Ancillary Control Services

PGE Group provides services to the Transmission System Operator (TSO) - Polskie Sieci Elektroenergetyczne (PSE). This is a special client because this entity has a public interest in the form of security of electricity supplies. The Operator's role is to balance the National Power System, i.e. balancing electricity demand and supply, in every second, minute and hour. To ensure the proper operation of the power system, the Operator purchases system services. Having geographically dispersed generation assets, PGE Group is an important partner for the Transmission System Operator (PGE Group's generation fleet is spread out between Szczecin and Bieszczady mountains).

Regulatory System Services are provided in three areas: 

1. Conventional Generation

Capacity reserve guarantee, system operation security and energy quality are ensured through services such as:

a) Operational Capacity Reserve - covering every business day,
b) Intervention Capacity Reserve - covering an expected period of capacity deficit,
c) forced operation, i.e. use of cogeneration units to ensure the quality of energy in response to system restrictions (of a local nature).

2. Renewable Generation

Units in this segment are adapted to intervention work in order to ensure a balance of power and compensation, i.e. ensuring the quality parameters of energy. Pumped-storage plants are activated at the operator's request and depending on the needs they can either generate or receive energy.

3. Demand management (DSR)

If a shortage or lack of reserves takes place in the system, the operator may try to reduce demand (demand side response) - this consists of voluntary limiting energy intake according to rules agreed with the Transmission System Operator. Our company PGE GiEK participates in capacity reduction tenders, having the requisite energy-consumption equipment at the lignite mine Bełchatów.

In 2016, our consolidated revenue from Regulatory System Services reached PLN 513 million, denoting 3% growth from 2015.

The above activities (Ancillary Control Services) are of an ad hoc, short-term nature. PGE Group is also involved in long-term work intended to re-store capacity in the system and ensure lasting supply-demand balance. Stricter technological standards (BAT conclusions), resulting in older conventional units being driven out of the system and renewable energy sources being developed, constitute a challenge for the Operator as regards ensuring the required capacity reserves for the National Power System. Being aware of this problem is a catalyst for legislative work on introducing the Capacity Market, which should eventually replace the temporary solutions Operational Capacity Reserve and Cold Intervention Capacity Reserve.

Baseload (work 24/7)

Our contribution to system security is not just specialist services for the Operator.

PGE Group is of a strategic importance to the Polish economy. PGE Group is the largest producer of electricity in Poland. We meet over 1/3 of domestic demand for energy. Our flagship power plants operate in baseload, meaning work 24 hours a day, 7 days a week. The energy market is organised in a way in which units with lower variable costs have priority over units with higher variable costs. This is called the merit order During peak demand ("PEAK"), a larger number of production units is involved in meeting demand than during off-peak hours ("OFF-PEAK"), when energy is generated by the most economic units. Naturally, energy in peak is more expensive than off-peak. 

What makes up the cost of electricity?

The cost of electricity is made up of the following:

• cost of investment, i.e. construction of the power plant. This cost is amortised over the plant’s lifecycle.
• fixed costs, i.e. on-going maintenance: employee wages, repairs, equipment, etc. These costs are incurred regardless of whether the plant is producing electricity or not.
• variable costs, i.e. how much it costs to generate each additional MWh of energy. The level of variable costs directly depends on the level of production. The main component of variable costs is the cost of fuel.

For different types of power plants, the relation between these costs varies. For example, for wind farms or photovoltaics, the cost of investment and its share in total costs are high. However, operating, fixed and variable costs are relatively low. In the case of conventional plants, variable and fixed costs are more balanced, largely depending on the cost of fuel.

This is why in Poland the levelized cost of electricity per 1 MWh is still higher for renewable energy than conventional. However, at PGE we are also forecasting a gradual decline in the cost of generating energy from renewable sources.

The mechanism shaping prices on the wholesale market - how does it works?

The price on the wholesale market is driven by variable costs, and more precisely – by the marginal cost to produce 1 MWh of electricity. Based on the level of these costs, from the lowest to the highest, a supply curve (merit order) is created. The point where the demand curve crosses the supply curve is the current market price of energy.

Fixed costs are incurred regardless of whether a given plant operates or not. Therefore, they have no present impact on the price of electricity.

High costs of investing in renewable sources (i.e. sources with low variable cost) are financed outside the electricity market, from subsidies that all consumers pay for.

Why do energy prices change throughout the day?

