Poland’s capacity crunch

Poland may be one of the last bastions of coal in Europe but exponential growth in solar capacity has propelled it to a top five ranking on the continent.

Listen to a discussion on the outlook for renewables, and how the country plans to cope with a shortfall in capacity from 2025.

Guest: 

• Pawel Czyzak, Head of Energy and Climate, Instrat.

Transcript

0:01

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Richard Sverrisson, Editor-in-Chief, Montel: 0:28

Hello listeners. And welcome to the Montel Weekly podcast, bringing you energy matters in an informal setting. Today's pod focuses on one of Europe's largest energy markets, and while a last bastion for coal, it has also witnessed a rapid growth in solar power. There are ambitious plans for offshore wind and also for nuclear. But will Poland managed to wean itself off coal given the ambitious net zero targets at a EU level? And how will it finance its green energy transition? Helping me, Richard Sverrisson to answer these questions is Pavel Czyzak head of Energy and Climate at Instrat Warsaw based think tank. So a warm welcome to you, Pavel. I hope I haven't totally mispronounced your name.

Pawel Czyzak, Head of Energy and Climate, Instrat: 1:10

No, that's perfect. Thank you very much. Hello.

Richard Sverrisson, Editor-in-Chief, Montel: 1:13

I thought we could start Pavel by talking about the renewables in Poland. What's the current stages of solar? There's been quite a boom hasn't there? In, in, in recent months and years.

Pawel Czyzak, Head of Energy and Climate, Instrat: 1:23

Yes. It's perhaps good. We're starting from a positive note before, before going into the cold issues. Yes. Solar has been, it has been growing fast. Last year we were actually the fourth biggest market in Europe at around 2.5 gigawatts added in 2020. I think this year will probably be more or less the same, definitely around two gigawatts. And and the outlook for next for the next four or five years is is pretty steady. So the analysts are still forecasting around two gigawatt added per year. And placing Poland in the top five of European countries in terms of solar growth. So I think this is a pretty stable situation, fortunately, and perhaps in contrary to the other renewable technologies, but we are seeing some, starting to see some problems perhaps coming from the very rapid growth. One of these is the distribution networks. And because we've had a lot of growth especially in the pursuer market, so small small PV installations in households, and these have actually caused a bit of a problem for distribution network operators just because they feed in so much energy. From the houses to the network in areas where the network isn't very robust, let's say it's just old and not really adapted to two-way sort of currents flowing. So there have been talks to, to somewhat limit this growth at least in this area, in the market. And the support scheme is therefore changing to somehow accommodate that. So we will probably see a bit of a slower pace in the small PV sector, but we should see faster pace in the large PV solar farms. So perhaps now around 75% of the PV in Poland is small ERs. We will probably see the, this switching so solar, big solar farms will probably take over at least 50% of this market in the coming years just because the development pipeline is very strong. And also because of these these changes in the support schemes.

Richard Sverrisson, Editor-in-Chief, Montel: 3:44

That's very interesting. What's your view here, Pablo? Do you think more should be done on the DSO level to, to strengthen the grids rather than slowing down this massive prosumer surge?

Pawel Czyzak, Head of Energy and Climate, Instrat: 3:54

Yes. The, that's definitely that would be the preferred option, of course, because now I guess what the government is trying to do is to put a halt to the development of solar, and that's obviously not great for Poland. Because the country is already behind in terms of renewable targets and in general developing renewables. So solar is really the only market that is growing and stopping that is probably not going to make decision makers in Brussels happy. So I would say yes, definitely. The better option would be to push some money towards the DSOs and strengthen the networks. The problem is. This is public money, so it's the solar growth is mostly stimulated by private money and that's good but nobody will invest in. And distribution networks really, foreign investment, et cetera. So it's not easy to fund these investments in the networks,

Richard Sverrisson, Editor-in-Chief, Montel: 4:53

absolutely. But it'd be a shame if this boom or at the household PV level would somehow came to a stop. Yeah. And how about, the utility scale is who's building these kind of large scale solar plants? Is it the domestic utilities or? Is it also seeing some foreign investment?

