Possible revival of renewable energy auctions as a result of the coronavirus epidemic

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published on 15th June 2020


In view of the constantly rising electricity price, the producers of electricity from renewable sources were prepared to trade energy according to the free market model. However, after an analysis of the recent changes in electricity prices caused by the coronavirus epidemic, we dare to make a bold hypothesis that the auction system can become a safe haven that will enable the producers of electricity from renewable sources to weather the storm that the European economies are facing.
 

 

The fall in the energy price

On 4 March 2020, the Minister of Health announced the first confirmed case of coronavirus in Poland. Although there had been many rumours about this before, this day is believed to be the date when Poland started the fight against the virus.

Let’s first take a look at how energy prices developed on the Polish Commodity Derivatives Market (Polish: towarowy rynek terminowy, RTT), the largest commodity exchange in Poland for traded energy volumes. On that day, the daily settlement price for electricity under the Base Y-21 contract was PLN 244.56 per MWh. The first significant fall was recorded on 9 March, when the price fell to PLN 240.43 per MWh. In the following 2 days, a slight increase was observed, as a result of which the energy price settled at PLN 242.00 per MWh. The next important moment was 11 March when the government decided to close the schools, kindergartens and other educational institutions. It seems that this very event had a decisive impact on the development of the electricity price in the next days. As a reaction to the government decision, the price of the Base Y-21 contract fell to PLN 238.50 per MWh, but this was only a prelude to the further falls. On 16 March, the electricity price was PLN 225.83 per MWh, while on 17 March it was PLN 219.00 per MWh and the latest data show a decrease to PLN 213 per MWh.


Based on the data from the energy exchange, the changes in the electricity price since the beginning of February can be illustrated as follows:

 

 



An even sharper fall in the electricity price has been recorded for 24-hour block contracts on the Day-Ahead Market (DAM) (Polish: rynek dnia następnego, RDN), the Polish spot market for electricity. On the day when the first case of coronavirus in Poland was announced, the base index TGeBase was at PLN 221.56 per MWh, on 17 March it fell to PLN 175.89 per MWh. In order to get a better picture of the extent of the fall, it should be emphasised that according to the information provided by the President of the Energy Regulatory Office, the average quarterly price of electricity sold on the competitive market in Poland as of the end of the third quarter of 2019 was PLN 252.65 per MWh.


Is this the end of the fall in electricity prices?

Probably not. Above all, the epidemic is not ending yet. On the contrary, the number of people infected with coronavirus is constantly increasing in Poland. As of now, the government is not lifting the restrictions imposed in connection with the epidemic, including the closure of schools and other educational institutions. At the same time, energy-intensive production is facing temporary shutdowns or is carried on only to a limited extent; this is mainly due to the decisions to suspend production in car factories or in the metallurgical industry. The reduction in electricity consumption is also having an impact on the rail transport market, because certain train connections have been suspended. This leads to the conclusion that demand, which shapes the electricity price in Poland, will be massively curbed.


In view of the dependence of Poland's energy on coal, the cost of purchasing CO2 emissions is also a significant factor that determines the electricity price. Also in this case, Poland is faced with a dramatic plunge, caused, among other things, by the reduction of CO2 emissions by China by over 100 million tons. Just six months ago, the price was almost EUR 30 per tonne, and now it fell to less than EUR 20 on Monday and is currently oscillating around EUR 18. For Polish coal-fired power stations, this means savings of billions of Polish zlotys.


Advantages of the auction system

The main advantage is the stability of selling prices for electricity generated in renewable energy systems. The winner of an auction has the right to receive compensation for a negative balance between the selling price of electricity on the market and the price offered by the producer in the renewable energy auction. The analysis of the results of the auction for photovoltaic power plants of up to 1 MW in the previous year shows that the maximum price of energy offered by the winning producers was PLN 327.00 per MWh and the minimum price was PLN 269.00 per MWh. Moreover, even the most conservative bidders managed to achieve the freezing of electricity prices at a level significantly higher than that recorded due to the falls caused by the coronavirus epidemic. The results of the auction for the so-called large-scale wind power and photovoltaic power plants, i.e. systems with a capacity of over 1 MW, are also interesting. The maximum prices achieved by the producers at this auction were PLN 233.00 per MWh, which means that they achieved electricity selling prices at the level of the Base Y-21 contract of 13 March 2020, i.e. from the beginning of the coronavirus crisis.


Renewable energy auctions planned for 2020

According to a representative of the Ministry of Energy, two renewable energy auctions are planned to be held in 2020, in the middle and at the end of the year. According to the Regulation on the Maximum Volume and Value of Electricity from Renewable Energy Sources that can be sold at auctions in 2020, the maximum volume of electricity for which contracts can be awarded in an auction is 11,760,000 MWh for a price of PLN 4,527,600,000 in the case of photovoltaic power plants and wind turbines of up to 1 MW , and 46,290,000 MWh of electricity worth PLN 14 015 850 000 in the case of power plants with the capacity exceeding 1 MW.

The explanatory memorandum of the Regulation reads that small-scale photovoltaic power plants (of up to 1 MW) with a total capacity of approximately 800 MW may be commissioned as part of the budget. With regard to large-scale photovoltaic power plants and wind turbines (of over 1 MW), the government assesses that large-scale wind power projects with a total capacity of approximately 800 MW and solar projects with a total capacity of approximately 700 MW will be eligible for subsidies.


The implementation of the above-mentioned auctions is related to Poland's goal according to which 15 percent of the gross electricity consumption in the country's energy balance in 2020 must come from renewable energy sources, in compliance with the rigid requirement set by Directive 2009/28/EC on the promotion of the use of energy from renewable sources. 

 

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