How much will the energy transition cost Poland?

Adapting Poland’s energy mix to the requirements of the European Union by 2040 will require investment in energy generation and transmission networks. According to the estimates of the Jagiellonian Institute, these may range from 250 to 400 billion PLN, which realistically means nearly 300 billion PLN that may contribute to the Polish GDP in the next decade. This is a huge opportunity, but it also carries the risk of increasing electricity prices for all of us. What will Poland’s energy future look like?

The fuel and energy sector in Poland is facing important decisions associated with the transformation of the Polish energy mix around 2040 and 2050. The need for a transformation derives primarily from the conditions of the European Union’s energy and climate policy, which aims to minimise emissions from the combustion of fossil fuels. What shapes the demand for and supply of hard coal and lignite that are so relevant to Poland? What is the role of these fuels in the energy sector and how do they affect the economy?

The analysis below is based on a report by the Jagiellonian Institute: Fuels and engines of economic growth: The impact of raw material prices and energy production on Poland.

Energy landscape on the Vistula River

The data from the Central Statistical Office (GUS) show that the key primary energy carriers consumed in Poland in 2018 were as follows:

• hard coal (HC),
• lignite (li),
• crude oil (CO), and
• high-methane natural gas (HMNG).

These fuels constituted 80% of the total energy consumed in the country.

Most of the hard coal is used in the power and heating sectors, as well as in households and industry. For crude oil, the most relevant areas of consumption are industry and transport. Industry is also the main consumer of high-methane natural gas, though it is also consumed by households, the energy sector, heating, and transport. Lignite, on the other hand, is mainly consumed by the energy sector.

In the case of the power industry, hard coal and lignite still make up approximately 75% of the energy consumed, although there is a noticeable downward trend in the use of these fuels in favour of natural gas and renewable energy sources (such as wind, solar, and biomass).

Hard coal

There are two key reasons for the observable changes in the production and consumption of hard coal in Poland:

• the EU energy and climate policy, which has been consistently striving to reduce the role of fossil fuels in the energy sector for many years, is heading towards zero-emission and low-emission solutions; the latest EU plans presented in the European Green Deal suggest that the pace of decarbonisation by 2050 will accelerate even more;
• the cost-price ratio of hard coal obtained in Poland compared to the costs of obtaining it in countries that are leading producers and exporters or to prices on the global market.

Globally, the key factor influencing the demand for hard coal will be consumption in China and India, i.e. the two largest consumers worldwide. The data from recent years lead to the conclusion that the recent upward trend in China’s demand for hard coal has slowed down, or even reversed, which can be associated with the intensive development of renewable energy sources and China’s policy for improving environmental protection, for example. Meanwhile, it should be noted that the decline in demand from China in the coming years will not be compensated for by India. On a global scale, a gradual decline in the demand for coal is expected.

Poland’s position on the global hard coal market ultimately defines our country as a recipient of prices set by leading producers—exporters of this raw material (Indonesia, Australia, Russia, Colombia, South Africa, and the USA).

Therefore, it can be expected that in the near future (approx. 5–6 years), significant factors influencing the demand, supply, and price of hard coal in Poland will include

• subsequent attempts to restructure the domestic mining industry,
• excavation in increasingly difficult physical conditions, and
• the situation in the power sector, i.e. the future make-up of resources used for electricity generation.

Considering the previous attempts at restructuring and the unfavourable effects of past actions, further increases in extraction costs can be expected, which is in opposition to the trends observed worldwide and results from the specific nature of the Polish market.

Moreover, the cost of extraction may also increase due to it being carried out at ever greater depths (below 1 m). Combined with the expected stable demand for hard coal in the Polish power sector in 2025–26, the above factors will create several years of pressure on a further increase in raw material prices on the market.

One of the most important factors in favour of maintaining the demand for hard coal in Poland over the next 5–6 years is the situation in the power sector. The forecasts presented in the latest draft plan (November 2019), i.e. Poland’s Energy Policy until 2040  (PEP2040), indicate that coal will maintain its role in electricity generation until 2025 and will gradually be reduced starting in 2030.

The total estimated decrease in demand for hard coal in the power sector in the period 2030–2040 can be estimated at approx. 6.6 to 9.7 million tonnes, assuming a reduction in electricity production from 63.1 TWh in 2030 to 45.7 TWh in 2040, and assuming that between 0.38 and 0.56 tonnes of hard coal are used to generate 1 MWh of electricity (for a gross value of generation between 36% and 45% and a calorific value of hard coal between 18 and 21 MJ/t).

However, this decline may be even greater if the EU energy and climate policy is tightened further, or due to the relationship between the prices of hard coal and natural gas and the price of CO₂ emission allowances, which together translate into a higher cost competitiveness of gas-fired power generation over coal.

The permanent shutdowns of coal-based generation capacities forecast by PEP2040 are fit into the context of the breakdown of electricity resources mentioned above. Forecasts indicate significant shutdowns only after 2030 and the results of auctions conducted in recent years as part of the so-called capacity market, which suggests hard coal-fired units will continue to operate in the coming years.