Pawel Czyzak, Head of Energy and Climate, Instrat: 5:08

It is actually quite a lot of foreign investment, yes. So I would say it's a mix of both. The Polish utilities were a bit late to the party, I would say. So the first rounds of big solar auctions, I think they were mostly one from developers, from Germany, from even from further western Europe companies like, I don't know, Spanish, et cetera. Now we have actually just recently Light Source BP announced two gigawatts of investment in Polish solar farms. So that's quite a huge pipeline. So it's quite a lot of, quite a lot of foreign investment. And there's also big, for example, Columbus Energy is a big developer of they started as a developer of solar for households. And now they're also going into the big solar farm market pretty strongly. And they have a huge expertise and polish. They know the law very well and the whole situation so they're very effective here. So yeah, I would say it's a mix of polish and and foreign developers, but mostly private money. I think the utilities they're now starting to build bigger solar plants, but it's been a bit slow. They were a bit late to this whole investment

Richard Sverrisson, Editor-in-Chief, Montel: 6:25

process. Do the bigger PV projects, do they, is it easier to manage the grid stability there?

Pawel Czyzak, Head of Energy and Climate, Instrat: 6:31

It is, it's still a bit of an issue, but the really large solar farms, they can actually plug in straight into the TSOs network. The big substations the high voltage substations. So it's a bit it's less of an issue, I would say. Usually when you have a 20, maybe 30 megawatt project, 50 megawatt, then you can already, you would usually just build couple, probably a couple. Kilometers of transmission lines, and then you can plug in straight into the high voltage substation. So that's, easier If you have projects like maybe one two megawatt, they would plug into the medium voltage substation and then that could be potentially an issue. And I've heard investors saying that they have problems with getting the connection permits in some parts of the country, especially perhaps the northeast is not an easy. Place to invest in solar. Even the, even though there's quite a lot of land, free land and the solar conditions are good, but the network conditions are terrible. So developing smaller projects there is not very easy

Richard Sverrisson, Editor-in-Chief, Montel: 7:42

and potentially very expensive as well. Yes. How about. Wind. Poland has some very ambitious plans for offshore wind. Could you talk us through some of those pa

Pawel Czyzak, Head of Energy and Climate, Instrat: 7:50

Yes. I could. Yes. And offshore is definitely the, for some reason the government likes offshore, doesn't like onshore wind. The offshore pipeline is is pretty strong. The idea was to build around five, six, maybe seven gigawatts by 2030, which is pretty soon. And the projects. We already have a couple projects that are in progress and they got the first round of financing. We have a sort of special support scheme for these first projects. So definitely the six gigawatts should be developed by 2030. They already have connection permits, all the paperwork pretty much done. And they seem to be on track in terms of the schedule, which is of course great. One. One issue is the installation port.'cause all these, it's a couple hundred turbines that need to be. Shipped out to the sea and it's not so easy to do that in the port facilities we now have. So we're still waiting for some investments done on the ground in Poland, in Nia, most probably. And these should allow for the installation of the, of all these turbines. If this gets delayed, there's a risk we will have to ship these turbines from elsewhere, from Germany, for example. So that is one thing that might delay the progress, but I think I'm still pre pretty optimistic in terms of offshore just because it is pushed strongly by the government and a lot of state owned companies are involved here. While being honest, of course their life is easier and they have strong sort of lobbying power. They should be, it's in their interest to get the government to buy in and of course handle all the legal matters that are necessary. So I think this should be going well. And then in the sort of after early 2030s, we should see another round of project. These will be supported by a sort of auction mechanism. And this is now being prepared and already another round of projects is forming. So this could add another five, maybe even up to 10 gigawatts. In the forties and early forties. So that is going well. There's a bit of a controversy'cause the government wants to prioritize Polish companies, mainly Orland, PGE. This is definitely gonna cause some hiccups in Brussels.'cause it's it's not very compliant with the EU common markets rules. So we'll see how that goes. But but anyways, I think either way there's a lot of foreign interest in investing in Polish offshore, I think whether it's the state companies or the foreign companies, they will, there's gonna be a lot of people that want to invest in Polish offshore. So that's optimistic, I think. Yeah.

