Energy Transformation in Poland
AmCham Business and Economics Review, vol. 1/2022
Energy cost and availability is a key factor for economic growth and development. Energy demand increases as economic activity rise in a nation. However, experience has shown that Poland has made remarkable achievements in decoupling energy growth from economic growth. Over the last three decades, while its GDP has increased by 7-fold, Poland has slashed its energy and electricity consumption more than any other country.(1)
Nevertheless, Poland deals with severe local and global environmental threats due to its heavy reliance on coal. In addition, an increase in energy demand has appeared as an effect of unlocking an economy previously stopped by pandemic-induced lockdowns. This unnatural impulse resulting in increased manufacturing activity has resulted in increased demand for both raw materials and energy, as well as extraordinary increases in transportation costs.
Moreover, climate issues have become increasingly important in the discussion of mega global trends.
Increase in energy prices
The increase in energy prices for businesses and households will be the most substantial impediment to economic development momentarily, both in Poland and worldwide. The price increase is already visible at the power exchange, and the announced increase in prices for households will shortly follow. In November, the average monthly (weighted) price of 1 MWh was 74% higher than in January. The increase was comparable to the change over the 2008-2020 period.
Pic. 1. Average selling price of energy electricity on the competitive market in PLN/MWh(2)
The jump in wholesale electricity prices in Poland and throughout Europe is the result of several factors. The prices of natural gas and coal (as well as the prices of shares, industrial raw materials, cryptocurrencies, real estate, and everything else in which money can be invested) have reached unprecedented levels. Apart from speculative factors, the prices of energy raw materials are of course also a result of fundamental factors, the lowest reserves in western European gas storages in years and the surging demand for hard coal caused by the closure of many mines in the world during the pandemic and the rapid restoration of demand for this fuel at present, triggered by the growing demand for electricity(3).
The dynamic growth of energy prices results from both rising prices of raw materials and increasingly high prices of emission certificates, i.e. carbon dioxide emission allowances, which in the first days of December this year again reached record highs, approaching EUR 80 per tonnes of CO2. Despite that, Poland remains one of the cheapest wholesale markets in Europe through its exports. For the first time since 2017, Poland exported more electricity abroad than it imported in August 2021. In Western Europe, energy prices are now higher than in Poland.
Polish utilities sold 176 GWh more electricity abroad than they bought. Poland exported electricity to Slovakia (363 GWh) and Germany (141 GWh). At the same time, they were importing a net 220 GWh from Sweden and 108 GWh from Ukraine. In the meantime, the small import from the Czech Republic was fully covered by exports to Lithuania (23 GWh net each).The price of energy in Poland is now competitive compared to abroad since, in our market, almost all trade in coal for power plants is based on long-term contracts. Until recently, rates in power plants were partially linked to Western European spot prices in ARA ports (Amsterdam, Rotterdam, Antwerp). However, when coal was relatively cheap there, Polish miners forced power plants to abandon this link to buy more expensive coal from them than from imports(4).
Today spot market prices are different. As a result, power generators are buying coal at just over USD 62 per tonne, while spot prices in European ports currently are over 112 USD per tonne (on December 6, 2021), but the peak was achieved on October 5 this year when the price of one tonne reached 274 USD.
Energy generation in Poland and directions of changes
According to Eurostat, fossil fuels in Poland represented 84% of energy generation sources in 2020, which is one of the highest indicators in Europe. At the same time, the share of renewable energy is one of the lowest in the EU, the share of RES in the energy mix is only 15%. Only Cyprus, Malta, Czechia and Hungary have less green energy. The latter two countries produce a significant part of the generated energy in nuclear power plants. It is 35% in the Czech Republic and 48% in Hungary. Slovakia and France have more than 50% of nuclear energy share among EU countries. The most developed renewable sources are located in Latvia, Portugal, Sweden, Croatia, Austria, Denmark, Lithuania, and Luxembourg.
