Energy sector restructuring could mean end of purchase agreements
By Greg Goodale
The cabinet is to address radical new energy market liberalization measures next week to eradicate power purchase agreements (PPAs) in favor of one-off compensation payments aimed at restructuring debt and introducing competition among power generators.
PPAs were introduced in 1994 to stimulate investment and support the development of a free market following the de-monopolization of the energy sector. They guarantee a long-term commitment by the national grid operator (PSE) to purchase power at above-market prices. Some expire as late as 2023.
Experts estimate that the 32 existing PPAs have brought €5.6 billion (zł. 24.9 billion) worth of investment to domestic generators, including €3.82 billion (zł. 17 billion) in commercial loans. But nearly 10 years on, PPAs have unexpectedly outgrown their original purpose and have become the single biggest obstacle to kick-starting the competitiveness of the Polish power-generating sector in time for full integration with the EU market next year.
"PPAs make the continued development of the Polish energy sector impossible," said Eugeniusz Makowski, energy policy consultant to the economy ministry. "Once they are gone the sector can breathe freely, without the burden of artificial mechanisms."
The government's biggest concern in ousting PPAs is the €3.82 billion (zł. 17 billion) borrowed by generators from commercial lenders. Creditors will not allow the government to simply whisk away their only security against these loans, while the strained Polish budget cannot afford to repay them.
The government plans to give PPAs the chop by paying generators a one-off compensation payment that would be funded by a bond issue. The bonds would not be backed by the Treasury, but rather by a new financing tool: systemic restructuring payments (ROS).
The government wants to fix prices for end users so that, as generators become more competitive and reduce their costs, the savings will be pooled into ROS instead of being passed on to consumers.
Since, in theory, a power plant's ability to generate ROS and repay debts will grow with increased cost-effectiveness, the government argues that the mechanism will act as a motor for efficiency measures. Details of how ROS levels will be established and how the payments are to be collected from end users have yet to reach the light of day, Makowski said.
"There is still a question of agreeing compensation levels for individual generators with their banks," Makowski said. "The technical details still have to be finalized because the government, the generators and the banks are still doggedly pursuing their own best interests. The document that will be examined by the cabinet is a working version and the government still has to establish its final form."
Sources inside the Economy Ministry claim that the compensation system will slash the generators' debt by around 80 percent, making it easier and cheaper for generators to obtain credit for further modernization. The pay-out of the remaining 20 percent will be made in installments and will depend on the effect the abolition of PPAs will have on the energy market.
The list of problems inherent in the PPA regime is extensive. The majority of them stems from the fact that the regime was intended to influence only around 30 percent of domestic power production; to date it has reached more than 50 percent.
"The price of electricity from PPAs is much higher than market prices offered by generators not burdened by the financial cost of servicing substantial loans," said Ireneusz Wesołowski, a director at the Opole power plant.
The prices fixed in PPAs nine years ago were high enough to allow generators to comfortably plod on with minimal restructuring. This they did, while maintaining non-viable management strategies, employment levels and essentially acting as a welfare system for the sector's most inefficient generators.
Not only have Polish consumers never received energy at market prices, by removing the economic pressure to reduce generating costs, PPAs have given trade unions in the energy sector a reason to oppose job cuts and privatization.
With PPAs in place, there is little variation in the prices offered by different generators, an essential condition for third party access (TPA), which allows large industrial consumers to bypass distribution firms and buy directly from the national grid. While the total number of consumers entitled to TPA reached 640 in January this year, only 19 have made use of this form of purchasing, and market observers see interest declining if the PPA regime is not overturned.
The agreements have also started to raise concerns about their influence on the security of domestic power generation. As generators enter PPAs with PSE, a wholly state-owned joint-stock company, their long-term survival depends on the financial standing of the grid operator. Unfortunately, its condition is deteriorating: PSE closed 2001 with losses of $13.3 million (zł. 52.1 million), attributed to the disparity between the cost of PPAs and revenues obtained from the sale of electricity to the domestic market.
Generating costs vary widely between the 19 power stations supplying Poland's national grid. The domestic leader is Bełchatów, which turns out one megawatt-hour (MWh) at a cost of around zł. 45. The majority of generators, including Pątnów, Adamów and Konin, have costs ranging between zł. 60 and zł. 75 per MWh. The least cost-competitive power stations, Turów, Dolna Odra, Stalowa Wola II and Ostrołęka, run up costs of over zł. 80 per MWh.
The cabinet discussion of the energy sector, which will also discuss plans for the merger of the Bełchatów, Ostrołęka and Turów power plants with three coal mines to create the long-awaited BOT group, has now been delayed by more than a month. Since the ROS proposal is still subject to approval by the Energy Regulation Office (URE), the European Commission and the Sejm, it is unlikely that the program will receive the go-ahead before parliament goes into summer recess.
