10 steps to overcome the energy crisis
The prices of coal, gas, and CO2 are reaching record levels while the price for electricity is galloping, causing panic among politicians, energy consumers, and institutions responsible for maintaining Poland’s energy security.
There is a state of emergency in the Polish energy sector caused by, among other things, the situation on the energy source market, but not only. The country is also bearing the consequences of many years of postponing necessary modernisation decisions. It is time to take urgent actions that match the situation.
The aim of Forum Energii is to support the transformation of the Polish energy sector, and therefore we propose 10 steps to exit the crisis. This is a result of our long-term work and each of the proposed points is backed by in-depth research. This plan can be conducted over two years. In the following weeks, we will encourage other groups, including experts, politicians, and non-governmental organisations, to join the discussion. The future of energy deserves consensus.
Step 1: Strengthen energy strategy planning and implementation
There is no topic more important at the moment than sustaining Poland’s energy security and maintaining the competitiveness of its economy. Strong institutions are needed for this to finance and strengthen the key organisations ensuring national energy security, including the Ministry of Climate and Environment, the Energy Regulatory Office, and the transmission system operator PSE. It is necessary to define realistic and ambitious energy policy goals with a 2030 and 2050 perspective, and to define the tools to achieve them. This will give a strong signal to the market to implement investments desirable from the perspective of the transformation. The appointment of a deputy prime minister responsible for the energy transition would frame the subject with the correct level of importance. Also needed is a competent think-tank to support the decision-making process in terms of content, one that will prepare independent impact assessments and be responsible for cost calculations and proposals for implementation of the strategy. It also is important to establish an independent and respected energy and climate commission that will support the government with expert advice in making difficult decisions.
Step 2: Unbundling coal assets
Energy companies, to accelerate investment in new capacity, need to divest coal assets. Today, such assets are like a ball and chain, making it difficult to obtain financing, among other downsides. The project prepared by the government to establish the National Energy Security Agency (NABE) should be thoroughly revised. For now, it does not take into account the principles of competition on the market, the existing regulations on support of coal capacity, or limitations on state aid. It raises big doubts in other ministries and the energy sector. It also does not resolve what should happen with the sector’s huge debts amounting to tens of billions of zlotys. The introduction of the NABE at this point threatens the loss of control over market energy prices. The separation of coal assets should be based on a thorough analysis of the availability of coal resources, the real costs of coal mining and electricity production, energy security, and climate goals. Separation of assets from particular groups is necessary, but they cannot be lumped together. An urgent review of the NABE concept and bringing it in line with market realities is necessary.
Step 3: A strategy for gas
Leaving behind coal requires defining the role of gas, including green gases (hydrogen and biomethane) in the future energy mix. Enthusiasm for fossil fuel gas is currently high in Poland, and its development must be planned rationally, avoiding excessive dependence on this source, especially in the current market reality where we can see how quickly one strong player can destabilise the market. In the future, various sectors of the economy—industry, power production, heating, and transport—will compete for gas. The development of gas can only be promoted where it replaces more carbon-intensive coal and where there are currently no other alternatives. Already now we need to think about adapting generation and transmission infrastructure to green gas. Poland must plan the use of gas as part of a dedicated strategy.
Step 4: RES strategy and grid development
Building up renewables must be prioritised, overcoming grid and market barriers to their integration into the system. In the 2030 perspective, at least 50% of energy in the electricity sector can come from RES. It is necessary to set ambitious targets for the development of these sources and to mobilise the market to compete and deliver cost-effective and well-prepared projects. RES sources can be supplemental to fill in capacity gaps, reduce CO2 costs, and guarantee energy security. It is important to mobilise DSOs to adapt the grid to RES development. It also will be important to implement a localisation market.
Step 5: Plan for the construction of nuclear power plants in a realistic timeframe and budget
It cannot be denied that a nuclear power plant will be necessary in Poland to achieve climate neutrality by 2050. It is clear, however, that it will not happen in the next 15 years; meanwhile, the problems with the energy system are already occurring. It is necessary to competently and professionally design this project with realistic costs and time frame. Referring to the Polish Nuclear Program as the key to solving Poland’s problems by 2033 and the simultaneous lack of progress in its implementation threatens the energy security of the country.
