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Saturday, November 22, 2014

Delay in Final Approval of the RES Law in Poland: Impossible to Conduct Auction in 2016

Increasingly it appears that the new law on renewable energy will not be in effect until substantially later than the latest government prediction. This is no surprise, since the government has been promising a new law within six months for the last two years. 

Final approval by both houses of Parliament will go over into 2015, an election year, which will make final consensus difficult. The final figures for renewable energy production and investment for 2014 will reflect the uncertainty and doubts in the market. Perhaps the fact that investors are lined up to invest in Poland in this sector (perhaps as in no other sector) and are only blocked by the government, will leak into the elections themselves. The fact that electricity bills for everyone are higher than legally permitted by the inclusion of subsidies for co-firing and old hydro would seem to be a political liability. Much of this support does nothing to help compliance with the 2020 target, since it is either superfluous or the facilities receiving the support will be closed when the compliance level is measured.


The European Commission is still posed to drop the sword on the whole current system of Green Certificates, which also affect the future support system since they will remain a part of it for grand-fathered facilities. The UOKiK, when it was professionally run, concluded that the system was state aid and the European Commission has informally advised the Polish Government of this fact. Unless the Polish Parliament passes a revised Green Certificate program levelized by technology to retroactively cover the past nine years, all of the aid will have to be recovered. See e.g. previous posts here on UOKiK correspondence. Without the use of certificates, the big coal-fired utilities will be out of compliance and face penalties for that fact in addition to recovery of billions of past support. Even the retroactive legislative fix (as in France) would have to lower the support for co-firing which the Government has admitted on numerous occasions is over-compensated. Aid to old, depreciated hydro will have to be recovered in its entirety. Delays in taking the medicine in this case will clearly not make the disease go away.

Once fixed, the certificate system can be continued as fully compliant with the new state aid guidelines, eliminating the necessity for auctions altogether if the government was so inclined or was so tied in knots that it continued the current impasse. Nothing in the certificate system has to create over-compensation, the bogeyman raised by the government.[1] The only over-compensation now is for co-firing and old hydro!

Elements of the new law are also inconsistent with the competition law of the European community and will be subjected to another complaint to the Commission on this count. 

Throw this mix into the elections and is it almost impossible to see how all of the new procedures can be enacted and approved in Brussels in 2015. The default case is that the Green Certificate system will have to be fixed to avoid a crisis that would have immediate severe impacts on the state-owned utilities. This can be done by bringing back the previous version of the law written with the state aid rules in mind and informally running it by the Commission as a fix for the state aid problems. This will have to be the first order of business once the decision is announced that the certificates are unlawful from 2005 until now. Without a certificate fix, their use for compliance is precluded and penalties will start immediately on the state-owned companies for missing the renewable quota. Their accumulation of co-firing certificates will be useless for compliance and they will be short the necessary amount of renewable energy in their mix. The financial markets, even the ineffective and collusive one in Poland, will have to adjust to these facts, which will also likely stop or seriously impede new capitalization and borrowing by the utilities.  The specter of massive refunds of the aid received will have to be resolved to stabilize the financial market.

      RWE coal-fired plants closing in Western Europe
Instead of working on a solution to the real problems (illegal state aid to date and the crisis in renewable energy investment)  the Polish Government is still committed to the fantasy that co-firing can receive disproportionate subsidies and that the transition in electricity generation can be done without a robust climate of free competition and investment .[2] Turmoil in the renewable energy investment climate affects all investment in the electricity sector in Poland. If the Government could solve these problems with their owned state-owned companies alone, we would still be seeing mandatory Russian language courses taught in schools. Only private sector investment with international participation can modernize Polish electricity. The RES system must be fixed as a first priority. The longer the solution is delayed, the more painful the transition.

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[1] Previous posts have pointed out that the examples cited by the Government in other countries involved subsidies of 35-52 Euro cents a kWhr (levels enormously more inflated than anyone's proposal for Poland) and levels which were subsequently adjusted down.

