The financial stability of PGE, Poland’s largest utility, could be undermined if it sticks with its current fossil fuel-heavy generation profile, writes Gerard Wynn. In a new report for the Institute for Energy Economics and Financial Analysis (IEEFA), Wynn concludes that the company could be hit hard by increasing carbon prices and tougher air pollution rules if it does not shift away from coal.
Continuing to rely on coal could cost PGE, Poland’s largest utility, €3.0 billion more than switching to a majority-renewables portfolio, we show in a new analysis for the Institute for Energy Economics and Financial Analysis (IEEFA). Our report — “Decision Time at Poland’s PGE: Why a High-Risk, Fossil-Heavy Strategy Doesn’t Add Up”— describes how tougher European Union air-emissions standards taking effect in 2021 and rising carbon prices could endanger the company’s future.
PGE is the largest CO2 emitter in the EU and far more dependent on coal than other big utilities.
The company has made some green noise lately, for example, to “embrace wind power.” In its latest annual report, the company lists a host of ideas and new technologies that it says are on the table, including “energy warehouses, electromobility, car sharing, bike sharing, construction of charging stations, LNG, diffuse energy sources, development of coal gasification installations, photovoltaics, intelligent home solutions, natural gas and demand management,” as well as nuclear power and offshore wind.
PGE’s real strategy is to dominate Poland’s power and heating sectors by doubling down on coal
But the notion that the company is changing direction is belied by its actions. PGE’s real strategy is to dominate Poland’s power and heating sectors by doubling down on coal. At present, it is building three new coal power plant units, extending the life of its existing coal plants to make them compliant with new European air pollution regulations, and acquiring the coal generation assets of its rivals.
In 2017, the company spent PLN 4.3 billion acquiring the Polish assets of the French utility conglomerate EDF; PLN 2.8 billion in capital expenditures (capex) building new coal plants; PLN 0.6 billion in capex upgrading existing coal plants; and PLN 0.08 billion in capex on renewable energy (down 44% from 2016).
Last year, the company increased the capacity of its coal power plants by 65% and its coal-fired combined heat and power (CHP) plant capacity by 232% while increasing its renewable energy capacity by less than 3%. These metrics don’t indicate a company “embracing wind power.”
In our report we dug into the financial hazards of PGE’s coal-centric strategy and found that by increasing its coal dependency, PGE will also be increasing its exposure to carbon and air pollution risks largely out of its control, which may in turn make it difficult to compete in Poland’s new capacity market, a further risk to its financial stability.
Regarding air pollution risks, we estimated that making its existing coal power plants compliant with new EU emissions limits, which are known as Best Available Techniques Reference (BREF), would increase the utility’s coal generation costs by around 10% and lignite generation costs by 15%.
Regarding carbon prices, EU allowance (EUA) prices have more than trebled over the past year, to €16 at the end of May, and analysts forecast rising prices through 2030. Since coal accounts for more than 90% of PGE’s total generation (more than the 80% country average), higher carbon prices pose a particular financial risk for the company. PGE’s allocation of free EUAs has been falling over the past decade meaning it now has to pay for most carbon dioxide emitted. With higher costs, coal and lignite power plants will likely run less frequently and less profitably.
Even if the fossil heavy scenario were cheaper than all renewables, it would still make sense to insure the company against capacity market and carbon price risks
PGE is hoping to cover the capex costs of its BREF upgrades and coal new-build programmes with capacity payments under Poland’s new capacity market scheme. However, experience shows that in Britain, which served as an example for Poland’s capacity market, new technologies and interconnections have already disrupted capacity payment-based strategies driving record low capacity market prices and forcing older coal units to retire. PGE could face a similar problem.
There are other risks regarding the company’s strategy. These include low generation diversity which may impair its ability to refinance rising levels of net debt; expected growth in renewables both domestically and via imports which may have a deflationary impact on wholesale power prices and coal running times; EU-backed national investment in demand- side controls which poses down-side risk to PGE’s demand projections; and other risks, for example to secure expanded mining concessions, rising mine rehabilitation costs and political risk from environmental activism.
Hurry or wait
Is there an alternative for PGE? We developed two scenarios, Hurry versus Wait, in which Hurry involves an overnight shift to 100% renewables. The Wait approach maintains PGE’s existing energy mix, at 96% coal and gas.
The high-renewables scenario is €4 billion more expensive, on a present value basis, excluding carbon costs and capacity payments. For the high-fossil fuel Wait scenario, even a generous assumption of €5 billion of capacity payments fails to offset €12 billion carbon costs under a €15 carbon price. The overall net result is that the Wait scenario is €3 billion more costly.
The Hurry versus Wait analysis also suggests that failing to secure capacity payments could pose an existential risk to PGE, given the magnitude of the excess costs associated with that strategy. Even if the fossil heavy scenario were cheaper than all renewables, it would still make sense to insure the company against capacity market and carbon price risks, through a progressive shift to more zero emissions, near zero operating cost renewables generation.
This article is based on an article and a new report by the IEEFA website: As risks mount, Poland’s PGE struggles to break from its fossil fuel past