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The Polish elections results are official as from today. Law and Justice Party (Prawo i Sprawiedliwość), a conservative and Eurosceptic party, has taken enough seats to govern alone – a precedent in 26 years. The biggest challenge ahead for the new government is securing an economically viable model of energy supply. The issue has little relevance to the heated Polish debate about the European climate package. Sandbag is looking forward to the first steps of the new government hoping they will treat it as an opportunity to support already emerging market and consumer solutions.

Forming a majority government is a grand success of Law and Justice Party. It comes with a great responsibility for the future of Polish energy system. Picture used under Creative Commons License.

During the week before the general elections, Sandbag engaged with major stakeholders in the Polish energy sector to understand possible futures for the sector. The times of declarative policy making are over. Poland is struggling against a capacity deficit in the very near future. This can reach up to 5-6 GW in 2018, which the newest estimate of Henryk Majchrzak, who represents the transmission system operator Polskie Sieci Elektroenegetyczne. Shortages during summer 2015 could have costed Poland about 230 mln Polish zlotys. To alleviate this problem, the previous government, especially in the last months, pressured state owned utilities to invest in large coal capacity along with unprofitable coal mines – an approach largely criticised in the Law and Justice Party’s campaign.

Polish climate and energy politics are not, however, expected to change dramatically under the new leadership. The Law and Justice Party wants to build between 6-8 GW of new capacity within 4-5 years. The previous government had aimed to build 6,4 GW over the same period. The low percentage of new renewables and nuclear capacity envisaged by both governments means that costly modernisation of remaining old coal capacity is needed due to its inefficiency and pollution levels. According to Maciej Bando, representing Urząd Regulacji Enrgetyki, the main regulator, there is currently no market price signal that would incentivise investment in coal generation in the Polish market. On the contrary, Polish operators are planning to close between 9 – 11 GW of coal capacity to 2022, according to information leaked from the questionnaire undertaken by the grid operator.

The Law and Justice Party blames the expected capacity crises on the negative influence of the EU climate policy package. The new government opposes proposed control over EU aid under a modernization fund by the European Investment Bank. It also opposes the rules on carbon efficiency standards. However, these issues have little to do with the inability of Polish conventional energy generation to make a return on investments. It’s not the climate energy package that is likely to be the biggest Polish sticking point but their own aging and costly energy infrastructure. Opting out of EU climate and energy policies will not necessarily change this conventional generation problem since the problem lies with the relatively high cost of Polish coal compared to alternatives.

Beata Szydło, a miner's daughter and Polish Prime Minister to be. Picture used under Creative Commons License.

There are different ideas on how to make Polish coal profitable again. However, all of them risk locking the Polish economy into expensive energy prices for consumers and unprofitable business models for the operators. Solutions offered to date have failed leading to disillusionment. In 2013-2014 there was a strong belief among operators that capacity market solutions should be introduced to favour coal. This is no longer the case according to our informants. A quasi capacity reserve/market mechanism has already wasted between 900 mln polish zlotys on keeping old inefficient coal fired power on the market. These payments failed everybody. They were not high enough, by at least 250 mln polish zlotys, to enable operators such as ENEA to make the reserve profitable; and they did not rescue the Polish grid operator during the summer capacity crises.

Instead of looking into ways to increase government spending on keeping the unprofitable coal business going, the new Polish government could look into ways to use the EU to help it modernise. Poland receives enormous year on year support under EU climate change policies to modernise its energy sector. These are funded via potential income from EU Emissions Trading Scheme auction revenue redistributed from wealthier Member States. After 2020 this help will be enlarged by Modernisation Fund of which Poland is the biggest beneficiary. Opting out from the EU climate package would mean losing the funds that can be devoted to support decisions of different market actors and would increase the burden of the current strategy on the tax payer. Polish business – especially medium scale one – already faces higher electricity prices than in the neighbouring countries.

Though there is great potential for renewables, modernisation projects do not have to be limited to these. At Sandbag we believe a number of lower carbon technologies and approaches should be supported by the EU Climate and Energy package and that Poland should be incentivised to choose those that work with its particular circumstances.

Therefore, Sandbag encourages the new Polish government to:

– Keep the costs of restoring adequate energy supply low for consumers by encouraging competition and enabling all new forms of capacity in the system.

– Minimise the use of distorting subsidies and ensure political decisions do not negatively affect investments made by publicly owned utilities, which in turn affect the market and industry.

– Continue to focus on increased efficiency and modernisation whilst finding competitive ways to improve energy security, which involve more actors, including prosumers, in the energy market.

– Work to improve the EU’s carbon pricing policy and Energy and Climate 2030 package by highlighting its real flaws, especially in respect to incentivising investment in energy and emissions intensive industries. Poland could gain a leadership in this area by suggesting solutions such as Carbon Capture and Storage and Use. These are particularly beneficial for industry sectors as well as the climate.

This way, Poland will work with current market trends towards a resilient future economy rather than continue to work against them. You can read more about Sandbag stand on the Polish energy strategy in our response to a recent consultation on the previous government’s plan.

*If not stated otherwise all information quoted proceed from the public speeches recorded at Nowy Przemysł conference that took place in Warsaw during 19-20 October.