[2] I personally think that it is widely accepted inside the state-owned utilities that their long-term competitiveness requires that they ultimately abandon Polish coal (which cost three times more to mine that the competition's surface-mined coal) moving to imported coal to contain costs and simultaneously shift overtime to non-coal forms of energy.  This induced period of confusion in the RES sector primarily serves to deter foreign investors and to attempt to set the stage for the state-owned firms to become the RES leaders in 2016 and beyond. A large number of coal-fired plants from the Soviet-era must be closed due to EU emission rules in the next year. Others will increasingly be uneconomic to run at all, especially on expensive Polish coal.

Note: Photograph of Niagara Falls canoeists: my uncle actually went over Niagara Falls as a stunt man in a movie

Friday, November 21, 2014

United States-China Deal on Carbon Reduction is a Scam

This is a classic case of political leaders in need of a headline and not a real agreement. The details are discussed in Mr. Krauthammer's excellent article, linked here.


If you believe in the climate alarmism, then this is not a real deal. If you are like me and hope that at least carbon is a good surrogate for really harmful pollutants, then it is still a bad deal.

CHANGES FOR BIOGAS IN NEW POLISH DRAFT LAW

The first really good news for Polish biogas in a while happened yesterday.

The Parliamentary subcommittee has revised the draft law on renewable energy to provide for separate auctions for biogas. This will mean that biogas projects up to 1 MW will only compete with other biogas projects for support. The big issue will be how big the bundle is for biogas in the auctions. The 2030 energy plan is showing a doubling of biogas from the 2020 target to the level in 2030 in Poland. This is very optimistic given the past experience. 


We are working on the 1 MW limit in Brussels. It is quite arbitrary and anti-competitive, although it ironically was suggested by the DG Competition. A practical ceiling based on the market and the objectives of other European legislation (the Landfill Directive, the Revised Waste Framework Directive, etc.) would be 2-5 MW. Above this level would trigger competition with other RES technologies that have lower costs per kWhr. So the cap is the de facto limit on the size of biogas plants that can be supported in the EU.



Member States can submit a rationale to do things differently than the guidelines in this and other cases, but they will be put into line for Commission approval, while open auctions will be "fast tracked" with no individual review (in theory). The Polish Biogas Association has filed comments on this in Brussels and has been a leader in the EU of fixing these problems.

We still have not seen how the new draft treats substrates and other issues raised in the public comments.




Thursday, November 13, 2014

Energy Storage Growing and Becoming Cheaper

A new report noted that lithium-ion battery prices continue to fall and that U.S. growth in total energy storage is expected to increase by tenfold by 2018.


See GramZielone.pl.

So far, Poland has not benefited from these trends. The deployment of energy storage on an individual and even grid-scale could provide huge savings to Poles, currently locked into providing peak electricity demand from coal-fired power plants.



In Poland where electricity prices are higher than the US. the incremental benefit of storage would actually be greater.

Saturday, November 08, 2014

RES Auctions in Poland?

An expert at the International Renewable Energy Agency, recently wrote:

"Regulatory stability, transparency and the investors’ perception about the fairness of the process are pre-conditions for the success of an auction."

It remains hard to see how Poland will meet any of those criteria on its present trajectory.

Monday, October 27, 2014

EU DEAL ON CLIMATE: INITIAL THOUGHTS ON THE POLISH END

First, it is not clear what will happen when the US, China and India refuse to agree to new mandatory GHG targets in the next UN meeting. The EU may reconsider its new 40% GHG reduction target for 2030.

Second, Poland got some concessions, but there are important caveats. First, the total amount of concessions to "reduce dependence on carbon energy" in Poland is about 8 billion Euro. That is somewhere between 10-15% of what is necessary to modernize the conventional power system and to meet the current EU renewable energy targets (not including new efforts on RES for 2030). So there is still a major burden on the Polish energy price structure to come up with funds for new investments in both conventional energy and RES. The annual shortfall will have to be made up by at least a 50% increase in the price of electricity over this period. The increases will likely start after the Parliamentary elections.

