1 Introduction
Well-functioning energy sector is a key element of the country’s economic development, stability, wealth and energy security; therefore, its development should be planned with great thoroughness. Climate issues have for long exerted impact on energy policy (IPCC
2014; OECD/IEA
2015). Thus, taking into account the aspects of climate change into national energy policies seems to be an obvious and rational obligation of politicians and energy planners. Being for long the concern to the limited number of the countries committed to the United Nations Framework Convention on Climate Change Kyoto’s Protocol, the issue of addressing the aspects of climate change in energy policy has at last gained a truly global dimension after the 21st Conference of the Parties Paris Agreement. This conclusion is likely to remain valid despite a new, not yet fully recognisable, situation which emerged after the United States (US) declaration to withdraw from the Paris Agreement and which was counteracted by strong re-commitments from other main players including China, India, Japan, Canada, Russia and the European Union (EU).
EU has plans to reduce its greenhouse gas (GHG) emission by 20% in 2020, by 40% in 2030 and then even further by 80…95% in 2050 against 1990 levels. The share of the power sector in these plans amounts to 57…65% in 2030 and 96…99% in 2050 (EC
2011). Further plans set for 2030 aim at least a 27% share of energy from renewable energy sources (RES), 27% energy savings compared with the business-as-usual scenario (BAU). Nowadays, the main policy instrument used by the European Commission (EC) in its efforts to reduce GHG emission in the power sector is its obligatory participation in the EU Emissions Trading System—EU ETS (Directive EU ETS
2009).
Poland has, as a signatory to the Kyoto Protocol since 2002, two legally binding obligations on the GHG reduction, namely, the first one stemming from the protocol to reduce its emissions by 6% in 2008–2012 in relation to 1998 as the base year, and the second one of reduction 20% in 2013–2020 as the EU Member State (MS). Despite successes in meeting these GHG reduction goals, Poland’s climate policy has been heavily criticised by environmentalists who blame insufficient measures undertaken to curb GHG emission caused by extensive coal use (Climate Scorecard
2016; EurActiv
2014). In the opinion of the European Environmental Agency (EEA),
Poland remains one of the most material- and energy-consuming economies of the EU in terms of efficiency (EEA
2015). As well, Poland is known as a major opponent to the EU climate policy (e.g. O’Rourke-Potocki
2016; Reuters
2017). Adoption to the EU climate policy by Poland may have pivotal importance for the whole EU climate policy which can be blocked or at least effectively obstructed by an MS not fully accepting the EU abatement policy based on the EU ETS framework. This approach is mostly caused by partially understandable fear that adapting domestic energy sector to the climate requirements will cause unbearable burden to the whole economy (see Section
6) and may lead to social unrest in coal regions. The leading role of climate policy in decarbonisation of the whole economy is recognised and acknowledged by the government though even official reports conclude that Poland is not yet prepared to meet the requirements of the EU climate-energy policy (NIK
2016). Obligations imposed on the power sector due to its binding participation in the EU ETS are commonly regarded a real threat looming over the energy future of Poland. Paradoxically, no reliable estimations of the cost of the power sector transformation are available. In the years to come, due to the EU climate policy, especially after the Paris Agreement, it is obvious that the Polish energy mix and energy technologies will have to change. Therefore, a quantitative analysis how the EU ETS affected the conventional power plants in Poland should be of value.
This article addresses in a broad political and economic context a development of coal technologies in Poland’s power sector in the European decarbonisation trend. To this end, a research was made on an economic position of the conventional power plants in 2008–2020 including EU ETS-related costs. This assessment was supported by a 2050 energy demand forecast to check whether current investments in coal-based capacity may lead Poland to commit its GHG emission reduction goal.
The innovation of that article consists in proposing methodology of estimation actual costs and benefits of power stations in a country with a heavily coal-dependent power sector in the transition to low-carbon economy. The article gives answers to the following research questions—what is the cost of participation of currently existing conventional power sector in Poland in the EU ETS over the period 2008–2020? Whether and when will the participation in the EU ETS cause any real threat to the existing coal-fired power plants? May Poland meet the EU emission reduction target for 2050 without a huge reduction of coal usage in the power sector? What should be the recommended generation technologies to replace coal-based plants?
