The coming 2-3 decades will be about abandoning fossil fuels in energy generation in favour of zero-emission sources, such as photovoltaics, windfarms, and – last but not least – the atom. The estimated costs total in the hundreds of billions of zlotys.
In all likelihood, the need to protect the climate and reduce human impact on the natural environment is indubitable. Yet rather natural debatesregarding the tempo of pro-ecological action have been sparked. How does one go about handling the cost, its social aspect in particular, in order to avoid it exceeding the benefits and the fear factor blocking the entire process?
European Union member states have been facing progressively ambitious goals laid out by the Union’s successive versions of its climate policy. The scale of the challenge is particularly enormous for Poland, the country’s energy sector historically coal-based. The hard coal share in the energy mix is high, the resource having always been available and relatively cheap to secure. In contrast to Scandinavian countries, we lack the natural conditions required to develop hydropower, the “Big Brother” having habitually frowned upon nuclear energy unit construction in socialist times. Today, that road lies wide open. While having chosen solar and wind power as well, we are still at the toddler stage in terms of the zero-emission energy path. Following it will require enormous investment outlays.
The Law of Large Numbers
The “Polish Road to Energy Transformation” report co-authored by the Polish Electricity Association and EY accounting & consulting firm suggests that Poland has met the European Union 2020 goals, having reduced overall greenhouse gas emissions by 20 per cent in comparison with the year 1990. The Renewable Energy Sources (RES) share in final energy consumption has grown to approximately 16.1 per cent, surpassing the EU’s 15 per cent target.
Pursuant to government assumptions, Poland is to abandon coal mining altogether by 2049. A major financial challenge, it will also require profound and costly socio-economic changes in leading mining regions.
According to BloombergNEF estimates, Polish energy mix transition-related investments may well reach EUR 100–120 billion by 2030. Similar calculations have been quoted by EY analysts who believe that energy sector transformation spending, protective measures included, may reach EUR 135 billion (or approximately PLN 600 billion) by the same year.
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Long-term, the scale of investment and challenges for the Polish energy sector aspiring to zero-emission status will be even greater – the EY report claims it may well total EUR 200 billion (over PLN 900 billion) by the year 2050. In the original version of “Poland’s Energy Policy until 2040” (PEP 2040), the cost of the energy sector transition for the years 2021–2040 was estimated at around PLN 1.6 billion. Yet the PEP 2040 is currently undergoing a comprehensive update.
Poland’s energy policy assumes, among other things, that by 2030, the RES share in final energy consumption (gross) will have reached a minimum of 23 per cent: at least 32 per cent in electricity generation (wind farms and photovoltaics the main players), 28 per cent in district heating, and 14 per cent in the transport industry (electromobility a major contributing factor). In offshore wind power, installed capacity is expected to reach around 5.9 GW and up to around 11 GW by 2030 and 2040, respectively; in photovoltaics, around 5–7 GW and 10–16 GW along the same timeline.
Nuclear power will be particularly significant to the transition process. The Polskie Elektrownie Jądrowe (Polish Nuclear Power Plants) company entered into an agreement with US firms: Westinghouse and Bechtel on 27 September for the design of Poland’s first nuclear power station to be developed at the Lubiatowo-Kopalino location. “Poland is opening a new chapter in nuclear power history today. Just as the 20th century was the age of coal and oil, the 21st century is the age of the atom”, Poland’s prime minister Mateusz Morawiecki remarked on the occasion. “We cannot risk the stability of the energy system or that of our entire economy by basing them on unstable energy sources. Nuclear energy is the only clean, stable, and safety-tested energy source”, Morawiecki said.
The power plant’s first unit (approximate capacity: 1–1.6 GW) is expected to come online in 2033, successive units to become operational at 2–3-year intervals, the entire nuclear programme including the development of six units with a total capacity of 6–9 GW.
Where Will the Money Come From?
According to estimates laid out in the aforementioned Polish Electricity Association and EY’s report, the investment potential of the four largest energy groups (Polish Energy Group (PGE), Enea, Tauron and Energa) – accounting for their secure yet already considerable level of debt – comes to just under EUR 29 billion for the years 2021–2030. These valuations are based on economic standing updates for all four organisations, analyses of their investment plans, and additional related cash flows. This means that even should all other market players (not least Orlen with its huge potential) make substantial contributions to energy sector modernisation, a major investment gap will have to be filled.
