SHOULD THE EXCHANGE OBLIGATION APPLY TO RENEWABLES?

Abolished in 2022 based on questionable arguments about its negative impact on electricity prices, the exchange obligation is now returning in the amendment to the RES Act (UD 332). There is an ongoing debate around whether the exchange obligation should apply to renewable energy sources or not. A threshold of 10 MW has been introduced for applying the obligation, but it is difficult to find any justification for this level, it appears arbitrary. Moreover, it is hard to find a rational reason why RES installations should be subject to the exchange obligation at all. To recall, the exchange obligation is the requirement to sell a certain portion of electricity through the exchange market.

This does not mean that the exchange obligation, even if RES are excluded from it, is neutral for the RES sector. Quite the opposite.

Yes to exchange obligation, no to RES obligation

The exchange obligation fundamentally reduces the risk of low liquidity in the electricity market. For the RES sector, it is important that the power exchange market is liquid, as only a liquid market provides reliable price benchmarks. These benchmarks are the basis for structuring RES power sale contracts, as well as for calculating bids in RES auctions, where settlement per MWh is based solely on exchange indices.

However, when it comes to applying the exchange obligation to RES energy, the opposite is true, it is neither necessary nor advisable.

The vast majority of RES sell electricity under the so-called “market access” model, meaning access to the spot market, selling energy to trading companies based on exchange indices. Even without the exchange obligation, RES already place most of their production, albeit indirectly, based on market indices.

However, the market access model works well only if the market remains liquid. If liquidity declines, the current model will become too risky for trading companies, leading to discounts that reflect deviations between actual transaction conditions and benchmark prices.

Exchange trading is based on baseload instruments with constant hourly delivery profiles. Most RES are not able to generate electricity in this way and therefore cannot enter into forward contracts.

Market liquidity is valuable for the entire energy market, but forcing RES to sell electricity on the exchange will not improve the situation. In Poland, the issue is not so much the liquidity of the spot market, where RES are already active, but rather the forward market, which remains inaccessible to RES due to the lack of suitable baseload products.

Exchange obligation as a threat to the development of cPPA

Introducing the exchange obligation would negatively impact the development of corporate PPAs (cPPA), a fast-growing segment expected to become one of the key pillars of the future energy market.

Requiring RES to sell electricity on the exchange would limit the development of physical cPPA contracts, currently the preferred model for RES market growth, based on simple direct agreements with energy consumers. RES (PV and wind) are currently the cheapest way for consumers to hedge electricity prices over time horizons not available on the exchange market. Why reduce the volume of energy attractive to industrial consumers by introducing such an obligation?

The obligation to sell on the exchange should not significantly affect financial cPPA, as in this model, electricity is already priced based on spot indices. However, financial cPPA are regulated financial instruments, subject to additional regulatory requirements, making them more complex and therefore accessible mainly to large industrial consumers.

In other words, RES installations subject to the exchange obligation would be forced to sell electricity on the spot exchange market, which is already their main market, while simultaneously reducing the volume of MWh that could be contracted through long-term off-exchange cPPA agreements. Therefore, imposing the exchange obligation on RES would bring no benefits to the energy market, while undermining the foundations of the rapidly growing cPPA segment.

Grzegorz Skarżyński
Partner
Tundra Advisory