Climate Energy

Poland: Phasing Out Coal and Moving Away from Russian Gas

| 2021-06-21 5 min read

Poland: Phasing Out Coal and Moving Away from Russian Gas

Reading Time: 5 minutes

Meeting the EU’s 2030 climate targets poses a huge challenge for Central European countries, especially for coal-dependent Poland. But it is also helping the country with a population of 40 million to modernize. Thwarted by the highest electricity prices in Europe, and pressured by EU environmental regulations, Poland has committed to phasing coal out of its energy mix by 2049. According to the Polish Energy Policy 2040, besides boosting renewables and involving nuclear power in its power matrix, Poland will increase LNG imports significantly. This move will also allow for the establishment of a North-South Gas Corridor, from Croatia to Poland, which is supposed to weaken Russia’s dominance in the region’s energy market.

For the eighth consecutive month, Poland’s wholesale electricity prices have been the highest in Europe according to Ember, an independent climate and energy think tank. Electric powere is now at EUR 46/MWh, which is almost 50% higher than the average for the rest of the EU-27 (EUR 31/MWh).

Obviously, such extremely high utility prices have a severe impact on the industrial competitiveness of Poland, which has been evident from companies reducing activities or even shutting down in Poland in the past few months. ArcelorMittal, the largest steel producer in Poland announced last October that it would permanently close a blast furnace and steel plant in Krakow due to reduced demand caused by the COVID-19 pandemic, but also because of “high energy costs, rising carbon prices and a lack of emergency trade measures.” By “emergency trade measures” the company may have been referring to state support to preserve the competitiveness of Poland’s manufacturing industry. Meanwhile, taxes on household and non-household electricity are already extremely low in Poland.

Polish power production relies heavily on hard coal and lignite: they account for about 70% of the electricity produced in Poland, followed by natural gas and oil, accounting for 10% and just under 3% according to 2020 data. In fact, Poland is the second-largest coal-mining country in Europe, after Germany, and the 9th-largest coal producer in the world. Polish coal mining dates back to the 18th century and is still associated with work ethic and independence from Russian energy imports, especially in rural areas. However, dependency on coal has become as painful as it can be for Russian gas, as natural gas has been cheaper than coal since March 2019. Renewable energy sources have a share of some 17%, including wind, biomass and hydropower.

Costs provoking energy policy change

Today, rising coal mining costs and declining gas prices, exacerbated by EU environmental regulations, have forced Poland into a corner. Therefore, it has recently committed itself to phasing out coal by 2049. Preliminary versions of the Polish Energy Policy 2040 (PEP2040) published this March project rising renewable energy and nuclear power generation, the latter being absent in the country’s present energy mix but expected to become reality by 2033. In addition to the construction of new power plants, the focus in Poland is on the expansion of gas imports and renewable energy production, which is expected to help reduce greenhouse gas emissions by 30% by 2030 compared to 1990 levels. Although even this plan would fail to achieve an EU-wide 55% greenhouse gas (GHG) emission reductions target. As envisioned by PEP2040, Poland will see the largest growth in electricity generation from fossil fuels (+40 TWh) among the EU-27 countries. This would make it the EU’s 3rd-largest gas-generating country by 2030.

The Polish government estimates the cost of the proposed transition over the next two decades at around EUR 200 billion in the energy sector and EUR 167 billion in other sectors: industry, households, services, transport and agriculture). According to Poland’s environment minister, Michal Kurtyka, the envisaged transformation of the energy system will create up to 300,000 jobs over the next 20 years.

A gas trading hub for Central & Eastern Europe

Though renewables play an important role in PEP2040, fossil fuels are expected to remain indispensable in the country’s future energy mix. So far, Poland has made every effort to keep its gas consumption as low as possible but only to avoid dependency on Russian natural gas. In 2015, 90% of gas imports came from Russia, but that figure has gone down to about 60%.

As for natural gas, PEP2040 proposes creating a regional transmission and trading hub for Central & Eastern Europe. In line with this commitment, Poland’s state-owned natural gas company, PGNiG, announced last May that it would not renew its gas supply deal with Russia expiring in 2022. The decision was backed by a major agreement the company had previously concluded with Qatar Petroleum to increase LNG imports, thus replacing Russian gas. PGNiG also has inked deals with Cheniere Energy Inc., Sempra Energy and Venture Global LNG to take volumes from proposed and existing export terminals along the North American Gulf Coast. Those contracted Gulf Coast supplies would surpass the amount of gas currently imported from Russia. In addition to that, PGNiG expects a surge in gas imports from Norway via the Baltic Pipeline and awaits even more LNG imports with the expansion of Poland’s Świnoujście LNG terminal. These developments lay the foundations of a Central & Eastern European gas trading hub as outlined in the North-South Gas Corridor.

Gas interconnectivity and the construction of the North-South Gas Corridor have been underway since 2017, and the Polish-Slovak interconnector is expected to be completed this year. This development opens up room for real source diversification and a weakening of Russia’s market power within the region. Poland and Hungary will probably have a dominant role in this process, since these two countries, unlike Slovakia or the Czech Republic, can facilitate the flow of non-Russian gas to the region. Poland’s development of its LNG import capacity and Baltic pipeline mean it can offer transit potential to neighboring countries. Simultaneously, Hungary has been eager to distribute natural gas from Romania produced in Black Sea gas once production commences. In theory, this would mean that the vertical connection of Polish (Świnoujście) and Croatian (Krk) liquid natural gas (LNG) terminals, together with Romanian offshore gas fields in the Black Sea (through the BRUA pipeline), would enable the provision of alternative gas sources to Central Europe, thereby helping to diversify the region’s energy market.