European funding could bring something of a relief. As pointed out by the Polish Economic Institute, under the European Union Multiannual Financial Framework 2021–2027, climate goal-related funds were allocated with the European Regional Development Fund (ERDF), Cohesion Fund, and Just Transition Fund (JST). Poland would receive a total of EUR 26.6 billion for energy transformation purposes from said sources over the years 2021–2027, making us the largest beneficiary in the member state community as a recipient of nearly 25 per cent of all EU money earmarked for the purpose.
The scale of challenges is sufficiently enormous for the domestic banking sector to potentially face financing issues: stigmatised with the legal risk issue associated with Swiss franc-denominated loans and resulting in the need to establish provisions to the tune of billions, developments over recent years have restricted the banks’ capacity for equity rebalancing, and thus their ability to sufficiently cover the economy’s financial needs.
“The Polish banking sector’s relative power is insufficient. The banks’ equity is too low, their assets short. This is partly due to Polish companies’ success in recent years. The economy was developing at speed, banking sector capitalisation and asset-building processes incapable of keeping up”, said Jerzy Kwieciński, deputy CEO of the PeKaO S.A. Bank during the 32nd Economic Forum in Karpacz.
He emphasised that Poland is facing the immense challenge of ESG funding, energy transition a particularly notable component therein. Jerzy Kwieciński added that of all European Union member states, Poland – with her coal-based economy – will be facing the greatest challenge. He claimed that the banking sector would come up two to three times short if attempting to cover all process-related requirements.
CEO of the same Bank Leszek Skiba is of a similar mind. “Given current capital surplus volumes, the Polish banking sector will in all probability find itself unable to fund such challenges as the Polish economy’s energy transformation – and Polish firms joining Ukraine recovery efforts – simultaneously and in full amounts required”, Skiba declared during the 25th Banking Forum & 21st Insurance Forum. “Let us consider the eight largest banks in Poland. Their capital surplus over strategic equity amounts to around PLN 20 billion, which translates into the potential to generate PLN 150 billion in credit lines. Yet everything today seems to suggest that the scale of funding demand will skyrocket over the coming years”, he added.
Narodowy Bank Polski to Lend a Helping Hand
Narodowy Bank Polski has declared its backing for the key component of the process: nuclear energy. “Reducing the hard coal share and carbon dioxide emissions in the Polish economy – while preserving energy security – will require a large and stable energy source, nuclear power plants being the only choice. While nuclear energy investment will certainly be a major financial challenge for Poland, I am certain we will rise to the challenge”, the Governor of NBP Adam Glapiński wrote in the opinion piece periodical “Wszystko co Najważniejsze” in 2021. The head of the central bank declared that NBP would obviously back the process as well, using in-house instruments and taking action within its remit.
Assistance will also be provided by governmental agencies. MS Galleon GmbH owned by Michał Sołowow, for example, will receive EUR 500 million (over PLN billion 2.2) in Bank Gospodarstwa Krajowego funding, the money to be spent on developing Small Modular Reactors (SMR) and new production lines of the Barlinek Group companies. Amounts due to BGK will be repayable over 10 years.
BGK will be supporting MS Galleon projects spanning investments in zero-emission energy sources, Orlen Synthos Green Energy (OSGE) operations in particular. OSGE is a joint venture between Michał Sołowow and the Orlen Group, designed to back the process of decarbonising the Polish energy sector by building BWRX-300 Small Modular Reactors.
A Structural Opening
Targeting the isolation of coal assets from energy sector corporations and incorporating them into the National Energy Security Agency (albeit the respective act of law is to be passed during the upcoming parliamentary term) is intended to secure greater foreign investor involvement. The move is significant in that the vast majority of European banks have bowed out of funding coal-based investments – and of providing corporations with any coal assets in their portfolios with funding. Relieving Polish energy corporations of their coal baggage will make it easier for them to secure energy transition funds.
According to Fitch rating agency analysts, National Energy Security Agency project progress is a positive contributing factor to the energy companies’ creditworthiness profile. Coal asset divestment will reduce their business risk, improve their capacity for indebtedness, and solidify their ESG profile.
Having already entered the road leading to a low-emission economy, Poland will continue walking it consistently – at her own speed – over the coming decades. The capacity to fund the process, which should be seen as an investment rather than cost, will rise in direct proportion with economic growth, corporate wealth advancement, and private Polish wealth progression.