Think tank: Coal crisis, not climate policy, is forcing Polish energy overhaul

The coal mining crisis and the need for investment in the energy sector are the two main drivers of change in Poland, not the EU’s climate policy, says Joanna Maćkowiak Pandera. [Greenpeace Polska / Flickr]

The unfolding crisis in the coal sector is leaving Poland with a looming power generation gap which is forcing decision-makers to reconsider the country’s energy mix. But politicians have until now delayed hard decisions and a transparent debate about it, says Joanna Maćkowiak Pandera.

Joanna Maćkowiak Pandera is President of Forum Energii, a think tank based in Poland. In 2007–2011 she worked in the Polish Ministry of Environment. During the Polish EU presidency, she was undersecretary of state and represented Poland in international forums. She answered questions from EURACTIV’s energy and environment editor, Frédéric Simon.

INTERVIEW HIGHLIGHTS:

  • Polish coal is uncompetitive compared to imports from outside Europe
  • About 20 gigawatts need to be switched off in the next 15 years
  • 25% coal in power mix by 2050 is realistic, down from 84% currently
  • Replacing coal with nuclear power will be a challenge because of the long build timeframe
  • Polish government has a problem putting a name and a vision on the energy transition

***

First, about Forum Energii: Establishing a think tank on energy matters must be a peculiar endeavour in a country like Poland, where coal represents 84% of electricity production. How did that come about?

Our mission is to support the energy transition in Poland, by delivering economic analysis and concepts on how to do the transition and why we should go for it.

We want to convince stakeholders that there can be a Polish model for the energy transition. And because the Polish power mix is monopolised by one source of energy, it’s worth supporting energy diversification and innovation.

As a government official for four years, I was involved in the past in European energy and climate negotiations. And already back then negotiations were difficult as there was a lack of trust towards ideas coming from Brussels.

There is still reluctance in Poland to have an open conversation about the future of energy. We want to support an open debate with the publications and the conferences we organise with stakeholders and energy businesses.

We are also transparent about our sources of funding, which come mainly from the European Climate Foundation (ECF).

Forum Energii has done an evaluation of the cost of the energy transition in Poland. Assuming lowering carbon emissions is the main objective, what is the earliest that Poland can realistically consider phasing out coal entirely?

The timeframe for phasing out coal depends on the ambition of politicians, who have to take into account the costs of the transition, public acceptance and security of supply but also the need to reduce pollution in the country.

And my impression is that Poland has come to the conclusion that some change is necessary to adjust to new realities – whether in terms of low emission policies or new technologies which are now becoming competitive.

There are two important drivers behind this slowly changing attitude in Poland. The first is the crisis in the coal mining sector. Productivity in coal mines is just too low – it would have to double or triple in order for Poland to respond to the global price of coal. Poland’s main energy objective of self-sufficiency and energy independence will be difficult to attain in the future because of increasing imports of cheap coal.

So coal is no longer competitive in Poland?

Yes, coal extraction is uncompetitive compared to coal from outside of Europe.  There are geological and economic factors which make it difficult to reverse. Coal mines are mainly situated in Silesia, which is a densely populated region. So the remaining coal is harder to get and more costly to extract.

There is some potential in other parts of Poland. But for about 20 years investments in new coal mines have not been made and coal production is decreasing. Currently, the extraction is insufficient to cover domestic demand. It came as a surprise to many when it emerged in October that there may not even be enough coal to meet the demand for heating this winter. And many stakeholders realised that Poland’s energy security objective risked worsening in the next years if we won’t look for alternatives and diversification.

Additional pressure on decision-makers emerged because of heavy air pollution in many Polish cities. For years fuel quality standards have been lacking – many households have burned low-quality coal in stoves. As a result, Poland has the worst air quality in Europe. And the pressure on the government is growing.

Another issue relates to the lignite future. Existing power plants will operate until 2030 and after that lignite production will fall sharply. Opening new mines is unlikely for several reasons, the lack of local acceptance and high cost being the most prominent.

In the past ten or fifteen years, only 500MW of new power capacity has been added to the system. There has been some replacement and modernisation of the power generation fleet but this was insufficient compared to increasing electricity demand.

Finally, there is currently an artificial oversupply because the whole system is based on old, coal-fired power plants which benefit from long-standing environmental derogations. But these plants either need to be phased out or deeply modernised. Either way, it will cost money. And the market currently doesn’t supply the right price to do this.

