Poland is the European Union’s most coal-dependent economy. Coal represents over 80 percent of Poland’s national energy production and nearly 90 percent of its electricity generation. The outsized share of coal in Poland’s energy sector heightens pressure to develop renewable energy to meet the European Union’s 20-20-20 Directive. Under that mandate, Poland faces a national target of 15 percent RES (Renewable Energy Sources) of total energy consumption by 2020, nearly double the level obtaining now.
Poland is fortunate to possess strong renewable energy resources. According to the European Environmental Agency, Poland holds over 3600 TWh (terawatt hours) of commercially exploitable wind power, the 6th highest EU-27. Poland ranks behind only France, Germany and Spain in biogas potential produced through landfills, sewage, and agricultural residues. Poland’s ample farms and forests offer more unutilised biomass potential than any other EU country.
Despite vigorous efforts to exploit this national resource endowment, renewable energy remains a small share of Poland’s energy mix. Achievement of the country’s 2020 renewable energy target hinges on a range of commercial, regulatory, and technical factors.
Poland’s Energy Sector
Poland is no longer a net coal exporter, but still mines its abundant reserves of lignite coal in the central part of the country and bituminous coal in southern region of Silesia. Consequently, 57 percent of electricity in Poland is produced from bituminous coal and 32 percent from lignite1.
By contrast, natural gas accounts for 2 percent of electricity generation in Poland–a share that will surely increase if Poland’s anticipated shale gas boom materialises. Wind and other renewables represent less than 1 percent of electricity and 3.5 percent of total energy production. (See Table 1 below.)
Rising Demand for Renewable Energy
While renewable energy currently represents a small share of Polish energy, trends in energy demand bode favourably for the growth of Poland’s renewable energy industry.
Between 2000 and 2010, Polish energy demand grew annually by 1.5 percent. By the end of the decade, per capita energy consumption in Poland was only 48 percent that of Germany, indicating substantial scope for growth in coming years. Electricity demand in Poland is steadily rising, and renewables represent the fastest growing source of electrical power. In 2004, wind accounted for just 0.1 percent of Polish energy production. By 2011, wind power reached the 1 percent threshold. Table 2 illustrates the impressive growth of renewable energy in Poland, measured in absolute numbers.
Poland’s Electricity Grid
Continued development of renewable energy industry requires modernisation of Poland’s electricity grid, including (1) enabling the grid to accept renewable power sources, and (2) upgrading the grid in rural/agrarian areas where much of the country’s RES potential resides.
Most of Poland’s electrical grid was constructed over 30 years ago, and is poor condition especially in the eastern part of the country. According to the International Energy Agency, in 2009 Poland lost 8.3 percent of electricity stemming from deficiencies in transmission and distribution. Renovation of the national grid is a slow process owing to financial constraints, tedious permitting procedures, and lengthy negotiations with private land owners over easement of electricity transfers through their properties.
To stabilise the grid, Poland both buys and sells electrical power. In recent years, net electricity exports have ranged around 1 percent of domestic production. Polish energy exports may increase in the aftermath of Germany’s decision to phase out nuclear power. The EU is supporting improvements in grid connections with Poland’s neighbors, particularly Lithuania and Germany.
1 Annual report of 2010 of Polskie Sieci Elektroenergetyczne Operator S.A.; this value excludes 6% of energy which is produced mostly from varied nonrenewable sources by industrial companies for their own needs and is not transferred to the public grid.
Energy Market Liberalisation
Since 2004, Polish business entities have been able to choose their electricity provider. Households were granted this right in 2007. The number of Polish energy consumers that have opted to switch their provider is small but rapidly growing.
Liberalisation of electricity prices is fully implemented in the business sector. But Polish authorities have delayed price deregulation for households because of fears of politically unpopular price volatility.
To hasten development of the country’s renewable energy industry, the Polish government introduced tradable Renewable Energy Certificates (“Green Certificates”). In 2012, electricity suppliers are required to purchase certificates representing 10.4 percent of their total energy purchases.
The green certificate share is steadily growing, and projected to reach 12.9 percent in 2017. There is a penalty fee for failing to purchase the required amount of certificates that effectively serves as the upper ceiling for their price. To stabilise the certificate market, Polish authorities are establishing a price floor equivalent to 75 percent of the fee. The system is being expanded to include certificates with different colors symbolising other desirable ecological activities such as cogeneration at small plants.
Private Investments in Renewable Energy
While the Polish government is imposing rigorous regulations on energy providers, current legal/regulatory conditions are not favourable for private investors in renewable energy. For example, wind farm developers face an array of hurdles that is hindering exploitation of Poland’s wind resources:
Regulations governing constructions of wind farms allow them to be built only in areas with zoning plans, which the majority of Polish communities lack. Consequently, when offered an investment local authorities must undertaking the time consuming task of writing zoning plans.
To overcome a lack of local power transfer capacity, wind developers are required to pay in advance for grid connections proportional to their declared need. This requirement facilitates grid planning, but also raises the starting costs of wind farms. Since most of the national grid is in poor shape, investors are often required to renew a part of the grid to accommodate wind power. In some instances, the closest available connection point is far away from the wind farm, boosting connection costs and reducing project profitability.
Costly ornithological research is a prerequisite for obtaining a wind farm building permit in Poland, whose bird-related regulations are among the most restrictive in the European Union. There are known cases where the discovery of an endangered bird in the vicinity has forced cessation of wind projects already under construction.
The existence of secret low altitude military flight routes in Poland threatens the development of wind farms. Because these corridors are classified, investors may only learn about their existence after the project has started and significant costs are already incurred.
Poland’s current renewable energy policy is based on energy origin certificates and not on feed-in tariffs. Consequently, investors’ calculations of future profitability and payback period are uncertain.
Conclusion: Long-Term Energy Development in Poland
Poland has not prioritised renewable energy to the degree of most Western European countries. In March 2012, Poland was the only member state to veto the EU’s 2050 low-carbon roadmap. Zero carbon emission is not considered as the ultimate aspiration of Polish public opinion, while energy security from Russia is.
The long-term trajectory of Polish energy depends on the following:
- Continued convergence toward the EU’s 2020 RES targets
- Development of Poland’s share gas reserves, whose actual size and technical recoverability remain unclear
- Execution of current plans to build a nuclear power capability, which under highly optimistic assumptions would not become operational until 2025 or beyond
Piotr Liss, Tax Partner
RSM Poland KZWS