Power security has become a big political issue in Europe over the past two months – you need only say the words gas pipeline and you grab people's attention. And yet electricity too will surely share centre stage some time soon. In short, Poland needs to boost generation capacity at a time when the banks have stopped lending and we are all supposed to worry about our carbon footprint.
New capacities
For the last few years the overall capacity of the Polish power-generating sector has been pretty constant at around 33,000 MW to 35,000 MW. Meanwhile, the power infrastructure is starting to creak – many power generation units are more than 30 years old and unplanned/emergency outages are occurring with greater regularity: in 2004 – 2.96%, in 2005 – 3.84%, in 2006 – 6.57%, and in 2007 – 6.61%. At the same time, it is estimated that 10,000 MW to 12,000 MW of extra capacity is needed by 2020, which translates into an extra 800 MW to 1000 MW every year. That would require ZL135 billion ($38 billion) of investment in power generation units in Poland in the space of 11 years. This is obviously a tall order.
Since 2000, only three generation projects have been successfully developed with approximately 1,750 MW of installed capacity: Lagisza (460 MW power generation unit) – expected to be completed by mid-2009, Belchatów (858 MW power generation unit) – expected to be completed within three years, and Patnow II (464 MW power generation unit) – completed in 2008 but still undergoing commissioning. Several investments are planned, mostly by four domestic power groups (Energa, Enea, PGE and Tauron), as well as foreign energy companies with a presence in Poland: Blachownia (900 MW power generation unit) by Tauron, Ostroleka (1000 MW power generation unit) by Energa, Opole –two new power generation units by PGE, Turów (500 MW power generation unit) by PGE, Dolna Odra (800 MW power generation unit) by PGE, Kozienice II – two new power generation units by Enea, Siekierki CHP (480 MW power generation unit) by Vattenfall, Gdansk – a new gas-powered CHP, with interest expressed by energy and fuel consortium Lotos, Energa and PGNiG, ¸Leczna, 1200 MW by PGE, Pulawy (1400 MW power plant) by Vattenfall and big chemical group ZA Pulawy, Stalowa Wola (400 MW) by Tauron and PGNiG, Polkowice and Glogow – new gas power units by copper conglomerate KGHM, Skawina (400 MW power generation unit) by CEZ.
It should be emphasised that the installation of new capacities is inseparably connected with the need to construct new transmission grids. The current Polish transmission infrastructure – 236 transmission grids with a total length of 13.053 km (one 750 kV line, 68 450 kV lines and 167 220 kV lines) – is not capable of connecting the planned power capacities. It is estimated that until 2030 3,500 km to 4,000 km of lines need to be built. For that purpose, the amendments to legal regulations that would facilitate and accelerate the investment process are also necessary.
Financing
The joker in the pack is of course the world financial meltdown, which has thrown up the fact of the banks being unwilling or unable to provide the all-important funding. They expect a quick return on investment, at least their costs, which seems to be asking the impossible in the power sector. According to the latest statements from the Ministry of the Treasury, Polish energy groups may invite foreign investors to support the execution of planned investments as they may not bear the investment costs on their own. Therefore, the financing of the planned investments will become a real challenge that the power sector will need to face.
CO2 reductions
Adding to the general chaos is the EU energy and climate package adopted in December 2008. Under the deal, Polish electricity enterprises will have to purchase part of their emission rights for the 2013 to 2019 period. From 2014, the amount of free rights will be reduced gradually. The rate of reduction will be established by the Polish government. The energy enterprises will have to purchase at auction 100% of their emission rights in 2020. In 2018 Poland will be authorised to apply to the European Commission for a prolongation of the interim period. New investments in the power sector, actually commenced before December 31 2008, will also obtain free emission rights after 2013. However, the phrase works-actually-commenced seems to be imprecise and therefore discrepancies of interpretation have arisen. There are some who argue that the submission of an application to relevant grid operator requesting specification of the terms of connection to the transmission grid is enough to fulfill the condition above. Others hold that the wording means that works on the construction site have been commenced (for example, the drilling has started). However, it is beyond doubt that the CO2 limits will make some of the existing coal-fired power plants unsustainable and that a switch to the greater use of low-carbon technologies is necessary. This is the subsequent challenge to the Polish energy sector. Current plans make space for only two clean power carbon capture and storage (CCS) facilities. The first one is the biggest lignite power plant in Europe, in Belchatow. The pilot installation is expected to be completed by mid 2011 and the proper, more efficient installation is expected to be completed by the end of 2015. It is estimated that, as a result of the CCS installation in the Belchatow power plant, the annual volume of CO2 emissions is expected to be reduced by 1.7 million tonnes. A letter of intent between PGE and Alstom has just been signed. The European Commission has offered support to the tune of €250 million ($321 million) for the abovementioned project. However, it remains to be seen whether these funds will actually be granted. The second one is in Kedzierzyn, by the chemical group ZA Kedzierzyn and Tauron. The planned 288 MWe installation will require ZL5 billion to ZL5.5 billion. The installation start-up is planned for May 2014. The project is also competing for EU funds.