EU power utility boss: ‘Coal is finished, the hard question now is gas’

Apart from Poland, there are no plans to build new coal-fired power plants in Europe, says Francesco Starace. The hard question today is instead who will build a new gas power plant. “And many companies are not doing that either,” he told EURACTIV in an interview.

Those 500MW that were added, was it coal, gas, renewables or something else?

I mean net capacity in various projects – mainly coal.

Poland is only just starting to discuss how to fill the looming generation gap in the future and how to adapt to global energy generation megatrends.

Last year, the Polish transmission system operator PSE presented a study which showed that in the next fifteen years, about 20 gigawatts need to be switched off because they will not meet current or future environmental standards and are economically not efficient.

So this is what’s really driving the debate: we have to finally decide on electricity mix diversification. The heat wave of August 2015 which caused a ‘brown out’ [a fall in production caused by lack of cold water for cooling] illustrated the need to diversify our sources of electricity. And solar PV or gas can play a role there. Resource adequacy is not only about sufficient generation but about a diversified mix of resources.

So you say there is now a realisation in the Polish government that coal no longer has a future?

Frankly speaking, I think coal still has some future in Poland. Because if you have 84% of coal in the system, it will still take at least twenty years to transition to something completely different. But the government has a problem in putting a name and a vision on this.

And the share of coal will definitely decline in the coming years. The energy ministry has put forward a figure of 50% for coal in 2050, which is already something. In our study, we say 25% coal in 2050 is realistic. But it depends very much on other developments, such as the strategic plan of the Polish government to diversify gas supplies, which is really important, as is the question of interconnection.

So, 50% coal by 2050 is the baseline scenario. Have you made an evaluation of the costs this would entail, compared to other options?

We have four scenarios: one coal-based, which essentially maintains the status quo, two diversified ones – with and without nuclear – and a renewable energy-based scenario.

What was surprising, even for us, is that the total costs of the four scenarios until 2050 are very similar. But the scenarios are quite different when looking at the cost dynamics on an annual basis. In the next ten years, the coal-based scenario will be a little cheaper than the other three.

But after 2030, the situation will change and the coal scenario will become the most expensive.

The political elites can see the problem. The energy minister in September this year for the first time declared that there will be no new coal-fired power plants in Poland apart from those under construction now. But there is still no plan on the table for the country’s energy mix looking forward to 2030 or 2050.

When do you expect such a decision to be made? Is there a roadmap?

It’s not clear. And the decision has been delayed several times. According to recent declarations from the Energy Ministry, a plan should emerge before Christmas.

Coming back to my initial question: according to the four scenarios in your study, when can Poland envisage a complete phase-out from coal, realistically speaking? Is it something that can happen before or after 2050?

Given current political conditions, the most realistic scenario is what we call the diversified scenario, without nuclear power. For many reasons, including cost, nuclear will be a challenge. The time to build is too long and Poland needs capacity quickly, in the coming 10 years.

The government has promised that it will introduce some financial mechanism for nuclear by the end of the year. But this is not confirmed and announcements can still change. So I think we should focus on something which is feasible under current conditions. And that corresponds to the diversified scenario, without nuclear. I think more gas and more CHP is also possible. And solar PV has huge potential in Poland.

Poland to treat coal addiction by embracing nuclear power

Poland’s ongoing large-scale investment in three new coal-fired power plants may be the country’s last fossil fuel venture, its energy minister said on Wednesday (6 September), indicating a possible energy shift in the EU’s largest eastern member amid revived plans to embrace nuclear power.

Can gas and solar PV fill the power generation gap you mentioned earlier? Nuclear might take too long to build but it does provide a huge amount of reliable baseload capacity…

How much baseload will we need in the future? Probably coal, lignite and nuclear. The Polish generation system surely needs some gas peakers. And solar PV is something that would strengthen the distribution grid and is needed to address the big problem of summer peaks as peak load is increasing faster in summer than average yearly demand due to air conditioning.

This makes Poland’s situation similar to France. We always have a problem in the summer because of the low water table. This is a challenge for thermal power plants which become exposed to heatwaves. And nuclear will not solve this problem, for sure. But solar PV can.

There is also the potential for offshore wind which is attracting interest from big Polish energy companies, especially since onshore wind is currently unpopular. Expansion of offshore wind to the North would make sense and would be cost-effective in an era of rapidly falling costs.

