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Polish utilities plot move away from coal as climate pressure, carbon costs rise

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Polish utilities plot move away from coal as climate pressure, carbon costs rise

SNL Image

PGE's lignite power plant in Bełchatów, central Poland, is the largest in Europe.
Source: Associated Press

Poland's largest power generators are slowly waking up to what many of their European peers have long internalized as part of their strategies that coal may not be king for much longer.

State-run utilities like PGE Polska Grupa Energetyczna SA and TAURON Polska Energia SA have recently started to complement their coal-heavy portfolios with wind and solar power. The moves come as political and investor pressure around climate change is mounting and as rising carbon prices under the EU's emissions trading scheme are squeezing earnings from the large hard coal and lignite-fired power stations that still produce most of Poland's power.

In a bow to EU climate policies, Tauron said May 27 that it would replace most of its coal-burning plants with renewables over the next decade, lifting wind and solar capacity to 65% of its power generation by 2030. At the moment, the utility runs 4,291 MW of thermal power plant capacity, compared with only 334 MW from wind farms and hydropower plants.

Analysts are expecting a similar shift at state-owned PGE, by far the largest power producer in Poland, with an installed capacity of over 16,000 MW. The company will release its strategic update in August.

But on a May 29 call with analysts, Henryk Baranowski, president of the board and CEO of PGE, touted that the company had just signed what it says is Poland's first corporate power purchase agreement, selling the output of a planned 5-MW solar farm to the operator of a local sulfur mine. Baranowski also said that the utility wants to develop 2,500 MW of additional PV capacity over the next decade.

"This is of course a longer prospect, reaching 2030," he said. "However it is important that we have already taken the first steps toward that goal." The company has also been busy looking for partners to build some of the first offshore wind farms in the country, competing with Polish energy group Polenergia SA.

The shifting sentiment among the two state-run groups is striking in a country where sustaining the coal industry has long been one of the policy pillars of President Andrzej Duda's Law and Justice party, which critics say has scared off private investors in renewables with unstable subsidy schemes.

Outside pressure, changing economics

Duda's government has announced plans to shrink the share of coal in power production from about 75% now to 35% in the long term, but in the meantime new coal mines and power plants are still being built in the country. While the EU negotiated a wide-ranging package of energy legislation last year, countries including Poland pushed through changes that will enable them to make capacity payments to coal stations until into the 2030s. Analysts estimate that many of the plants would be forced to come offline long before then without the subsidies.

Its strong support for the fossil fuel has long made Poland a favorite target for environmental campaigners. A study of national climate and energy plans by EU members from environmental groups Climate Action Network Europe and Sandbag, published on May 29, ranked Poland last in its ambition to reduce coal capacity.

But lately investors, increasingly mindful of environmental, social and governance metrics, and looking to reduce their exposure to climate change risks, have also taken note.

French bank BNP Paribas SA said on May 23 that it would no longer finance electricity producers in Poland because of their dependence on the coal industry, specifically highlighting that the companies were not moving fast enough toward replacing their coal assets with renewables. In December 2018, a group of 95 investment firms managing or advising on more than $11 trillion of assets under management had called directly on European power companies to phase out coal by 2030.

Utilities with large coal fleets have also had to deal with surging prices for carbon certificates that heavy emitters like power plants need to buy under the EU Emissions Trading System. Since the start of 2018, prices under the cap-and-trade scheme have risen from below €10 to above €25 in anticipation of a managed reduction in supply.

Utilities hedge their exposure to carbon prices but PGE nonetheless cited the price increase as one of the factors that drove down its earnings and profit in the first quarter of the year, reducing EBITDA by 624 million Polish zlotys compared to the first quarter of 2018. Lignite and hard coal accounted for 86% of PGE's generation during the first three months of this year, with gas producing 9% and renewables 4%.

Tauron, in announcing its new strategy, also mentioned rising CO2 prices as one of the main drivers behind its switch from coal to renewables.

SNL Image

Limited choices

At PGE, vice president of the board and CFO Emil Wojtowicz said that he believed the company's transition, which also includes plans to build Poland's largest gas-fired power plant, was not yet fully reflected in its share price. Investors may be cautious because executives' talk of boosting renewables has not trickled through into the group's investment plans, where thermal power plants dominate.

PGE is building two large coal plants, one fueled by hard coal and another by less efficient and more polluting lignite. Almost two-thirds of its 1 billion zlotys of capital expenditures during the first quarter went into new thermal projects and the upgrading and maintenance of existing ones. By comparison, renewables made up only 1% of the total investment, about 11 million zlotys.

But, hinting at the strategy update to come, Wojtowicz said that picture would change over the coming years. "You will see that share of the pie increase in the future," he said.

Joanna Flisowska, coal policy coordinator at Climate Action Network Europe, said in an interview that such talk from the utilities will eventually have to be backed up with action to convince investors and campaigners that change is on the way. She noted that there are no timelines yet for actual coal closures either from companies or the government. She also added that the financial headwinds for coal may already be sufficient to force them into action.

"There are higher fuel prices, emission prices, and there will be rules for capacity mechanisms ... all of these elements make it more and more difficult to maintain so much coal capacity in Poland," she said.

"So I would say their remarks [on strategy] are trustworthy, in a way. They don't have many other choices if they want to stay in business."

As of May 30, $1 was equivalent to 3.85 Polish zlotys.