Black gold, green gold

Coal is Poland’s „black gold,“ this is a common belief in the country. From the Polish perspective, coal as a source of energy has two major advantages: it is cheap and it is located within country borders, which crucially connects to national security. After all, coal seemed to be gold in the past, but there is reasonable doubt about its status in the future. Can green energy become the new Polish „green gold”?

Given the low costs and the regional availability, it is not a surprise then that the Polish energy sector is predominantly based on coal: 88% of electricity is generated by coal and lignite power plants(1). Now, as coal prices dropped significantly and even the largest coal producer in Poland, Kompania Weglowa, loses 50 zloty on each tone of coal extracted(2), one might say that not all that glitters is gold. The Future outlook for this „black gold“ is also not so bright, given the decarbonisation policies implemented in the EU, and the term “global warming” slowly sinking into people’s minds across the world as a fact rather than merely an opinion.

Polish energy sector is at the crossroads. The power plants’ average age in the country ranges up to 40 years(3), which requires some serious decisions regarding new investments in the generation of electricity to be made.

The easiest approach seems to simply stay on the path from the past, as coal is readily available. However, this path will have to be abandoned sooner or later, because the world is moving away from fossil fuels. These processes have been and still are widely debated in Polish society. Several opinions — strikingly diverse – are proposed and it is not that clear to say what the conclusion of this debate will be. Various declarations have already been made and organised debates among Polish politicians have taken place. Also, energy companies’ investment plans tend to alter as they are sensitively connected to an unsteady regulatory environment.

Follow the money!

A more convenient way to quickly show where the energy sector is heading would be a simple ”follow the money”-analysis. Its objective would focus on the reaction of businesses looking at the direction of money invested so far. In simple words: to see which way the wind is blowing. The easiest possibility to do so would be just to take a „sample” from the energy sector. PGE, the largest Polish electricity producer, seems fitting best for such a case study.

During the first three quarters of 2014, at PGE, a coal based generation of electricity amounted up to 94% of the total energy production (both lignite and hard coal)(4), the generation from renewable energy sources (RES) added up to around 4%. Looking further into the future according to the PGE investment plan for 2014-2020, only 3% of outlays are to be spent on building new capacity of RES.

Clearly, a cost-benefit analysis rivets PGE on coal, but what leads policy makers in Poland to create an environment to foster such strategies as represented by PGE? Perhaps a simple cost-benefit analysis from a policy maker’s perspective will allow for some conclusions.

First of all, there is no significant political force supporting renewable energy present on the Polish political stage. The necessity for green energy support comes from non-domestic political developments. As such, since there seems to be no benefit for politicians to promote green energy on a national level (no demand from voters), it is considered rather a cost to adhere to EU-strategies, and as such, a rational calculation would render the implementation of green policies as a cost that could be avoided.

The PGE example shows that this „minimising the cost /maximising the benefit“ attitude is present in green energy production. Taking a closer look at RES produced electricity by PGE, one could see that approximately 60% of the „green” energy is generated from biomass, which basically means co-firing coal and biomass in the same power block. This solution has not much in common with the general strategy to decrease the usage of fossil fuels in the long term. It is rather a step to meet outside requirements at the lowest possible costs.
Of course, this could be explained as the most beneficial solution for a carbon dominated energy sector in Poland, hence it can be reasonable argued from a pure economic perspective. However, it is only a short term benefit, because it reduces efforts of the energy sector in the short term whereas the long term perspective is that carbon based technologies needs to be replaced!

„The economy of cheap”

Situation in energy sector reflects general approach to designing economic policy in Poland. One of the main objectives is to attract Foreign Direct Investment (FDI). The key selling point for potential foreign investor is cheap production factors (mostly low wages). This used to be a good strategy in the 90’s, but it cannot last forever. Eventually, an emerging economy should transform into a developed one. The threat on the way is the so called „middle income trap”. Unfortunately, there is no certain recipe for how to transform from an “imitative” to a “creative” economy; one thing is yet for sure: The aim is to increase the amount of innovations(5). As a matter of fact, due to an inherent risk and an uncertainty in outcome, innovations are not that cheap in the beginning.

However, the adjective “cheap” seemed to be quite commonly used in discussions on fostering economic growth. It seems that policy makers still believe that “cheap” is the only thing that can “sell” Poland as an investment destination. A new Poland based factory is a great selling story for any politician. So any decisions not in favour of backwards-faced thinking are seen as threatening, especially when there are no FDI from companies manufacturing devices for the renewable energy sector on the horizon so far.

This bias towards the “cheapest option” did work in the 90’, however, now it also creates some costs. One of the more widely reported examples is the problematic situation with the Chinese construction company Covec, chosen to build a highway in Poland in 2011(6). It is sometimes forgotten that “cheap” is not always a bargain.

A „Cheap is good“-belief is not only an outdated approach for economic policy in Poland. One more advantage of the cheapest option from a policy maker perspective is that it is easy to evaluate objectively and quantitatively. It may give a sense of control and security as it creates an objective point of reference. However, a few of the long term developments are possible to estimate quantitatively: This does not mean that if something cannot be asserted by numbers, it should not be taken into consideration. For a policy maker it is easier to focus on a short term, quantifiable profit than on a long term uncertain one. Becoming less reliant on fossil fuels is most certainly one of these long term — hard to quantify — profits.

Green opportunities for Poland

Given the biases regarding the design of economic policy mentioned above, the following issues should be more widely discussed to make a more conscious stand on RES policy in Poland:

  1. When it comes to support of green energy from voters and discussing costs for the taxpayer in Poland due to development of RES it should also be noted that a result, for example, would be cleaner air in large cities in Poland. That would lead to longer average life expectancy. Better health and long live is worth paying a little more.
  2. „Cheap is not a bargain” — short term savings do not warranty long term growth in case of climate change. Global warming induced by humans is an unprecedented event, therefore only quantitative, revenue based business approach is not sufficient to make the right decisions on the energy policy. Although business perspective of dominant companies in the energy sector is very valuable, it also has to be taken into account that it is limited to rather short term and certainly not foolproof. Average lifespan of large company is only around 50 years(7).
  3. Poland needs to develop new technologies in order to become an advanced economy. EU climate policy may become a support in creating new industry around RES, e.g., manufacturing of devices for RES. Proximity of Germany with its firm stand on developing green energy may be an impulse for creating an innovative cluster for this start-up industry. That could result in creation of jobs in Poland and gaining competitive advantage in the global market as one of the leading producer of some sort of equipment used in generation of energy from RES.

Last but not least, it is worth mentioning that Poland has shown courage before, even when there was not much certainty about the outcome of the decisions made. This is why Poland is quite often described as a leader of post-communist transition in CEE when deep structural reforms in the early 90’s fostered growth and initial difficulties later paid off. From a country and societal perspective, short term costs were outweighed by long term benefits and this conclusion can also be drawn when it comes to restructuring the Polish energy sector relying on the new “green gold”.

 

Fotocredit: Marcel Oosterwijk via flickr.

Footnotes:

(1) http://www.paiz.gov.pl/files/?id_plik=19610

(2) http://www.ft.com/cms/s/0/ca6a2f74-5483-11e4-b2ea-00144feab7de.html#axzz3K6De4alg

(3) Ibidem

(4) PGE results for Q3 2014 presentation

(5) http://www.investopedia.com/financial-edge/1011/how-can-emerging-markets-avoid-the-middle-income-trap.aspx

(6) http://www.ft.com/intl/cms/s/0/d17dda5a-96b7-11e0-baca-00144feab49a.html#axzz3KHI6zxGm

(7) http://www.bbc.co.uk/news/business-16611040

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