National Report to the European Commission The President of the Energy Regulatory Office in Poland 2011 July 2011 National Report 2011 2 National Report 2011 Table of Contents Acronyms and Abbreviations 5 1. Foreword 7 2. Main developments in electricity and natural gas markets 9 3. Regulation and performance of the electricity market 21 3.1. Regulatory Issues [Article 23(1) except ‘h’] 21 3.1.1. Interconnector capacity management and allocation, and congestion management mechanisms 21 3.1.2. The regulation of the tasks of transmission and distribution companies 28 3.1.3. Effective unbundling 31 3.2. Competition Protection and Promotion Issues [Article 23(8) and 23(1)(h)] 33 3.2.1. Description of the wholesale market 33 3.2.2. Description of the retail market 39 3.2.3. Measures to avoid abuse of dominance on the market 49 4. Regulation and performance of the natural gas market 59 4.1. Regulatory Issues [Article 25(1)] 59 4.1.1. Management and allocation of interconnector transmission capacity and network congestion management mechanisms 59 4.1.2. The regulation of the tasks of transmission and distribution companies 62 4.1.3. Effective unbundling 67 4.2. Competition Issues [Article 25(1)(h)] 68 4.2.1. Description of the wholesale market 68 4.2.2. Description of the retail market 71 4.2.3. Measures to avoid abuse of dominance on the market 74 5. Security of supply 79 5.1. Electricity [Article 4] 79 5.2. Gas [Article 5] and 2004/67/EC [Article 5] 88 6. Public service issues [Article 3(9) electricity and 3(6) gas] 101 3 National Report 2011 4 National Report 2011 Acronyms and Abbreviations CNG Compressed Natural Gas n/d no data DSO Distribution System Operator EMA SA Energy Market Agency SA ENTSO-E European Network of Transmission System Operators for electricity ENTSO-G European Network of Transmission System Operators for gas ERO Energy Regulatory Office ERO President The President of Energy Regulatory Office EU European Union GK PGNiG SA Polish Oil and Gas Company SA Capital Group IRiESD Distribution Grid Code IRiESP Transmission Grid Code LNG Liquefied Natural Gas LT PPAs Long Term Power Purchase Agreements NES National Electricity System OGP Gaz-System SA Operator of Gas Transmission Pipelines Gaz-System SA PGNiG SA Polish Oil and Gas Company SA PSE SA Polish Power Grid Company SA PSE Operator SA Polish Power Grid Operator Company SA RES Renewable Energy Sources SSO Storage System Operator TSO Transmission System Operator TPA Third Party Access UCTE Union for the Co-ordination of Transmission of Electricity UOKiK Office of Competition and Consumer Protection (OCCP) 5 National Report 2011 6 National Report 2011 1. FOREWORD In 2010 another amendment to the Energy Law came into effect. This fact had significant impact on the situation observed in the energy sector, and it resulted in substantial extension of scope of responsibilities assigned to the President of ERO as regards regulation and promotion of the competition. However, new prerogatives of the President of ERO are still inadequate to curb potential anti-competitive behavior in the sector. In consequence, the Regulator has to resort to non- administrative measures. In that context, the President of ERO was involved in 2010 in numerous social campaigns and initiatives focused on the dissemination of knowledge among energy consumers and on promotion of pro-competitive behavior. As a result of all these efforts, there were developments on Polish electricity and gas market in 2010 which not only contributed to greater competition, but also increased country energy security and represented an important milestone towards the integration between Polish and European energy market. Developments in legal environment observed in 2010 were also related to external factors, such as the need to harmonize Polish law with the EU law. Pursuant to European Union law, all member states are required to implement to their respective national legal frameworks the provisions of the so-called 3rd energy package, which came into effect on March 3, 2011. The process of introduction of new EU regulations has not been completed yet, but their full implementation will facilitate energy market integration and expedite the slow process of competition development on the Polish electricity and gas market. This Report presents the status of energy market in 2010 according to the best knowledge of the President of ERO. Such knowledge is based on constant monitoring of the sector and its operation, as well as regular collection and processing of information on the state of development of domestic energy markets. The document presented to the European Commission is the seventh report prepared by the President of Energy Regulatory Office, therefore it meets the obligation specified in the Energy Law and the European Union directives. 