
• Elektrociepłownie Warszawskie S.A. (the Warsaw heat and power company): 55% of its share capital originally acquired by Vattenfall of Sweden for $235m, plus a capital investment commitment of US$600 million; Vattenfall has increased its stake to 69%;
• Polaniec Power Plant: 25% of its share capital plus one originally share acquired by Tractebel for €87.5m; Tractebel transferred their shareholding to Electrabel, which has since increased its shareholding up to 99%;
• Kongeneracja S.A., the Wrocław based CHP plant is listed on the Warsaw Stock Exchange, 32.6% being owned by EnBW of Germany and EDF of France;
• MPEC Wrocław: another Wrocław heat and power plant whose shares have also been floated;
• ZEC Wybrzeże S.A., the Gdańsk heat and power company: 45% acquired by EDF and GDF for €623m; they have now acquired a majority. ZEC Wybrzeże S.A. has proceeded to buy 45% of two heat and power companies in Toruń - Elektrociepłownie Toruń and Energotor Toruń;
• Białystok CHP: 45% of its share capital acquired by the French company, Société Nationale d'Electricité et de Thermique for $44.3m, plus €16m to gain majority with investment commitments of €55m over five years;
• Elektrownia Rybnik S.A., a coal-fired system power plant: 35% acquired by EnBW and EDF for $120m with an obligation to acquire further shares to achieve majority; a majority stake has now been acquired;
• Elektrociepłownie Zielona Góra: 45% sold to Dalkia and Kogeneracja S.A. for PLN 45.3m; and
• Skawina Power Plant: 35% acquired by PSEG for $24.8m.

Coal-fired plants account for 57% and lignite-fired plants for 39% of total electricity generation. There are a small number of hydroelectric power plants. The basic types of generating units are 200 MW and 360 MW. These include some of the pumped storage type, numerous power generating facilities of various industrial enterprises and some small privately owned hydroelectric power plants.

The generation sub-sector employs 55,000 people and employment guarantees are a critical part of the privatisation process. The investor must negotiate an agreement, known as the "Social Package", with the trade unions and this agreement specifies the guarantees plus other benefits for employees arising out of the privatisation. The Social Package will also provide for privatisation bonuses and pay increases.

In general, the sector will have to undergo significant change and receive substantial investment if it is to meet the environmental protection standards of the EU.


Distribution

The distribution sub-sector embraces 33 regional companies (Zakłady Energetyczne), all of which (except one) are joint stock companies currently wholly owned by the state Treasury. The sector comprises a 110 KW distribution network and a total of 650,000 kilometres of medium and low voltage lines.

The distribution companies provide technical and commercial services to industrial and municipal electricity users, as well as to households. They are responsible for the maintenance of the network, for keeping distribution equipment in good repair and for its modernisation and development. They collect payment for the supply of electricity and are responsible for marketing. Privatisation of this sub-sector has begun. The southern distributor, Górnośląski Zakład Energetyczny S.A., was the first to be privatised and a minority stake has been sold to Vattenfall. Vattenfall paid $167.5m for 25% of the company. Vattenfall has declared its intention to increase its shareholding to majority by 2003 (it currently owns 32%). It has capital investment commitments of €260m over a two-year period and further commitments over a ten-year period. RWE has recently signed an agreement for the acquisition of an 85% stake in Stoen S.A., the distribution company serving Warsaw, for the price of PLN1.5 billion: in addition RWE has agreed to invest PLN422 m over a three-year period. The next scheduled privatisation will be the northern group of eight distributors (known as G8).

Transmission

PSE, originally a state enterprise, was transformed into a joint stock company in 1990. It owns the 13,000 kilometres of high tension transmission lines of 220, 400, and 750 kV, 89 transformer stations of a combined power of 113,260 MW and a controlling stake in a joint stock company owning all the pumped storage power plants in Poland. PSE's key responsibilities are programming and planning the development of the whole power industry system, the exercise of its role as operator, and the co-ordination of co-operation with the power grids of other countries. PSE purchases power from power plants for resale to the distribution companies, but this role will change.

As mentioned, a number of long term contracts with PSE have been entered into, in order to support financing, both domestic and foreign, in the power sector. Plans exist to restructure PSE and privatise certain of its activities. The process may start in 2003.


LEGAL AND REGULATORY STRUCTURE

The Energy Act (dated 10 April, 1997 and subsequently amended, constitutes the principal legislation governing the sector. It created a framework for a private energy sector and, most importantly, established an independent regulatory body (Urząd Regulacji Energetyki) to oversee the sector and issue the licences and approvals required under the Energy Act. This body, the URE, is headed by a president whose term of office is fixed for five years and who cannot be removed except for reasons related to breach of duty or illness.

The role of the URE is central to the regulation of the electricity sector. The Energy Act lists a number of obligations placed upon the URE. The two most important obligations are the issue (and amendment and withdrawal) of licences under the Energy Act and the approval of tariffs. The President of the URE may grant an exemption for obtaining tariff approval if he or she decides that the enterprise in question is conducting its activities in competitive conditions. Most of the generation sector has been released from the tariff approval requirement (with some exceptions for co-generation entities).

Other duties include the settlement of disputes with respect to third party access contracts, the approval of the development plans of electricity enterprises, the control of customer service standards, the imposition of fines, and the collection and dissemination of information on the electricity sector.

There are two types of control over URE's decisions: the influence of the Advisory Council and the appeal process. An Advisory Council is established, with its members appointed by the Council of Ministers although it has no decision-making powers. The Advisory Council is empowered to express its opinion on all matters which are within the scope of authority of the president of URE. Appeals against decisions of URE are made to the Anti-Monopoly Court and not the general administrative courts. The legislators considered that disputes over URE decisions would tend to relate to anti-monopoly issues such as monopolistic practices or the abuse of a "dominant position".

