What’s ahead for the Polish energy sector in 2018? | In Principle

What will change in the regulations governing the energy sector in 2018? What must energy companies and customers be prepared for? Many new legal proposals have appeared recently. Some of them are still in the legislative process, and others have already been adopted and will enter into force this year.

A host of changes await the Polish energy sector in 2018. The capacity market, MiFID II, and a new tariff regulation for electricity sales are the big changes that will affect the energy market. We present below the main premises of the laws that have already entered into force, have been adopted by the Sejm, or at an advanced stage of the legislative process. We also discuss announced future acts and proposals in the early stages. We will publish separate articles about some of them in the near future.

Capacity Market Act

The upcoming months will be a time of intensive work on executive regulations pursuant to the newly adopted Capacity Market Act. The act is intended to protect against shortages of power in Poland by ensuring the availability of reserves of power to meet customer demand at sources generating electricity and introducing a two-track market for electricity.

The capacity required to cover users’ peak demand, plus a required surplus of capacity in the power system, is to be contracted for in special auctions where the commodity will not be electricity as such, but the readiness to deliver it. (The first auction of this type, for supply periods in 2021–2023, will be held in December 2018.)

All power customers will contribute to the support mechanism, as electricity bills will include a new “capacity fee” from 2021. The power sector is anticipating a detailed definition of the shape of the capacity market in executive regulations, primarily specific regulations on the method of performance of capacity obligations and announcement of the exact parameters of the planned auctions.

MiFID II

All EU member states were required to implement into their national legal systems the provisions indicated in MiFID II (Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments) and MiFIR (Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments) by 3 July 2017, and the national regulations were supposed to enter into force by 3 January 2018 at the latest.

MiFID II expands the list of financial instruments to include such items as emission allowances, and modifies the scope of the rules governing commodity derivatives which are or may be delivered by the supplier. MiFID II redefines the exclusions from the obligation to obtain a licence for brokerage activity from the financial regulator (in Poland, the Financial Supervision Authority—KNF). This is particularly important for energy companies with respect to their conclusion of transactions for commodity derivatives for their own account. The changes are also tied to introduction of a new type of system for trading in financial instruments, known as an organised trading facility or OTF. The subject of transactions on the OTF will be the instruments listed in the regulations: bonds, structured financial products, emission allowances, derivatives or energy products that are the subject of wholesale trade which must be delivered by the supplier. These regulations will have a major impact on the organisation of the Power Polish Exchange (TGE), as the Commodity Forward Instruments Market with Physical Delivery will need to be brought in line with the OTF requirements.

Unfortunately Polish lawmakers missed the deadline for implementing the directive, and thus from 3 January 2018 there is an overlap of national and EU regulations governing trading in financial instruments, raising doubts on the scope of application of MiFID II. KNF clarified these doubts by issuing a position paper on 27 December 2017, providing a number of examples of situations illustrating how the unimplemented provisions of the directive should be applied. KNF also mentioned the general rules in force in member states in the event of a conflict between national law and Community law, i.e. the principles of the priority of Community law, directive effectiveness of EU directives, and indirect effect of directives.

It is anticipated that the first (statutory) phase of work on implementation of the EU provisions will be completed in Poland by the end of the 1^st quarter of 2018.

Tariff Regulation for electricity sales

Most of the provisions of the new Tariff Regulation (Regulation of the Minister of Energy on Rules for Establishing and Calculating Tariffs and Settlements in Electricity Trading) entered into force on 30 December 2017. The regulation introduced reduced rates for consumption of electricity by households billed in a single zone between 10 pm and 6 am. The regulation also includes a provision advantageous for consumers requiring power companies to pay a rebate in justified instances for failure to meet quality standards for customer service and quality specifications for power without the customer having to file an application or request for payment (this provision enters into force on 1 January 2019).

Draft of Electromobility and Alternative Fuels Act

At the end of 2017 the Council of Ministers adopted a proposal submitted by the Minister of Energy for the Electromobility and Alternative Fuels Act, which is designed to encourage investment in electric vehicles and promote the use of electricity and alternative fuels (particularly LNG and CNG) in transportation. The bill also simplifies the provisions of the Energy Law governing trade and distribution of electricity for the needs of electric vehicles (including exemption from the obligation to obtain a concession).