Pic. 2. Sources of Energy, 2020, in %
The high share of coal in energy production makes the cost of energy largely dependent on the price of coal. About 70% of the hard coal mined in our country is used to produce electricity. Coal from Upper Silesia and Lubelskie goes to power plants in the country. The mining of hard coal and lignite has stabilized in recent years at a level that covers domestic demand. In the case of hard coal, we import and export small amounts, which depend on the annually changing prices of coal on the domestic and foreign markets. Coal resources are estimated to be sufficient for us for several hundred years, but the availability of coal and the increasing cost of mining is becoming a significant problem. In particular, the cost of extraction, economically, environmentally, and socially, is high in the case of opencast lignite mines.
Two other energy resources used in Poland, crude oil and natural gas, must be imported in large quantities. Crude oil production in Poland accounts for less than 3% of domestic demand. In the case of natural gas, extraction accounted for approximately 30% of demand. Natural gas began to be recognized as a transition fuel in transforming the Polish energy sector. In both cases, domestic resources fail to satisfy demand, so in the case of crude oil and gas, the world market determines the price of these fuels. The crude oil and gas consumption is steadily growing, while production remains unchanged, which means importing more and more of these raw materials is necessary.
On the way to decarbonization
The systematic reduction of carbon dioxide (CO2) emissions into the atmosphere to eventually stop altogether is a response to the harmful effects of CO2 on the environment and is linked to environmental policy.
The deterioration of ambient air quality has already impacted Polish health and quality of life. On the top-50 list of most polluted cities in Europe, Poland holds 36th in position. Furthermore, Poland is among the 20 highest carbon dioxide emitters globally, with the World Bank report estimating that the cost of ambient air pollution amounts to about 31-40 USD billion, equivalent to 6.4-8.3% of GDP in 2016.
Decarbonization and the consequent development of renewable energy sources, as well as increased energy efficiency, are currently the most important directions in the energy transition in Poland.
The system performance scores are based on three components: economic development & growth, environmental sustainability, and security & access. The second variable in the matrix - transition readiness is based on six dimensions: capital & investment, regulation & policy, stable institutions, infrastructure & innovative business environment, human capital & consumer participation, and energy system structure.
The figure below presents the performance/readiness matrix provided by the WEF (World Economic Forum) report. Poland was classified among emerging countries, close to Vietnam and behind Thailand. The main obstacles to Poland’s transition to sustainability highlighted in the WEF study are the lack of integration of energy and environmental policies, an inadequate approach to technological innovation, poor improvement in the efficient use of resources and an outdated energy structure.
Pic. 3. Performance readiness matrix for energy transformation
On system performance, Poland scored better than the WEF study average for energy access and security and close to the EU28 average. However, it scored less than the averages for the 114 WEF countries and the EU28 on economic growth and development and environmental sustainability. The country’s result in transition readiness is lowered by energy system structure, infrastructure and innovative business environment, regulation, and political commitment.(5)
With the above in mind, the projected increase in energy demand in the near and distant future will shape the strategy for changing Poland's energy mix.
Pic. 4. Expected energy demand as assumptions for the electricity planning model for Poland (TWh)
Poland has already decoupled energy growth from economic growth. The economy has reduced energy intensity more than any other EU member, approximately 30%, as registered in 2016 compared with 1987, the year of its peak demand. The International Energy Agency has noted that diversification of the power generation mix took place between 2000 and 2016. At that time, gas and renewables, mainly wind and hydro, not only met all the growth in electricity demand but also helped bring down the coal share by about 4 percent.
The efficiency potential is still significant because its energy intensity is higher than most EU countries. Some efforts are required due to long-term sustainable development, such as adopting advanced technologies for the most efficient energy use in all energy-consuming sectors (leapfrogging), prioritizing those with the most growth potential.