The Energy Act lists the types of activities that require a licence under that Act. They include the production of electricity and fuels, the transmission of electricity and fuels, and trade in electricity and fuels. The Energy Act does, however, provide certain de minimis exceptions. The basic licensing procedure is set out in full in the Energy Act and needs no secondary legislation.

The Energy Act imposes certain key criteria on the applicant for a licence. For example, under the current law the applicant must have an office in Poland, have sufficient funds for the activity in question, have the appropriate technical capability and employ persons with suitable qualifications. Upon Poland's accession to the EU, companies based in the EU will also be entitled to be granted a licence. In taking the decision as to whether or not to issue the licence, URE must take into consideration the "social interest" and the state's electricity policy guidelines. It is unclear what is meant by "social interest" and whether this might be equivalent to a public service obligation, as understood by the EU Electricity and Gas Internal Market Directives.

Licences are issued for a period of not less than ten and not more than fifty years. URE is empowered to amend or withdraw a licence in certain circumstances, which are, however, described in general terms and leave some grounds for uncertainty.
The Energy Act states what is to be contained in the licence. This includes the scope of the activities covered by the licence, the period of validity and any special conditions relating to the performance of the activity in question, taking into account the provision of a proper service to customers. In addition, the licence should contain provisions dealing with the necessary environmental protection safeguards for the activity (and its termination). Indeed, the Energy Act provides that the licence may be conditional upon the licensee providing some kind of guarantee or security to cover environmental damage.

The most recent changes to the Energy Act published on 28 August, 2002 bring Polish law into compliance with the EU Internal Market Directives on electricity and gas. Some of the new provisions come into force on 1 January, 2003; others will take effect upon Poland's accession to the EU.

A number of new regulations will be issued under the amended Energy Act. Existing regulations which conflict with the provisions of the amended law will cease to be effective upon the entry into force of these provisions. A number of key regulations are awaited dealing with matters such as third party access and renewable energy sources.

MARKET STRUCTURE

Poland is currently experiencing the initial phase of a competitive electricity market. Reforms in under consideration are aimed at limiting the role of PSE to the transmission of electricity and at allowing distribution companies and large individual consumers (steelworks, chemical plants, etc.) to purchase power directly from the producers at wholesale prices determined by the market (or, until the market is sufficiently competitive, approved by URE). However, these reforms are hindered to a certain extent by the existence of long and medium term contracts (at least five years) signed between PSE and the electricity producers, which set the electricity prices at a relatively high level for future years. The contracts cover approximately 65% of annual base-load generating needs. The restructuring of the power purchase agreements regime is considered by URE to be part of the process of creating a competitive electricity market in Poland. Another important development in this connection is the establishment and operation of the Power Exchange (Towarowa Giełda Energii S.A.).

The setting up of the Power Exchange is a part of the government strategy for the liberalisation of the power sector. Liberalisation has a number of interconnected elements, all of which are critical to the process. These include: the passing and amending of the Energy Act and the subsequent issuing of the secondary legislation; the establishment of an independent regulatory authority (URE); the privatisations currently underway involving the generation and co-generation entities and the regional distribution companies; the compliance of the legal framework of the sector with the EU Electricity and Gas Directives, the restructuring of the long term power purchase agreements; the introduction of third party access; the transformation of PSE from a single buyer to a transmission company; and the establishment of trading activities and of the Power Exchange.

In the wholesale market, electricity is bought and sold in three ways: through bilateral contracts, through contracts resulting from trade on the Power Exchange and through balancing contracts effected by the Transmission System Operator (TSO), currently PSE. Bilateral contracts are those entered into between the generators, the TSO, distribution companies, power trading entities and end-users. Contracts on the Power Exchange are those for physical delivery or financial contracts.

The Power Exchange (Giełda Energii S.A.) was established in December 1999 and the members of the consortium which won the tender to operate the exchange are now shareholders of Towarowa Giełda Energii S.A. Shareholders include Elektrim S.A., the Warsaw Stock Exchange, PSE, Endesa S.A. of Spain, Elektrownia Opole S.A., Obrót Gliwice – GZE Sp. z o.o., the PAK Power Plant Company, Energia Gdańska Kampania Energetyczna S.A., Stoen S.A., PKP (the Polish railways), Elektrim Volt S.A., Dom Maklerski Penetrator S.A., Bergen Energia S.A., Vattenfall and the State Treasury.


Access

The issue of third party access is another important factor in the context of the liberalisation and opening up of the sector.

The Energy Act imposes an obligation on transmission and distribution enterprises to provide access, i.e. transmission services on equal conditions and terms to all entities. Under the current law, the obligation only applies to fuels and electricity produced in Poland (although this requirement will fall away upon Poland's accession to the EU). The parties are required to enter into a Transmission Agreement. There are also some general conditions, i.e. the provision of access must not reduce reliability of supply nor the quality of the electricity and must not cause an unfavourable change in prices of electricity supplied to other entities connected to the grid.

The Energy Act has chosen regulated third party access (one of the types of third party access provided for in the EU Electricity Directive). On 20 January, 2003, the Minister of Economy, Labour and Social Policy issued the Access Regulation (the "Access Regulation") that determines which groups of users are entitled to third party access according to their annual purchases of gaseous fuel, electricity or heat. This Regulation replaced the previous dealing with access issued on 6 August, 1998.

The current timetable for access by customers with different levels of consumption is set out in the following table:

Timetable for Market Opening in Poland under the current Access Regulation