There is a vast amount of literature on the impact of the EU ETS on the European power sector. The authors investigate such mainstream topics as economic effectiveness of the EU ETS in GHG emission abatement; its ability to cause technological transformation to low-carbon technologies; European Union Allowance (EUA) price paths required to meet the climate objectives; extent to which EU ETS costs are passed through to energy prices; and methods of EUA allocation and their impact on the system functioning. Another mainstream research is modelling of different scenarios up to 2050 to see the impact of numerous energy mixes on GHG emissions. Some of these issues, if relevant, will be discussed in subsequent sections. A truly comprehensive review of EU ETS functioning can be found in Healy et al. (
2015).
7 Global dimension of Poland’s case
The role of coal in the modern world is contradictory—it enables the development by providing cheap energy, and it threatens that development by having negative impact on climate. The future of coal in the power sector related to the GHG abatement is also a subject of worldwide discussions (Akimoto et al.
2014). Coal, according to the IEA, will remain the main energy carrier for decades with a predicted fall of coal share in the global power generation mix from 41% in 2014 to 36% by 2021 (IEA
2016b). The diminishing investment trend in coal-fired plants is visible now as in 2016 nearly 20 GW fewer were commissioned following climate concerns and the emergence of overcapacity in some markets. The final investment decisions for new coal-fired power plants taken in 2016, totalling a mere 40 GW globally, indicate low interest in future coal technology investment once the current construction trend ends.
The EEA (
2016c) predicts that solid fuels share in electricity production will shrink from 97% in 2014 to 80% in 2030 in the Central and East European (CEE) countries, whereas gas will increase substantially to become responsible for 20% of the production of electricity by 2030. The EEA concludes that there is no risk of carbon lock-in for the CEE countries which seems to be corrected only for the whole block of countries but not for Poland where continuing the investment in coal capacity makes the risk real. A danger exists that erroneous investment decisions on power capacity, concerning the future fuels and technologies used, may lead even in the short term to over- or under capacity at a national power grid level. A possible shortage of energy supply may easily be covered by energy import, provided sufficient interconnection infrastructure exists, e.g. the EC wishes to meet the currently adopted 10% interconnection target by 2020 with options to find cost-effective ways to increase it to 15%. A completion of regional energy markets with high interconnector capacity poses a threat of losing competitiveness of national power sector due to lower energy prices in the neighbouring countries. In Poland, such a market transition is a subject of political discussions in the light of cheap energy supply from neighbouring countries in which RES-produced energy is heavily supported. Future energy mix and technological issues in the long-term perspective are essential and can be decided upon only when decisive political decisions, for example on coal phasing-out, nuclear option, RES development rate, energy efficiency aggressive policies, are in place. The lack of firm political decisions on social and economic development makes numerous long-term energy outlooks rather academic topics than strategically useful plans. These forecasts shall also address the social issues in coal-intensive regions to enable taking the right steps to mitigate them.
Poland is not alone in its struggle to reform the power sector based on coal. Goodman et al. (
2016) summarised research on the role of coal, mainly investigating the cases from India as industrialising country, Germany being a post-industrialised country in energy transition and Australia with its resource-dependent economy. Poland’s lesson can be regarded as complimentary to these considerations as a case of a country heavily relying on coal and a subject to the highly demanded climate policy of the EU. Similar problems occur in the USA, China, Australia or India and in many other countries worldwide. Reforms in these countries are being strongly driven by climate change policies (World Bank
2016). There are also a number of other factors that are more decisive in taking investment decisions in power sector than low EAU prices (Hoffmann
2007). Nepal et al. argue, basing on data from 28 countries including Poland and covering years from 1990 to 2012, that the Kyoto Protocol was not the main drive in mitigating GHG emission per capita. They point rather at increased economic efficiencies resulting from mixture of market reforms that contributed to emission reduction. This conclusion supports, apart from direct emission curbing instruments, the need of reforming all sectors with a substantial relevance to the climate change. The ineffectiveness of the EU ETS in phasing-out coal-fired power station is also, despite all the reforms undertaken, one of the main concerns in the after-Paris policy (Climate Analytics
2017).
