Roundtables are an initiative of the Reform Institute, carried out with the participation of stakeholders and experts. Together, we create a forum for constructive discussion on the challenges facing the Polish economy in its transition to climate neutrality. Meetings are held both online and in person, bringing together representatives of business, expert communities, and policymakers.

Background

Green electrification – i.e., increasing the share of electricity in final energy consumption while rapidly expanding renewable energy sources (RES) – is key to achieving climate neutrality by 2050. However, fully harnessing the potential of renewables will not be possible without unlocking the flexibility potential on the demand side of the electricity market.

Greater flexibility in electricity consumption at both national and local grid levels would not only facilitate system balancing but also help reduce the costs associated with grid expansion and modernization through more efficient use of existing network infrastructure.

The primary tools identified for activating consumers are dynamic electricity tariffs and flexibility services. However, it is also worth considering whether an appropriate structure of network charges could serve as a complementary instrument to support flexibility.

The meeting organized by the Institute aimed to initiate a discussion among representatives of public administration, industry associations, and non-governmental organizations on the reform of electricity distribution tariffs (a new model for charging network usage fees).

Summary of the Discussion

Current Situation of Distribution System Operators (DSOs)

• Fixed costs account for 80–90% of DSO costs, while variable costs represent only 10–20%. On the revenue side, however, variable charges account for approximately 60% of DSO revenues, while fixed charges and other fees account for around 40%. Current network tariffs therefore do not accurately reflect the actual cost structure of DSOs.
• Over the past decade, renewable generation capacity connected to distribution grids has increased significantly and now represents around 40% of Poland’s total generation capacity. This trend is particularly visible in micro-installations, which account for 12 GW out of the 29 GW of total renewable capacity.
• DSO capital expenditures have risen substantially in recent years. In 2023, investment spending reached PLN 11 billion, an increase of PLN 3.6 billion compared with 2022.

Reform of Network Charges

• Since electricity distribution is a regulated activity, network charge reform and the implementation of dynamic network tariffs should form part of broader public policy.
• Dynamic network charges could benefit consumers introducing new electricity demand, for example through investments in electric vehicles or heat pumps.
• Increasing demand-side flexibility is essential, as it can reduce the costs of investments in both electricity grids and generation assets. Flexibility should work in both directions—discouraging consumption during certain periods while encouraging it during others (e.g., charging an electric vehicle on a sunny Sunday afternoon).
• Encouraging consumers to shift their electricity usage would lower electricity bills for all consumers compared with a business-as-usual scenario.
• The main barriers to implementing demand-side flexibility today are:
  a) regulated/frozen electricity prices,
  b) net metering arrangements for prosumers.
• Greater flexibility in the power system is strongly supported by the renewable energy sector. Increased demand flexibility has the potential to significantly reduce non-market redispatch, i.e., the curtailment of renewable generation outside market mechanisms.
• In the coming years, Poland is likely to face constraints in expanding connection capacity needed for electrification (heat pumps, electric mobility). Increasing demand-side flexibility, including through changes in network charges, is seen as a key solution.
• Distribution tariffs must reflect DSO costs and should not result in cross-subsidization among different groups of energy market participants.
• Most consumers currently—especially low-voltage customers—do not use time-of-use tariffs and instead choose single-rate tariffs because they are simpler and because the available tariff options are limited. Price differences are generally not attractive enough to encourage switching.
• Reforming network charges alone may not significantly change consumer behavior, as the energy supply component represents a larger share of the electricity bill than the network charge component.
• Several European countries have successfully implemented distribution tariff reforms. Examples include:
  • mandatory time-of-use tariffs,
  • seasonal tariff differentiation (summer vs. winter),
  • pilot schemes in Italy allowing consumers to exceed their contracted capacity at night to facilitate electric vehicle charging.
• Dynamic network charges would improve the business case for energy storage investments, which are essential for the energy transition.
• Dynamic network charges would also enhance the economic viability of producing zero-emission fuels (Power-to-X).

Related Reforms

• Reform of the quality charge set by Poland’s Transmission System Operator (PSE) should also be considered.
• The most important enablers of consumer flexibility are price signals, device automation, and sub-metering. One possible solution is to introduce different tariffs within a household for:
  a) standard electricity consumption,
  b) heat pumps,
  c) electric vehicles.
• In the near future, as the number of prosumers and connected devices increases, incompatibilities may emerge between price signals from electricity markets (generation) and those from network operators (distribution and transmission). Nodal pricing could help address this challenge.
• Reform of distribution tariffs will only be effective if accompanied by reform of electricity supply tariffs.
• Two competing paradigms are at play: whether flexibility should be driven primarily by market-based price signals or by regulation. Currently, flexibility in electricity pricing and distribution remains largely rule-based rather than market-based.

Costs of the Energy Transition

• Consumer flexibility alone will not eliminate or replace all investment costs associated with the energy transition. International experience shows that flexibility services do not necessarily reduce total investment costs. However, the relevant benchmark is not today’s costs but the future costs that would arise without flexibility measures.
• A higher share of variable renewable energy sources lowers electricity generation costs but increases system balancing costs.
• Governments should manage the energy transition in a way that ensures growing electrification (through electric vehicles and heat pumps) does not increase the unit costs of electricity transmission and distribution.
• Consumer flexibility can optimize the network investments that are required. Greater flexibility allows available funding for grid development to be used more efficiently.
• If new electricity consumers—particularly users of heat pumps and electric vehicles—do not receive sufficiently accurate signals reflecting the costs of generation, transmission, and distribution, they will have neither the incentive nor the ability to adjust their demand profiles. This would increase the costs of the energy transition and delay investments due to limited grid connection capacity. The lack of available connection capacity is a non-monetary cost of insufficient flexibility in the electricity market.
• Reforming network charges would encourage consumers to modify their electricity consumption patterns and would stimulate the deployment of new, more affordable technologies that enable a more flexible energy system. Such technologies include energy storage systems and smart devices.

The transformation of Poland’s electricity grids will require investments of approximately PLN 500 billion by 2040. Flexible demand management can help reduce these costs, ultimately leading to lower electricity bills for consumers. However, this will require a shift in the approach to network charges, which should better reflect the actual costs of the electricity system. More in the Institute’s new report, Fixed, Variable, or Dynamic? Network Charges in the Context of the Energy Transition.