Changes to the heat tariff scheme in Poland

Poland

A new regulation on detailed rules for the creation and calculation of tariffs and settlements for heat supply (“the Regulation”) has recently entered into force. The Regulation results from the requirements set forth in the Act of 14 December 2018 on support of highly-effective combined heat and power (“CHP” or “cogeneration”). The said Act introduced a new CHP support scheme in Poland, replacing the former tradable certificates of origin system with the auctioning/feed-in system.

In Poland two methods exist for calculating heat tariffs. One is the cost method, which is based on planned incomes and costs. The other one is the benchmark method (simplified method), which may be applied to CHP units and in which the heat price has to adhere to the level of the relevant benchmark published by the energy Regulator. The main amendments introduced by the Regulation concern both methods and can be divided into three main categories.

Firstly, the cost method for creating the tariffs for heat produced in cogeneration units has been adjusted due to the above-mentioned new CHP support scheme.

Secondly, some modifications have been introduced which are aimed at making the tariff change process more flexible in the event of a change in external factors, i.e. increased prices of greenhouse gas emission allowances, fuel or electricity prices. Heat producers which use the cost method as well as heat distributors have been entitled to change the tariff in the case of a significant, unforeseen alteration of their operation conditions. In such case they can make use of correction indicators which modify the tariffs by reflecting market changes and which are applied by the energy Regulator.

Some relevant amendments in this regard have also been made with respect to the benchmark method. As a rule, tariffs formulated by the benchmark method last for one year. However, according to the Regulation, entities may now request a change of the tariff before the lapse of this period. This mechanism can be applied if: (i) –new average heat sale price for production units other than CHPs (which is used for calculation of the benchmark price) is published or (ii) in the case of a change in the existing licence resulting from a significant change of conditions for carrying out the activity covered by the licence, in particular the change of the fuel used in a given source.

Thirdly, the Regulation provides for a mechanism enabling the coverage of already incurred costs of purchasing greenhouse gas emission allowances in 2018, which have not yet been covered by the tariff. In the case of CHP plants using the benchmark method, the dynamic increase in CO2 costs is transferred to the tariffs with some delay. As a consequence, CHP tariffs may not always fully reflect the current level of CO2 costs. The Regulation enables coverage of such extra costs. Sources that are required to purchase greenhouse gas emission allowances and which were commissioned by the end of 2017, have been given the option of adding to the heat prices - once, at the new tariff approval stage - specific amounts of money per GJ. Coal units may add PLN 1.36/GJ (c.a. EUR 0.3/GJ), while gas units - PLN 0.78/GJ (c.a. EUR 0.17/GJ).

Irrespective of the above, the Regulation also says that the distributor’s or heat company’s tariff should set an equal way of determining the prices and rates of fees used in financial settlements with the customers in the same heating system. Customers connected to a given heating network should be covered by the same prices for heat.

Moreover, the Regulation extends, from 18 to 36 months, the period for which the so-called “risk-free rate” is calculated. This change is to ensure that the risk-free rate will be more stable over time. The level of this indicator is used to determine the cost of capital used for transmission tariff calculations and corresponds to the average profitability on 10-year Treasury bonds with the longest maturity, listed on the Treasury BondSpot Market.

To summarise, even though the Regulation does not modify the current legislation on tariffs for heat extensively, it provides for some changes which may be beneficial to heat producers. In particular, new mechanisms making it possible to adjust the tariffs to the current market environment, as well as the right to cover high costs of CO2 allowances borne in the past, can be applied to the benefit of CHP producers.