China reaffirming its climate policy seems to be on the path of curbing the role of coal in the power sector and aims at reining in its overcapacity. The country announced the suspension of 104 planned coal-based power plants with a total capacity of 120 GW, of which around 54 GW are from projects under construction. Although China remains, with 21% of the global total investments, the leader in energy investment, yet in 2016 a 25% decline in commissioning of new coal-fired power plants took place (IEA
2017). The USA generated 30% of its electricity with coal in 2016, much down as compared to over 50% a decade ago. Also in India (IEEFA
2017b) and Bangladesh (IEEFA
2017a), the shift away from coal has been much swifter than predicted although the latest report (IEE
2017) predicts that coal will remain a dominating fuel in India’s baseload power till 2047. In India, a stricter regulatory framework, especially addressing the environment, is also of concern. To meet the Paris commitments, India will have to increase the supercritical technology from the current rate of 11.5 to 50% by the time. Even some countries of the Organisation for Economic Co-operation and Development (OECD) plan or have under construction of a new coal-fired power capacity, e.g. Turkey (74 GW), Japan (22 GW), South Korea (20 GW) and Poland (9 GW) (Endcoal.org
2016).
African countries lack, in opposite to the developed countries, a strong regulation in the energy sector. A programme New Deal on Energy for Africa (ADBG
2017) aiming at creation of a supporting policy environment to foster adequate private sector interest and sustainability has recently been launched. Reluctance of major international financial institutions to coal investments is likely to increase, which may put a new barrier to invest in coal-based capacity, especially in developing countries. Developing countries should follow the leaders in transformation, despite their possibly different starting position.
In the EU, climate policy-related aspects seem to be a steady and long-lasting component of the future economic development—
overarching priority for the Commission over the coming years (EC
2015c). Such EU approach, very much oriented on economy decarbonisation, provides enormous challenges for those MSs which still use coal. Some of them like the UK, Germany, Belgium, Portugal or recently Finland (Morgan
2017) have adopted their ways to solve the problem of coal, and they are on the path to coal phase-out; some, like Poland, the Czech Republic, Romania (World Bank
2015) and Slovakia, are still coping with this socio-economic problem of national importance (Climate Analytics
2017). Bertram et al. (Bertram
2015b) point out that near-term climate policies allowing for larger emissions may take up more of the EU 2010–2030 long-term GHG emission abatement budget which will result in higher budgetary expenses and the urgency of reducing GHG emissions after 2030. Moreover, a weak near-term GHG emission target set by less stringent policies encourages investments in additional coal-fired power stations. Unclear future of the energy sector in the EU, caused by constantly rising climate-related demands, is one of the reasons why EU investments in energy are weak—with an investment decrease by 10% in 2017 as compared to 2016—mainly as a result of lower renewable investment. The EU countries, although fairly successful in the GHG abatement from the power sector, are not free of challenges. Many argue that the adoption of the proposed Emission Performance Standard—EPS 550 (550 g CO
2/kWh) may enforce a start of gas phase-out in the EU. Even gas peak-hour capacity may be eliminated. The Eurelectric (
2017) claims that the fulfilment of the EPS 550 would result in a 40% rise in gas consumption for the EU power sector in the period of 2020–2040. Meeting the EPS 550 objective would cause extra EU power sector investment costs of around €50 billion between 2020 and 2040, mostly spent on additional GHG emission reduction. Gas consumption in Western Europe would increase by 100 TWh per year, resulting in annual gas increase above 400 TWh until 2035. For Eastern Europe alone, it means an increase of gas demand by 90 TWh per year in 2025 to 160 TWh per year in 2040. As much as 50% of the increase of annual gas consumption in 2040 would take place in Poland which would dramatically turn down national energy security.
