Cristina Dascalu (CD): From your professional experience, to what extent is energy policy shaping our future energy system in the perspective till 2020, and then 2030?
Henryk Baranowski (HB): It is clear that the climate and energy regulatory framework is shaped by various interests within the EU Council. Therefore, the EU’s climate and energy policy is not the only tool to shape our energy market(s). I see it, also, as a tool in the hands of the EU’s leading economies, to push the EU’s energy system development in their preferred direction.
Until 2020, the EU-fuel mix will be shaped predominantly by the RES Directive, which imposes obligatory (at the national level) targets for the RES share in final energy consumption. In Poland, it has resulted in a rapid RES development. It means that RES electricity generation in Poland has increased in the last seven years by 175%. The impact of the EU’s legislation is also revealed by the fact that the RES share in electricity generation, grew four times between 2008 and 2014. Delivering the RES 2020 target in Poland is not at risk. However, we are not certain how the regulatory RES framework will be shaped in the post-2020 period. It depends on the implementation of the European Council’s conclusions regarding the binding legislation.
The EU ETS has not been a key driver in the power sector’s emissions reductions, but will most likely become one in the future, due to the foreseen scarcity of free EUA and their price growth. Therefore, in the long-term perspective, we can see that the EU ETS will generate significant economic pressure on conventional power generation in Poland.
CD: What are the priorities you will press for in Brussels, as a member of the Board of Directors of CEEP, concerning the production of power based on fossil fuels and RES?
HB: The EU’s energy and climate policy already covers nearly all regulatory dimensions. Moreover, it highly influences the business environment for the power sector across Europe. This is why we have to focus our efforts on the most important energy policy issues.
Currently, the EU ETS Directive’s revision is being processed, and the vast effort of the Polish power sector is devoted towards ensuring that compensatory mechanisms (capacity market) will be adequately shaped to cover our sector’s investment needs. We estimate that investment outlays within the scenario of 40% emissions reductions in Poland by 2030, will be at the level of EUR 60 bn. Having said that, I want to underline that current and future compensations together, would cover only 20% of investments – therefore, these compensations should be much higher, in order for the Polish economy to afford rapid modernisation of its power sector. I believe that a high cost, caused by the implementation of the EU’s energy and climate policy will occur, and in other Member States, dependent, to a large extent, on coal and lignite. This is why we need to be flexible when it comes to choosing the best method of free allocation of EUA and/or receive 100% derogation for newly build power plants/blocks with 45% efficiency for coal and 43% for lignite till 2030, and enhance the beneficiary Member States’ control over the Modernisation Fund.
We will also advocate an increased emphasis on the security of supply in the Energy Union’s governance. Security of supply should be based predominantly on indigenous fuels, and we will try to convince our European partners to reflect this in the EU’s regulatory framework. Consequently, we argue that the RES 27% target for 2030, should remain non-binding at the national level. There are also interconnectivity issues that need to be addressed. In my opinion, before developing the new infrastructure, we should focus on eliminating the loop-flows occurring, due to uncontrolled RES generation.
To sum up, the EU’s climate and energy policy is a big challenge, particularly for utilities dependent on fossil fuels. However, I see it also as an opportunity. We should take the leading role in those fields, which could present new business opportunities, such as the electrification of heating and cooling, or the recently launched e-mobility strategy.
CD: What is your most recent hands-on project that has its origins in the EU’s regulatory policy?
HB: Almost all key projects conducted by PGE are significantly driven by the EU’s regulatory policy. We are reducing our environmental impact, of course, not only to follow EU legislation, but also to display our corporate and social responsibility. In this respect, we are preparing our units to comply with future, even more challenging requirements, arising from BAT-LCP conclusions.
Our will to diversify PGE’s energy mix is clearly revealed in the new strategy, which introduces a possible off-shore wind technology development, up to the level of 1,000 MW. Recently, PGE also became a leader in on-shore wind farm installed capacity in Poland, with over 500 MW. Taking into account that rapid decarbonisation is not possible within one decade, we are constantly developing technologies, which are crucial to clean coal use. In the next few years, we are going to launch significant, clean energy investments in: micro-cogeneration, coal drying – clean carbon fuels, coal gasification, carbon capture, and utilisation. Moreover, we will invest in energy storage associated with unstable RES sources (PV and wind). The new business scenario will also be developed in Poland, in respect of electric vehicles and hydrogen mobility. We are still open to new investment possibilities, which could contribute to the EU’s climate and energy targets, as well as enhance our competitiveness.
CD: Poland will most probably move from a strategic reserve to a capacity market, when it comes to capacity mechanisms to help keep the lights on. From your perspective, how should this capacity market mechanism be best designed, considering the specificities of the Polish national energy mix, and what are the chances that the EU will accept your concept, not only for Poland, but for all interested countries?
HB: Our idea of a capacity market is included in the Polish Electricity Association’s report: ‘Power Market or How to Avoid a Blackout’, that will be published soon. In this publication, we provide a detailed answer to a question that is fundamental to the industry: how do individual models of the electricity market influence the system’s potential for development, with regards to ensuring energy security? It is our opinion that no discussion about the Polish economy is possible, without touching upon the basic matters of security and the continuity of energy supply. The conclusions of our analysis indicate that urgent action must be taken, in order to increase the efficiency of the Polish electricity market. Failure to take these actions will negatively affect the broadly defined social welfare, most of all, due to an increase in the cost of supplying electricity to end recipients.
From the regulatory perspective, we need to address certain issues: namely, the auction mechanism should primarily recognise the current LCOE for selected technologies, and the strategic replacement of the already existing capacities, as well. We are looking forward to the legislative proposals in this regard. We estimate that the first auction will be launched by 2018, and payments will be transferred in 2021.
I think that the crucial problem is the opening of the auctioning system to trans-boundary capacities. In Poland’s case, it is restricted by limited physical flows of electricity across borders, due to the unresolved loop flows problem.