Aquila Clean Energy on Poland: ‘not undersupplied’, higher financing costs and a two-year window to get in

In this Q&A, Leykam discusses the markets in CEE the firm is looking at most closely, namely Poland and the Baltic region (Lithuania, Latvia and Estonia).

Key takeaways include his view that the Polish market is “not an undersupplied one”, that project financing costs there will be higher than its other markets, and that developers need to get into the market within the next two years to not miss out.

Energy-Storage.news: Talks us through how you view the CEE market’s attractiveness generally?

From a regulatory perspective we have seen good developments, both in Poland as well as in the Baltics. The markets are maturing, obviously with certain uncertainties still around particular things like the ancillary services market opening, in terms of their timelines.

So we are looking at projects, we are looking at transactions in Poland in the battery space, we haven’t done anything yet.

Everybody is expecting the (capacity market) auction to clear below the cap this year, I think that’s pretty clear. We expect that batteries will be the price setters in the auction.

With 6GW of granted connection capacity, Poland doesn’t look like an undersupplied market for batteries, to be very honest. It seems there are plenty of projects around. Right now the situation is mainly market participants trying to figure out how to get it off the ground.

But in terms of fundamentals, the Polish market is a good fit. You have the renewable buildout, the coal decommissioning, so it takes a lot of boxes in terms of being a country where you want to deploy batteries.

What will the revenue stack look like in Poland?

Currently the capacity market is strong and given the very high clearings last year, obviously it constitutes a big amount of revenues. I would expect that going forward that is going to change and we’ll begin to see a smaller portion of capacity market revenues just like we see in the capacity markets in the rest of Europe, like in Italy, Belgium, UK.

You have usually a smaller portion of revenues allocated to capacity markets. The importance of that is probably expected to decrease, then we have the ancillary services market opening.

FCR/AFRR (ancillary service markets) are expected for next year. And we think there can be attractive opportunities going forward in these markets.

Regarding the wholesale arbitrage at the moment there is a lot of flexibility in the Polish system thanks to firm generation in the Polish system. At the same time, the renewable rollout has just started. So once we see that the firm capacity is phased out with the lignite plant exits in Poland, plus renewables really kicking in, we think that the market set-up for arbitrage will further improve in Poland.

Poland is only committing to phasing out coal by 2049 but I think the majority will be phased out in the second half of this decade.

I think you need to get into the Polish market with acquired projects within the next two years to not miss out on the opportunities. Projects themselves will only really start coming online in 2026 onwards.

Does going into Poland necessitate a different approach to other markets?

Something that is really positive is that the regulator here in Poland is establishing a market framework for ancillary services which is very similar to what you see on the rest of the continent, and the same is actually true for the Baltics.

So the plan is to establish the same structure as you have for example in Germany and that is being rolled and harmonised with Picasso etc. So in terms of market set up, there isn’t a big difference. You have the experienced developers from the new build side here, which is also something you can bank on.

So I would actually say the approach to Poland is similar.

What about financing projects in Poland, how is that different?

In Poland you have the Zloty exposure which obviously has a lot higher base interest rate than you have on the euro.

The income streams are also Zloty-based so you do not have Euro PPAs (power purchase agreements) which means that you probably should also do the financing in Zloty which means that you probably will need to work with a local bank on that. And interest rates are just higher in Poland. A risk-free interest rate is above 6% compared to around 4.5% for Euros.

So you have a higher base rate, which translates into higher financing costs. And also from what I’ve seen so far is also that the Polish banks are not fully comfortable with batteries yet.

But I guess that is something that I would say is not fundamentally different than in the other markets, because in every market the banks needed to have their learning curve.

In the UK the companies are pretty advanced in terms of using debt, but even on the rest of the continent it’s still something people need to figure out: how much debt to use on the projects for batteries and how to make banks comfortable with this.

What about the Baltics?

The setup for the Baltics is more immature than in Poland. But we see good progress there from the regulators to set up an ancillary services framework that is similar to Poland and the rest of the continent, which we think is very good, because it reduces the tentry hurdles for international players that can bring in experience and that can kick start the market.

And we see with a desynchronisation of the Baltics from Russia, we see an opportunity there to deploy batteries.

So we see in Baltics as well as in Poland the opportunities for international players to bring in the experience from operational projects into these markets to basically fasten the development.

And it’s not only about how to build up a business case, case how to run a battery, but it’s also the whole supplier relationship topics.

Can you comment on the recent market saturation/fall in revenues in the UK and Germany, and give us a quick word on Belgium, where you’ve been in energy storage longest?

This is no surprise, no one expected 2022 revenues for the next 20 years.

But I think the reason why they’ve come down in Germany is just a general normalisation of the market. So you’ve seen gas prices coming down therefore intraday spreads coming down and this is something which is fairly in line with expectations.

I think in the UK the situation is a bit different because the revenues have come down because of saturation of ancillary services and I think people realise that the whole story of energy trading revenues in the UK is more tricky than expected. The BM is so far a bit of a disappointment, while in Germany, we see better opportunities in intraday trading revenues.

We’re very happy with how our Belgium asset is performing.

See other articles related to the CEE event here.