Poland-Lithuania interconnection
Another large-scale investment in progress is the power link between Poland and Lithuania. The project is at the preparatory stage: in 2008 the Polish-Lithuanian SPC was established in preparation of an investment. PSE Operator and Lietuvos Energija are its shareholders. The project includes the construction of a 400 kV two-circuit power line connecting Elk and Alytus. The total length of this power link will be 154 km, with 106 km on the Polish side and 48 km on the Lithuanian. To use this power link, extensions of the electricity systems of both countries, especially in north-eastern Poland, are needed. This means that the construction of several hundred kilometres of transmission lines, running through awkward areas on account of environmental issues (for example, the Natura 2000 Programme), is needed. Also, legal issues such as obtaining the right to encroach on private property will probably cause many inconveniences to the investor. The approximate costs of the project on the Polish side will be: €250 million, plus more than €400 million for the extension of the electricity system. According to the latest Ministry of Economy statements, more than €200 million will come from the Infrastructure and Environment Programme for 2007 to 2013. The remainder will be financed by Poland. The project's planned completion date is 2015, possibly in conjunction with the development of new NPP Visaginas (replacing the existing NPP Ignalina). However, due to the dispute over the division of the capacity of the projected nuclear power plant between Poland, Lithuania, Latvia and Estonia, the future of the joint atomic power investment is very much in the balance.
A non-competitive electricity market
Another factor further complicating matters is the non-competitive electricity market dominated by one owner – the State Treasury. In 2008, the State Treasury held majority stakes in the four energy groups, being principal players on the energy market: Energa, Enea, PGE and Tauron (established as a result of the 2006 Programme for the Energy Sector). In November 2008 an initial public offering (IPO) of Enea was made. The planned completion date of the sale of the remaining shares is the end of the third quarter of this year. In 2009 or 2010, IPOs of PGE, Energa and Tauron are planned. According to the latest information from the Ministry of the State Treasury, the privatisation of Energa and Tauron by sale to a strategic investor is also a possibility. The sale of 50% of the PAK power plants, together with two mines supplying lignite, is something else to consider. Altogether, the proceeds from privatisation in 2009 are estimated by the Ministry of State Treasury at ZL12 billion.
The emergence of a competitive energy market is one of the big factors that may lead to a reduction in end-user prices, which significantly increased in 2009 for both business and household offtakers. The energy prices for business offtakers are no longer regulated, but prices for business offtakers are still subject to tariffs imposed by the President of the Energy Regulatory Office (URE), who believes that the liberation of energy prices for household offtakers is possible but only if the energy market becomes competitive. The current situation in the energy market forces one even to consider the option to restore tariffs on energy prices for business offtakers.
In order to make the energy market more competitive, amendments to the Energy Law Act are in preparation. A wider range of competition, effective regulatory instruments and legal guarantees of independence issued by the President of URE are set forth in the proposed amendment. However, such solutions have many opponents. The most frequently raised criticism is that too many regulatory provisions obstruct free market mechanisms and as a result are even more harmful. However, the main disputes arise over the introduction of the obligation to sell the generated energy on the stock exchange. At present, only 4% of generated energy is on the market. About 90% is sold through bilateral agreements. In this, two main projects require attention: firstly, assuming the unconditional obligation concerning the sale of 100% of generated energy on the market; and secondly, assuming the sale of 100% of generated energy on the market, but only by those enterprises that are subject to the long-term PPAs termination act. The other energy groups' members will be obliged to sell to the market as from 2011, and only 10% of the generation to start with. The obligation will be increased gradually and as from 2013 will be 30 % for enterprises that are not bound by this act.
