Poland’s blessing in disguise

Russia’s turning off the gas taps to Poland – along with Bulgaria and more recently Finland – has created an opportunity for one of Europe’s biggest producers of fossil fuels to switch to more renewables like wind and solar. Listen to a discussion on how Russia’s war in Ukraine has spurred Warsaw to speed up its green transition, even if it means a brief pick-up in coal-burn to keep the lights on.  

Host: Richard Sverrisson, Editor-in-Chief, Montel 
Guest: Joanna Mackowiak-Pandera, President of Energy Forum.

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:05

Hello listeners and welcome to the Montel Weekly podcast, bring You Energy Matters in an informal setting. This week's episode focuses on Poland, along with Bulgaria, the first countries to be cut off from Russian gas. How has the country reacted and how will it be able to source alternative supplies? Will Norway come to the rescue or will renewables fill the gap? Perhaps Poland. We'll need to rely on Cole for a while longer. Joining me, Richard Sverrisson is Joanna Mackowiak-Pandera, president of Poland's Energy Forum, a think tank. A warm welcome to you, Joanna.

Joanna Mackowiak-Pandera, President of Energy Forum: 0:40

Hello Richard. And hello everybody. It's nice to be with you.

Richard Sverrisson, Editor-in-Chief, Montel: 0:43

Welcome back. Absolutely, Joanna. And it's quite dramatic what has happened in Poland over what happened at the end of last month. So I'd like to focus, first of all on the energy crisis and what's currently happening. So was the cut in Russian gas? What? Did it come as a surprise to people in Poland?

Joanna Mackowiak-Pandera, President of Energy Forum: 1:01

It's indeed a very good question, and I think that everything that has happened recently has not been a surprise in Poland. So on the contrary, Poland has been afraid of it for a long time. So it was our longstanding imaginarium, we call it. Deep fear that Russia would use its energy advent advantage over Europe, over Poland. And this exactly happened. So this is something what we observed since July last year this energy war, which Russia is leading. And in the last month or years, Poland political efforts around north through were exactly an attempt to prevent this growing independence. But of course you can never be well enough prepared for war. And and the scale of brutality was a surprise to many. So also in Poland. So in fact, Poland is doing its diversification project in terms of gas since already 15 years. So at the end of the year, 2022, we should be already ready to cut off Russian gas. So finally it was something what Poland was for a long time prepared already, however, it's still a stress for Polish consumers and as everywhere in the world or maybe not in the world, but in Europe the issue of rising fuel prices is a challenge. This is, I think where we are. So it's not as dramatic as you say. I don't see a lot of anxiety among decision makers and and consumers. Anxiety exists in terms of what happens then next in the economic terms, but it's not that we afraid that from one day to another, there will be completely no gas. Also gas storage is full now. So it's 19% full. Which means, but of course it means that we could survive for a few months, only maybe two in summer, in winter, it's it's probably worse for one month. But nevertheless, the situation is not. As dramatic as you say but of course it's may. And as everywhere in Europe we see decision makers who focus too less, in my view, on demand reduction and on on preparations of the society for the coming winter, because winter certainly it'll be a challenge for Poland and for many member states.

Richard Sverrisson, Editor-in-Chief, Montel: 3:24

Was there an element, maybe John, of, Poland telling. Brussels or it's maybe it's Western neighbors like we told you so that we told you this could happen.

