Capacity fee: a significant increase in electricity prices from 2021 | In Principle

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Capacity fee: a significant increase in electricity prices from 2021

Both industry and households will see increased fees in their electricity bills. Meanwhile, the announced relief for energy-intensive industry is still lacking.

On 30 November 2020, Poland’s Energy Regulatory Office (URE) announced the electricity rates consumers we will find on their invoices from January 2021. The RES fee, financing the support system for renewable energy sources, was raised from zero to PLN 2.20/MWh, with a prospect for further increases in connection with subsequent auctions as well as planned investments in offshore wind energy. However, for 2021, this cost will be mostly offset by a reduction of the cogeneration fee, for financing support for high-efficiency cogeneration, from PLN 1.38/MWh to zero.

Next item on the bill: capacity fee

A new item on the bill for electricity supplies will be the capacity fee, which for recipients other than households be PLN 76.20/MWh. The capacity fee provides financing for the capacity market, i.e. mainly for maintaining capacity in readiness and for modernisation and construction of new conventional power plants. This fee will depend on energy consumption between 7 am and 10 pm on weekdays, but given that these are standard working hours, the vast majority of energy consumption will be covered by it. Thus, a company consuming 10,000 MWh per year will have an electricity bill that is about PLN 750,000 more, while a company consuming over 100,000 MWh will pay about PLN 7.5 million more.

Meanwhile, relief still not approved by the Commission

However, introduction of the announced relief in collection of the capacity fee from industrial customers, i.e. energy-intensive businesses reporting significant energy consumption, conducting activity under the PKD codes indicated in the regulations, is not immediately in sight. The relief is provided for in the law, but has not entered into force because the notification process to the European Commission is still ongoing. The unofficially ongoing notification process will be interrupted and started again next year, which may mean that the relief in its envisaged form will not enter into force. In a letter sent to one of the chambers of commerce, the Ministry of Climate and Environment explained that negotiations with the Commission are still ongoing, and it is hard to say at this stage when a formal decision authorising state aid in the form of this relief will be obtained. On the other hand, a delay in introduction of the capacity market, called for by industry, is impossible due to the potential risk of lack of sufficient spare capacity in the national power system, threatening the continuity of supplies in the near future.

The ministry also pointed out that the cost of the capacity fee reduction would have to be covered by other customer groups, including SMEs and households.

Time for an industry move?

The fact is that if the relief comes into force, it would only cover the largest customers in selected industries (52 entities as of 2019). Tariff applications awaiting approval at URE will probably mean an increase of several percent in the related fees, and due to the dominance of fossil fuels in the Polish energy mix, wholesale prices of electricity have for months remained the highest in the EU, with little chance of decrease (due to the cost of purchasing emission allowances by power plants). Thus many companies may be tempted to implement projects reducing energy consumption, or invest in their own sources of electricity. Construction of their own renewable energy sources or high-efficiency cogeneration installations may, in turn, qualify for support financed from the RES and cogeneration fees mentioned above. Companies may also be interested in the possibility of earning money from the demand-side response service, which is also paid for within the cogeneration market. Hopefully the vast majority of companies will be more inclined to pursue rationalisation and investment activities than to decide to close down their business and move production to a country with lower energy costs.

But whatever companies do, in the longer run, the biggest loser may be precisely the centralised conventional power industry supported by the capacity market. Growth of the industrial power industry or a slowdown in economic growth caused by rising energy prices will have a negative impact on the demand for electricity from producers.

Not just companies will be out of pocket

Finally, it is worth mentioning that the capacity fee will also be charged to households, specifically at the point of consumption (commonly the meter). Here, it depends on the annual power consumption of the household and amounts to:

  • PLN 5.51 per month gross with consumption of up to 1.2 MWh per year
  • PLN 9.19 per month gross with consumption of 1.2–2.8 MWh per year
  • PLN 12.87 per month gross with consumption above 2.8 MWh per year.

The majority of households consume quantities in the middle range, which means an increase in energy costs by about PLN 110 gross per year for the capacity fee alone, and applications for approval of new tariffs with electricity fee increases of up to several percent are pending at the Energy Regulatory Office. This could mean a further increase in household bills in 2021.

Marek Dolatowski, adwokat, Energy practice, Wardyński & Partners