Challenges for the energy sector and opportunities for the Polish economy.
Poland’s transition to a low-carbon economy may present challenges for the power sector but also brings opportunities for the wider economy. The pace of change to some extent could be dictated by the need to replace Poland’s ageing power plants as well as its commitment to meet climate targets. No matter what the pace at which Poland wants to achieve carbon-neutrality (which still is being discussed at EU level) reducing greenhouse gas emissions is vital for the future of the Polish economy.
Poland is committed to its existing climate 2030 targets and remains part of the European Emission Trading Scheme (ETS). While Poland may choose to take it more slowly, it will still contribute to efforts to reduce greenhouse gas emissions.
So where do those emission reductions come from and what do they imply for the energy sector and the Polish economy more broadly?
In Poland, the power sector (public electricity and heat production) is the single biggest source of emissions, contributing c. 40% of emissions in 2017. The remaining 60% come from a number of other sectors, each requiring their own approach; emissions in some sectors, such as transport, in fact increased significantly in recent years. We first focus on the power sector – largely because decarbonisation of this brings opportunities and challenges for the remaining areas – especially transport and heating.
The transition of power from coal to renewables: an opportunity, out of necessity
Emissions from electricity generation are likely to come down, one way or another. The government’s 2040 Energy Policy aiming to reduce emissions is in place and the ETS price signals – that make carbon emissions more costly – will help. Above and beyond this, the objective can sound simple: Transition the power production mix from one heavily reliant on high-carbon coal to one with zero-carbon renewable energy sources, and / or nuclear power.
The first part of that transition is bound to happen. At a pace determined in part by the age of existing power plants. Poland’s largest hard-coal and lignite power plants have an average age of 42 years, with some of them being significantly older: The remaining Łaziska generation units entered operation 50 years ago; the Łagisza and Adamów plants are around 55 years old, and the Turów lignite plants are approaching 60 years of operation. With or without climate policy, they are soon approaching the end of their useful technical lifetime and may leave the market. Generation units more than 35 years old make up more than one third of Poland’s coal-fired generation capacity, coal generation accounts for more than 80% of total generation.
It seems certain that a large share of the coal-fired capacity leaving the market should be replaced by renewable energy generation, where renewable energy has become increasingly competitive and is expected to become even cheaper in years to come. While the government also pushes for nuclear generation, two big question marks remain: firstly around the acceptance of the technology on a local level – and secondly on the economic business case for investing in nuclear power plants.
Investments in renewable energy in Poland have to date covered a wide range of technologies, from biomass to solar and onshore wind (see Figure 2). Going forward, both government and investors indicate that offshore wind is considered the most relevant technology as (i) there is a huge amount of untapped potential in the Baltic Sea, and (ii) it could reach significant scale more easily than alternatives such as onshore wind farms - which can run into permitting problems and local resistance.
To make the transition a success – Polish citizens, the Government, and domestic and international investors – must overcome five challenges:
- Grid expansion – Poland’s power grid is geared towards transmitting electricity from its coal mining regions over relatively short distances to its densely populated areas, both of which tend to be in the geographic South or center of the country. Future offshore wind farms in the Baltic Sea to the North will need extensions of the power grid to connect them with consumers further south.
- New power storage – Wind power production is intermittent – generating lots of power when its windy, but none at all when its calm! This generation profile may not match with the shape of demand, so there is a need to increase storage capacity – which could take many forms include ‘power-to-x’ technologies that use excess wind power and convert it to fuels such as ‘green gas’ for later use.
- Back-up capacity to ensure security of supply – Poland’s capacity market is designed to ensure the country has sufficient secure electricity generation capacity to meet peak demand. EU requirements however limit the emissions of technologies which can participate in capacity markets and so restrict the choices available and risk driving up prices for end consumers. Perhaps solutions to the new power storage challenge above can unlock the capacity market constraints.
- Efficient regulatory framework – the framework governing the hoped-for expansion in offshore wind is planned to be finalised in 2020. It will need to balance the requirements of investors (attractive and secure conditions under which to invest) with those of the state and power consumers (reliable and low-cost renewable energy supply). The recently proposed New Green Deal by the new European Commission also emphasises that “offshore wind production will be essential” with a “Strategy on offshore wind” also to be published in 2020. While Poland is likely to benefit from such initiatives at the EU level with similar priorities to its own 2040 Energy Policy, ensuring consistency and avoiding unwanted incentives needs to be a priority.
- Building the social and political will for the necessary changes – Last but not least, changes in the power sector will induce significant changes in other sectors of the Polish economy and are likely to have implications for the labour market – in both geographic and sectoral terms. They need to be addressed by policymakers in a way that allows Poland to tap all the potential and opportunities that the transition of the power sector – and ultimately the wider economy (see below) – will bring.
These five challenges require careful consideration by policymakers. For business, they imply both commercial opportunities and risks. Despite this, the transformation of the Polish power sector is on its way, and the path for the 2020s and beyond is starting to become visible.
Beyond power: Energy independence through domestic green fuels and gases?
To get anywhere near zero-carbon, whether in 2050 or later “at its own pace”, moving to a low-carbon electric power sector will not be enough – as the power sector itself only accounts for 40% of Poland’s emissions today. The government will need to take further measures to reduce emissions in the industrial, transport, and residential heating sectors which together account for another 40%. A transitioned power sector driven by renewable sources can help decarbonize these sectors.
The question is what is the best way to achieve that?
Provided that decarbonisation of the electricity sector succeeds, a “full electrification” through sector coupling is often discussed as the most obvious solution. The use of electric vehicles and electric heating would bring its own challenges or intensify those mentioned above. Firstly, demand for power would increase significantly – re-enforcing some of the challenges above. For example, Poland’s distribution grids may not be fit to accommodate electric heating and charging unites for electric vehicles in every home, requiring massive additional investments. Secondly, Poland’s continental climate brings significant seasonal variation in heating demand (see Figure 3). The balance of power-storage, power generation capacity, transmission grid infrastructure would need to be dimensioned in a way to enable electric heating on a calm, cold winter day. A narrow reading of this challenge could imply that such infrastructure would be massively over-dimensioned in the rest of year. Broader systems thinking could find solutions to this challenge. But, here the question remains: what are the economic and technical solutions necessary to make this happen in the best way for Poland?
One solution to this system problem for a low or zero-carbon Poland will likely come from green gases or green fuels. Using gases or fuels that are themselves generated renewably has a number of advantages - they can store excess power from intermitted generation and they can use existing infrastructure for gases and liquids (with reduced investments requirements, see Figure 4), and can themselves be used for heating or to regenerate electricity. Policy makers face a choice of “make or buy” for green gases/fuels, which will have implications on the extent of Polish energy independence as it plots its path to a zero emissions future.
In future low-carbon fuels and gas markets, it is not unlikely that exporters of such fuels will emerge. A previous study by Frontier Economics has shown that the cost of producing green gases in North Africa or the Middle East (using cheap solar power there), and transporting it to Western and Central Europe, may in theory be between one third and one quarter more cost-effective than producing green gases from Baltic Sea offshore wind. But, it’s unclear if such exports will ever happen. And Baltic Sea offshore wind – converted into green gas – could reduce Poland’s dependency on the countries from which it currently imports gas. This is possibly a geopolitical and strategic opportunity current and future Polish governments might want to pursue to increase Poland’s energy independence – at its “own pace”.
Frontier Economics regularly advises clients on issues related to decarbonisation and regulation of energy markets, see for instance our recent study for the European Commission.