Richard Sverrisson, Editor-in-Chief, Montel: 10:39

That's a positive there. Do you then view this growth in both an offshore wind, but also, if we're talking two gigawatts of solar a year, will this offset sort of the closure of the of Poland's aging coal units

Pawel Czyzak, Head of Energy and Climate, Instrat: 10:51

alone? Probably not. At least not according to our forecasts. We haven't touched really on onshore wind, and that is a bit of a. More difficult situation because the onshore wind investments have been blocked since 2016. There's a 10 h rule in motion that bans placing turbines around, let's say two kilometers even from households. And Poland is very there's quite a lot of small villages everywhere and there's houses everywhere. So it's not easy to find a spot where you can. Place a wind turbine now and that means we haven't been seeing much growth in the onshore wind market and we won't see it for at least a couple of years. And that's, that will mean that there's not enough renewables to multi, to cover the demand. It's considering the closures of coal plants. So in our forecast we've written quite a few reports on this and we've done a very comprehensive assessment of the renewable potentials, and these potentials are pretty high in terms of well placement and the social acceptance and economic factors, all of that. So the potentials are there. It's the. I guess the legal situation, that's a problem. And development pace of these projects that is a problem and that means that we still need some in 2030. We will definitely need a cold reserve. We will have probably some newer coal units still running. We need some of the older unit units to stay available. We probably need some gas peakers to handle the peak demand and we need a lot of renewables. So if we keep the PV pace as it is now and we build the offshore. In time according to schedule, that will still not be enough. We need the onshore wind investments to to cover the, cover, the demand. Otherwise we're, we will be in trouble. That is a missing link here.

Richard Sverrisson, Editor-in-Chief, Montel: 12:52

How likely is a change in the onshore wind law? That seems to be, it has to come from government circles, but there seems to be some opposition to onshore wind in particular.

Pawel Czyzak, Head of Energy and Climate, Instrat: 13:01

Yes. That is a weird, I would say, situation. Just recently I heard that'cause the law is there, it's it's not there. It's ready to be passed in Parliament. It's just, I guess it doesn't have the political momentum it needs to go through the Parliament, but it's actually written and we've seen it and commented on it and it's ready. But sadly I've just recently heard that, the government is standing down here. We're going into this anti-EU anti-climate narrative, which means that there's really no political will at this point, to, to pass the wind law, the updated wind law. So I wouldn't expect this happening this year. Let's hope for next year, especially since this this bill was linked to the EU funds, the re recovery and resilience funding, so it should be passed. But of course the funding is stalled because everybody's angry in Brussels at Poland. So there's a lot of difficult political, chaotic situations happening now and it's really hard to forecast when this will change, but I definitely wouldn't expect it changing this year, which means the first projects, even if they pass the bill next year, that the first projects will, will start coming in maybe 2023. And that is already a huge delay. It's seven years of no. Really no, no activity on the onshore wind market.

Richard Sverrisson, Editor-in-Chief, Montel: 14:34

I'd just like to stay with this spat that Poland is currently having with the eu. You mentioned the implications for onshore wind. Are there other implications? Are we talking even, something as dramatic as a pole exit from the eu?

Pawel Czyzak, Head of Energy and Climate, Instrat: 14:48

I definitely hope not, and it's, I guess I don't want to go very deeply into the Polish politics 'cause it's. Depressing. Sure. Not very helpful, but it's definitely gonna have an impact on the energy transition and I think it, we can see that already with the wind law we've just talked about, but also there's of course with the funding 'cause yeah, as I mentioned the resilience fund. I think that was around maybe 15 billion euros. That's stalled in Brussels because there's so much controversies around Polish rule of law and LGBT free zones, all of these ridiculous things the Polish government is doing. So the money we don't have the money, which of course some of it was supposed to go to green projects, to renewable investments. And it's hard to imagine with this anti-EU narrative that money will be available for Poland in the near future. So that's that. There's a couple of state aid situations now being negotiated with a European commission. And these state aid for coal mines, for coal power plants. And of course the negotiations around these will be much more difficult with the current sort of political tension. So yes, I would say definitely I, I wouldn't go into the politic discussion and I definitely hope it's not gonna happen. But even now the. I would say anti-EU narrative of the Polish government. We are already seeing some negative consequences for the energy transition the climate transition and of course the renewables markets,