We also have a huge district heating network in Poland and there is the potential to build around 5,000MW of new, distributed co-generation power plants if the proper policies are adopted.

From your four scenarios, the costs are roughly the same. Doesn’t that make the renewables scenario the preferred one?

For sure, the renewables scenario requires a deeper change in how the energy markets operate. But I’m not sure decision-makers are ready for this.

However, from the energy independence perspective – which is so important for Poland – you will see that import dependency is the lowest in the renewables scenario.

You say a renewables-driven energy transition in Poland is feasible both from a cost perspective and an energy security perspective. So, it’s just a matter of acceptance from public opinion and politicians, right?

After many discussions with all the stakeholders in Poland, it is obvious that the coal scenario – the status quo – is not feasible anymore because of costs and subsidies which cannot be paid after 2018.

We have to decide now how to move forward. I think both the renewable scenario and the diversified scenario are possible. And renewables are supported by society if you look at the opinion polls.

Assuming Poland moves ahead with its plans for nuclear, what would be the implications in terms of costs and timeframe?

Total costs are roughly the same, but the dynamics differ. However, we made quite conservative assumptions regarding the cost reduction of renewables. And if storage technology reaches maturity, the advantages of the renewables scenario only grow.

Nuclear power plants usually don’t build themselves without massive state support. So what would be the appeal for Poland to go for the nuclear scenario?

It’s mainly linked to the awareness that we need baseload. And to the awareness that lignite mines will disappear from the Polish power mix after 2030. There is also this conviction that coal needs to be replaced with a similar source of energy that can run more than 7,000 hours per year.

So this is why nuclear is being pushed forward. And this is where opinions are divided because it’s not clear how much baseload will really be needed in 20 or 30 years. But it’s definitely less than now.

Still, in your four scenarios, the nuclear option appears to be the least costly in the long run, despite all the related costs and heavy investments that are needed upfront. How did you come to that conclusion?

For this analysis, our assumptions regarding the costs of nuclear were quite moderate in comparison to the recent experience in Hinkley Point [Britain]and Olkiluoto [Finland]. So these scenarios are quite sensitive to assumptions. We took moderate assumptions regarding building costs.

The big question, of course, is the price of electricity after the nuclear plants are built. But first you have to build them over a certain timeframe and they have to have a purpose in the system. And for those two reasons, I think this project will be difficult, but we will see.

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Moving on now to the European Commission’s ‘EPS 550’ proposal to introduce a cap of 550 grams of CO2 per kilowatt hour for state subsidies to power plants. That would effectively exclude all subsidies for coal and even some gas power stations. What would be the consequence for Poland if such a decision goes through?

As mentioned, according to energy ministry declarations, no new coal-fired power plants will be built. This means the cap of 550g may have an impact on the existing power fleet as it will limit the possibility to support for coal-fired power plants.

On the other hand, if Poland doesn’t diversify its energy mix until 2050 (e.g. in our coal scenario) we will only reduce our CO2 emissions by 7%. In the diversified scenario, we will cut our CO2 by around 62% and in the RES scenario about 80%. So it is important for our membership of the EU but also because of other reasons to diversify our power mix.

The EPS 550 proposal would effectively rule out coal subsidies but also state support for so-called gas “peakers”, according to some industry studies. What difference would this make for Poland?

You’re probably referring to the Compass Lexecon study ordered by Polish Electricity Association. We don’t want to make comments on it.

The study gives ammunition to those arguing against the costs of EPS 550 for the Polish economy. But your own study seems to suggest it might not be the case…

In my personal view, the specifics of a country like Poland need to be taken into account by Brussels. But my country has to finally propose a transformation plan and ask for the cooperation of all member states. We cannot agree on environmental standards one day and wait until the energy system changes by itself. A clear signal to business is important also to create new jobs in Poland.

But this discussion needs to be transparent – you don’t want to see new coal power plants move to the strategic reserve within the regular market. EPS 550 triggered an important debate on the transformation of the Polish power system.

And this discussion needs to be transparent because we now see a lack of trust between the EU, Poland and also other countries. The transformation of the power system in Europe needs more transparency and cooperation.

EU still divided over curbing power subsidies with CO2 cap

A European Commission proposal to put an emissions limit on what power plants can be subsidised continues to divide the member states but the EU executive and the European Parliament stand united in supporting the CO2 cap.

