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1 Jego Ekscelencja Pan Jacek Czaputowicz Minister Spraw Zagranicznych Al. Szucha 23 PL-00 - 580 Warszawa COMMISSION europ enne/Europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGI - Tel. +32 22991111 EUROPEAN COMMISSION Brussels, C(2018) 601 final In the published version of this decision, some information has been omitted, pursuant to articles 24 and 25 of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty, concerning non-disclosure of information covered by professional secrecy. The omissions are shown thus [..]. PUBLIC VERSION This document is made available for information purposes only. Subject: State aid No.

2 (2017/N) Poland Planned polish capacity mechanism Sir, 1. PROCEDURE (1) On 16 November 2016, Poland pre-notified its plans to introduce a new capacity mechanism. The COMMISSION sent a request for information to the polish authorities on 27 January 2017, to which they replied on 31 March 2017. Several meetings or phone calls took place between the polish authorities and the COMMISSION services, on 10 February, 5 and 11 April, 8 June, 19 and 27 July, 18 August, 14 and 27 September, 5, 11 and 18 October, 20 November 2017, and 18 January 2018. (2) Following those pre-notification contacts, by electronic submission dated 06 December 2017, Poland notified the measure to the COMMISSION pursuant to Article 108(3) of the Treaty on the Functioning of the EUROPEAN Union (TFEU).

3 2 2. DESCRIPTION OF THE MEASURE Overview of the mechanism (3) The polish authorities have estimated that the electricity market in Poland will reach critical levels of generation adequacy around 2020, as further explained in Section below. (4) To address the issue of the future generation adequacy, they have designed a capacity market where the polish Transmission System Operator (TSO), Polskie Sieci Elektroenergetyczne (PSE), will be entrusted to organise centrally-managed auctions to procure the level of capacity required to ensure generation adequacy. The auctions will be open to existing and new generators, demand side response (DSR) and storage operators, located in Poland or in the control area of neighbouring EU TSOs.

4 Successful bidders will receive a steady payment during the duration of the capacity agreement in return for a commitment to delivering capacity at times of system stress called on by PSE. Financial penalties will apply if beneficiaries do not deliver the amount of energy according to their capacity obligation. The measure will be financed through a levy on electricity supplies. The need for a capacity mechanism Poland's generation adequacy concerns (5) The polish authorities have identified various characteristics that make Poland in their view particularly prone to generation adequacy issues and therefore justify the introduction of a capacity mechanism. (6) According to the polish authorities, and as further explained in recital (11) below, the polish electricity market will face substantial mothballing and phasing-out of old inefficient power units by 2020.

5 This will result in a situation in which the electricity market will not be able to meet peak demand. As a matter of fact, Poland already experienced electricity shortages in the summer of 2015, which resulted in the limited supply of energy to numerous industrial customers. (7) Those concerns are unlikely to be solved by market forces only as, according to the polish authorities, the polish market suffers from the "missing money" problem. (8) This concept has been identified and described in academic literature1 and in the COMMISSION 's Sector Inquiry on capacity Missing money exists in an energy-only market when energy market revenues alone may fail to bring forward sufficient investments in capacity.

6 The reasons why this may happen are twofold: (a) Inability of prices to reflect scarcity: wholesale energy prices are not allowed to rise high enough to reflect the value of additional capacity at times of scarcity. 1 Cramton and Stoft (2006): The Convergence of Market Designs for Adequate Generating Capacity ; Joskow (2006): Competitive Energy Markets and Investment in New Generating Capacity ; Cramton, Ockenfels and Stoft (2013): Capacity Market Fundamentals . 2 Section of the COMMISSION 's Sector Inquiry on capacity mechanisms {SWD(2016) 385 final}, available at: 3 (b) Lack of certainty that prices will rise, even if they can: electricity prices being very volatile, the occurrence and magnitude of (usually rare) scarcity events are delicate to forecast.

7 Moreover, at times when the wholesale energy market prices should peak to high levels, investors may be concerned that the Government or market regulator would act on a perceived abuse of market power, for example through the introduction of a price cap, or that prices may simply not rise, for instance because of more production than expected from intermittent renewable energy sources (RES). (9) The polish authorities have demonstrated the existence of this market failure and quantified the adequacy issue by means of a detailed probabilistic assessment, which was carried out by PSE and whose assumptions and results were reviewed by an external consultant. This assessment compares supply and demand adequacy forecasts with a reliability standard, which has been expressed in terms of a Loss of Load Expectation3 (LoLE).

8 Like France and the UK4, the polish authorities have set this reliability standard at 3 hours per annum. (10) The adequacy assessment relies on the data that PSE submitted to ENTSO-E for its Mid-term Adequacy Forecast (MAF) 2017 The MAF methodology implemented in 2017 is based on a probabilistic assessment of the adequacy risks in 2020 and 2025 driven by the variation of demand, RES production, hydro conditions and forced outages of power plants and High Voltage Direct Current (HVDC) transmission capacity. The MAF probabilistic assessment is performed through a Monte Carlo simulation of the EUROPEAN electricity system by taking into account the impact of these uncertainties in a given year at hourly granularity.

9 This simulation is repeated over several random draws of the adequacy assessment drivers to achieve reliable estimates of the following two main adequacy assessment indicators: the amount of Energy Non-Served6 (ENS) and the LoLE. (11) In addition to the assumptions used in the MAF 2017, PSE's adequacy assessment tests the following sensitivities regarding the assumptions about the polish electricity system: higher assumption on mothballing/decommissioning of thermal capacity, increased import interconnection capacity with neighbouring countries against the normal increase assumed in the MAF 2017 and reduced electricity demand growth against the normal demand projection used in the MAF 2017.

10 PSE in its 2017 adequacy assessment presents a number of scenarios which combine the aforementioned assumptions. The external consultant has critically reviewed those assumptions and assessed, for instance, the impact of lower levels of economic decommissioning and higher levels of new entry driven by revenues from the energy market only. (12) In all simulated scenarios, both PSE and the external consultant conclude that capacity shortfalls are expected to arise in 2020 and 2025. In PSE's base case scenario as reviewed with the assumptions proposed by the external consultant, the LoLE 3 This is defined as the average number of hours per year in which supply is expected to be lower than demand under normal operation of the system.