7 National Report 2011 8 National Report 2011 2. MAIN DEVELOPMENTS IN ELECTRICITY AND NATURAL GAS MARKETS In 2010 there were several significant processes which contributed to a gradual increase of competition on the Polish energy market. Nevertheless, electricity and natural gas market in Poland is still characterized by low level of competition. Measures taken by the President of ERO are summarized below and described in greater detail in subsequent chapters. Wholesale market Current structure of the power sector and the extent of concentration have been influenced by the process of first horizontal, and then vertical concentration of the enterprises owned by the State. This process results from the implementation of ‘Programme for Electric Power Sector‘, adopted by the Council of Ministers in 2006. The share of individual energy groups, as well as their structure, remained largely unchanged in 2010. The biggest share in generation subsector continues to be held by capital group PGE Polska Grupa Energetyczna SA, whereas Tauron Polska Energia SA is the leader on end user supply market. Consolidation process, which has not been finalized yet, will exert substantial impact on potential for competition development on the wholesale market. Electricity generation and trade markets remain highly concentrated due to the presence of vertically consolidated equity groups. Competition development on electricity market is described predominantly by the concentration measures. HHI level, measured according to installed capacity, changed only slightly in 2010 compared to 2009, and the same is the case when gross production of electricity is taken into account. Three leading producers (i.e. those that belong to the following equity groups: PGE Polska Grupa Energetyczna SA , Tauron Polska Energia SA , EDF ) had more than half of the total installed capacity, and they accounted for almost 2/3 of the total domestic electricity generation. Trade on wholesale electricity market was highly concentrated, especially within the vertically consolidated energy groups. As in previous years, bilateral contracts continued to dominate trade on the wholesale electricity market. During 2010, analogically to the previous year, over 90% of electricity sold by generators to trading companies was sold within the framework of bilateral contracts. The remaining portion of sales was carried out on the balancing market (including the need to ensure NES security of supply) and, to a very small extent, on spot markets (power exchange, internet platforms for electricity trading). In 2010 transaction structure on the wholesale market was quite similar to previous years. Trading companies remained the key recipient of electricity on wholesale energy market. Sale to customers within a group was still dominating. Looking at the structure of electricity sales contracts in 2010, the wholesale electricity market players still treated the power exchange marginally. In contrast, one could observe significant increase in the use of that trading platform in to conclude trade contracts for 2011. In particular, TGE SA power exchange experienced dynamic growth in 2010. The main reason of a growing share of sales on the exchange was the fact that on August 9, 2010, Energy Law amendment came into effect. The amendment obliged all generators to sell 15% or 100% (for generators involved in long-term power purchase agreements) of generated energy through the exchange. Thanks to an increasing trade dynamics on TGE SA power exchange, Polish energy market gained sufficient liquidity to make available to third parties the first cross-border connection with a Scandinavian market. This is done through market coupling mechanism , i.e. implicit auctions on day-ahead markets on Nordpool Spot and TGE SA exchanges. Available capacity on direct current cable connection between Poland and Sweden ( SwePol Link ) is equivalent to 600 MW. Thanks to this project, the participants of TGE exchange and Scandinavian NordPool Spot exchange have been able to sell generated electricity to other markets, and to purchase cheaper electricity from neighbouring markets. Yet, insufficient level of transmission capacity on cross-border inter-connectors remains a significant challenge from the standpoint of integration between Polish market and neighbouring countries. Additionally, increasing level of wind generation in Northern Germany made it difficult to 9 National Report 2011 take the best advantage of existing cross-border interconnectors due to growing loop flows through NES 1), which are hard to forecast. In particular, this applies to the possibility of importing electricity from neighbouring countries, which in turn exerts significant impact on competition