Lignite

Another popular energy carrier in the Polish energy sector is lignite— approx. 26% of electricity production in our country is based on this raw material. Although Poland is at the forefront of its production and consumption, it is not in the first place. Germany is the global leader, followed closely by China. Poland is responsible for approximately 6% (Euracoal) of the global production volume of this energy carrier.

What does its price depend on? Lignite has a low-density structure and a high water content. These features make it unprofitable to transport the fuel over longer distances. Lignite-fired power plants are located in the vicinity of mines, which is clearly exemplified by Polish complexes (the Belchatow Power Plant and the adjacent Belchatow mine). Consequently, there is no global trade in lignite as there is in other fuels. Thus, in practice the price of lignite depends solely on the costs of mining and maintenance of mines, and its domestic production is strongly correlated with consumption. The average level of lignite consumption in Poland in recent years has been approx. 60 million Mg.

The EU energy and climate policy provides for a reduction of CO₂ emissions in the long run. Among the leading fossil fuels used in the power industry, lignite has the highest unit emission in relation to the electricity generated. This is mainly due to the fuel’s much lower calorific value (approx. 8 MJ/kg, KOBiZE). All this will cause a rapid departure from this raw material by 2030 and 2040. This is confirmed by the PEP2040, which does not provide for new investments in lignite-fired power plants (apart from the investment in a 460 MW unit at the Turow Power Plant).

Crude oil

Another important energy carrier in Poland is crude oil. This is particularly visible in its impact on our economy; its prices are and will remain important, especially in the near future. The production of plastics and rubber currently accounts for about 8% of industrial processing, with sales revenues exceeding 85 billion PLN. The sector employs over 190,000 people. Poland is responsible for approx. 6.8% of the total consumption of plastics in the European Union. Out of the entire processing industry, the packaging sector shows the highest demand (35%). Over the past eight years, demand has skyrocketed (by 60%) to 1.2 billion tons.

Speculative fluctuations on the crude oil market may translate into the competitiveness of Polish industrial processing, may lead to an increase in packaging prices, and may affect the construction (consuming 24% of plastics) and automotive (10%) sectors. After implementing the EU circular economy directives and achieving the required percentage of packaging recycling (90%), i.e. around 2030, the impact of oil prices on industrial production will lessen significantly.

Crude oil prices will have a significant impact on the transport sector, at least until the development of electromobility. In order for electric cars to compete with internal combustion cars, it is necessary to expand the fast charging infrastructure so that approx. half of a car’s battery can be charged in no more than 15 minutes. Forcing drivers to take long stops in order to recharge their cars will significantly reduce the use of electric engines in transport. Battery capacity is no longer problematic, as the current Tesla S model batteries have a range of up to approx. 600 km, which is as much as a large fuel tank in a combustion car.

Over the course of the next few years, we can expect technology to develop further, expanding and improving hydrogen engines, which are already powering some models. Diesel vans in particular can be replaced by hydrogen-powered vehicles. Assuming that the development of infrastructure and the wider product range will take approx. 10 years, the Polish transport sector will become much less dependent on oil prices by around 2030.

Consequences of transformation for the Polish entire economy

Electricity demand and production will grow steadily. This growth may be much faster if Poland becomes a place of investment in high technology and industrial processing.

Adapting the energy sector to changing conditions requires considerable investment, which must be carried out wisely in order to provide Poland with: stable supplies for industry, benefits for companies, and technology transfer.

The trajectory of the planned investments in the energy sector resulting from the change in the energy mix was presented in PEP2040.

The investments proposed by PEP2040 will have a significant impact on the Polish GDP, as some of them will go to domestic companies. Due to the crucial importance of technology transfer, this percentage should increase over time. The economic impact can be calculated according to the principle of Keynesian multipliers. The investment multiplier is assumed to be in the range of 1.5–1.6, in accordance with the literature and researchers’ calculations. In the energy mix described by the PEP2040, between 75% and 80% of the invested funds will remain in the country.

The end of economic dependence on fossil fuel prices?

The impact of hard coal on the economy will lessen over time. This is due to coal-fired plants in Poland being shut down one by one. The JI report assumes a reduction in installed capacity by 60% over the next 20 years.

Higher prices of hard coal in 2025 may translate into slight increases in electricity prices, but due to the political sensitivity of the topic and the elections in 2023 and 2025, it is unlikely that they will actually increase. Moreover, a possible increase in hard coal prices may compensate for the growing use of other energy sources.

A possible increase in the price of gas will not have a major impact on energy prices due to the fact that this raw material is a transition fuel between coal-based energy and low-emission energy. In 2040, gas will account for approximately 14% of installed capacity.

Fossil fuel prices will have an impact on the Polish economy until around 2030. After that, there will be significant independence from them due to the increase in the percentage of recyclable plastic packaging and the development of electromobility, along with its infrastructure.

 Polish version is available here.