Not all capacities are always available on the market. Therefore, the price is driven by their availability and by demand for electricity – lower at night, higher during the day, and seasonally shifting – higher in the winter, lower in the summer.

In Poland, we have limited water resources and limited capability of using solar energy, which translates into a limited number of plants fuelled by these forces of nature. This is why the most important renewable source is wind energy. It is wind conditions that largely determine the level of available capacity.

The most important factor in capacity availability is thus the weather. Therefore, the level of the availability of renewable capacities is variable, and there must always be an appropriate conventional capacity reserve, ready for immediate use whenever weather conditions make it impossible to generate energy from wind.

Where do specific generation sources place on the supply curve?

It is because variable costs have an impact on the price of electricity. For conventional plants, the main costs are: cost of fuel and cost of CO₂ emission allowances.

Wind farms, hydro plants and photovoltaic units do not incur these costs. Therefore, they are always first in the merit order. CHP plants are similar – their primary role is to produce heat, while electricity is generated in addition to that. Given the cost of fuel (coal, gas) and CO₂ allowances, conventional plants are further out in the merit order.

In Poland, lignite plants usually have the lowest variable costs, followed by hard coal plants, with gas-fired plants being the most expensive.

The production cost, of course, depends on the efficiency of fuel processing at the plant. Therefore, new units will offer cheaper electricity than existing ones.

What if the market price does not fully cover the plant’s operating costs?

The mechanism for setting prices based on variable costs was effective in a free market situation, undistorted by the subsidising of select technologies.

Subsidising the costs of investing in renewables has distorted the energy market, worsening the economics of conventional unit operations because these cannot operate at full capacity. In many markets, the operation of permanently or temporarily unprofitable assets is being limited. This may not be allowed on the market for electricity, which is one of the basic human needs. In disadvantageous weather conditions (e.g. no wind), there would not be enough energy, which would cause a blackout. This is destructive for the economy and for the regular life of people.

This is where the concept of capacity market comes in – as a market supplementary to the electricity market, offering the certainty of electricity supplies irrespective of the weather or time of day. 

The need to support the operational readiness of generating sources results directly from market distortions caused by non-market support for uncontrollable renewable energy sources. This is not additional support – this is really just levelling the playing field. Thanks to this, stable generating sources may receive partial compensation for declining wholesale prices (which until now covered variable costs and fixed costs). This will allow plants to be maintained and modernised so that they can be cleaner and more efficient – for uninterrupted and reliable supplies of energy to our clients. 

Reliability of supply

Energy security is not just base generation and support for the Transmission System Operator. The product - electricity - must be supplied to the client, to an energy consumption point.

The transmission of energy is the use of high-voltage grids, the operator of which is Polskie Sieci Energetyczne S.A., which also actively manages the operation of generation units across the entire country. Energy distribution is based on high-, mid- and low-voltage networks, carrying out supplies from the Transmission System Operator to end clients.

PGE Dystrybucja is one of five regional Distribution System Operators.

Quality indicators

The reliability of supply is a strategic objective of PGE Group but above all, the basic requirement of the end customer. Distribution activities are exposed to natural forces. Thanks to investments, we have an impact on technologies and we can shorten repair time through process organisation. We aim to keep energy supply interruptions as short as possible and as infrequent as possible. The quality of distribution services is measured by the SAIDI and SAIFI indicators.

SAIDI – System Average Interruption Duration Index - System Average Interruption Duration Index -  index of average system interruption time expressed in minutes per customer per year.  

SAIFI – System Average Interruption Frequency Index - index of average system amount of interruptions, determined as number of off-takers exposed to the effects of all such interruptions during the year  divided by the total number of off-takers. 

Both of these indicators are only counted for interruptions lasting more than three minutes and concerning MV and HV lines.

The on-going investments will contribute to increasing supply reliability and decreasing the SAIDI and SAIFI quality parameters by 56% until 2020, as compared to 2015.

The achievement of these objectives is supported by the development of a system for monitoring energy quality, intelligent grid operation metering and automation and the construction of a digital transmission system. The 2016 results confirm that we are closer to achieving our strategic goals for 2020.

A systematic improvement in quality indicators is not just an issue of image. Fees for distribution network operators are regulated in the tariff process, by office. According to the existing quality regulation, the level of fees obtained by Distribution System Operators depends on achievement of quality goals. Failure to meet the quality indicator levels set out by the President of the Energy Regulatory Office may be subject to a penalty in the form of a reduction in regulated revenue.