Step 6: Capacity-building support until 2030
In the coming years, coal technologies will be leaving the Polish power system in waves. This is a major challenge to the security of energy supply, given the lack of viable options to fill the gap. However, planning for new gas capacity must be approached with caution, keeping in mind that it is a largely imported and emissions-intensive fuel, subject to global price fluctuations. The demand for gas may be reduced by modifying the power market accordingly (to a clean power market, as discussed below), promoting energy efficiency, and including the heating sector in power system balancing. There is an urgent need to review the effectiveness of existing support mechanisms for cogeneration, whether in the capacity market or in the energy price premium auction. So far, cogeneration capacity growth has been very low relative to the potential available in the country. The flexibility of district heating and its ability to participate in NPS balancing are not sufficiently rewarded.
Step 7: Capacity market modifications to a clean capacity market
The capacity market improves short-term security of electricity supply, but it is very expensive and so far has not led to the development of new capacity, which is currently most needed in Poland. It is too early to terminate the capacity market, as sudden changes would destabilise the energy market. However, as coal-fired capacity can no longer apply for support under the capacity market, its rules need to be revised and conditions created that encourage more active participation of all flexible and low-emission resources such as energy storage, DSR, and small co-generation units. At the same time, it is necessary to outline a vision for market reform with a 2025 perspective.
Step 8: Plan for coal phase-out
The lack of transparency in the approach to coal is blocking the transition and creating uncertainty, whether in the regions, industry, the energy sector, or others. The agreement agreed with mining unions setting 2049 as the end date for coal mining in Poland can hardly be called a social compact, as its perspective refers only to one professional group. The transformation requires communication and consensus between energy consumers, experts from the generation sector, the industry, the system operator, and environmental organisations. Given the increasingly limited supply of domestic coal, price fluctuations, and prices of CO2 emissions, moving away from coal by 2035 at the latest is not only feasible, but necessary. However, in order to make it possible, Poland must have a plan for filling the NPS with new generation capacities, grid development, and market reforms. In addition, everything must be done so that the energy transition does not repeat the scenario from the 1990s when many industrial plants went bankrupt almost overnight, leaving people without state support and putting regions into unemployment for many years. The transformation must be socially just.
Step 9: Flexible and efficient use of NPS resources
The Polish energy system, which was created in the 1960s, is not adapted to accommodate large amounts of RES in a short period of time without significant changes in the operating model, primarily in terms of remuneration of flexible resources, which are the best desired source. We propose to introduce a reform that will implement a multi-commodity market that will reward resources according to the functions they perform in the system, e.g., according to the criteria of flexibility, capacity, voltage regulation, and demand reduction. At the same time, the phasing out of the capacity market should be planned gradually.
Step 10: Reforming the financing system for decarbonisation projects
Poland may have at its disposal a large amount of EU funds in the new financial perspective. However, the lack of good decarbonisation projects ready to be implemented is worrying. There are many reasons for this situation. These include the lack of government policy to stimulate innovation and the ambitions of the industrial sector, but also the lack of think-tanks that would support the implementation side and communication with market participants about the expected changes. The financing system was created in Poland in the 1990s and it is directed at large, repeatable projects (e.g., construction of freeways, wastewater treatment plants). One can say that it is too analogue for the current 3D times—digitalization, decentralisation, and diversification. In the new financial perspective, the actions required will be more complex, must consider local energy specifics, reach for new technologies, and precisely define decarbonisation goals. Poland will need better communication, technical support, assistance for the less resourceful, more creativity, and new technologies in the solutions promoted. The financing structure will have to be adjusted to this reality.
The current energy crisis should be a warning sign and a turning point for Poland. Drift and lack of decisions as to the shape and direction of further energy transformation is dangerous from the perspective of the country’s energy stability. This is the last moment to develop a rational strategy for the energy sector together with decision-makers, experts, market operators, and enterprises. We encourage discussion and criticism. The topic is crucial for the future of the country.
Author: Joanna Maćkowiak-Pandera, PhD
Cooperation: Forum Energii team
Date of publication: 8 December 2021