This coming Friday 19th March, 11.00 to 12.30 CET, we have an online panel discussion plus audience Q&A on “The Role of the EU ETS in Decarbonisation to 2030”. All are invited. We will dig into how the EU ETS is being shaped to ensure it meets its primary objective, the decarbonisation of Europe. To help set it up, Wanda Buk, Vice-President for Regulatory Affairs at PGE Group answers questions that are being asked of Poland’s position and its energy sector. One main concern is the different pressures – like adding the transport and buildings sectors to the ETS – that are likely to raise the carbon price. If it’s too high it will reduce money available for investment in clean energy, explains Buk. Other funding mechanisms can help, but they are already stretched. PGE calculates Poland’s potential investment gap in the 55% emissions reduction scenario exceeds €90bn. Meanwhile, the role of private investors will be limited if they are wary of committing to integrated firms – even those with ambitious renewables targets like PGE – that include hard coal and lignite amongst their assets. Buk goes into the details of all these matters, and warns that any shortfall in funding will be passed to the Polish consumers and industry.
### To register for the event free, click here. The panellists are Adam Guibourge-Czetwertyński, Undersecretary of State, Polish Ministry of Climate and Environment; Beatriz Yordi, Director for European and International Carbon Markets, DG CLIMA; Wanda Buk, Vice-President for Regulatory Affairs at PGE Group (event sponsor); Philipp Ruf, Director for Energy Analytics, ICIS and Dirk Forrister, President and CEO, International Emissions Trading Association. It’s moderated by Energy Post’s Matthew James.
Adding Transport and Buildings to the EU ETS will raise carbon prices
[Q 1] The difference between ETS and non-ETS areas is about the ability to adapt. Latest figures show that non-ETS areas, like transport and heating, are lagging behind and are considered “hard to decarbonise”. However, the recently agreed 2030 emissions reduction target of at least 55% in greenhouse gas emissions by 2030 cannot be delivered only by the energy sector and industry. How can we make all sectors contribute their fair share to implement the common 2030 target?
- The EU officially adopted the “at least 55%” target for 2030 in December 2020 meaning that, according to the Commission’s “2030 Climate Target Plan”, ETS sectors have to deliver a reduction of up to 65% and non-ETS sectors 39% respectively. What is worth noting is that overall targets may be also calibrated with RES or energy efficiency targets.
- This effectively means that most emissions reduction is delivered by the power sector due to the highest availability of relevant technologies. In contrast, non-ETS sectors are characterised by a lower range of zero-carbon technologies and their higher costs in the mid-term perspective.
- The Commission is right now exploring the possibility of including buildings and road transport in the EU ETS. So, if transport and buildings are included into the EU ETS, the price of CO2 will be driven upwards. Given that, is it fair to distribute the costs of the EU’s decarbonisation predominantly among the electricity consumers?
- In our view, because of the different dynamics of the emissions reduction, it seems quite impossible to simply extend the ETS scope leaving existing ETS entities with a problem of increasing pressure on carbon prices.
High carbon prices leave little money left for Renewables investment
[Q 2] Investing in solar and offshore wind projects to balance PGE’s fleet would lighten the load. Isn’t this the rationale behind EU ETS policies? Could PGE have a larger share of renewables in its portfolio than recently announced if we adopt higher emissions reduction target?
- PGE’s new strategy is our future-proof response in the light of EU commitment to achieve climate neutrality by 2050. By 2050 PGE will provide its customers with 100% green energy.
- However, when focusing on long-term targets, one must not forget intermediate steps and milestones to be reached. By 2030, PGE Group intends to build 2.5 GW of new capacities in offshore wind farms, 3 GW in photovoltaics and expand the portfolio of onshore wind farms by at least 1 GW. One of the key issues for PGE is the indispensable transition from coal to gas in district heating cogeneration plants, using natural gas as a transitional fuel for the next 20 years.
- Our total investment portfolio until 2030 requires around €16.7 billion of CAPEX alone.