Third, the organization handing out the cash from the first deal changed this time, from the Polish National Environmental Fund (NFOSGW) to the European Investment Bank (EIB). The Polish Fund had given out most of the cash from the sold portion of the first batch of free allowances to coal-fired energy projects, largely owned by the state. EIB may be expected to be more demanding in its decision-making and should be looking at the cost-effectiveness of carbon reductions in the investments. A proviso in the deal specifies that it not contribute to market distortion, so the idea that funds will be used to shore up principally state-owned coal plants may be challenged in the next round. It is also clear that funds will not be used as some were last time to go to general revenue in Poland (a violation of the earlier agreement).

Polish politicians may look back on this deal as a way that Brussels' priorities got "through the gate." There is no way to gloss over the fact that the Polish Government has declared its perpetual desire to be dependent on coal and the new European funding is to be structured to "reduce dependence on carbon-based energy.,"

Having been misled once, it seems less than likely that the EU will be tricked again into supporting the status quo in the name of change.

Wednesday, October 22, 2014

Shale Gas Fades, Nuclear Energy Remains Illusive and Coal Remains Problematic in Poland; Government Stays in Denial

As the Government in Poland makes glorious plans for shale gas in the country's long-term energy plan pipe-dream, the actual number of active wells in exploration drops to 13 (a 50% reduction from last year). The Government plan for was 80 wells this year. By contrast, the United States has 27,000 active wells. "Experts say that around 300 test wells are needed to get a proper estimate of Poland's gas reserves." The major international oil companies have generally pulled out of Poland.

The leading political party has long held out to the public that shale gas would be a critical part of 
Poland's energy mix. Now the Ministry of Economy at least concedes that it is uncertain. But the politicians have not taken it out of their election speeches.

The only plan is to remain dependent on coal and lignite with the illusory promise that Poland will somehow make deep-mined coal competitive with surface-mined imports. This premise is essential farcical. The "material and supply costs for underground mines are 50% more than those of surface mining and that labor costs are five times higher. As well as, the capital costs also shows higher costs for underground mines." The relative cost of deep mining is approximately three times higher. 

I think that only in a former communist country or in some authoritarian regime could the government so systematically lie about basic economic facts.  It may, however, be that the government only assumes it can be so disingenuous.See below. 



And somehow coal-fired power plant capacity now closing will be replaced or even expanded.[1] With no major international investment in coal in Poland, and European firms closing newly-built coal plants elsewhere, this seems to be a dubious proposition. The government has pressured its state-owned power companies to build new capacity, but this will be hard-pressed to keep up with closure of Soviet-era plants.

The plans for nuclear plants seem just as uncertain. Originally sold to the public as cheaper energy, it turns out that new nuclear plants are more expensive right now than some renewables. 


This is an ironic contrast to the statements by the Polish Government that renewable energy cost too much. The fact is that only the  government-controlled energy firms are "interested" in doing nuclear plants in Poland. The commercial investment market may have already rendered its verdict.

The bright spot is that the Polish public overwhelmingly supports green energy and the political parties are simply locked in a time warp that has distorted their vision. Attitudes in Poland are changing under the political radar,but will manifest themselves in the near future. 

