Poland’s final battle for coal

Executive summary

  • The Polish government is planning to merge coal generation assets in a state agency called NABE, prolonging their life until into the unspecified future
  • With the majority of coal plants struggling financially and needing support, the plan constitutes state aid and requires approval from the European Commission
  • Polish energy transition pathways outlined in the Polish Energy Policy 2040 are not compliant with GHG-55% climate targets and assume significant shares of coal in the electricity mix even after 2040. The EC’s approval for NABE might compromise 2030 climate targets for the whole EU

Instrat and ClientEarth described the previous version of the plan in a report from November 2020, with several findings still relevant. An alternative is proposed in Instrat’s recent report.

The Commission’s decision on NABE will not only set a precedent for new coal state aid, but also the design of coal phase-out mechanisms and decarbonization pathways, which means it is critical in light of the 2030 GHG emissions reduction targets.

The What

The Polish government is planning to restructure the electricity market, combining the majority of coal generation assets (currently owned by PGE, Tauron and Enea) under the National Energy Security Agency – NABE. This would mean that a single, state-owned entity would gather over 70 coal units with 23 GW of installed capacity – 85% of the capacity of Polish centrally dispatched generation units. Coal CHP’s will not be included in the restructuring, as they are supposed to be converted to gas under the current ownership. There is discussion around Ostrołęka B. Even though it is owned by Energa/Orlen, it was included in the draft plan from 2020 – it is possible that it will also be merged into NABE. Ostrołęka C (now planned to be gas-powered) will remain under Orlen.

The plan has been discussed behind closed doors since mid-2020, with details described in a report from November 2020 by Instrat and ClientEarth. On Friday 16th April 2021, the plan to create NABE was officially confirmed by the Ministry of State Assets. At the moment, no information about coal phase-out dates were published. There is also no indication of the total costs, or the financing scheme. However, the Ministry confirmed that the plan will contitute state aid and thus require approval from the European Commission.

The timeline assumes all economic assessments will be made in 2021, with the legislation coming in late 2021. Next year, the utilities would be reorganized, the assets moved. Along the way, an approval from the EC would be needed. The whole process would be finalized by the end of 2022.

The Why

Why is the plan even needed? Reading the official press release, one can see that Poland is shifting the blame for it’s energy transition struggles onto EU’s climate policy. The plan is designed to save the Poles from increasing electricity prices caused by the EU ETS.

In reality, because of their coal-heavy portfolios, Polish utilities are unable to finance investments. They are also struggling to generate profits, with around half of the coal fleet having negative operating margins already in 2020. The dramatic increase of CO2 prices in 2021 means that the percentage is now even higher. The only thing keeping these plants afloat is the capacity market – a mechanism providing payments for each MW of dispatchable capacity, covering the fixed costs with a significant premium.

However, most capacity contracts expire in 2025 and 2028. After that, without financial support, Polish coal plants would be unable to function and would have to shut down. The flawed design of the capacity mechanism means that in 2025 Poland would see a 7 GW drop in installed capacity, with a further 4 GW drop in 2028, resulting in the country being unable to balance the power system. Therefore, ensuring energy security (so keeping the coal plants from shutting down all at once) will probably require new funding – thus the idea for NABE and more coal subsidies.

Of course, one solution to the problem would be to design the capacity market in a way that ensures a gradual decrease of capacity, giving time for the replacement of coal by other energy sources. Why such an inefficient capacity scheme was proposed in the first place and why the European Commission approved it, remains a mystery. Let’s hope that the EC learned it’s lesson and this time will not approve solutions that compromise climate targets.

The Result

After the restructuring, the Polish energy market would be consolidated heavily, with NABE having a 50%+ share in electricity generation. With coal assets taken off the stock market, any control over them would be much more difficult – it is likely the state would keep subsidizing coal plants behind the scenes, prolonging their life and delaying the clean energy transition.

No official announcement about the costs of the plan were made, but Instrat’s assessment of the 2020 draft showed that NABE could generate as much as EUR 6.8 billion losses during it’s lifetime (2021-2040). It is worth noting that NABE will already receive the vast majority of capacity payments (up to EUR 8-9 billion), so additional state aid is even more controversial.

Perhaps most importantly, NABE would employ the workers of PGE GiEK, Tauron Wytwarzanie and Nowe Jaworzno, Enea Wytwarzanie and Połaniec – overall 32.2 thousand, with around 2/3 coming from PGE.

Does Poland need a support mechanism to facilitate the coal phase-out? Probably yes. But should it be so extremely expensive and result in the disruption of the open energy market, the likely increase of electricity prices and imports, and the risk of compromising EU 2030 GHG-55% targets? There are better options on the table, let’s hope the European Commission takes those into account.

Sources:

You can find details on all generation units being included in NABE in Instrat’s Power Plant Database.

Coverage

Featured image made by photo3idea_studio from flaticon.com