Poland wants more EU money to finance its green transition. But getting its hands on EU cash will require the government to put forward a credible roadmap for the country’s energy transition, which is currently lacking. EURACTIV’s media partner, Wysokie Napięcie, reports.
So far, the Polish government’s reaction to the EU’s ‘Fit for 55’ package of energy and climate laws has been rather restrained.
The EU climate package, presented last week by the European Commission, includes “many valuable elements,” said the Polish Ministry of Climate and Environment.
In reality though, Poland is deeply concerned about the potential negative effects of proposed changes in the EU’s carbon market, the emissions trading system (EU ETS).
For several months now, the price of emission allowances on the ETS have reached unprecedented levels. After hovering at around €8 per tonne for many years, EUAs now exceed €50 per tonne. And the European Commission overtly says it is now expecting carbon prices to reach €85 by 2030.
The ETS has been instrumental in pushing out coal power plants from the Polish energy system, making greener alternatives like natural gas and renewables cheaper to build and operate. But the current high price of carbon, combined with high natural gas prices, are making coal competitive again, according to the International Energy Agency (IEA).
The European Commission plans to gradually reduce the number of allowances available on the ETS, aiming for a higher carbon price in the coming years that will drive the energy transition and help the EU reach its 2030 objective of reducing emissions by 55%.
The National Centre for Emissions Management (KOBiZE) estimates that in 2030 EU emission allowances may cost as much as €75. But this is probably a conservative estimate. Analysts at ICIS, an independent commodity intelligence services firm, believe it could reach €90.
In Poland, it is the ministry of finance which sells carbon emission allowances and takes the associated revenues. Still, Poland believes the system is unfair. This is because of an EU distribution of auction allowances which is based on historical emissions. Countries get a certain number of allowances and sell them through auctions to companies covered by the ETS. But Warsaw says the system benefits countries like France and Italy, which have more allowances than they need to cover their industrial emissions.
According to Warsaw’s calculations, some countries with a negligible share of coal in their energy mix may have as much as 30-55% of surplus allowances. Poland, on the contrary, has a shortage of allowances: Polish companies covered by the scheme need more allowances than the Polish government can sell.
Germany is in a similar situation, but the debate over the EU distribution key is less controversial there, because German companies have more financial muscle than their Polish counterparts.
The bad news for Poland is that higher carbon prices make the balance even worse. And the Polish government’s lack of interest for the energy transition means valuable ETS revenues have so far largely been lost.
For instance, Polish power plants received free allowances in 2013-2020, but they failed to make proper use of that money to prepare for the green transition. Rather, the consecutive governments appeared more interested in delaying the energy transition and keeping high shares of coal in the country’s energy mix, fearing the social consequences.
Theoretically, the EU Modernisation Fund is tailor-made for Poland because it redistributes 2% of all allowances sold for auction on the ETS to the 11 poorest EU member states. The fund, established in 2014, will start operating this year. At current prices, Poland could receive approximately €8 billion by 2030.
But Warsaw says this is not enough. According to the Polish electricity industry, new investments worth €136 billion will be needed by 2030 in Poland to reach the EU’s clean energy goals.
Poland tried to convince its EU partners that the Modernisation Fund is too small, and managed to extract some concessions from the European Council, which brings together the EU’s 27 heads of states and government.
In their December 2020 conclusions, EU leaders stated that “the problem of imbalances for beneficiaries of the Modernisation Fund in not receiving revenues that are equivalent to the costs paid by the ETS installations in those Member States will be addressed as part of the upcoming legislation”.
Indeed, the Commission has dealt with the issue. As part of the ‘Fit for 55’ package, the EU executive proposed doubling the fund with another 2.5% of ETS allowances. However, under the new proposal, the pool for Poland will unfortunately be smaller, since Greece and Portugal were added to the list of beneficiaries.
Will all this be enough to compensate for the deficit in allowances mentioned by the Polish government? There are no detailed studies yet, but a report by KOBiZE published last year shows that even with a Modernisation Fund boosted to 6% of ETS auction revenues, Poland would still be lacking 300 to 500 million allowances.
And by 2030, the net difference between what Polish power plants would need to buy on the market, and what the Polish government can sell, could reach between €3-5 billion a year, assuming a carbon price of €60.
Poland is not alone in this situation. According to KOBiZE, raising the Modernisation Fund up to 6% of ETS auction revenue would prevent a deficit in Romania, Lithuania, Latvia, Croatia and Slovakia, but it would still be too little for Poland and Bulgaria.
This suggests tough debates ahead in the political negotiations to get the ‘Fit for 55’ package approved. During the talks, Warsaw is expected to argue that the Commission’s proposals do not accurately reflect the conclusions of the December European Council, and that the Modernisation Fund should be bigger.
The Modernisation Fund is not the only incentive that the Commission has put on the table to help EU member states with the energy transition. There is also a new Social Climate Fund for poor households, which is expected to bring €72.2 billion in fresh money over 10 years.
However, it is still unclear how much Poland will receive from it. Under the Commission proposal, the fund will cover all EU countries and will be financed mainly through a new separate ETS covering transport and heating fuels.
EU countries are not particularly enthusiastic about this, with many of them warning it will push up the price of petrol, diesel and heating fuels. Objections to the plan have already been raised by diplomats from France, Italy, Spain, Hungary, Ireland and Bulgaria, according to the Financial Times, with only Germany and Denmark coming out in support of the idea.
Does Poland stand a chance of succeeding in the EU negotiations? Each increase in the Modernisation Fund means that the German, French and Italian tax authorities will earn less money on the sale of allowances. This means Poland must convince the governments of these countries not only that the current distribution key is unfair, but also that Warsaw is going to use the EU money received to push forward its energy transition.
For that to happen, Warsaw needs to come up with a roadmap that spells out closure dates for the country’s coal-fired power plants, in line with the EU’s goal of reaching net-zero emissions by 2050. The roadmap should also spell out the energy sources that will be mobilised to replace coal.
However, the government’s plan is to close hard coal mines by 2049, a date which seems detached from the realities of the power market, which is already pricing out coal.
Earlier this year, the Polish government did announce plans to nationalise 70 lignite coal power units and hand over their management to a state-run National Energy Security Agency (NABE). But the plan still lacks detail and critics say it is unlikely to be approved by antitrust regulators in Brussels unless there is a clear commitment from Warsaw to phase out coal in return.
In any case, the government’s “National Energy Policy until 2040” already looks out of date because it does not take into account the latest developments in EU policy.
[Edited by Frédéric Simon]