Richard Sverrisson, Editor-in-Chief, Montel: 16:26

The eu, the tap of the EU funds is being closed, tight, or always closing anyway, in terms of the context of this disagreement or major spats. But, and this of course comes at a time when Poland faces. A generation gap a supply crunch after 25 due to EU rules on the emissions directive. The 50 50, the 550 rule. But what options are the table there? Is gas coming back on the discussion? Even her talk of nuclear?

Pawel Czyzak, Head of Energy and Climate, Instrat: 16:54

Yes. The problem with that is the timeline is very short. So the capacity market was introduced in 2018 were the first auctions, and then. Some of the newer power plants got contracts for up to 15 years, but most of the Polish coal plants. Could only be supported until 2025, as you mentioned. So the bottom line is that most of the coal plants are already running at negative operating margins, and they are kept alive by the capacity market payments. So they basically just get money for staying alive or being available to the market operator. And these, so these plants are now, again they get funding from the capacity market. By 2025, they will stop getting this funding, and by that time they won't be able to cover their sort of fixed costs, and they will have negative, even more negative operating margins than today. So all of this means that they will either shut down or they will have to be funded in some other ways. And since it's so soon, it's four years time, really five years, it's really difficult to, 'cause we're talking here like seven, eight gigawatts of coal plants at least. So we won't build seven, eight gigawatts of any thermal. Energy source within five years, we can maybe build, I don't know, one, two gas, CCGT project. Two are in development. That's why I mentioned those Wanka and ra that's two gigawatts, right? So we have a huge huge hole in the electricity mix and the power balance in 2025. And of course nuclear will not be the solution because it's not gonna happen in five years. It's probably not even going to happen in 10 years time. So I would say we, we are not in a good position here and that's why that's why the government is planning to propose a new funding scheme for the coal plan. There's a restructuring plan, and that's being discussed basically to offload the coal assets onto different state owned agency that would slowly shut them down. But that will require funding to, to run these power plants after 2025. So it's a difficult process and very complex proposal. So I won't get into the details, but basically we really need those onshore wind farms 'cause these are the quickest to build. That's the really the only thing that can supply power. Within five years time, so that's why this onshore wind law is so important. And it's the cheapest option

Richard Sverrisson, Editor-in-Chief, Montel: 19:42

as well, isn't it? But of course, yes. But just a final question for you, Pawel. Something that's come very clearly out of the current energy crisis we are seeing, not just in Europe, but across the globe, is the scarcity of gas. How. If Poland did decide to build two gas fire plants to meet some of this shortfall, where would it source the gas from? There's certainly not an abundance of it about at the moment.

Pawel Czyzak, Head of Energy and Climate, Instrat: 20:03

Yes, that's why I think we are seeing a bit of a different angle and a different direction of the gas discussion now. Poland used to be very pro gas and wanted to build a huge pipeline. I think they're now backing off in here. Because of course now I think 75, 80% of the gas is imported most of that from Russia and we don't really want to be reliant on Russia, especially with the current situation. So I think actually the gas pipeline will be smaller and smaller, I would expect maybe the two CCGT projects. Happening, but we've already heard banks and the largest Polish banks saying that they don't really want to finance that because they don't see the gas plants being profitable. So I, I don't think Poland will stay on this pro gas course. As it planned, I think we're probably steering more towards the nuclear option. Yeah I wouldn't say gas has a very positive outlook at this point.

Richard Sverrisson, Editor-in-Chief, Montel: 21:06

And as you say the nuclear option is also very long term. Who knows what will happen in 10, 15 years. Pawel, thank you very much indeed for joining the Montel Weekly podcast this week. So 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 Montell News. You can subscribe on Apple Podcasts and Spotify or wherever you get your podcasts from. Thank you and goodbye.