- Yet, we still need to cover our operational costs, including still rising carbon costs, which may even reach €1.8bn this year. This translates directly into limiting new sustainable and green investments, since we need to secure carbon costs in the first place. Even in the light of these operational costs, we cannot simply shut down our conventional plants due to the lack of alternatives in the Polish power system.
- To sum up, increasing CO2 prices will not foster our green investments agenda. In a broad sense, it seems questionable if Poland is able to commission more green capacities if and when CO2 prices rise above 40 EUR/t.
Will the other funding mechanisms help?
[Q 3] The European Council Conclusions from December 2020 states that: “The problem of imbalances for beneficiaries of the Modernisation Fund in not receiving revenues that are equivalent to the costs paid by the ETS installations in those Member States will be addressed as part of the upcoming legislation”. What is the scale of this problem? Why it is so important for PGE to increase the Modernisation Fund while there are other public and private financing mechanisms available?
- Right now, every year Polish companies buy more EU ETS allowances than the amount of allowances which Poland receives as its share. This imbalance will grow throughout the entire fourth trading period. As a result, there are less and less resources in the Polish budget to finance programmes dedicated to the energy sector transition.
- According to our estimates, the potential investment gap in the 55% emissions reduction scenario for Poland exceeds €90 billion. That number already recognises all national and European funds, dedicated to decarbonisation by 2030. Therefore, additional EU ETS funds to close the investment gap are absolutely key to finance our new strategy and deliver the EU’s 55% target. Otherwise, additional cost will be passed to the Polish consumers and industry.
- Moreover, mechanisms such as the Just Transition Fund, Recovery and Resilience Facility or European Regional Development Fund and Cohesion Fund are primarily dedicated to other sectors of the Polish economy, also facing significant investment challenges.
- When it comes to financial markets – as long as Polish energy companies are integrated with hard coal and lignite assets they have limited possibilities to increase their debt. In line with the taxonomy regulation we will have to report the share of environmentally sustainable activities in our turnover, CAPEX and OPEX, which due to the decisions from the past 10 years are still highly carbon intensive. This makes investors from financial market more cautious, even if our new strategy clearly shows new carbon-free investments. One also has to underline the issue of transitional activities – the use of natural gas remains uncertain.
- This is why we are still appealing to increase the Modernisation Fund and to use other carbon revenues to finance large-scale RES and cogeneration plants with the highest decarbonisation potential. To increase the Modernisation Fund we can also use allowances placed in the Market Stability Reserve, which can guarantee that a bigger volume of the Modernisation Fund does not result in lower allocation for other Member States.
The effects of market speculation
[Q 4] Some stakeholders following the EU carbon market, including the Danish Climate Minister Dan Jorgensen, raised questions to the Commission asking to analyse the impact of investor speculation on the EU ETS. What is you view on that?
- The recent spike in the EU ETS price to more than €41 is an absolute record. Until not so long ago hardly any analyst was predicting that CO2 prices would reach these kinds of levels before the mid-2020s. At the moment, some market participants are eagerly waiting to see whether the Commission will take action over the problem of CO2 prices, which are rising so quickly.
- The average EUA price in 2020 was €25 and the pandemic is still far from being over. That is why the current change given the economic crisis is unprecedented. In this context, the questions about possible speculation on the market and their impact on the formation of prices on both the primary and secondary markets are understandable.
- Another aspect is hedging, which becomes a more important price driver as large utilities are hedging their future emissions, being a signal to some market participants about future volumes impacting the price. The Commission should explain as soon as possible where does the high volatility on the carbon market originate from and propose specific measures to address it.
- One of the possible solutions is to limit the possibility for keeping high volumes of allowances in the ETS registry by institutions, when they are not using those allowances to cover their factual needs. This requires the Commission to answer whether the way that the current system works reflects its main purpose – to drive the emission reductions cost-effectively – and to take necessary steps to restore the market stability in the EU ETS.
Wanda Buk is Vice-President for Regulatory Affairs at PGE Group