This bill, the first proposal in Poland comprehensively setting forth the rules for functioning of the market for alternative fuels for transportation, calls for construction of a network of basic infrastructure for alternative fuels in cities and other heavily populated areas, as well as along roads included in trans-European transport corridors. It also calls for appointment of operators of vehicle charging infrastructure through competitions, or if no operators come forward certain services would have to be provided by power distributors (obligated sellers). The bill also introduces a number of incentives for purchasing electric vehicles (exemption from excise tax, increased depreciation, free parking in paid parking zones, and the right to use bus lanes for a certain period).

As of the writing of this article, the bill was given its first reading in the Sejm and submitted to the Energy and State Treasury Committee and the Infrastructure Committee for further deliberations.

Bill to amend the Geological and Mining Law

According to the proposed amendment to the Geological and Mining Law dated 15 September 2017, drafted by the Ministry of the Environment, the procedure for obtaining concessions to conduct operations involving extraction of minerals from deposits is to be streamlined. Under the proposed regulations, first and foremost the procedures for extending existing concessions would be simplified and expedited. The rules for awarding hydrocarbons concessions would also be amended. Apart from the existing tender procedure, it is proposed to return to the “open door” procedure under which an enterprise may initiate a concession proceeding for extraction of hydrocarbons from deposits. In addition, mining ownership would be extended to cover noble gases, rare earth elements, and amber. The proposal also introduces the construction of a joint operating agreement, which has been functioning for a long time in other jurisdictions and enables a division of profits and costs during cooperation by the operator with other enterprises in the concession area. At the end of 2017 the proposal was at the stage of submission of comments via social consultations and response by the ministry to comments as part of further consultations.

Further amendment of the Renewable Energy Sources Act

The proposal for another amendment to the Renewable Energy Sources Act, presented for public comment while work was still underway on an earlier amendment, is intended to eliminate doubts on the compliance with EU law of the Polish system for support for renewables, and to introduce new forms of support for selected installations.

The proposed changes include clarification of the rules for combining operational and investment aid, a separate new support mechanism for small biogas facilities and hydro power plants, increasing the capacity of small and micro installations, and establishing rules for the sale of projects that have obtained support through the auction system. The amendment would also liberalise the restrictive provisions on the operation of wind farms, among other things by excluding the value of technical elements of wind generators from the basis for calculation of real estate tax. The bill is at the stage of response by ministries to comments submitted during social consultations.

Winter Package

In late December 2017 at a meeting of the European Energy Council, the energy ministers of the EU member states agreed a joint position on further work on key legislative projects in the Clean Energy for All Europeans project, known as the “Winter Package” and aimed at changing how the energy industry functions within the EU. Under the aims of the proposal, the EU’s energy industry will rely more on renewables, and access to smart solutions should make it more digitised and environment-friendly, favouring smaller, more broadly dispersed sources of energy.

Importantly for Poland in the context of the newly established capacity market, the planned solutions also include restrictions on support for coal-fired power, introducing limits on CO₂ emissions for generators of electricity supported with public money and operating on capacity markets. The guidelines agreed at the end of 2017 will enable tripartite discussions to commence early in 2018 among the Council of the European Union, the European Parliament, and the European Commission concerning the Winter Package.

Preliminary agreement on EU ETS reform

In 2017 a preliminary plan was worked out for reforming the EU trading system for CO₂ emission allowances (known as EU ETS), providing that from 2021 the volume of emission allowances will fall by 2.2% each year. Key from the point of view of the Polish energy mix was development of the system for support from the Modernisation Fund, fed by proceeds from the sale of CO₂ emission allowances, designed to support poorer EU member states in upgrading their energy systems and to stimulate investments in raising energy efficiency. Under the latest arrangement, support from the fund for investments in coal power has been refused. Although the text of the agreement as adopted is disadvantageous for the Polish energy sector, which is primarily coal-based, it appears to be a foregone conclusion that there will be no support for coal power. In 2018 we can expect stepped-up work on ETS reform aimed in that direction.

Zofia Romanowska, M&A and Corporate practice, Wardyński & Partners