Atomic power
Then there is the nuclear option. Discussions of atomic power have continued in Poland for many years. After the Chernobyl nuclear disaster of 1986, in which the whole society suffered, Poles are very cautious about atomic power plants. Finally, on January 13, the government took a formal decision to develop atomic power. Also, in the Energy Policy for 2030 project, the Ministry of Economy included an atomic power implementation programme concerning: works on establishing the body responsible for preparing and promoting the atomic power programme, analysis of atomic power plant locations, indications of the relevant amendments to the law necessary to the atomic power programme implementation, support for research on new nuclear reactor technologies and preparing a public awareness campaign on the nuclear energy programme and studies of educational programmes for entities involved in the nuclear power programme. As for the present time, one or two nuclear power plants are planned by 2020, under the watchful eye of a nuclear energy coordinator. The future of nuclear energy is still a big unknown, but it seems that recent government plans will kickstart a wider public discussion on the issue.
Renewable energy
The Polish wind energy sector has been developing rapidly in the past few years. In 2008, Poland was the most dynamically developing market for wind projects among all new EU members: 196 MW of wind capacity was installed, almost doubling the figure for 2007. Pursuant to the latest statistical data, the total capacity of all working wind farms at the end of 2008 was nearly 472 MW. It is estimated that more than 10,000 MW of wind projects are under analysis and/or at the development stage. There are nine professional wind projects in operation in Poland: Barzowice – 5.1 MW, Cisowo – 18 MW, Zagórze – 30 MW, Lisewo – 10.8 MW, Tymien – 50 MW, Puck – 22 MW, Kisielice – 40. 4 MW, Kamiensk – 30 MW, Jagniatkowo – 30,6 MW, Losina near Slupska – 48 MW and Ostrowo – 30 MW. Several projects are under development: Karscino – 69 MW, Lebcz – 8 MW, Malbork – 18 MW, Górzyca, Rzepin, Zajaczkowo i Widzino – 90 MW, Tychowo – 50 MW, Gniezdzewo – 22 MW and Sniatowo – 32 MW.
Pursuant to the EU energy and climate package adopted in December 2008, the EU's overall 20% renewable energy target for 2020 has been divided into legally-binding targets for the 27 member states, averaging out at 20%. The member states are given an indicative trajectory to follow in the run-up to 2020. The Polish overall target share of energy from renewable sources in the gross final consumption of energy in 2020 was set at 15%. In order to meet the target, the total capacity of renewable resources installed in Poland will be nearly 7,900 MW, which requires ZL40 billion of investment. The Polish government is obliged to ensure that its 2020 target is met and to outline the appropriate measures it will take to do so in a National Renewable Action Plan to be submitted by June 30 2010 to the European Commission. Polish energy experts are not unanimous in their appraisal of the achievability of these target capabilities.
Among the measures aimed at meeting the climate goals are the Polish regulations that require all licensed energy companies engaged in the generation of electric energy or who trade in this energy and sell it to end-users connected to the Polish grid, to obtain and redeem with the President of the URE their Certificates of Origin or to pay a replacement fee in accordance with a formula set forth in the Energy Law Act. Certificates of Origin are documents confirming the generation of electric energy from a renewable source. Certificates of Origin are issued by the President of the URE at the request of the entity generating electric energy from a renewable source.
Certificates of Origin are recorded in a special register kept by the entity operating the commodity exchange market. The rights incorporated in the certificates are transferrable, and their transfer is effected through appropriate records in the certificate register.