Some states in the USA are also heavily coal dependent—in Wyoming, nearly 90% of electricity comes from coal; in North Dakota, 80%; and in Colorado, 60% (2015). Kowalski (
2016) makes an interesting comparison of the State of Ohio and Poland by noting that similar to Poland, a bulk of Ohio’s electricity comes from coal. Ohio was the tenth largest coal-producing state and the fourth largest coal-consuming state—in 2015, coal-fired power plants produced 59% of Ohio’s energy. Although coal still accounts for a majority of the state’s electricity generation mix, the share is down from almost 86% in 2006. In the same period, Ohio’s natural gas share in electricity production increased from less than 2 to 23%. She points out that the plunge of the US coal production in 2015 to 900 million tonnes set a 30-year low and was a 10% fall from 2014. The drop was accompanied by seeking bankruptcy protection by large coal companies, e.g. Arch Coal, Peabody Coal and Patriot Coal. This could be a warning to all coal companies operating in the competitive market of low-price energy carriers mostly caused by cheap gas. In Europe, including Poland, this is not the case—gas prices are substantially higher than in the USA and energy prices are increased by the EUA costs. Some blame too strict federal law on GHG emission for crippling the competitiveness in the US coal industry, and this is exactly the same argument circulated in Poland. The other reason is the fact that coal-fired power plants in the USA are
older on average than modern competing technologies of electricity generation, and their efficiencies are lower than those of newer plants (SourceWatch
2017). The decision of President Trump to leave the Paris Agreement and review the Clean Power Plan (EPA
2017), having in back the restoration of the coal industry, makes the coal market and power technology development paths difficult to predict and the market more uncertain. This decision, although widely contested by many, e.g. Stavis (
2017), opens a room for a new round of the worldwide discussion on the coal perspective. Low prices of coal in the world market affect the coal sector very much similarly in the USA and Poland. The economic difficulties in the global coal market forced Poland’s government to decide in late 2016 to merge some unprofitable hard coal mines with relatively well-doing power plants. Consequently, the economic standing of the latter is likely to get worse.
8 Recommendations
The global combat with the climate change inevitably entails a need to rethink the future role of coal in power generation. It applies to countries with a large coal sector but as well to large coal importers which are now at the crossroads choosing future energy mix and power technologies. The global transition to clean energy is also in the interest of poor populations striving to lift themselves out of poverty which requires confronting the climate change in many aspects, e.g. natural disaster threats, water scarcity, land use, deforestation. For all of them Poland’s lesson on transition of coal based energy sector may be useful - it may serve as an example of a country historically based on coal and finding itself under pressure of the world’s leadership of the EU in climate policy. The article, by giving a thorough analysis of Poland’s case, formulates a number of recommendations applicable for coal relying countries inevitably facing the energy transformation.
9 Conclusions
The aim of this work was to determine the impact of the EU ETS on Poland’s conventional energy sector which is exceptionally dependent on coal. It provides analyses in two different approaches and time scales—in detailed economic terms in the years 2008–2020 and in the macroscopic scale in the long run up to 2050. The paper provides a short-term estimation of climate policy costs to the existing coal-dominated power sector. The estimations were based on 2008–2014 data which served as an input for the forecast analysis (2015–2020). It was proved that the financial standing of some coal-fired power stations may substantially worsen, provided the EUA prices increase as it is being planned by the EC. Furthermore, the conclusions indicate that 2020 shall be regarded as the deadline to commence a new phase of energy transition coinciding with the new EU ETS trading period. Before that date, the new energy strategy shall solve dilemmas on the future energy mix and the following structure of the power sector at least till 2050. It was also shown that in the long perspective, till 2050, to meet not very much demanding GHG emission reduction (40% in 2050 against 2005) will enforce retiring of a large share of coal-based capacity in Poland. The goal of 80% GHG reduction in 2050 demands almost an entire drop of coal in power generation. A recent report on coal-fired power sector in the EU, presented from the perspective of fulfilling the EU Paris commitments, forecasts even an earlier shutting down of Polish coal power stations due to their low market competitiveness (Climate Analytics
2017). Summing up the current Polish situation, it can be concluded that the EU ETS does not appear to have had much effect yet, either on electrical energy prices or on generation technologies. Technology remains invariant to EU ETS partially due to low EUA prices being well below the technology threshold and, therefore, not able to force technological breakthroughs, e.g. switch from coal to gas/RES. Additionally, the politically induced support for coal sector strengthens the dominance of coal.