EU energy policy
By joining the European Union, Poland undertook to be a part of EU policies - by adopting accession treaties; we agreed to targets to reduce greenhouse gas emissions, which in turn has a significant impact on our energy mix. The EU Emissions Trading Scheme (ETS), introduced in 2005, has become a way to reduce greenhouse gas emissions. It was supposed to prepare the EU for the implementation of the Kyoto Protocol, i.e., the international agreement which imposed on developed countries the obligation to reduce CO2 emissions by 5% by 2021 with respect to the 1990 level. The fees for CO2 emissions are the most critical tool for achieving the EU goal of a 55% reduction in emissions by 2030 with respect to 1990.
Emission certificates, which companies are required to have, are used as an emissions control tool. The companies need to hold the European Emission Allowance (EUA) for every tonne of CO2 they emit within one calendar year.
According to CIRE (Centrum Informacji o Rynku Energii, eng. Energy Market Information Centre), since the beginning of 2021, the price of carbon allowances has increased by 93%(6). In June it was over 50 EUR/t. Currently, the price of allowances sold by Poland has exceeded 60 euros. The increase in allowance prices results in more expensive electricity in Poland, among other things, because companies that emit CO2 are required to buy allowances to operate. Moreover, one of the biggest emitters is power companies that generate energy from coal. They pass on the higher costs of purchasing allowances to energy consumers.
The European Union is leading in its commitment to preventing climate change, not only by introducing and overseeing the emissions trading scheme. The European Commission has set itself the goal of making Europe a climate-neutral continent by 2050 by proposing a new energy policy, the so-called European Green Deal. This policy will require massive investment, estimated at 500 billion euros a year by 2030 (EUR 350 billion more than between 2011 and 2020).
Recently, the European Commission revealed 13 climate change policies in July 2021, all designed to cut greenhouse gas emissions faster. The EU renewable energy regulations will include measures targeting transport and industry, where the use of emissions-free energy sources is lagging. The EU is on track to obtain roughly 33% of its energy from renewable sources by 2030, against an existing goal of 32%.
Among the proposed solutions is the introduction of a Social Climate Fund to support citizens in financing investments related to the transformation, including renovation of buildings and lowering their emissions through electrification of heating and cooling and connection of RES, support for public and private institutions providing affordable solutions to improve the energy efficiency of buildings and related financial instruments, support for the purchase of low and zero-emission vehicles and bicycles, as well as necessary infrastructure, providing free public transport or introducing special fares, and development of car-sharing systems. According to the European Commission, 25% of the fund's income will come from the sale of allowances in the new ETS - it will be about EUR 72.2 billion in the years 2025-2032. Poland will receive as much as EUR 12.7 billion from this amount.
In addition, the EU package introduced solutions for qualifying heat production as a priority area related to greenhouse gas emissions, as well as a complete ban on financing investments that use fossil fuels. Therefore, the possibility of financing gas investments has not been proposed.
Moreover, as far as means of transport are concerned, it has been decided to include shipping in the ETS and abolish free allowances for aviation.
In the case of RES, the target was set to increase the collective goal to 40%. Concurrently, the mandatory target was set to increase the share of heat from RES by 1.1 percentage points per year in the heating sector.
The implementation of the "Fit for 55" package is the biggest challenge for the European economy in the post-pandemic period. The estimated annual investment costs in the energy sector require reducing CO2 emissions by 55%, which is 350 billion EUR more than in 2011-2020, with a total investment of nearly 5 trillion EUR by 2030. This capital boost will help rebuild the economy after the current COVID-19 crisis and accelerate the transition to a climate-neutral economy.
It is worth mentioning that the Glasgow Climate Summit in November also identified key climate-change mitigation initiatives. The first was to increase resources for developing countries to cope with climate change. The conclusion of the outcome document included for the first time a commitment by countries to move away from fossil fuels, including coal, by 2049.
Poland’s Clean Energy Strategy
Poland's energy policy, on the other hand, envisages moving away from coal within 30 years. We can achieve this by increasing the capacity generated by RES and creating nuclear power resources.
