Transforming the power system to reach climate neutrality by 2050 will cost approximately €100bn per year according to Eurelectric. In recognition of the different starting points for Member States, the European Commission has introduced the new EU ETS Modernisation Fund (MF) which could be worth as much as €25bn* to the beneficiaries between 2021 and 2030. According to Monika Morawiecka, CEO of PGE Baltica, offshore wind already makes business sense but Poland’s plans to increase renewable capacity need to be supplemented by investments in the grid, interconnections and social measures too. At a recent Energy Post panel discussion, DG CLIMA confirmed that the MF approval process should allow enough flexibility to be compatible with the type of large-scale “flagship” projects envisaged by PGE. Good news as it means the ever-decreasing cost of renewable generation can now be capitalised upon by Poland and the other beneficiaries of the new fund.
Different starting points
In his opening remarks, Polish Deputy Minister for the Environment and COP24 President Michal Kurtyka reminded the audience that “over 50 countries signed a declaration for a just transformation” at COP24 in Katowice last year. In practice, he continued, this calls for a clear recognition of the “different starting points” for Member States and the need to create “EU tools to finance that transformation”.
Cost of modernisation
The systemic and economic challenges of decarbonisation were outlined at the discussion by Eurelectric’s Policy Director, Marion Labatut according to a 2018 study conducted by Eurelectric in consultation with their members.
Labatut began by saying that to achieve 80-95% decarbonisation of the EU economy, 60% of final energy consumption will need to come from electricity by 2045. Electrification of key sectors such as heating, transport and industrial feedstocks accounting for much of the increase. She continued that “80% of that electricity will need to come from RES”.
In turn, all the additional wind and solar will need to be backed up by a big investment in interconnections to “move it from one side of Europe to the other”.
To complete the picture, Labatut said the study revealed that a mixture of gas and nuclear would perform a “stabilising role” for the system with coal being phased out. And finally, to “clean up the last bits of emissions”, a mixture of relatively untested technologies, such as CCS and direct air capture, should be deployed.
According to Labatut, the bill for this EU-wide transformation could average out at €100bn per year depending on the level of decarbonisation achieved. This is lower than previous EU estimates. Labatut explained that this was not just due to “reduced cost of renewables and a better understanding and lower cost of energy storage” but also because “the prospect of decarbonising different sectors hand-in-hand brings flexibility and synergies that allow the system [as a whole] to be decarbonised at a lower cost”.
Labatut then turned to the specific challenges facing Poland, by far the largest of the economies and eligible for over 43% of the new fund. Whilst she did not touch upon the cost of societal impact, she stated that “capital expenditure required by Poland for power generation and storage alone would be between €128bn and €147bn over the next 25 years”.
*What’s it worth?
The total value of the Modernisation Fund is estimated at between €9bn and €25bn over the next decade and is in addition to the Innovation Fund. Carbon market expert Nicolas Girod, founder and Managing Director at Clear Blue Markets, says he expects 290m EU allowances (EUAs) to be auctioned between 2021 and 2030 at a price of between €29/EUA (where they are trading today) and their forecast €78/EUA by 2030. Girod said the volumes could be even higher if not all of the free allocations are issued to utilities by Member States in the first place.
And to whom?
The ten beneficiary states (share of fund%): Poland (43.41%), Czech Republic (15.59%), Romania (11.98%), Hungary (7.12%), Slovakia (6.16%), Bulgaria (5.84%), Croatia (3.14%), Estonia (2.78%), Lithuania (2.57%) and Latvia (1.44%). These countries are eligible based on their GDP/capita as at 2013.
Offshore wind: the right choice
As the largest electricity provider in Poland, state-owned PGE endeavours to ensure its business decisions suit the economy, climate and society too. Previously Head of Strategy for nine years at PGE and now CEO of PGE Baltica, Monika Morawiecka is convinced the right decision for building its renewable capacity is offshore wind. She explained to the audience that “from the point of view of the level of prosperity of Polish society, RES has been too expensive for many years [but] costs have fallen and investments in offshore wind now have economic justification”.
In her presentation, Deputy CEO of WindEurope, Malgosia Bartosik supported PGE Baltica’s strategy by highlighting the case for the technology on three fronts:
- Wind’s track record in delivering reliable baseload power
- Record low strike prices making it the lowest cost RES option for consumers
- Additional €15bn added to the Polish GDP through wind industry supply chain by 2030
Eurelectric’s estimate that a budget of up to €150bn is required by 2045 just for investment in the Polish power sector includes spending on storage and infrastructure but does not include the cost of the societal upheaval it will cause in a country where currently 80% of electricity comes from coal. If, as Morawiecka says, offshore wind now makes economic sense, then it follows that finance for PGE’s flagship Baltic offshore plans secured via the new Modernisation Fund could release critical investments to ensure the least possible impact on citizens livelihoods. This, alongside the significant boost to GDP mentioned by Bartosik (perhaps €15bn by 2030 according to McKinsey), should be enough to gain the level of public support that elected officials will want to be sure of, before pushing through the required policies.
Flexibility: the green light
With PGE keen to pursue their offshore strategy, they were looking for assurances from DG CLIMA during the discussion that the new fund will function compatibly with the financing requirements on protracted, multi-billion-euro projects. Baltica-1, PGE Baltica’s first project, will add circa 1GW of renewable capacity to Poland’s energy mix with the total capacity expected to reach over 2.5GW by 2030. It is estimated that eventually as much as 10GW of capacity will be developed by Poland in the Baltic by 2040.
In a key exchange, Morawiecka sought clarity from DG CLIMA’s Stefanie Hiesinger (Deputy Head of Unit, ETS policy development and auctioning) on points concerning disbursements: “The first offshore project of PGE Baltica is worth several billion euros. In 2022 or 2023 an investment decision will be made, which entails the need to close the financing of the project. Can PGE count on MF financing because any funds secured at the investment stage mean lower financing costs which translates directly into lower costs of energy produced for end users?” she asked.
In response, Hiesinger said that “according to the European Commission proposal, beneficiary Member States are to have full flexibility as to when the funds are spent”. What this means is that if any of the beneficiary Member States makes an investment decision, as long as it is part of a priority list and approved, financing is guaranteed for subsequent years without the need to re-apply.
More confidence for politicians and investors
With DG CLIMA confirming that the Commission will allow the requisite flexibility for Poland’s offshore plans, it seems that the new EU ETS Modernisation Fund is precisely the kind of tool Michal Kurtyka said is needed to deliver on the promises of COP24. It is important to remember it is not the only fund available, but it is unique in that it directs proceeds straight to where they are needed most. In doing so, it is a major new contributor to investment signals that are already positive for RES in the region. As Morawiecka said, “customers are more sympathetic to climate issues than ever”. In the beneficiary states, this additional funding should mean politicians can start to deliver on those ideals with more confidence, bringing a higher level of certainty for investors at the same time.
Download the presentations
Eurelectric – “Decarbonisation pathways” (Marion Labatut, Head of Policy)
WindEurope – “Wind Energy Outlook” (Malgosia Bartosik, Deputy CEO)
DG CLIMA – “The Modernisation Fund under the EU ETS” (Stefanie Hiesinger, Deputy Head of Unit, ETS policy development and auctioning)
This article is based on Energy Post’s panel discussion “The EU ETS Modernisation Fund: enabling the Transition for all Member States” June 28, 2019, BRUSSELS which was sponsored by the Polish Energy Group (PGE).