Poland is implementing fundamental changes aimed at achieving climate neutrality, and actually exceeding the 2020 renewable energy target[1] can be good proof of that. The biggest Polish energy companies are playing a key role in this process by developing offshore wind farms and photovoltaic projects on a large scale. They are also carrying out innovative projects, for instance concerning electricity storage and the use of clean hydrogen and other low-carbon technologies.
Public acceptance is a pillar of the just energy transition, so keeping energy prices at an acceptable level is crucial not to cause an increase in energy poverty.
There are many initiatives underway to actively participate in the EU climate policy, but also to meet public expectations in Poland. According to the recent statistical study by the Polish Institute for Social Research and Market (IBRiS) commissioned by the Polish Electricity Association (PKEE), 82 percent of surveyed Polish citizens are very concerned about caring for the environment. However, only 41 percent of them said they could afford to pay more for electricity if it came from renewable energy sources. Public acceptance is a pillar of the just energy transition, so keeping energy prices at an acceptable level is crucial not to cause an increase in energy poverty. Poland has taken various steps to tackle this issue — by temporarily cutting taxes on fuels and electricity, and introducing additional financial support for the most vulnerable energy consumers. However, this is not enough. The Fit for 55 Package and, in particular, the Emissions Trading System (ETS) reform will play a pivotal role in ensuring a just energy transition and affordable prices. Another important topic is the complicated situation in the natural gas market, especially after the suspension of supplies from Russia to some EU countries, like Poland. It’s another challenge that requires quick and comprehensive actions, which will be less effective without changes in the ETS system.
Within the current architecture of the EU ETS, several countries are struggling with allowance shortages. The EU ETS should be an opportunity for further transformation of the sector, and not the cause of a reduction in financial resources that the energy companies could be spending on green investments. Given that, the European lawmakers in charge of the revision of the EU ETS Directive should seek to address the striking issue of imbalance.
First, to limit the negative consequences of the imbalance, the Modernisation Fund should be substantially increased to respond to the actual needs of the member countries. The European Commission’s proposal to strengthen the fund is definitely a step in the right direction; however, the proposed increase is not fit for its purpose and is simply not enough to effectively support the transition.
Another way to address the imbalance in the EU ETS is the revision of the Market Stability Reserve (MSR). The mechanism designed to intervene in the case of surplus or shortage of allowances on the market has a great potential to support transforming countries. One of the solutions is that the allowances placed in the MSR, instead of being cancelled as of 2023, could be transferred to the Modernisation Fund and further support the ongoing energy transition. Furthermore, it might be triggered when the specific level of EUA prices is reached, so that it protects the emitters better against the price shocks.
Within the current architecture of the EU ETS, several countries are struggling with allowance shortages.
The current discussion on the EU ETS has to reflect the issue of surging energy prices. In countries such as Poland, where a substantial, though constantly decreasing, share of generation is still based on coal, the price of energy is influenced by the cost of EU ETS allowances — EUAs. Only in 2021, the EUA price nearly tripled and recently reached the new record level of €93/ton. It translates into higher electricity and heat prices for consumers and significant expenses for the compliance entities — companies surrendering the EUA. This financial burden limits the ability of these companies to invest in green energy sources.
However, in the wake of the Russian invasion of Ukraine, the ETS prices plummeted in a short period of time by nearly 30 percent and started to rise again soon after. The recent volatility in the EU ETS market and sudden surges and drops in EUA price is augmented by financial players who participate in the market not for energy transition enhancement, but for their financial gains. These entities do not surrender the EUAs but treat EU ETS as another investment opportunity. These behaviors constitute a hurdle for the EU ETS market’s primary purpose, which was to be the accelerator of the energy transition in the EU.
Thus, the impact of such entities on the EU ETS ought to be limited. Polish MEP Jerzy Buzek, among other MEPs, tabled at the committee on industry, research and energy (ITRE) his proposal to exclude the financial institutions that do not act on behalf of the emitters. This amendment only recently has passed as part of the ITRE committee’s opinion. This shows that even a part of the European Parliament admits that the excessive speculation, caused by market participants with no compliance obligations, affects the creditability of the EU ETS as the tool designed for environmental and not financial purposes.
Furthermore, in its final report on the functioning of the EU ETS market, the European Securities and Markets Authority proposed to consider setting a limit for open positions that an ETS participant might hold in allowances derivatives. This idea should be further explored and one of the possible solutions is to introduce general and individual limits on positions that financial institutions might take, for example, by setting a percentage limit of the volume that financial players can buy individually. Moreover, if they exceed the general threshold, no further purchases by financial institutions would be allowed.
The EU ETS is undeniably an important tool to further carry out the energy transition.
One of the envisaged solutions regarding the ETS price volatility is the revision of the Article 29a of the EU ETS Directive in order to better address the market changes through the release of the additional number of allowances in case of a continuous surge in EUA[2] prices and to protect the European economy against price shocks. As in the case of the proposed amendments to the MSR, Article 29a should be triggered when the specific price is reached. Its current design based on multipliers makes it ineffective to prevent price surges. The current triggers activating this mechanism, which are based on price multiplications, are ineffective. There is also a risk that the price multiplications, even if relaxed — will still prevent the effective release of allowances to the market. Therefore, when it comes to Article 29a of the EU ETS directive, a substantial change to this mechanism is required including replacing price multiplications with a certain price threshold, which will follow from the Commission’s Impact Assessment to the EU ETS directive, automatic release of allowances to the market, and a precise definition of the timeline of release and the origin of allowances to be released.
The EU ETS is undeniably an important tool to further carry out the energy transition. However, faults in the system’s design have been revealed, and it must be amended. The Polish energy sector is constructively trying to contribute to the discussion on the reform of the ETS. It is for this reason that we propose the three solutions mentioned above. First — limiting access to the EU ETS market for financial institutions to limit excessive speculative behavior in the ETS market that weakens this market and deforms the assumptions and the underlying idea of the EU ETS. Second — the reform of the Market Stability Reserve, by moving away from the total number of allowances in circulation, known as TNAC, in favor of setting a price threshold above which allowances should be directed to the market. And last — the reform of the mechanism preventing excessive price increases, that is, the reform of Article 29a of the EU ETS Directive to ensure a faster response to the observed price shocks. This would be done by departing from price multipliers in favor of introducing (similarly to the proposed changes to the MSR) a price threshold above which allowances are released to the EU ETS market. A necessary condition for the efficient functioning of the EU ETS market is also the improvement of market monitoring and supervision. Let us remember that to continue the transformation of the energy sector and the decarbonization process we need market stabilization and predictability, also on the EU ETS market.
[1] Eurostat, EU overachieves 2020 renewable energy target, January 19, 2022, https://ec.europa.eu/eurostat/web/products-eurostat-news/-/ddn-20220119-1
[2] Peter Liese, We must curb rise in electricity prices – Main problem, however, remains dependence on gas, February 16, 2022, https://peter-liese.de/en/32-english/press-releases-en/3757-must-curb-rise-in-electricity-prices-main-problem-however-remains-dependence-on-gas
