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INTERVIEW: EU policies prompt Poland's PGE to pursue green transition

Highlights

Existing coal units to shut before 2040

New Opole, Turow units to close by 2045

Seeks to spin off coal assets, focus on RES

Warsaw — Poland's largest power utility Polska Grupa Energetyczna (PGE) is targeting phasing out its coal-fired power station fleet by 2040-2045, company officials told S&P Global Platts on June 2.

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"We're talking about withdrawing the entire hard coal and lignite fleet in 20-25 years," said Maciej Burny, director of the company's Brussels office.

"In Poland, we're thinking of a similar direction to the one that Germany is taking. If you look at the timeframe for both countries it is quite comparable. The Germans are doing it in 2038 with a smaller coal base in the energy mix," he said.

A faster phase-out driven by stricter EU emissions targets would reduce PGE's profitability and ability to finance renewable and gas-fired generation, he said.

Deputy chief executive for corporate affairs Pawel Cioch said PGE planned to publish a 10-year strategy in three months' time that will rest on three pillars -- offshore and onshore wind and PV solar. "Our green transition is a fact, this is not just talking," he said.

The strategy would provide a clear timeline for decommissioning coal assets. "Our coal phase-out plan will lay out the lifetimes of the existing assets. Many of them will be decommissioned much sooner than 2045 due to lower efficiency and technical degradation," Burny said.

The last coal assets to be decommissioned will be two 900 MW units commissioned last year at Opole and a 490 MW lignite unit at Turow that is scheduled to be commissioned later this year.

Burny said those units' viability over the next 25 years would depend on how carbon prices evolved, but guaranteed 15-year capacity market payments should help them remain profitable for longer.

"Economically speaking, we are talking about a faster withdrawal but as a state-owned company we also need to ensure security of supply. There is the social aspect that needs to be taken into account," Burny said.

Now or never

PGE's generation is dominated by lignite and hard coal. In the first quarter of this year, the fuels accounted for 84% of the company's generation despite a 10 percentage point year-on-year fall in lignite utilization.

In 2015-2018, the company spent 96% of its investment outlays, or Zloty 27.9 billion ($7.1 billion), in acquiring, renovating or building coal and lignite generation assets, as well as on gas cogeneration plants.

The company's change of direction was prompted by rising carbon prices and higher EU emissions targets. "Previously, there was perhaps a notion to prolong difficult decisions. There were signs that things may change in a few years. Now, we see that this is not the way forward. We either change now or never," Burny said.

PGE is supporting a plan to spin off the coal assets from all the country's state-controlled utilities to separate state-owned companies, one for mining and another for generation, with a government decision possible within the next month, Cioch said.

Burny said it would be a "fundamental game changer" because it will give the company access to cheaper financing from banks for its green investments.

"If we are able to separate the coal and lignite assets, we will be able to redirect more of our own resources towards low-carbon investments. We foresee that CO2 prices will be quite high over the next few years so we would have to spend a lot of money just to make these existing assets operational. Instead of paying for high CO2 for all our coal assets we can redirect money to invest in more wind, PV and some gas," he said.

If PGE did not separate its coal assets, the incoming EU taxonomy regulation that requires utilities to disclose how much of their generation is fossil-fuel based would make it harder for the company to invest in RES, he said.

RES ambitions

The company wants to have 2.5 GW each of offshore wind and PV solar by 2030, although Cioch said the new strategy would include more ambitious goals.

PGE is in talks with Denmark's Orsted to develop 2.5 GW in the Baltica 2 and 3 offshore projects, starting in 2024. The company has signed agreements with state copper miner KGHM and chemical manufacturers Grupa Azoty and Siarkopol to build PV projects.

Currently, the company's installed renewable energy consists of 2,192 MW of pumped storage, 548 MW of onshore wind and 41 MW of hydro. Growth of onshore wind will depend on a change to the "10 H" distance law that severely restricts the construction of new onshore wind projects in most areas of the country, Burny said.

Key role for gas

Gas-fired capacity is essential to complement new RES, Cioch said.

"Simply speaking, a system based on wind and solar generation only does not exist and conventional back-up is needed, and gas is a very good and flexible technology," he said.

The company will this year start constructing 1.4 GW of gas-fired capacity to replace old coal at its Dolna Odra plant and is planning to convert much of its coal-fired cogeneration plants to gas.

In terms of nuclear, the government has yet to greenlight plans to build between 6-9 GW of nuclear capacity by 2045 with a joint venture partner who will provide the technology and up to 49% of the capital for an estimated Zloty 120 billion investment.

Cioch said PGE would continue preparations for that investment until environmental and location decisions had been obtained.

For PGE's current board, nuclear is too costly and too long-term. "The priority is to quickly transform towards renewables. Then we are looking at our financing ability and there's no way to pick up nuclear on our own given the commitment to new RES investments," Burny said.