CEE Climate Policy Frontier

Restart: how to break the deadlock in the Polish energy sector [policy brief]

Time to restart Poland’s energy sector

The Polish fuel and energy sector needs a courageous and coherent action plan. “The current, unique circumstances allow us to design and implement a new deal for the Polish energy sector – one that would not just address the problems of state-controlled companies, but that would also engage them in the creation of a net-zero energy system in Poland and beyond” – reads the latest policy brief by Maciej Bukowski and Aleksander Śniegocki from WiseEuropa Institute.

“The inevitable nature of changes in the fuel and energy sector was already evident a decade ago”, believes Maciej Bukowski, co-author of the policy brief Restart: how to break the deadlock in the Polish energy sector. “Nevertheless, the decision to revise the sector’s operating model in Poland was being postponed year after year, leading to a number of suboptimal investment decisions, delays and inconsistencies in restructuring individual companies or chaotic regulatory changes”.

 

“The turning point came in 2020, with the COVID-19 epidemic and the appearance of significant losses or even liquidity issues of some enterprises. Simultaneously, the European Union confirmed its readiness to build a climate-neutral economy by 2050, while launching processes that, within next months should result in new, stricter greenhouse gas emission reduction targets for 2030”, adds Aleksander Śniegocki from WiseEuropa Institute.

Comprehensive restructuring: three challenges, three time horizons

Restart: How to overcome the impasse in Poland’s energy sector points to a number of required actions that should be implemented before the end of 2020. These concern limiting the scale of mining operations, a technological transition of energy companies, and decarbonising entities from the fuel and energy sector.

In the mining sector (both hard coal and lignite mining), consideration needs to be given to the need to phase out current operations by 2035-40 at the latest. This will require, first of all, a quick overhaul of the industry based on a reduction in extraction only to the most promising deposits and a reduction of employment on a scale ensuring operational profitability of mining companies. This process should begin as early as 2020 and be completed within the next 2-3 years. “However, the transformation of the mining industry needs to be just, which means its implementation should come without detriment to the development of other industries (in particular the power sector) and with respect for social and environmental issues at the local, regional and national levels”, says Aleksander Śniegocki.

Companies currently operating on the electricity and heat generation markets are in need of an efficient technological restructuring, implemented through consistent withdrawal from coal-based energy production. The key factor driving change is, in this case, the European regulatory framework, primarily rising CO2 costs and the technological revolution, including PV energy production, as well as wind and energy storage. “The main domestic producers of electricity and heat (at the national and regional levels) are already behind in this process to such an extent that in a few years’ time they may find themselves in a situation similar to that of hard coal mining now”, Śniegocki adds.

The need to transform and decarbonise also applies to other entities in the fuel and energy sector, especially those involved in the extraction and processing of hydrocarbons, operating conventional fuel infrastructure and responsible for the distribution and trade in liquid and gaseous fuels. “A decline in demand for their products and an increase in their operating costs stemming from regulatory, technological and market changes will occur later than in coal mining or power generation, but it may be significantly faster given the rapid spread of electric cars and energy storage after 2025”, says Śniegocki.

Inconsistency – the main sin of previous restructuring plans

“The government’s plans for the fuel and energy sector, which have gradually come to light in recent months, raise both hopes and fears. The narratives emphasising the need to maintain coal at the core of the Polish energy sector are being gradually abandoned in favour of communication accepting the need for a technological reconstruction of the sector in a manner that allows the future energy mix to be dominated by zero-emission sources. Simultaneously, the lack of determination to implement clear reduction obligations, as well as the lack of preparation and implementation of adequate restructuring plans for the mining and power sectors is still visible”, says Maciej Bukowski.

Recommendations for the permanent reconstruction of the Polish fuel and energy sector

  1. Avoid combining profitable and unprofitable assets

It would be a mistake, both in the short and long term, to return to the idea of further consolidation of mining and power sector assets. What should be pursued instead is their rapid and lasting separation. This is because they stand before completely different challenges and opportunities arising from European regulations and global technological changes. In particular, the mining sector’s restructuring in the short term and its gradual phasing out over the dozen years should not be a burden on the investment capacity of energy companies or on energy consumers.

  1. Avoid half-hearted changes

The experiences of the last dozen years show that inconsistent and partial restructuring fails to bring the ex-pected effects. After a short period of relative calm, problems return with redoubled strength, while lost oppor-tunities for restructuring lead not only to an actual loss of market competitiveness and economic value, but also growing social dissatisfaction and loss of confidence in decision-makers among the sector’s employees. Today not only mining, but also the power sector, requires a quick and decisive reconstruction. In a few years’ time, this may also apply to fuel companies, which are still financially robust. For this reason, restructuring plans need to be comprehensive and implemented in a manner that guarantees the assumed goals are reached, with a horizon of 10-20 rather than 2-3 years.

  1. Provide dedicated compensation for people and entities affected by restructuring instead of delaying changes

A recurring mistake in restructuring declining sectors in Poland was that significant financial and economic costs were incurred, while more difficult adjustments were being postponed indefinitely. This caused significant sys-temic costs (in the case of mining and the energy sector, estimated at approximately PLN 8 billion per year in the past decade) without satisfactory long-term effects. In light of the increasingly more stringent EU climate goals for 2030 and changes in market conditions (CO2, costs of renewable energy technologies, expectations of customers and financial players, etc.) this strategy is now ineffective and requires far-reaching adjustments.

  1. Consider long-term trends: climate neutrality, technological progress, rising labour costs

The restructuring plan for the fuel and energy sector must be centred around strategic acceptance of interna-tional trends, combined with their operationalisation, quantification and actual implementation at the national level in the next few years. The discussion on decarbonisation-related issues in Poland needs to cease focusing on whether the changes are justified and instead concentrate on devising effective transformation paths aligned with the EU’s goals for both 2030 and 2050.

  1. Acknowledge consumer interests, competition and private sector involvement

Considerations regarding the energy sector in Poland usually focus on the country’s energy security and the interests of the state-controlled energy sector. The interests of consumers (high quality of supplies, low prices, possibility to choose a well-tailored offer), as well as the role that private entities play on the market and in delivering innovative solutions, are treated as issues of secondary importance. This approach engenders certain side effects, such as the dysfunctional nature of the national energy policy, which for years has failed to provide clear market signals to private investors and consumers, as well as the low stock market valuation of state-controlled energy entities, which affects, among others, future pensions from the capital-based system. The coming wave of restructuring of fuel and energy companies creates an opportunity to revise this paradigm and develop a win-win strategy for all stakeholders: consumers, investors, employees of the sector and the State Treasury.

  1. Take advantage of the mutual benefits of internationalisation

The creation of a transnational multi-energy enterprise planned by the government is an opportunity for a significant improvement in its productivity and for the quality of its offer to be verified by more demanding foreign consumers. However, taking advantage of this development opportunity will, at the same time, require a stable supply of innovation and know-how, as well as a “champion” to skilfully follow global trends. This will be possible provided foreign activities are expanded towards zero-emission technologies while avoiding investments in conventional assets. It will be just as important to maintain an appropriate level of domestic competition, ensured by the participation of strong private actors. While a monopoly may bring a sense of security, it does not serve quality or innovation.

Read the full version of Maciej Bukowski and Aleksander Śniegocki’s policy brief Restart: how to break the deadlock in the Polish energy sector

Restart: how to break the deadlock in the Polish energy sector