Czech and Polish energy strategies in the perspective of changing regional electricity market

Energiewende, the German shift towards a decarbonised economy, accompanied by a large-scale deployment of renewable energy sources (RES), is arguably one of the biggest drivers of contemporary electricity market in continental Europe. With more RES to come and with growing interconnection and integration of individual national markets, the question of compatibility of the national energy strategies and policies comes to the fore. In this article, we take a closer look at the energy strategies of two of Germany’s eastern neighbours – the Czech Republic and Poland, arguing that both are going to face increasing difficulties in pushing their desired policies forward, should these policies continue to diverge from the direction that the regional market is heading towards.

The Czech energy policy has been described in the 2015 update of State Energy Policy (SEP) strategic document, which outlines the government’s vision for the national energy sector between 2015 and 2040. (MPO, 2015c) The SEP update places strong emphasis on self-sufficiency in electricity production and future development of nuclear energy, which is envisaged to become the backbone of the Czech electricity generation portfolio following a wave of coal plant shut-downs planned for the 2020-2026 period. (ČEPS, 2016)

The structure of the Czech electricity generation portfolio in 2040 according to SEP

Source

Share

Nuclear

46 – 58%

RES

18 – 25%

Natural gas

5 – 15%

Black coal and lignite

11 – 21%

Source: (MPO, 2015c, p. 46)

Considering the current and expected developments on the regional market, the bet on nuclear power seem questionable. The main reasons for this are as follows: the new chronically inflexible nuclear units are to be connected into a system where flexibility is expected to be the most important feature of a generation unit; new units will most likely be needed long before the grid-connection of the new nuclear reactors; the costs of nuclear power are gradually increasing while the costs of competing technologies (namely RES) are decreasing – investing in nuclear could therefore mean supporting a non-competitive technology.

The limited flexibility of nuclear power raises doubts about its ability to fit into the electricity system of the upcoming decades. Paradoxical as it may seem, nuclear power sources suffer from similar problems as non-dispatchable RES when it comes to flexibility. On one hand, non-dispatchable RES do not provide electricity at the exact time needed. On the other hand, nuclear sources feed electricity in continuously, including at times when it is not needed. In this sense, it is important to acknowledge that with a growing share of RES, the established load structure, i.e. the division between base load, intermediate load and peak load, will erode.

There will be time periods where the RES will cover as much as 100% of the actual load as well as periods where they will account for just over 20% (see figure 2). Importantly, these periods will change fast (see figure 3), leaving very little margin for sources that are designed to run at 80-90% capacity factor as in the case of nuclear power generation.

In this sense, it will be difficult to operate new nuclear plants profitably on a market with high RES penetration. Such markets will most likely prefer sources that are able to provide electricity at exact times needed, albeit at higher prices, over sources capable of delivering low-variable cost electricity over long periods without interruption. Maintaining the 84.5% capacity factor as envisaged by the Supplementary Analytical Material of the SEP 2015 update (MPO, 2015a, p. 55) seems to, therefore, be an increasingly difficult task.

Another grave problem connected with the nuclear option is the lengthy approval and construction times which, combined with high investment costs and their chronic over-runs, places nuclear among risky investment ventures. (Vlcek, Jirusek & Henderson, 2015) The National Action Plan for the Development of the Nuclear Energy (NAP) expects the overall approval and construction process of the new units to take between 17.5 and 22.3 years (MPO, 2015b, p. 68), which means that the new units will be connected sometimes between 2035 and 2040 if the whole process starts in 2017.

However, according to ENTSO-E, which uses data from ČEPS, the generation adequacy on the Czech market will be questioned as soon as 2025 unless new capacity beyond that already known to ČEPS is build.

That capacity could by no means be nuclear. Other sources with shorter approval and construction times will be needed to come online in the mid-2020s: gas fired plants that need four to five years or RES that need just around one or two years. Importantly, the lifespan of both technologies goes well beyond those 10-15 years between the coal shutdowns in the first half of the 2020s and the grid connection of the envisaged nuclear units that shall take place between 2035 and 2040, provided their preparatory phase indeed starts in 2017.

To conclude, the Czech energy policy, as defined in the 2015 SEP update, is growing further away from the direction of both the global and regional energy sectors. Maintaining this policy will therefore be increasingly costly and difficult as nuclear does not seem to fit into the most probable shape of the future regional market and as any form of state aid for the envisaged units could trigger the infringement procedure by the European Commission.

The position of the Polish government in the energy sector of the country is traditionally strong, justified primarily by the security of supply concerns. Successive governments emphasise coal as the primary tool of the energy security of the country. Despite growing imports, coal is an indigenous source that limits the dependency on energy imports. Social considerations also play a role, with 0.7% of employment directly in the mining sector (Bukowski, Masnicki, Sniegocki, & Trzeciakowski, 2015, p. 10) and influential labour unions.

While acknowledging some positive impact of coal in the electricity mix for security of supply and reliability of electricity supply, we argue that an effort by the Polish government to preserve its existing role compromises the long-term stability of the energy system.

The first problem is the economics of the existing coal-based generation fleet in the changing regional environment. The anticipated exposure to the changing German electricity market will call for more flexibility of the generation portfolio. Moreover, this issue cannot be isolated to Germany´s Energiewende only. As indicated by the trade dispute between PSE and the Estonian electricity producer Eesti Energia, the rather rigid production of the existing Polish fleet struggles to cope with the volatile cross-border regional trade and inflow of cheaper electricity. (Krajewski, 2016), (Barteczko & Mardiste, 2016)

Secondly, preserving the dependence on coal requires the Polish government to invest more and more energy and resources to shield the domestic power sector from the de-carbonisation trends of European energy policy. In October 2014, the EU energy and climate targets for 2030 were agreed: a binding target of 40% reduction in emissions and a binding target of 27% of renewables in total energy consumption. To achieve these goals several EU ETS reforms were introduced. Firstly, phasing out (backloading) of 900 million allowances from the auctioning in the 2014-2016 period and their phasing back into the system in 2019-2020. And secondly, the introduction of a Market Stability Reserve, whereby a certain amount of excess allowances could be taken in and out to stabilie the price of carbon in the system. (Buchan & Keay, 2015, pp. 29-31)

If this EU effort to increase the cost of carbon succeeds, the profitability of coal fired power plants would be seriously undermined. The figure below describes the emission intensity of major EU utilities, stressing the exposure of Polish companies to any carbon pricing.

As we can see, in the preparation of a long-term energy strategy, the government faces multiple issues. Coal, as a preferred source of secure electricity supply, does not fit well into the changing regional environment. While European regulation tends to increase its costs, volatile RES-based production of neighbouring countries increases the value of more flexible sources. We conclude that achieving multiple governmental goals (dominant role for coal in the system, its economic sustainability, participation in the European internal electricity market and compliance to EU energy and climate policy) is simply not possible. At least some of these goals will need to be sacrificed in the near future.

References

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Jan Osička, Filip Černoch; Center for Energy Studies, Masaryk University