Poland’s Farewell to Coal

The Only Possible Direction

According to the most conservative documents, such as the 'National Energy and Climate Plan for 2021-2030', published in 2019, in 2050 Poland will be producing about 40 per cent more than today, while reducing greenhouse gas emissions by 58 per cent compared to 1990. Another government document, entitled ‘Poland's Energy Policy until 2040’, assumes an increase in electricity demand of approximately 60 per cent over the same period, with an emissions reduction of 76 per cent. In turn, the working version of the ‘Strategy for Transformation to a Climate Neutral Economy’ predicts that in order to achieve climate neutrality by 2050, electricity production would have to increase by approximately 130 per cent. Similar orders of magnitude are suggested by the 'Poland Net-Zero 2050' analysis issued by the Centre for Climate and Energy Analyses and a forecast by McKinsey indicating at the same time that electricity demand growth rates, and therefore the scale of investment in new power units and networks, will increase rapidly above the historical trend after crossing the threshold of an approximate 60 per cent reduction in CO2 emissions.

All those analyses, both governmental and non-governmental, agree that renewable sources – wind and photovoltaic power plants – will be prevalent in the capacity mix to be built, supplemented by nuclear units (around 20-40 per cent of energy production in 2050) as the backbone of the system. Scenarios assuming no nuclear power plant construction are still being formulated, but the likelihood of their actualisation appears to be low due to strong support for the idea of building nuclear power sources, seen both in public opinion and among the main political forces in the country. The role of nuclear power plants is primarily to replace lignite-fired units in the energy mix, which are to be phased out of the system in the 2030s. The technology rounding out the system is likely to be natural gas, used primarily in CHP plants equipped with CCSU facilities. However, it will play a relatively small role due to, among other things, experiences with gas availability and prices in 2021-2022, resulting from the war in Ukraine and Russia's preparations leading up to the conflict. Those opposing the construction of new gas units as control sources point to alternative options for balancing the system: expansion of pumped storage and other energy storage facilities, increasing international interconnection capacity, cable pooling of solar and wind sources to improve their grid characteristics, and better forecasting of demand and generation from RES allowing implementation of effective demand control mechanisms (reducing it at times of RES shortfall).

Protectionist Practices

One serious problem that affects the current situation is undoubtedly the growing shortage of power in the national power grid. This is because the gradually growing demand for energy is hampered by many years of investment backlog – both in terms of generation and distribution networks. This increasingly translates into a system balancing close to the maximum possible load, leaving little margin for error. Much of this situation stems from a lack of market liberalisation and the government's preference for state-owned companies at the expense of private investors. This curtails investments in new capacity and results in deficits.

Admittedly, decision-makers increasingly understand that both the economic attractiveness of renewable energy and the need to increase energy security support the decarbonisation of the Polish energy sector. At the same time, however, their thinking is dominated by the traditional view of the central planner, who directs the transformation through entities under his control. As a result, the process of energy restructuring in Poland is highly politicised, which causes considerable delays in the industry's response to market incentives. Delayed decarbonisation among state-owned companies weakens their financial position and means that they require additional protection from the government, which uses regulations to ensure that private competition does not develop too quickly. This is allegedly justified by the fact that the calculations of private investors do not take into account the costs associated with additional market-wide investments, including the costs of balancing and network modernisation. This approach assumes that the development of RES must be controlled by the state until such time as modernised grids or energy storage facilities are put in place to enable appropriate supply profiling by grid operators.

This line of reasoning can be criticised as a ploy to justify Poland's protectionist practices, given that in other EU countries regulators have shown great openness to new energy producers, resulting in friendly regulations that have opened the energy market to private competition, and financing the costs of expansion of distribution and transmission networks either by means of the EU ETS or specially established tariffs. As a result, the increased share of zero-emission sources in the energy mix over the past 15 years has been on average twice as fast in the EU than in Poland. In Poland, a psychological breakthrough in the form of energy market liberalisation measures has not yet taken place, and thus the rate of development of low-emission sources tends to be a function of the investment capacity of state-owned companies rather than a result of market signals.

A Breakthrough Is Coming

Given growing capacity deficits, however, this time seems to be coming to an end. This is because, regardless of the details of the future energy mix, Poland will not be able to avoid a significant increase in energy sector investment outlays between 2023 and 2050. Governmental and non -governmental studies estimate the necessary investments to be in the range of EUR 200-300 billion, which corresponds to around 0.8-1.2 per cent of GDP generated over that period, with around 0.3-0.4 per cent of this amount resulting from an increase in reduction ambitions from about 60 per cent to about 90-100 per cent in 2050. At the same time, these calculations show that, due to the spectacular rise in fuel costs, basing future energy production on large centralised coal- or gas-fired units would cost more than a complete overhaul of the sector to rely predominantly on renewables supplemented by nuclear power.

Greater Decarbonisation Ambitions

At this point, it should be emphasised that, as in other EU countries, Russia's aggression and the consequent need to bolster energy security in these new geopolitical conditions has provided the impetus for the Polish government to revise its hitherto unambitious energy policy. One of the already revealed, though not fully quantified, features of Poland’s new energy strategy is the accelerated development of RES. Renewable energy sources are to account for about half of Poland's electricity production by 2040, which, combined with the already announced plans regarding nuclear power, would mean that at least 75 per cent of the country's electricity could be produced without carbon emissions by that time.

At the same time, the government plans to gradually reduce the economy's dependence on oil and natural gas through increased energy efficiency and electrification, as well as the development of hydrogen technologies, emphasising the importance of supply route diversification and the role of infrastructure in these processes. If these declarations are confirmed in the updated version of official energy strategies, we could speak of a certain psychological breakthrough in Polish energy policy caused by the war in Ukraine – the level of Polish decarbonisation ambitions would almost double in a short period of time. However, as the ambitions of other EU countries are also growing, Poland may remain economically dependent on fossil fuel imports longer than most other EC countries. However, the differences will be quantitative rather than qualitative, as the government's declarations indicate that both the goal itself (net zero in 2050) and the willingness to increase the pace of transformation would not distinguish Poland from other EU countries.

In this context, however, the main area of risk is the implementation capacity of the Polish political-administrative system, which may, for example, thwart the development of zero-emission sources in line with new government declarations due, inter alia, to an inadequate resolution of the energy sector restructuring problem and misunderstanding of the role that the state should play in it. In particular, the risk may be that the state will attempt – as it has done so far – to effect the 'zero-carbon revolution' mainly through State Treasury companies, favouring them over private investors. In particular, the government may try to continue adjusting the pace of the transformation to the capabilities of the entities it controls, even though opening the energy market to private competition would make the process of modernising Poland's energy sector much faster, cheaper and less problematic.

Looking at the difficulties involved in implementing a number of legal and institutional solutions expected by the market (liberalisation of the Landscape Act, results of offshore wind power auctions which were unfavourable to private investors), and even withdrawal of market solutions that have been in place for years (elimination of the electricity exchange trading obligation), one might come to the conclusion that the Polish political class has not yet understood that in an open energy market, a large part of the process could be handled by the private sector, while the state focuses on selected aspects of the transformation: building nuclear capacity, adapting the distribution and transmission infrastructure to RES, building the legal framework for industrial contracting of zero-carbon energy, and financial support for energy communities and prosumers. In a few years' time, however, this may change, bringing the substance of Poland's energy policy closer to the articulated vision, which is, after all, in a very different place today than it was even a decade ago, when the very idea of phasing out coal would have been difficult for most decision-makers to imagine. ©℗