Based upon the motion of an energy company subject to the certificate-related obligation, the registration entity is obliged to issue a document certifying the rights resulting from a certificate (corresponding to the volume of energy incorporated in the certificate(s) purchased by such an energy company on the commodity exchange market). Such a document may be presented to the President of the URE for redemption so that the volume of electric energy incorporated in the document may be counted against the satisfaction of the certificate-related obligation of the energy company. Once the document is presented to the President of the URE and redeemed, the rights incorporated therein expire and the given energy company's obligation to produce a certain number of Certificates of Origin in a given settlement period is correspondingly reduced.
The detailed quantitative scope of the energy companies' obligation to produce Certificates of Origin for redemption is contained in the Ordinance of the Minister of Economy of August 14 2008. Based on this regulation, the satisfaction of this duty is evaluated over the course of a calendar year. The current regulation provides for minimum annual thresholds through 2017, and the duty is deemed satisfied if the total share of the electric energy covered by the redeemed certificates (or covered by the replacement fee) in the total actual annual sale of electric energy to end-users in a given year is at least in accordance with the information in the table.
| Table |
| Year |
Share in the total annual sale of electric energy |
| 2008 |
7.0% |
| 2009 |
8.7% |
| 2010 |
10.4% |
| 2011 |
10.4% |
| 2012 |
10.4% |
| 2013 |
10.9% |
| 2014 |
11.4% |
| 2015 |
11.9% |
| 2016 |
12.4% |
| 2017 |
12.9% |
Anti-crisis package
In January 2009, the Minister of the Economy published an anti-crisis package setting out governmental priorities for the future. In order to accelerate the planning and implementation phases of investments in the power sector, the Ministry of Economy is in the process of preparing the initial assumptions that will serve as the basis for specific acts of parliament, notably the Grid Investments Act, and amendments to related Acts concerning real estate management, administrative procedures, special planning and land management, agricultural and forest land protection, environmental protection and nature protection. The planned changes are to be based on the analytical findings on the technical condition of the transmission and distribution infrastructure and analyses of legal barriers to grid investments. The current regulations are a drag on the investment process: a project's preparatory phase usually lasts longer than its physical implementation, therefore the regulations are in sore need of amendment.
In order to implement the EU climate targets, give a jump-start to the development of small and medium-sized enterprises and create new jobs, the Ministry of Economy is also willing to put emphasis on renewable energy development. The relevant amendments to the Energy Law Act and the adoption of a separate Act giving support to the development of renewable energy will be introduced in the near future. Poland will also join the International Renewable Energy Agency (IRENA), which is now being established. As a member of this organisation, we may gain access to advanced technologies and scientific projects relating to renewable energy sources. It is also planned to give these new investments financial support.
Energy efficiency is also the subject Ministry of Economy interest. The Energy Efficiency Act, implementing Directive 2006/32/EC on energy end-use efficiency and energy services, is being prepared. It aims at establishing the legal framework for acts engendering the growth of energy efficiency in the economy: the increase of energy savings by end-users, the increase of generation efficiency and the reduction of losses in the transmission and distribution of energy.
New investments in power capacities and low-carbon technologies will move us towards a more competitive energy market: the development of renewable and nuclear energy are the main challenges for the Polish energy sector. As with many things at present, the power sector is living through interesting times.
| Author biographies |
Arek Krasnodebski
SALANS
Arek Krasnodebski is a partner and head of the energy and natural resources practice. He advises clients operating in the energy and utilities sector on a variety of issues, including preparation of supply and offtake contracts and negotiations of such contracts, construction and operation of cross-border power interconnections, privatisation and regulatory matters. He has also concentrated on financial transactions such as credit facilities, swaps and receivables sale transactions.
Bartlomiej Ziebinski
SALANS
Bartlomiej Ziebinski is of counsel in the energy and natural resources practice. He has been involved in assisting clients from the energy and utilities sector in a wide variety of projects, including privatisation, infrastructure, M&A, renewable and co-generated energy, due diligence analyses, energy sale and purchase agreements. He also specialises in regulatory issues (including licence and tariff proceedings), as well as corporate and financial transactions.
Beata Zys
SALANS
Beata Zys is an associate in the energy and natural resources practice. She specialises in energy law and civil law. She has been assisting senior lawyers in property-related issues within the energy sector, particularly in connection with acquiring real estate for investments. She also supports the employment and public procurement practice teams. |