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Wojciech Jakóbik  20 października 2020

Invent from scratch or copy from the Germans? How to spend funds on energy transformation wisely?

Wojciech Jakóbik  20 października 2020
przeczytanie zajmie 13 min
Invent from scratch or copy from the Germans? How to spend funds on energy transformation wisely? Hans Permana - flickr.com

The energy transition goes beyond the energy sector and cannot be perceived solely in terms of the concerns of the coal mining and energy sector. Poland will be able to look for its own path only to a certain extent, largely responding to megatrends dictated by stronger players.

Money in exchange for change

The energy transition is a gradual shift from fossil fuel technologies to renewable sources in order to reduce CO2 emissions. It is one of the target points of the European Union’s energy and climate policy, described in EU legislation with the help of Community goals, such as 20% share of renewable energy sources (RES) in the energy mix by 2020. The plan of the European Green Deal submitted by the European Commission assumes that the climate goals will be included in the entire economic policy of the Community: reducing CO2 emissions, increasing the share of RES and energy efficiency are to become the priorities of all economic activity. One-third of the EU budget for 2021–2027 is to be allocated in the pursuit of climate goals.

July’s budget agreement of the European Council assumes that the value of the entire EU budget in 2021–2027 will amount to EUR 1.074 trillion, and the Reconstruction Fund worth EUR 750 billion will consist of: EUR 390 billion in the form of subsidies and EUR 360 billion in the form of loans. Poland will receive from it almost EUR 160 billion (EUR 125 billion in subsidies and almost EUR 35 billion in loans), and at current prices – nearly EUR 174 billion – the ministry’s memo states. Funds for the energy transformation of the European Union may come from three sources: the Just Transition Fund, the Reconstruction Fund and the cohesion policy under the Multiannual Financial Framework. This money can be spent for various purposes, but cannot be in contradiction with climate policy. It is recommended that these funds support it.

Will there be enough money to reform mining?

The Just Transition Fund is intended to support the transformation of regions most at risk of its negative effects. Poland can count on 3.5 out of 10 billion euros in its budget instead of the initially planned 8 billion. Half of these funds will be provided only in exchange for Poland’s support for the European Union’s climate neutrality goal by 2050. Although Poles accept it verbally, they have not yet signed the obligation.

EUR 3.5 billion from the FST may go to regions dependent on the coal economy in Silesia, Lower Silesia and Greater Poland. They should be allocated to protective programmes for miners, such as voluntary leave programmes, severance pay, or change of trades.

This means that 3.5 billion euros would be enough for thrice as ambitious a programme, without national funding. This is a considerable amount that theoretically would alleviate the social unrest related to Poland’s gradual withdrawal from coal. This, however, requires a plan and a suitable platform to discuss it with stakeholders in the reform.

The Polish government originally wanted to present the finished plan to the trade unions but withdrew from this idea at the end of July. The new proposal is to be developed in dialogue with trade unions. The German experience shows that it is worth expanding the talks to include other entities. The coal commission in Germany has prepared a plan to abandon coal in the energy sector by 2035 or at the latest by 2038 after several months of consultations with the participation not only of trade unions, but also industry, trade and non-governmental organisations. Thanks to broad representation, the social consensus reached by the commission regarding the mining and coal energy reform, signed by the most important players, gained strong legitimacy. The authorities should consider a more transparent and inclusive nature of talks about changes in the coal sector. Following the example of the coal commission in Germany, the talks about the future of post-mining regions should include representatives of NGOs (not only trade unions), industry organisations, representatives of the entire political scene and experts. This will be the best guarantee of legitimacy of the consensus reached.

It is worth highlighting that Silesia is a politically sensitive region due to the historical subsidisation of mining, which maintains the belief that a miner’s work is unique, but also due to the search for political autonomy by some regional organisations, which makes them cautious of ideas that would destabilise society in the region. These are additional arguments for the authorities to be cautious, but at the same time, they emphasise the need for a more transparent process of shaping the programme of changes. The programme should be developed under the conditions of far-reaching consultation of changes, presenting assumptions supported by discussions in working groups dealing with specific issues.

Economic transformation

It is worth highlighting that the energy transition goes beyond the energy sector and cannot be viewed solely from the point of view of the concerns in the coal mining and energy sector. The case is similar for funds from the European Reconstruction Funds, which should be used to co-finance projects for energy transformation. This will go beyond the power sector; it will involve heating and individual heating sources. Well-thought-out projects will be able to obtain these funds by integrating them into the EU’s decarbonisation plan.

An example may be supplementing planned investments, for example, gas-fired ones, with renewable elements, for example, by entering the production and transport of hydrogen or biogas into the assumptions of power plant and gas pipeline projects. These are the so-called emission-free renewable gases, which one day may have the goal of participating in the energy mix like RES today. It is worth considering a scenario in which the new gas infrastructure would be designed as hydrogen ready or biogas ready. Its profitability would receive a boost because, even in the event of a faster shift away from gas, EU climate policy will apply to it in the coming decades. New gas pipelines, such as the Baltic Pipe or the so-called floating gas terminal, i.e. the FSRU storage and regasification unit, which is to be erected in the Bay of Gdańsk, should take this possibility into account.

The more comprehensive and integrated the projects submitted for co-financing are, the greater the chances of obtaining funding. In creating the National Reconstruction Plan, the Ministry of Funds and Regional Policy has entered the next stage of works on the submitted proposals of ministries and regions. The representatives of the ministry mentioned that these funds are to be allocated to entities for the modernisation of transmission and distribution networks in order to prepare the national network for distributed energy, as well as for deriving power from offshore wind farms and thermal modernisation of buildings in Poland.