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[1] It seems unlikely that Poland can reverse the European trend for declining prospects in new coal power construction. Here. Investment analysts point out "Poland is one of the biggest primary energy producers in the European Union with the country's energy sector accounting for over 20% of its GDP. The obsolete capacities of the sector, however, are posing a threat to the future stability of the country's energy balance. More than 60% of Poland's electricity generation facilities have been in use for over 30 years now. According to economy ministry estimates, 12% of all generation facilities will have to be taken off the grid and upgraded or replaced between 2014 and 2017.Closing old generation facilities before new ones are built puts Poland's energy supply at risk and may cause blackouts."
- See more at: http://www.securities.com/emis/insight/polands-energy-sector-living-borrowed-time#sthash.oMUYgZBl.dpuf

Monday, October 20, 2014

ANALYZING THE TRUE  COST OF RENEWABLE ENERGY
Randy Mott, Vice president, Polish Biogas Association
     After over three years of debate and discussion and multiple versions of the proposed law and its regulatory impact, the Polish Government has never provided a realistic economic analysis of the impact of support for renewable energy. The simplistic model used by the government simply adds up the support for various types of renewable energy and creates a static total price tag. “Savings” and “optimization” are only viewed as a function of their measurement on the total price tag. There is abundant actual evidence that a reasonable support system on the Polish current model can be effective without having major price impacts.

 The actual economic cost of renewable energy on end-users, which is what the government professes to care about, cannot be viewed as simply the total value of the support. The new capacity created by renewable energy affects supply and demand for electricity (and heat). A fundamental concept of the free market is that increased supply lowers prices. This has been analyzed in depth in the United States under a scenario similar to Poland’s “Residential Portfolio Standard.” A 15% green energy target for the United States (RPS) was projected to only cause a “cumulative electricity and natural gas expenditures increase … [of] 0.3%.” U.S. Energy Information Agency, Impacts of a 15 Percent RPS, Chris Namovicz, July 11, 2007, EESI Briefing. The same effect was noted in a review of state RPS programs in the United States: “A review of state-level RES policies shows that utilities are successfully meeting their annual renewable energy requirements with little or no additional cost to consumers (emphasis added).” How can such a massive undertaking have so small a price impact on consumers? The answer is in several of the details ignored in the Polish Government analysis. For one, the net operating cost of renewables is lower than conventional fossil fuel operating costs.  Local renewable sources also reduce transmission costs. And all new renewable energy capacity increase competition. The net impact on consumers is always lower than the static total amount of support provided. 

Source: Union of Concerned Scientists, “How Renewable Electricity Standards
Deliver Economic Benefits,” May 2013 Cambridge, Massachusetts.


     Europeans often forget that the United States has 50 states that each has its own energy policies in this area. See UCS graphic. They are a regulatory workshop and can provide a good deal of experience, especially in this case since they generally use the same type of RPS as Poland.

     “Collectively, the renewable ener­gy requirements established by RES policies apply to more than 50 percent of total U.S. electric demand (Barbose 2012).” Union of Concerned Scientists, May 2013, supra.  Yet this green electricity now totaling over 100,000 MWs has not had a major impact on consumer prices: “The Lawrence Berkeley National Laboratory, having recently evaluated 2009 and 2010 RES compliance-cost data that were available for 14 states, estimated that all but one state experienced cost impacts of about 1.6 percent or less (Barbose 2012).”  UCS, supra, citing Lawrence Berkeley National Laboratory (LBNL) 2013. LBNL RPS compliance data spreadsheet, Berkeley, CA. Online at http://www.dsireusa.org/rpsdata/, accessed April 1, 2013. The support mechanisms used are the same approach as Poland’s system:

“Most states with RPS programs have associated renewable energy certificate trading programs. RECs provide a mechanism by which to track the amount of renewable power being sold and to financially reward eligible power producers. For each unit of power that an eligible producer generates, a certificate or credit is issued. These can then be sold either in conjunction with the underlying power or separately to energy supply companies. A market exists for RECs because energy supply companies are required to redeem certificates equal to their obligation under the RPS program. State specific programs or various applications (e.g., WREGIS, M-RETS, NEPOOL GIS) are used to track REC issuance and ownership.[1]

     The experience and data from past performance in states with RPC programs establishes the fact that a Polish style “quota” system backed by Green Certificates can theoretically work quite well to both achieve the desired mix of renewable energy and to do so with a modest impact on end-user prices.

