BY Heather Johnstone

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The liberalization of Poland’s energy markets began more than ten years ago, and its electricity market, in particular, has been transformed in that time. With the country’s energy regulator recently proposing further liberalization steps, Heather Johnstone takes a look at this evolving market, and sees that a number of issues still need to be addressed.

Last month Poland’s energy regulatory office, the Urzad Regulacji Energetyki (URE) put forward what it described as a roadmap, which outlined the next steps to be taken by the end of this year to continue the process of liberalizing the country’s electricity market.

Poland’s electricity sector has embraced market liberalization, but significant problems remain
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Although the details of the proposals were not released, URE’s head, Mariusz Swora, was reported as saying that the primary aim of the proposals was to protect consumers’ interests, while simultaneously fostering conditions viable for the continued liberalization of its electric power market.

Despite the fact that from July last year every European energy consumer has been able to choose their electricity and gas supplier, serious limitations in being able to switch electricity suppliers remain in Poland – a situation found in many of the other EU member states.

Poland began its liberalization process with the introduction of the 1997 Energy Law, which enabled important restructuring of the electricity sector to take place. Primarily it involved the separation into generation, transmission and distribution sectors, although the sector remained largely state controlled.

In 2003, with EU membership looming, Polish authorities amended the Energy Law in an effort to harmonize its power sector with the wider European market, and to pave the way towards privatization in the sector. The main thrust of the policy was horizontal consolidation, with power plants merging with other generation stations, but excluded any vertical integration, i.e. mergers between generators and distribution companies.

Within the generation sector the consolidation created two main power companies: BOT Gornictwo i Energetyka and Poludniowy Koncern Energetyczny SA (PKE).

Reorganization of the transmission and distribution sectors also took place. The most significant development being the unbundling of the transmission system operation unit from the Polish Power Grid company (Polskie Sieci Elektroenergetyczne, PSE SA), creating a separate company, PSE-Operator SA. While within the distribution sector, the local distribution companies were consolidated into a small number of geographically organized power distributors.

However, concern grew that this flat structure put Poland’s electricity sector in a less favourable position to compete with the open European market, and in 2005 the then ruling Democratic Left Alliance government decided to introduce vertical consolidation, this was subsequently implemented by the Law and Justice party.

Four state-owned regional companies were created, the largest being Polska Grupa Energetyczna (PGE) through merging the operations of PSE SA with the generator BOT and eight electricity distribution companies. The second biggest power company is Energetyka Poludnie, which was created late 2006, and comprises all the operations of PKE, two power distributors and Elektrownia Stalowa Wola.

The Polish power sector is the largest market in Central and Eastern Europe, with an installed generation capacity of over 35 GW, and along with France, is one of the few countries in the European Union that is a net exporter of power. However, the construction of new generation capacity has been inconsistent over the past 30 years and coupled with insufficient expenditure on maintenance and modernization projects has created an aging system that is becoming an increasingly serious problem. According to Katarzyna Rozenfeld, energy director at PricewaterhouseCoopers, Poland’s spare capacity fell from 46 per cent in 2002 to 32 per cent last year. At one point last summer spare capacity dwindled to an alarming six per cent.

Clearly it is imperative that Poland begins to significantly invest in its generation capacity, and some investment is already in the pipeline, with PGE currently constructing a 833 MW unit at the Belchatow power complex. However, Pawl Urbanski, PGE’s president, has acknowledged that greater investment is needed.

Another problem facing the sector came to the forefront last October when the URE tried to de-regulate electricity prices as of 1 January 2008. Power prices are much lower in Poland than the EU average, and analysts predicted the unexpected ruling would cause prices to jump by between 10 per cent and 15 per cent. However, the URE chief was sacked only ten days after his ruling, and his successor quickly said he would backtrack from the decision.

Clearly, the Polish electrcicity sector has come a long way since its Soviet state-controlled past and continues to look to the future, but with the lack of investment in new and existing generatiion assets beginning to bite and continued subsidization of electricity prices it looks like old habits die hard.