Joanna Mackowiak-Pandera, President of Energy Forum: 3:33

Of course, politically you can always see a kind of satisfaction that we told you. So it was already our story many years ago and nobody has listened. We also took part as forum in the discussion around Nor too, and indeed I think that we as let's say Europe underestimate this threat and this reliance or Russian fuel. Of course, it's not only that the decision makers are to be blamed it was also because it was for consumers. We had an access to relatively cheap resources. Renewables few years ago were much more expensive. So there was always this challenge, what to choose, and we choose just the cheapest option. And now we see, how difficult it may be once you have such market squeeze and and an aggressor on at the other end. Who uses this situation? Who uses this reliance? So this is a challenge and we did an analysis two months or three months ago about how much we paid for the Russian fuels and, it is about billions lot, which we paid in the last 20 years. So it's quite long period of time and in, in the discussion on how much the energy transition will cost. We also end up with the similar amount of. Investments, which are needed at the level of 1 billion slot. But of course those investments like energy efficiency, renewables, they are giving us more independence and more local energy and and diversification, distributed energy. So in fact, it's, the discussion which we are having now in Poland, what does it mean? Everything, what we are experiencing and what does mean for energy transition for also energy independence in the context that nobody in future can really use its monopolistic position.

Richard Sverrisson, Editor-in-Chief, Montel: 5:24

And has the sort of country united in in, in the aftermath of this cutting supplies from Russia, this stood together, would you say,

Joanna Mackowiak-Pandera, President of Energy Forum: 5:34

In Europe, you mean or

Richard Sverrisson, Editor-in-Chief, Montel: 5:35

in Poland and it's standing. Do you feel there's a sense of unity against this aggressive way of weaponizing gas supply?

Joanna Mackowiak-Pandera, President of Energy Forum: 5:43

I think it's really a good point, which you made that Poland is a generally very polarized country, so we have, government versus opposition. So we really are polarized. I don't know about other countries, maybe US is similarly polarized, so we are also polarized. But in the context of Russia, we see. Really huge sense of unity of of common goal. And I'm also pleased to see that this mood is not only in Poland, but even in the eu. So I'm really happy that Poland in this context in this, context of Russian War really stands on the right side and is actually leading to some extent in Europe on on how we can, tackle this crisis. But of course the situation in each membership is completely different. There are countries who can really not resign of gas from one day to another or call from one day to another because, this kind of diversification requires certainly preparation new contracts, new directions. But my feeling is that at this stage I also have been to Brussels this week when I had the conversations with different representative of different chambers of commerce and also representative of the commission. So we see that the dialogue on the European level staff but still, quite we have the same goal. This is my feeling that I never, I didn't hear any other voices that we should really stick to Russian supplies. It, it would be very unpopular at this stage to say that I have the feeling

Richard Sverrisson, Editor-in-Chief, Montel: 7:17

absolutely there's a sense of unity. And now I, I think I, I can sense as well that Poland has assumed quite a prominent role, especially after the gas was cut at the end of the last month. We're in the middle of an energy crisis. You have, very high prices both at wholesale and retail level. Many countries in Europe have introduced a price cap, both at wholesale and retail levels. What, how has the government and Poland reacted?

Joanna Mackowiak-Pandera, President of Energy Forum: 7:43

This is also a good question. First of all pro probably polish power and heating market is not the most li liberalized market in Europe. In fact, so we were in the discussion about deregulating tariffs in terms of gas and electricity. So now those discussions, of course, have been stopped. So everybody knows we should actually for electricity from the next year on. And for gas we should basically cancel the tariffs, but it won't certainly happen. So this is the number one that we are moving more, back in, in the direction of strict regulations for consumers stricter price regulations. And then government at the beginning of year of the year introduced also anti inflation shield which consists of several measures VAT reduction or, basically access tax cancellation. It should be operating until end of July. We don't know whether it'll continue or it'll stop at the end of July. I don't think it may stop at this stage because as you may know, Poland has very high inflation rate. Now it's around 12%, so it's extremely political topic. On top of this the GTP is also growing. So it's not that we now see huge demand for in industrial sectors or on the consumer side. GDP is growth is now at the level of eight 0.5%. We may say that our economy is really heated up. So once the summer is over and we may expect some difficult developments on the supply site regarding gas coal, and to oil. It may be really big shock for the economy. I expect in Aon.

Richard Sverrisson, Editor-in-Chief, Montel: 9:35

And how about Polish industry? How has it reacted in the current energy crisis? Have you seen any signs of demand, destruction or lower demand from industry?