Comparing the situation of Poland, still having a large share of coal based power sector, with other EU countries, it can be noticed that while others, e.g. Germany, Italy, Portugal or Spain, have clear plans to phase out coal, Poland, as the only EU country (except for Greece), stubbornly sticks to the development of the coal-based power sector. A political inability to adopt the energy strategy poses a threat that high energy prices or even power shortage may pose a barrier to Poland’s economic growth, the first symptoms of which energy users experienced in August 2015 when deep cuts of power supply to large industrial users were ordered by the Transmission System Operator. The risk of capacity shortage is growing due to the country’s delay in replacing dirty coal capacity, reluctance to support RES and postponing political decisions on launching a nuclear programme.
The lack of strategic planning and coherence in the Polish energy and climate policies are conspicuous. In practice, any deep restructuring process in the energy sector encounters a barrier of political dogma—an unquestionable and dominating role of coal in planning energy future whereas environmental objectives are perceived as second-order priorities. The gap between the defined strategy for coal-oriented investments in power sector and the climate objectives is not likely to get smaller. Thus, mostly due to political decisions, the energy sector is rather in the state of being coal captive. Despite the market signals, the government keeps on funding the mining sector regardless of the fact that it lost its profitability years ago. Moreover, some new power plants running on coal are being under construction despite the requirements of the EU climate policy. The recent idea to merge power companies with some unprofitable coal mines seems a time gaining solution that will just pass the problem from the government itself to power companies. The plan, announced late 2017, to construct two new coal mines is also striking. There are voices that Poland’s current political leadership now promotes coal as a means for continuing independence from external influences (Kowalski
2016). The IEA (IEA
2016a) has recently called upon the Polish government to
establish a clear vision for the coal sector, consistent with the new long-term energy strategy, based on a fair assessment of costs, transparent accountability and elimination of cross subsidies between power producers and coal mines, and provide the private sector with opportunities to develop and compete in the market.
The threat of losing profitability by part of the power sector shall give a warning to politicians as to what technologies should be developed and whether coal is an economically viable option for meeting national climate and energy goals. On the other hand, the results obtained can be helpful for the energy sector by providing arguments proving the risk of losing profitability and calling for immediate actions from the government. For ambitious mitigation strategies, the period 2030–2050 is of critical importance, since it is then when the most rapid shift to low-carbon technology will take place (Eom et al...
2015). Therefore, it is so essential for decision-makers and investors to avoid the carbon lock-in in the power sector. The short-sight temptation to invest in coal-fired power plants, compensated by relatively inexpensive operational costs, would over time lead to political, economic, environmental and social factors that will make it hard to move away from, or “unlock” carbon (Erickson et al.
2015). Poland requires to resume a political dialogue on the future of coal—it is essential to send a strong message to citizens that the coal industry remains in a deep and permanent crisis, not because of the EU climate policy, but because technological progress has been making it possible to get energy from unconventional sources, e.g. the sun or wind, in a cheaper and cleaner way, and the shifts in global energy carrier markets. The period of “ineffective” functioning of the EU ETS may be a blessing period for Poland’s power system offering time for taking strategic decisions and restructuring. The time is going to end after 2020 when the new rules of EU ETS functioning come into force and the Winter Package reforms are accepted.