In recent years, the number of households, institutions, and enterprises with photovoltaic (PV) installations has increased from 51,000 in 2018 to 602,000 at the end of June 2021. It is estimated that the total generation capacity of energy obtained from the sun is more than 5.5 GW. Already, in favorable weather conditions, with ample sunshine, even a dozen percent of the country's power demand is covered by solar energy.
Currently, solar and wind power's combined capacity is more than 12 GW. Over the next 10 years, this capacity will double due to the construction of wind farms in the Baltic Sea.
Given these goals, it is emphasized that nuclear sources will be necessary for energy generation. It is assumed that around 2045, up to 25% of electricity generated in Poland will come from nuclear energy. According to government plans, nuclear power will be launched in 2034 in the form of the first 1-1.6 GW unit and will increase with time.
Energy source support programs will facilitate nuclear power development. In one of them, a few weeks ago, during the UN Climate Change Conference, the United States announced its 25 USD million to expand access to clean nuclear energy. Under the 'Nuclear Futures Package' project, the US government is committed to developing programs to advance large-scale, clean, and modern nuclear power generation, innovative, secure, and safe nuclear technologies such as small modular reactors. Poland was listed as one of the partners in the project, along with Kenya, Ukraine, Brazil, Romania, Indonesia, and others. Joint efforts include capacity building, equipment, feasibility and siting studies, demonstration projects, study tours, site visits, and technical collaboration. This commitment includes the Foundational Infrastructure for the Responsible Use of Small Modular Reactor Technology (FIRST) Initiative, which the United States launched at the Leaders’ Summit on Climate in April this year. The Nuclear Futures Package underscores the strong commitment of the United States to energy innovation and nuclear technology.
Poland and the United States signed a strategic agreement to cooperate on developing the former country’s Civil Nuclear Power Program and Civil Nuclear Power Sector in October 2020 (entered into force in February 2021). Our government has declared to build six reactors 6-9 GW of nuclear energy capacity, and the first reactor is to begin operation in 2033. In the meantime, Poland and the United States cooperate on designing and implementing Poland’s nuclear power program. The agreement outlines fields of cooperation in regulatory, research, and training through developing supply chains, which would also involve Polish suppliers in joint development projects.
Poland is moving away from fossil fuels and is ramping up the implementation of clean technologies for a greener future.
Energy Transformation in Poland will not be easy; however, it will not be impossible either. As Poland is working on its energy mix transformation, it certainly will encounter some challenges. One challenge is the trend of energy price increase through the extraordinary use of fossil fuels in Poland.
Nevertheless, as we go toward an energy mix transition, we must keep in mind that on the technology side, some efforts are required to adopt the latest technology to increase energy efficiency for all citizens. Properly implementing technology ensures that the economy keeps on developing and growing. Still, to achieve this, Poland needs capital investments, proper implementation of policies, and a suitable energy infrastructure with a qualified, trained workforce to build, operate and maintain the infrastructure to be flawlessly operational throughout the nation.
Finally, there is much support for this transformation as the United States is backing the country with the Nuclear Futures Package and bilateral programs that introduces nuclear energy production in Poland.
1 Energy Policies of IEA Countries: Poland 2016 Review, International Energy Agency, 2017.
2 The price listed by the Energy Regulatory Office (original: Średnia cena sprzedaży energii elektrycznej na rynku konkurencyjnym w PLN/MWh).
3, 4 Derski, B., Eksportujemy najwięcej prądu od lat, https://wysokienapiecie.pl/40615-eksportujemy-najwiecej-pradu-od-lat-dzieki-tanszemu-weglowi/# (access on Nov 10, 2021).
5 Poland Energy Transitions: The Path to Sustainability in the Electricity and Heating Sector, World Bank, 2018.
6 Data on Nov 15, 2021, source: https://handel-emisjami-co2.cire.pl/artykuly/serwis-informacyjny-cire-24/notowania-uprawnien-eua-do-emisji-2-wegla-i-paliw-15-11-2021 (access on Nov 15, 2021).