Joanna Mackowiak-Pandera, President of Energy Forum: 9:45

No, this is something what we don't see, electricity pro production consumption is still growing. It's it's quite huge. Also compared, last year's were of course not typical because of COVID. So 2020 there was demand destruction. That for sure. Then it recovered in 2021. But what we see in 20 2022 that electricity consumption is still going up. So from one month to another, it's 4%, like in April. So it's still we do not see the signs that the economy is really, now suffering a lot. Of course what we can see also on the electricity production side is very high margins CDS clean dark spread. And I think that this is, also the panic we are in the panic mood where everybody really afraid and uses also the situation in order to make profit. But of course, electricity generation in Poland is also in very difficult position because on one hand, Poland has one of the lowest wholesale electricity prices in Europe still or in the region because of low share of gas. And the low electricity prices were related with a country specific contract for coal. We have a lot of basically we use in the power sector, generation in, in, in electricity generation. We use on call mainly. There is almost no Russian coal in electricity generation. And the producers, electricity producers they had long term contracts with mines. And now they are, were really disattached from global a coal price. And now this is changing. So mines are basically they try to cancel the contract. And there is, in the context of Hispanic pro electricity producers, they don't know at which price they will. By call in future. They thought that they have long-term contracts, but now it's not the case. So what we can see is is really high prices in the long-term contracts for electricity. It's above 250 euro per megawatt hour for the next year. And this is quite unique. So basically, short term market in Europe are quite expensive, but still long term it does look it does not look like this. What is, what has been shock for Polish consumers recently are these long-term contracts, which seems to be going up because of this entire coal crisis and this redefinition of contract with polish mines.

Richard Sverrisson, Editor-in-Chief, Montel: 12:12

But then the electricity generators, it would be fair to say I'm earning quite a good margin if the prices in the wholesale markets are that high as well.

Joanna Mackowiak-Pandera, President of Energy Forum: 12:20

They are making huge margins at the, at this moment. Even regulatory office last week said that they will make an investigation around this. According to the remit rules however regulatory office also complains that they do not have sufficient tools in order to really check it into details. And this is something what I think we need to pay attention in the entire Europe, that in such fast changing dynamic market, we really need to have tools for good market monitoring. And I'm afraid that, we are not well prepared for such in transparency, which we can see now in the market and not clear reasons on what is exactly happening and to which extents prices increases are justified, and to which extent it's just market play.

Richard Sverrisson, Editor-in-Chief, Montel: 13:11

It's. Do you think in certain countries in Europe, there's been increasing cause for windfall taxes on profits generated by, mainly oil and gas companies, but also electricity producers. Certainly the ones that are benefiting from the increased prices due to higher gas levels. But is that. The case in Poland Joanna?

Joanna Mackowiak-Pandera, President of Energy Forum: 13:30

Yes. Generators are also making a lot of money and of course there is as we mainly speak about state owned utilities. So decision makers are not very much complaining about this. Of course, in the past, utilities were in very difficult situation. In, in terms of their financial conditions. So there is still ongoing discussion in Poland about divestment of the coal assets because they but of course the, we see that the discussion slow down because currently. With electricity generation for the first time since years you can actually make profit. But of course we can see that the discussion goes in the taxation of those profits additional taxation and probably it'll also happen in Poland. We don't know when exactly, but I think it is something to be expected.

Richard Sverrisson, Editor-in-Chief, Montel: 14:20

Interesting. I, I just want to turn to, the cuts in Russian gas and the implications of that where, so what can replace this in Poland? You say by it can replace it by the end of the year. From where would that gas come?

