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Energy markets are rapidly changing to meet the Paris Climate Agreement and clean up Europe’s air. So how come some EU Member States can still get away with finding new money to sustain the burning of coal? This might come as a surprise to some, given the plethora of climate and clean air files from the European Commission. How is this possible?

Looking at the case of Poland, we see a country still pushing hard to keep its coal plants open, made possible by skilfully re-negotiating legislative files proposed by the European Commission.

Belchatow poland coal by Phil MacDonald

The latest on-trend coal subsidy is capacity markets. A report last week by Greenpeace showed that EU conventional generators are in for a €58 billion windfall from capacity payments, and two-thirds of these are to coal plants.[1] An incredible €32 billion has already been paid out, and it is estimated that existing capacity markets will pay out a further €26 billion in the coming years. The Polish capacity market is the biggest of all, with €14 billion anticipated to be paid out from now to 2030

This windfall for Polish coal plants will be for both new and old coal. The new 1000MW coal plant in Poland, Ostroleka C is only be being pursued because of the golden ticket of a capacity contract.[2] And the Polish capacity market is arguably designed to incentivise investment into refurbishing ancient coal plants,[3] rather than finding new modern solutions.

So, as the EU Electricity Market Design discussions unfold, it will be crucial for decision-makers to ensure capacity markets are not abused. This especially means to ensure they are not used as state aid for coal plants, which means applying an emissions performance standard on capacity payments. Currently Poland is trying to block the EU Commission’s and Parliament’s attempt to do this.

A 550gCO2/kWh limit on capacity payments would align with the investment criteria of the European Investment Bank, and for the same purpose: to avoid public money being used to invest into coal. This is a real risk for the Polish capacity market, since it is set-up in a way that might benefit coal (e.g. 4yr-ahead procurement, 15-year contracts).[4]

To avoid public money being used to invest in coal the 550gCO2/kWh limit on capacity payments – as proposed by the Commission and supported by the European Parliament – should be adopted without a lag period.

 

This is not the first time that Poland has redefined Commission rules to keep subsidies for expensive coal. Here is a checklist of 6 other Polish coal plant subsidies:

  •  CO2 permits given for free
  •  Subsidies to burn trees in coal plants
  •  Generous reserve payments
  •  Derogations from EU air pollution limits
  •  European Investment Bank funding
  •  Coal mining subsidies

This article documents all these Polish coal subsidies, which has explained how Poland has managed to keep fuelling its reliance on coal. Much of the evidence is from Sandbag’s reports, where we have been tracking these subsidies for a few years.

 

CO2 permits given for free: From 2013, free CO2 allocations to power plants were stopped. Although not in some countries like Poland, which negotiated to receive free CO2 permits until 2020. In just 4 years from 2013 to 2017, 46 Polish coal plants received free “Article 10C” allocations of 216 million tonnes; more will be issued this year. If we assume a price of €10/tonne, this would equal a €2.16 billion subsidy.

But more may be yet to come. Post-2020, it may be possible for coal plants to claim more free CO2 permits. The EUETS reform agreed on the framework for funds. From Sandbag’s latest internal analysis,[5] we calculate that Poland could allocate 16 billion Euros of permits into these funds:

  • Article 10B: 269 million tonnes, worth €5.4 billion at €20/t (“Solidarity fund”).
  • Article 10C: 415 million tonnes, worth €8.3 billion at €20/t.
  • Article 10D: 135 million tonnes, worth €2.7 billion at €20/t (“Modernisation Fund”).

Commission rules have been agreed to discourage the use of these for coal plants, but the rules are ambiguous especially for 10C. Undoubtedly Poland will be lobbying over the next 1-2 years to make these rules as loose as possible so that Polish coal plants can continue to receive subsidies towards 2030.

 

Subsidies to burn trees in coal plants: Until 2016, the main renewable support scheme was a renewable quota obligation, which was combined with a certificate trading scheme. Biomass co-firing installations were eligible to obtain a full certificate per MWh generated from biomass. The Res Act of 2016 replaced the quota obligation and certificate trading scheme with a tender process as the main renewable energy incentive mechanism. We estimate biomass payments were about €1 billion during 2013 – 2016.[6] For many coal power plants, this was a huge boost to their profitability allowing them to stay open. Quite ironic, given that renewables targets were meant to reduce our reliance on coal.