Applying these lessons to Poland, which uses a similar support system, it is clear that the Green Certificate program here was overly expensive and abused. Co-firing of biomass with coal, which has a nominal cost according to the Polish Institute for Renewable Energy, received the largest amount of support and created no new electricity production capacity. This type of policy will have the maximum impact of consumers in the form of a higher price with little or no mitigation.

     Similarly, Poland provided old hydro plants, some of which were pre-war, with another major share of Green Certificates, although they were depreciated long ago and certainly did not require any investment incentives. About 70% of the Green Certificates have been awarded without creating new electrical capacity. The impact of this policy on end-user prices was nearly a one-to-one price increase. They bought the same electricity from the same places, it just cost more!


      Support for renewable energy producers which adds new capacity to the supply of electricity operates in a fundamentally different economic way. A substantial body of data from multiple sources in the United States supports the notion that renewable energy supported in the RPS programs does not have a major adverse impact of end user prices.[2] However, it is clearly possible to abuse the support system, especially feed-in tariffs, is a manner that causes over-compensation and higher prices to electricity customers. The support systems in Germany and other countries where the impact on end users is much higher were enormously more bloated than the Polish green certificate system. German solar producers got between 46-57 Euro cents per kilowatt, while the Polish system to date offers about 11.5 Euro cents (if Green Certificates are at 100% value). German biogas plants got between 25 and 40 Euro cents per kilowatt, again compared to 11.5 cents in Poland. Because of the higher feed-in tariffs, much more capacity was built in Germany than predicted when the impact of consumers was initially projected: for example, in 2010, "7,400 MW of solar panels were installed; six times as much as estimated in the reference scenario used by the environment minister." [Daniel Wetzel, Die Wel, October 25, 2012].  Similarly, in Spain, the solar subsidies got adjusted to a level that proved excessive to consumers. "The payment for PV solar was set at 41.4 eurocents per kWh, with the Spanish government anticipating 400 MW of installed PV solar between 2007 and 2010. However, the high rate that was set for PV solar spurred developers to install 344 MW of PV solar in the first nine months of 2007 alone." Environmental and Energy Study Institute (2012). "Due to the Spanish government’s subsidization of electricity, there was a cost to Spanish taxpayers totaling over $1.4 billion. In response, the Spanish government imposed a cap of 500 MW for PV solar in 2009 and reduced the payments to 32-34 eurocents per kWh. " Id. The Czech solar subsidies were also excessively high ($700 MWhr or 55 Euro cents a kilowatt hour) and resulted in a disaster to consumers of electricity: "The result was a more than 24,000 percent increase in Czech solar energy plants, from nine in 2005 to more than 2,230 by January 2010, making the Czech Republic the third-largest solar energy producer in Europe, despite the country's relatively small size." Prague Post, March 24, 2010. The problem has been that subsidies three or four times higher than Polish levels then lead to excessive development of the technology and create an even greater cost multiplier.

     The problem that the Member States with hyper-support schemes have to now to adjust new support to lower the average support provided to a reasonable level. The overly generous levels are generally under long-term commitments and the only corrective adjustment that the governments can make is to seriously lower new support levels. Poland absolutely does not have this issue.

     However, when the Polish politicians try to use the experiences of overcompensation in other countries to cut support here, they are being disingenuous. Those high levels of support have nothing relevant to say about the current or proposed Polish system. As long as the support is only offered to technologies that add capacity and is levelized across technologies to avoid overcompensation, there is no indication that the impact of user prices will be serious. The Polish Institute for Renewable Energy study makes a major effort to define these coefficients and should only be ignored in the new law based on more compelling actual data, not political decisions. 