Joanna Mackowiak-Pandera, President of Energy Forum: 14:37

So first of all, Poland has already LNG terminal and it has still some capacities to increase LNG imports. In that context already, some eight years ago, we had around 80% of gas from Russia, 90%. The rest was on production which is at the level of four or 5 billion cubic meters. But at that time we consumed 70 billion 17 billion or 16 billion. Cubic meters. It has changing now in Poland po In the recent years, Poland increased actually dramatically, very dynamically consumption of gas. So last year we con consumed 21 cubic meters. So it's four, 5 billion cubic meter more compared to few years ago. And of course, entire energy transition is really, complic is getting complicated because certainly many utilities thought that they will transition from coal to gas. That gas will be transition fuel. At this stage, you can see still many utilities and districting plants and generated generator. Does they insist that they will build some either CHP or or. Some generation units in electricity, but nevertheless we may see if the concrete investment decision may be taken in such disrupted market. But coming back to your question on where the gas can come from, Poland invested in the Baltic pipe from Nor which is Norwegian gas basically, and it should be in operation. It should be ready by October, November, we hear. Probably from January, Poland will be able the entire capacity of this pipe is exactly 10.5 billion cubic meters, which is exactly the volume of gas, which we are now obtaining from Russia. So theoretically we may replace Russian gas with Norwegian gas from January next year. But of course there is an issue of the contracts with Norway and whether there will be enough gas and to what will happen with prices. So there is already some volume with Norway, which is contracted. It is like two, four, billion cubic meters a year. I hear different numbers, so I'm not entirely sure. It's also not not public. But then the rest everything depends on the, in my view, on the coordination of the European Commission of this topic. One of the repower EU program is also common purchases of gas, and it is extremely important that. EU countries will not compete with each other. That, that there will be some mechanism to to coordinate who is buying how much gas because of course what is also interesting that since war started that the volume of the contracts with Russia is basically going up. So in fact we want to get rid of Russian fuels, but we are paying at this stage more and more for for goods traded from Russia, including oil and gas. This is also a challenge.

Richard Sverrisson, Editor-in-Chief, Montel: 17:45

Absolutely. So there, there's, I was gonna say, there's gonna be quite intense competition for. This Norwegian gas and in, in the end it'll probably come down to prices and to the contract signed. But yeah, maybe it, that can all be coordinated at a central European level, although there are probably several member states that, that oppose that as well. But what if you, you mentioned Repower eu. What does your, the. Policy or the proposals, the package that came out of Brussels in, in late May. What's your reaction to that? Joanna, is that a positive side? Can Poland access more funds here to really push to, to, to the energy transition?

Joanna Mackowiak-Pandera, President of Energy Forum: 18:22

First reaction is certainly positive because the commission has prepared this paper quite quickly. And this is first reaction. It's a plan. It's not actually it's hard to define what actually Repower EU is exactly, because it's not set of regulatory measures which would take them years in order to implement it. It's not also new funds, which would be a viable. So it's a kind of mobilization and direction for EU members stay in which we are in the context of this difficult situation in which we are what we should do. And in that context, I think it's really good. But of course what I can see and generally energy efficiency, renewables common purchases of gas more coordination on the EU level. It's all good. So certainly there is nobody who would say that the we have we don't have as Europe, by the way. Really no. Other, what we can do. Should we really be more reliant from on gas or oil supply from other countries? Are these countries much better than Russia? Maybe. Maybe they are. But in future we shouldn't be dependent too much on any other countries. So this is also part of this entire. The Carbonization Pro project that we should be be depen we should build renewable local sources. But generally Poland still what is important in the terms of funds that unfortunately that we still discuss with European Commission. Recovery funds. So we are one of the least countries who didn't get prepayment. And actually it's still not clear whether we will get the funds or not. In the back you have the issue of rule of law and and on one hand, government last week said that the agreement was reached and Poland will get recovery funds. And but on the other hand, it seems still not to be resolved. The European Commission said there needs to be specific milestones, legal milestones which needs to be made in terms of rule of law. And it seems that this is still part of a political discussion within the government. But of course also, the entire multi annual financial framework and the partnership agreement, which is part of setting EU budget. EU budget is not recovery fund. A recovery fund is something additional, but normally Poland should have from next year on also EU funds. For other purposes it's like just transition regional funds. Phoenix program. And I hope that this will also be accepted. I mean there will be agreement reached between European Commission and those funds will be a viable certainly in this situation in which we are. Further electrification, renewables development, grids development, also heating district heating is under huge pressure. And investments are needed because the only thing which we can do is in fact accelerate a transition from coal and gas. Coal is now, of course, there is, now it's maybe a different topic, but coal environment, you can say in Poland is now trying to say that we need to come back to call, but in fact, the call prices are so high at this stage. And also the decision of Polish government that will not buy a call from Russia anymore. The result of the decision is that district heating plans, but above all households. Will face really huge challenge with heating their homes in winter because majority the Poland imported around 15% of coal. Majority came from Russia. And actually 18% was was directed to households. Now this situation, which we have in Poland that the call prices for households increased by 300% and still there is no call for households you cannot buy. So the situation is that once you heated your home year ago at the cost of around 1000 euro you have to be prepared that this winter you would need 4,000 euro for heating your house. And of course, mainly poorer households are heated with coal. So we expect that there will be hot discussion around coal in winter, and also thermal renovation and heat pumps which are only the solution in this context.

