PGE Group is Poland’s largest energy company. Its transformation plan targets a 50% share from renewable generation and an 85% reduction in CO2 emissions by 2030. By 2050 it intends to have net zero CO2 emissions and provide 100% green energy to its customers. As with all nations around the world, and certainly in the EU, successful transitions depend on capital flows to the right sectors, signposted by policies and support. What does and does not get support is to be defined in the “EU Taxonomy”, a classification system establishing a list of environmentally sustainable economic activities. PGE warns that gas (because of its emissions) and nuclear (safety and environmental concerns) are in danger of being left out of that support. In this article, setting up our panel debate, Pawel Strączyński at PGE Group explains how nations dependent on coal need more gas (and/or nuclear) to replace it in the short to medium term. Renewables, grid upgrades, alternatives to gas (like hydrogen), though they are the ultimate goal, cannot be swapped in like gas can. PGE wants policy makers currently debating the Taxonomy to understand that leaving out gas and nuclear will make the transitions of coal-dependent nations much more expensive and harder to achieve.
***STOP PRESS: On Monday February 22nd we are hosting an online panel discussion on the EU Taxonomy. Speakers include Nancy Saich, Chief Climate Change Expert, European Investment Bank; Paweł Strączyński, Vice-President for Finance, PGE Group (event sponsor); Mieczysław Groszek, Member High Level Expert Group on Sustainable Finance, European Commission; Ian Simm, CEO and Founder, Impax Asset Management. You can REGISTER HERE***
 Is there a danger that Taxonomy definitions could have a counter-productive effect on related EU Policy emanating from the Green Deal? If so how?
- There is no doubt that sustainable finance and the EU Taxonomy as its cornerstone will play a very important role in the transition to a climate neutral economy in 2050. This becomes clear when we look at some numbers: the European Commission estimates that achieving the current 2030 target, a 55% reduction of GHG emissions compared to 1990, will require yearly investments only in the energy system (excluding transport) of at least EUR 400 billion throughout the European Union. More ambitious targets will mean a much larger investment challenge. It is evident that such costs can’t be borne by public funds only, already stretched to their limit due to the COVID-19 pandemic. And that is where sustainable finance and private funding is entering the game.
- However, the Taxonomy regulation should not generate obstacles for the energy transformation. One of the issues which will be introduced in the context of the EU wide Taxonomy is picking which technologies can be regarded as sustainable from an environmental perspective and which cannot. This is especially an issue in case of natural gas and nuclear energy as the European Commission is going to decide in delegated acts whether or not these technologies will be regarded as sustainable.
- A second issue is the issue of transitional activities understood by many as activities which should make the transition to a climate neutral economy easier. Gas-fired power and heat generation (CHP) units substituting highly polluting coal-based power generation could be regarded as such activities. However, if you look at the draft delegated act on climate change mitigation and climate change adaptation, it turns out that transitional activities are understood in a much different way – as activities which themselves are on a transition pathway to climate neutral economy. Transitional activities in the former meaning (in the draft delegated act and the Technical Expert Group report on Taxonomy) aren’t regarded as sustainable and this will be an obstacle for the energy transition.
- This is because there are no available large-scale alternatives to the natural gas-fired CHPs in efficient district heating systems. With the latest Council conclusions, gas CHPs remain an important technology with a significant role in reducing emissions, especially in regions transforming away from coal and dense urban areas. Switching from coal to natural gas saves over 70% of CO2 emission while providing the security of heat supplies and improving the air quality.
- Moreover, the already contracted new installations are technically ready to use renewable hydrogen, provided that there will be enough hydrogen to cover the demand.
- A third issue is the “spillover” of the EU Taxonomy to areas other than private funding. There are attempts to link the EU funds as well as state aid guidelines to the Taxonomy and its delegated act, which has not been adopted yet. Such moves will undermine investors’ decisions, when it comes to conduct investments in transitional technologies, which are necessary to replace high-carbon fuels with low-carbon generation.
 How can the Taxonomy affect the energy mix in Poland going forward?
- To comply with the EU’s ambitious climate targets Poland needs massive investments, including offshore and onshore wind, PVs, storage and highly efficient gas-fired plants that will be gradually replacing coal-fired generation. Not mentioning other pollutants, in the case of Poland, gas-fired plants are a natural way to replace coal-fired generation as it emits about three times less CO2 in comparison to coal.
- For gas investments – we are well aware of their transitional, but necessary role, especially in the power and heat generation segment. What will impact the financial viability of natural gas investments is their limited lifetime till 2040s when they will have to be replaced by carbon-free fuels. In such conditions, support is a must to provide a return on investment, even if taking into account future retrofit of gas-turbines allowing them to operate on fuels like hydrogen.
- We need to be ready for what future technological progress may bring. This is why gas-fired generation and related energy infrastructure (e.g. heating networks) will require higher financial support and they should still be deemed to be eligible to obtain public support, e.g. under the new state aid framework, and private funds from capital markets.
- In the meantime, low-emission highly efficient gas units are to play an important role in stabilising the electric system in times of growing intermittent RES sources and continuous decommissioning of coal units without any other alternative available in the short to medium term. Therefore, gas will help to transform the Polish energy mix in a climate-friendly direction without endangering the security of supply. At least until we can, for example, realistically use hydrogen for this purpose.
- Moreover, natural gas will allow us to gradually eliminate coal generation in the most developed heat distribution network in Europe that we have in Poland which will significantly improve air quality.
- So, to be clear, we have to transform our coal-based generation mix totally. However, with today’s level of technology it is not possible to build an electricity system or district heating systems for large cities based solely on renewable sources.
- This is why Poland also plans to develop nuclear that will replace coal in base-load generation and provide stability to the system to balance a very high share of renewables, as projected in Poland’s Energy Strategy by 2040 adopted recently.
- But if gas and nuclear energy will not be regarded as sustainable then most probably the cost of financing investments in such technologies will be much higher as potential investors will be reluctant to lend money for investments into gas and nuclear technologies. As a result the cost of the energy transformation will be much higher.
 How do we envisage PGE’s portfolio by 2040? What policy factors could affect this?
- The new strategy of the PGE Group published in October last year shows our vision to 2050. It presents the Group’s transformation plan and the path to decarbonisation of generation with the goal of achieving climate neutrality by 2050. It’s based on three pillars: environmentally friendly energy, modern energy services, and efficient and effective organisation.
- The PGE Group plans to build by 2030 2.5 GW of new capacity in offshore wind farms, 3 GW in photovoltaics and expand its onshore wind farm portfolio by at least 1 GW. These large-scale projects will be accompanied by a complementary energy storage programme of at least 0.8 GW, which will support safe and flexible operation of the power system. And here we are pretty sure we are complying with the Taxonomy.
- But we are to complete our generation mix by the construction of flexible gas-fired generation and by replacing coal with gas in our CHP plants. Here we have no guarantee that these projects will fulfil the rules of the Taxonomy, regardless of their undeniable decarbonisation role.
- Consequently, by 2030 the share of renewable energy in the Group’s portfolio will be increased to 50% and carbon dioxide emissions will be reduced by 85%. By 2050 we intend to achieve climate neutrality, i.e. zero net CO2 emissions and provide 100% green energy to our customers.
Paweł Strączyński is the Vice-President for Finance, PGE Group