EU clean energy proposals are often met with resistance in Poland, where they are seen as an assault on the country’s sovereignty. Can the EU help make the energy transition debate in Poland more positive?

I don’t believe the energy sector can develop without a policy vision and targets. Energy and climate plans at EU level are a very good move because they create a chance for Poland to develop its own model for the energy transition.

Poland should provide its own energy strategy. Businesses in Poland have changed a lot in recent years, utilities are more open now and they need clear guidance on how they should adjust to the energy transition. And I see some dialogue between the European Commission and Poland on this.

When talking about the positive aspects of the energy transition, the EU’s multi-annual budget after 2020 is another opportunity to generate momentum. ETS revenue recycling, the Modernisation Fund and the prospects for offshore wind and how to link it to other European projects of common interest are all areas of huge opportunity.

Energy intensive industries like steel and chemicals have criticised the ETS as a massive effort to subsidise the power sector and the Polish energy transition in particular. Do you share this analysis?

Climate policies, directly and indirectly, have led to wholesale electricity price decreases in recent years and industry is the main beneficiary. And there was indeed a time when the ETS was in crisis and there were even suggestions to abandon it.

But I don’t think there is a better system than the ETS. It is like democracy – it is not perfect but there is no better alternative. The EU ETS is a market-oriented mechanism. It is good that the ETS reform is finally being concluded. And this is actually one of the conclusions of the Compass-Lexecon study for Poland, ordered by the Polish Electricity Association: instead of the ‘EPS 550’ proposal, they recommend strengthening the ETS. Emissions trading systems similar to the European one are becoming more and more popular worldwide.

Would a carbon price floor be acceptable for Poland? Or would it penalise the economy too much?

Things are changing in Poland, for sure, but maybe not that fast. The suggestion of introducing a carbon price floor has been a sensitive issue from the beginning in Poland, which objected strongly to strengthening the ETS. And I don’t think this is likely to change now.

So the ETS is seen rather more as a stick than a carrot at the moment in Poland.

The perception of the ETS has changed a little. It was worse five or six years ago and now more people are aware that it may be used as a tool for modernisation. It is now perceived as something that can bring income to the state budget. Revenues can be used for modernisation of the energy system and adjustment to climate policies.

Once Poland presents targets for 2030 or2050, the discussion may take a more positive turn. Some decision-makers say we shouldn’t have a strategy because everything changes so quickly that we need to stay flexible and adjust to technological changes.

But I think this is incorrect. Any number that comes out for 2030, which is now the priority, will strengthen the debate and make Poland focus on that goal. And, finally, a planned and organised energy transformation costs less than uncoordinated modernisation because it avoids stranded assets.

Poland wins bigger coal transition funds in reformed ETS

The European Union has offered Poland more room to subsidise the coal transition in ongoing talks on reforming the Emissions Trading System (ETS), the EU’s flagship instrument to fight global warming, a move that sent alarm bells ringing among environmentalists.

The discussion on 2030 targets started at EU level a while ago. So it’s the EU process which is driving the debate in Poland in a way, more than Polish decision-makers themselves…

This is true, although I’m not sure Poles would like to hear it.

Despite all the difficulties, I feel the debate has evolved and that our role as a think tank is to support this dialogue between Poland and the European stakeholders. What we want to do is show the different options to stakeholders in Poland. The discussion is no longer about whether Poland should transform its energy system but how to do it.

Things are moving and, as I said, the coal mining crisis and the need for investment in the energy sector are the two main drivers of change in Poland, not the EU’s climate policy.

You said the ETS is still the best tool to reform the energy sector in Poland. Electricity utilities in Europe have made windfall profits from the sale of carbon allocations in the ETS, which in a way was intended as the “carrot” of the system. How much did Polish firms actually benefit from that?

They have benefitted a lot. Looking at the structure of income from polish utilities over the past years, the share of free ETS allowances was substantial. This is not something that should happen. Under the previous ETS phase, money should have been invested in the modernisation of the electricity sector.

Which they haven’t done?

No, this has not materialised. The ETS reform is going in the direction of an auctioning system, which should be more transparent and more target-oriented. But I think the main benefit of the ETS reform is the clarity and stability of the CO2 price, which will stabilise investments.

The ‘capacity market’ mechanism, which is now the subject of heated discussion in Poland, probably won’t have the same effect of triggering new investment.

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