Richard Sverrisson, Editor-in-Chief, Montel: 22:50

Just finally, Joanna I'd like to look at, I know we've seen a massive boom in solar installations and solar capacity in Poland. Now in the light of the energy crisis the reduction in Russian gas supply does this mean an acceleration of the energy transition in Poland despite some calls to return to coal?

Joanna Mackowiak-Pandera, President of Energy Forum: 23:13

I think there is still a dispute in the government what the strategy should be. So there are different fractions with the within government and the major challenges still that this distance regulation for onshore wind has not been relaxed or has not been revised despite many announcement that it'll happen already last year. Then at the beginning of this year and still some, there is some blocking minority in the party who does not want to allow this. So I think it's in, from my perspective dealing with energy policy since 15 years I don't see any other, really any other choice. Of course the challenge lies on the grid side because distribution grids need to be enhanced. And there are c certainly really issues with with new new decisions for connecting renewables into the grid. So this is something what but of course there are also solutions like Kabul pooling but also the industry is making huge pressure on the government because renewables and long-term contracts, PPAs would now lower their cost. But nevertheless, this is not happening, but. In fact, I can expect that the only way to go for Poland is really to invest and allow for renewables development because in the first step, it would lower also gas demand. Regarding coal. This is good question. What can happen in Poland? You still need to remember that all the generation units are really old. And underinvested because of many reasons. We don't have to time we don't have time to speak about this and this will not change. And also the the amount of Polish gold, for years pro co-production is fo falling down. And it would be difficult really to change that trend because of many economic reasons and also geological reasons. So there is no coal which is I mean there is still Poland Steel has coal reason us, but not. Which should be accessed at the, reasonable economic level. But I can expect that for three years there will be more enthusiasm toward coal and then probably will pay also much higher prices for coal. But then I don't expect it'll impact the final call and date in Poland. We just. In our view, 2035. And then of course is the answer. What could be really this solution, the carbon, what can fill that gap after coal? In this context? Nuclear is very vivid project but still in the next 10 years, it's not the solution for the crisis which we see. So in this context, having in mind that we built renewable projects within. Few years, basically both in solar energy and onshore wind. Only reviewing, permitting and solving grid problems. And then renewables deployment and further integration and market changes in order to make it more flexible is the solution which would be really realistic and, accessible help for Poland.

Richard Sverrisson, Editor-in-Chief, Montel: 26:24

Joanna, thank you very much for joining the Montel Weekly podcast.

Joanna Mackowiak-Pandera, President of Energy Forum: 26:27

Thank you. Thank you, Richard.

Richard Sverrisson, Editor-in-Chief, Montel: 26:28

A fantastic overview. Listeners, you can now follow the podcast on our own Twitter account, aply named the Montel Weekly podcast. Please direct message. Any suggestions, questions, or, let us know if you think you have a good idea for a guest on the show, you can also send us an email to podcast@montelnews.com. Lastly, remember to keep up to date with all that's happening in energy markets on Montel News. You can subscribe on Apple Podcasts and Spotify or wherever you get your podcasts from. Thank you and goodbye.