 

Generous reserve payments: Reserve payments came as a transitional measure until a capacity market is launched to support a shrinking surplus of coal generation. During 2014-2016, the Polish government budgeted about €300 million for the Operational Capacity Reserve (OCR). In 2017 they spent additional €127 million. Additionally, in 2016 €41 million from the Intervention Cold Reserve was given to the oldest coal-fired units that are not in environmental compliance under the BREF Directive. That totals €468 million of coal subsidies, a considerable expense for what was quite a small-scale procurement.

 

We have mapped out which coal plants have received these 3 critical subsidies:

Derogations from EU air pollution limits: The EU sets a “safety net” limit on the rate that coal plants can emit pollution. These are designed to protect European citizens. Poland’s coal plants are among Europe’s dirtiest: they caused a modelled 5,310 premature deaths in 2013.[7] Yet 35 Polish coal power plants had derogations from tighter air pollution limits effective from 2016.[8]

And despite the air pollution crisis in Poland, the Polish government continues to lobby hard against European legislation on clean air. The next round of tightening air pollution limits are agreed by the European Commission for implementation in 2021. Poland is not only planning on applying for more derogations, but it has also submitted a legal challenge to overthrow the entire BREF decision on procedural grounds.

 

European Investment Bank (EIB) funding: There are rules preventing the direct use of EIB money for coal investment. Polish coal companies have received much of this money, to use it for renewables and network investment. However, it’s impossible to prove that this hasn’t been subsidising coal plants. Hopefully, the EIB will change its rules this year to prevent more money going to coal plants. Key examples are:

  • €250m to Energa for the upgrade and extension of its electricity distribution network in northern and central Poland.[9]
  • €145m to Grupa Azoty to optimise the chemical company’s production processes and reduce production costs, while improving environmental performance and energy efficiency.[10]
  • Investments into PGE’s and ENEA’s network businesses.
  • And Tauron guarantee of green loan issuance.

 

Coal mining subsidies: The coal mining industry was restructured in 2016, and through a network of deals gave money to cross-subsidise the inefficient, loss-making mining activities with profits from utilities.[11]

 

Conclusion:

Poland’s coal plants already get billions of Euros subsidies through a variety of loopholes and derogations from European law. And now, the spectre of a capacity market means an even bigger figure. The question is: how effective will the European Commission be in preventing Poland using capacity payments to invest into coal?  

Will the Informal Energy Council tomorrow cave in to new coal subsidies, or will it accept the Emission Performance Standard on capacity markets as proposed by the Commission and Parliament?

 

 

References
  1. See Greenpeace’s report: “EXPOSED: €58 billion in hidden subsidies for coal, gas and nuclear”
  2. For more info, see Carbon Tracker’s report “Ostroleka: burning more money than coal”
  3. For more info, see Sandbag’s briefing “Let’s Copy-Paste Poland’s coal strategy across Europe”
  4. For more info, see Sandbag’s report “Capacity payments:The final ingredient to supercharge coal”
  5. Our default scenario assumes the auctioning pot is set at 57% of the cap for the first half of Phase IV, with an adjustment down to 52% by the end of Phase IV, to take into account the provisions on the avoidance of the Cross-Sectoral Correction Factor.
  6. For more details, see Sandbag’s report, “There’s something nasty in the woodshed”
  7. See Sandbag’s landmark report: “Europe’s dark cloud: How coal-burning countries make their neighbours sick”
  8. See the derogations list by plant on page 42 of Sandbag’s report: “Lifting Europe’s Dark Cloud”.
  9. See http://www.eib.org/attachments/country/factsheet_poland_2017_en.pdf
  10. See http://www.eib.org/projects/pipelines/pipeline/20160931
  11. For further reading on this, please see Greenpeace’s report “The Hidden Bill for Coal in 2017 in Poland”.

Written by Dave Jones and Suzana Carp. Special thanks to Sandbag’s former analyst Aleksandra Mirowicz for the research supporting this work.