The case of Poland’s largest utility, PGE, shows how Europe’s more coal-intensive power companies are struggling to make a break from fossil fuels, even as the associated risks escalate.

Headwinds facing fossil fuel electricity generation in Europe include a global transition towards low-carbon energy sources, pressure on investors to align their investments accordingly, and wider environmental advocacy opposing bank financing of coal companies.

PGE is one of Europe’s most coal-intensive utilities. Hard coal and brown coal (called lignite) already account for more than 90% of its generation – see Figure below.

PGE has made some green noises lately, for example stating that it is shifting to embrace wind power. In its latest annual report, PGE listed a host of ideas and new technologies of potential interest, including “energy warehouses, electromobility, car sharing, bike sharing, construction of charging stations, LNG, diffuse energy sources, development of coal gasification installations, photovoltaics, intelligent home solutions, natural gas and demand management,” as well as nuclear power and offshore wind.

However, the notion that the company is actually shifting direction is entirely opposite to its actions.

PGE’s present strategy is to achieve leadership in Poland’s power and heating sectors by doubling down on coal. To achieve this, the company is building three new coal power plant units, extending the life of many existing coal plants (to make these compliant with new European air pollution regulations), and acquiring the coal generation assets of its rivals.

In 2017, the company spent PLN 4.3 billion acquiring EDF’s coal assets in Poland; PLN 2.8 billion building new coal plants; PLN 0.6 billion upgrading existing coal plants; and PLN 0.08 billion on renewable energy. This renewable energy capex was 44% down from the previous year.

Last year, the company increased the capacity of its coal power plants by 65% and its coal-fired combined heat and power (CHP) plant capacity by 232%, and its renewable energy capacity by less than 3%.

These metrics don’t speak of a company “embracing wind power”!

This week, the Institute for Energy Economics and Financial Analysis (IEEFA) unpicked the financial hazards of PGE’s strategy.

We found that by increasing its coal dependency, PGE is increasing its exposure to carbon and air pollution risks largely out of its control, which may in turn make it difficult to compete in Poland’s new capacity market, a further risk to its financial stability.

Regarding air pollution risks, we estimated that making its existing coal power plants compliant with new EU limits, known as BREF, would increase coal power generation costs by around 10%. Regarding carbon costs, we noted a more than trebling in European carbon prices in the last 12 months, with further rises expected.

These rising costs may make it more difficult for PGE to compete in Poland’s new capacity market, just as major coal-plant upgrades and new-build and acquisition programmes create greater urgency to secure such capacity payments. Our findings echo warnings from rating agencies that failure to win capacity contracts threaten PGE’s credit ratings, given the company’s capex plans and rising level of net debt. Should PGE fail to secure timely, long-lasting, reliable and appropriately sized capacity payments, the financial consequences could be dire.

We combined our estimates for higher generation costs and capacity market risks in a “hurry versus wait” analysis, comparing two scenarios in a stylized thought experiment, where PGE would choose either to “hurry” to an immediate shift to 100% renewables, or “wait”, and maintain its present fossil fuel-heavy energy mix.

We found that even under the most favourable (and highly unrealistic) conditions, including zero growth in carbon prices and nearly 30 years of continuous capacity payments, the present value of cumulative carbon costs outweigh capacity market revenues by more than two to one. Under this set of assumptions, the fossil-fuel-heavy “wait” scenario would be €3 billion more costly to PGE and its investors than an overnight switch to renewables.

These two scenarios are designed to be extremes, and a practical solution lies somewhere in between. At present, PGE’s fossil-heavy strategy risks leading the company into a vicious circle, sinking capital into building and upgrading coal plants to collect capacity payments, and to pay for carbon emissions. We have shown that it would cost less (in present value terms) for PGE to switch to a majority-renewables portfolio, while also reducing the company’s environmental regulatory risks.

PGE’s recent public statements suggest that it understands the importance for investors of going green, but its actions to date are still rooted in the past.

  • Tags:
  • BREF ,
  • capacity market ,
  • carbon price ,
  • carbon prices ,
  • CO2 ,
  • coal ,
  • fossil fuels ,
  • lignite ,
  • PGE ,
  • poland ,
  • power generation ,
  • renewables ,

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