In the same vein, the price for renewable energy in Poland is often compared to coal-fired electricity. The problem with this comparison is that the coal-fired data reflect historical cost data based on old coal-fired plants built in the 1960s that are being closed due to the infeasibility of their meeting EU emission limits after the grandfathered date of 2015. The true cost of coal-fired energy would reflect compliance with these emission standards for SO2 and NOx and other pollutants. The actual cost in the future will also reflect higher coal prices as Poland imports more foreign coal due to the economics of domestic mining. Finally, the government subsidies to the coal industry are normally overlooked. See Karaczun et al. Poland 2050 at the Carbon Crossroads. [3]

    The comparative cost of providing electricity from different modern sources was just analyzed in the United States in January 2013. The data clearly show that some renewable energy sources are already economically attractive. These figures also contradict the Prime Minister’s erroneous perception of the relative cost of energy. The historical Polish situation with coal  is certainly not representative of the future.


     The fact is that the Polish Government has pushed to keep electricity prices artificially low, such that it is not economically to build even new coal plants. The price of all electricity in the future in Poland will be higher because the price will have to reflect the investment incentive necessary for growth or the electricity will have to be imported from more expensive foreign producers.  This will not cause a vast amount of coal-fired energy to disappear (although 7000 MWs are closing by the end of 2015 due to environmental rules). The choice between coal, renewables or nuclear is a meaningless gesture. Poland will need all of the electricity capacity that it can construct and operate. The issue is not whether renewable energy will replace coal, but whether coal energy can meet the Polish user demand and legal requirements of the EU without renewable energy. The answer is clearly no way.

     Renewable energy is a legal necessity under European law. All of the required objectives can be financially met without undue economic impact, but only as long as the system is repaired to satisfy these objectives and not other interests. Up to this point, the system has been manipulated to reduce the burden of renewable energy obligations on the state-owned power plants. The RES system can effectively meet the EU target and do so in a reasonable way, but it cannot serve other masters.


Published in Polish HERE.



[1] http://en.wikipedia.org/wiki/Renewable_portfolio_standard#California
[2]  From the Pennsylvania Dept. of Energy fact sheet, supra: (1) A 2010 analysis of House Bill 2405 by the engineering consultancy Black and Veach indicates that “…the net present value of the price suppression benefit over the life of the (bill) could be $3.5 to $6.2 billion …. Notably this savings is much higher than the direct electricity cost impacts … ($1.6 billion increase for AEPS). (2) A 2009 PJM Interconnection study of the impacts of adding wind generation to the market concluded that “…15,000 MW of wind offers wholesale market price reductions of $4.50-6/MWh, translating to reductions in annual market-wide expenditures of $3.55 billion to $4.74 billion versus not having that wind in place.” (3) A 2009 PECO/Exelon study of the market impact of adding 400 MW of capacity to the Pennsylvania Peach Bottom Nuclear facility gives further support to the price suppressive effects of low marginal cost generation: “We estimate conservatively that these benefits would average $137 million per year in Pennsylvania, and more than $425 million per year in all of PJM-East.”  (4) A New York State Energy Research and Development Authority (NYSERDA) analysis of New York’s Renewable Portfolio Standard (RPS) estimates that the reduction in wholesale electricity prices from the addition of renewable energy resources in 2010 is likely to be approximately $2/MWh (0.2 cents/kWh).  (5) A 2009 study by Tudor, Pickering, Holt, & Co., Energy Investment & Merchant Banking, of the impacts of wind generation estimated that “…6,500 mw of wind capacity dispatched into the supply stack significantly impacts prices. Vs. no wind, the marginal price of off- peak power falls by $20/MWh during peak demand (24%), $15 off-peak (25%).

[3] “…a coal-based energy sector will not ensure inexpen­sive energy. Energy infrastructure is slowly becoming degra­ded. Replacement costs for this infrastructure – even for coal-based installations – are estimated at around PLN 200 billion until 202073. In order to repay these investments, energy prices for final consumers will have to increase. Climate poli­cy measures and the necessity to incorporate external costs in energy prices will further increase the cost of coal-based energy.” Poland 2050, supra, p. 18. Polish coal imports have exceeded exports since 2008 and there is no reason to think that the trend will reverse. Id.