It is worth emphasising that the changes imposed by the EU’s green agenda follow the prevailing technological trends – they reward renewable energy and hydrogen, i.e. the specialties of the most developed EU countries, led by Germany. These megatrends dictated by the stronger actors may, in turn, be a part of European specificity allowing the Old Continent to compete more effectively with innovations from the USA or the Middle Kingdom.

Poland can search for its own path only to a certain extent, claiming the right to nuclear or clean coal technologies. However, it will thus disperse the means necessary to effectively use the shrinking and greening EU funds. It should be calculated which scenario will benefit the Polish economy more. Poles must answer the question whether, in the face of the inevitable technological change (supported by regulation!) and the replacement of conventional energy with renewable energy, it is better to follow the path trodden by the avant-garde of these changes or to look for its own path to protect the status quo in the energy sector, while slowing down the pace of changes.

The time is running out!

Poland doesn’t have much time for reflection. The timeframe for spending funds on the energy transition until 2027 is relevant. The draft of the Polish Energy Policy until 2040 assumes that coal will remain in the energy mix until then. Effective spending of funds for transformation, however, would require dealing with it before 2050, when Europe is to be climate neutral, because after 2027 it may be increasingly difficult to find measures supporting change unless Poland takes care of them at the EU level.

Poland supports the functioning of the coal energy sector due to unfavourable market and regulatory conditions by means of the capacity market mechanism, which makes coal-fired power stations profitable with the help of a power fee added to energy bills, but reduces the competitiveness of the economy paying more for electricity. This, however, is necessary from the point of view of a country that wants to maintain the stability of energy supplies in the transition period, when there is no alternative in the form of nuclear energy or a mix of gas and RES. This solution may function for up to two decades, but it will be advisable to create an agency that will collect coal assets from the market, which, with the consent of the European Commission, could safeguard Poland’s energy security with the use of coal in exchange for the fact that the rest of the energy sector will transform faster and without the burden from this type of assets in the portfolio. Such plans are being considered by the Polish government and should be consolidated as soon as possible. In such an agency, coal assets would be purchased and subsidised by the state regardless of the market conditions. Without their burden, companies could operate more effectively in the existing market and regulatory realities.

The Polish administration admits that it is following the example of solutions from Germany, which created the so-called cold reserve. This means a group of conventional assets that will be subsidised by the state to ensure energy security regardless of market and regulatory conditions. The said agency would be made up of conventional power plants which would remain available regardless of further developments on the market and in the European Union’s climate policy. They will guarantee the continuity of energy supplies.

Without black assets, the big four, i.e. Polska Grupa Energetyczna, Tauron, Enea and Energa, could develop based on a growing portfolio of low- (nuclear, gas?) and zero-emission sources (RES). It is possible that they would then have to be reorganised into new companies of the State Treasury dealing separately, for example, with the production and distribution of energy. Creating the concept of change is an arduous effort, but the decision-makers will not be able to deviate far from the solutions proven beyond the Oder; not unless they opt for rebelling against the European machine driven by the avant-garde from the western part of the continent.

Poles want to go their own way, but which way is that?

The current European budget is probably the last one in which Poland can count on such significant support. Even now one can informally hear that Poland will become a net payer of the EU budget in around 2027, i.e. almost a quarter of a century after joining the Community.

Moreover, if the political trends in favour of green political parties persist in Europe, the further greening of the European budget is to be expected. This means that an increasing part of the EU funds can be spent on purposes in support of sustainable economic development with respect for the environment.

It should therefore be recognised that the better Poles plan their energy transformation, the more effectively they will use this money. The direction will be defined by the entire package of EU regulations, which Poland may have an impact on, although not a decisive one. This means that it will be able to seek its own path only to a certain extent, largely responding to megatrends dictated by stronger players.

Therefore, we must continue our efforts to develop EU regulations allowing Poland to implement energy transformation projects, which are already considered undesirable in the most advanced countries on this path. It is about energy and gas infrastructure, which are to be used to stabilise the development of renewable energy sources in the Polish reality that still require a conventional reserve, with the proviso that dependence on coal should not be replaced with dependence on blue fuel, even if it comes from various sources. Gas, on the other hand, will be less emissive than coal. The use of EU funds to build a Polish nuclear power plant, which would have an obvious environmental effect in the form of a sudden drop in CO2 emissions from the Polish energy sector, remains to be considered. This argument should therefore end with the well-known conclusion that Poland will be able to use the funds for the energy transformation optimally when it officially defines its direction in the Energy Policy until 2040. So far, Poles do not formally know how they intend to spend EU energy transformation funds. They have pledged that they would go their own way, but have not set it yet. The new PEP 2040 project, presented in September 2020, assumes the share of coal at the level of 11-28% in 2040 (previously 56%) and thus arouses resistance from trade unions. Endless debates in the government are ongoing, time is running out, and things will not get better in the next budget. It’s time for Polish government to make up its mind!

Polish version is available here.

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The publication co-financed by the Ministry of Foreign Affairs of the Republic of Poland as part of the public project "Public Diplomacy 2020 – new dimension" („Dyplomacja Publiczna 2020 – nowy wymiar”). This publication reflects the views of the author and is not an official stance of the Ministry of Foreign Affairs of the Republic of Poland.