Bartosz Sobik
SGH Warsaw School of Economics, Poland
Introduction: Energy transition is a significant challenge for the European energy sector, especially in the context of the energy and geopolitical crisis. The Polish energy sector, which is 79% dependent on coal, is in a particularly difficult situation. The existing investment gap associated with the phasing out of the obsolete coal-fired units will threaten the energy security in Poland in the coming years, so a number of large investments in energy assets are necessary in order to avoid missing capacity.
Russia’s invasion of Ukraine significantly affected Poland and has led to the necessity to update the energy transition strategy. The interruption of coal and natural gas imports from Russia created the need to quickly find alternative supply routes. Dependence on coal has therefore led to a threat to energy security.
Basing electricity generation on coal and lignite also leads to high exposure to climate risk and, consequently, to financial risk. Coal assets are treated as ‘toxic assets’, making it even more difficult for energy companies to raise capital. The problem of ‘missing money‘ leads to missing capacity – phased-out coal units are not replaced by other dispatchable units, which poses a risk to the functioning of the electricity system.
Methods: A literature review, comparative analysis and financial models were used in the research project. Data sources included energy entities from Poland and Europe, public administration, Polish Statistics, Eurostat and energy databases. A linear SRMC (Short Run Marginal Cost) model of all power units in Poland, operating as centrally dispatched units, was also carried out. It includes coal-fired and gas-fired units. Its purpose is to present the impact of the merit order mechanism on energy market dynamics in 2021-2022.
Results: Severe increases in natural gas prices have resulted in a sharp rise in the price of electricity in Poland, which has become a significant driver of inflation – CPI inflation in Poland in 2022 was 14,4%, one of the highest in Europe. In line with the merit order mechanism, power units using natural gas with the highest SRMC received small margins, while entities using, for instance, hard coal or lignite recorded extraordinary profits.
The SRMC model showed that the increase in natural gas prices resulted in gas-fired power plants being the most expensive units in the Polish system. The increase in natural gas prices made gas-fired power de facto uncompetitive (gas prices on the Polish exchange TGE have increased from 50 EUR/MWh to 117 EUR/MWh), and its use of the merit order mechanism led to drastic increases in electricity prices – the SRMC of the most expensive gas units was 100 EUR/MWh in 2021 and almost 225 EUR/MWh in 2022. Despite an average annual carbon price of 80 EUR/tCO2 (vs 54 EUR/tCO2 in 2021) and large increases in the price of hard coal, coal-fired power plants were clearly cheaper. This mechanism led to disproportionately large windfall profits for energy companies with coal-fired power plants in their portfolio.
Conclusions: The energy and geopolitical crisis has significantly affected almost every sector of the economy. The solution is to accelerate the transition away from fossil fuels, especially coal. Gas-fired power generation (perceived as a transitional technology) has become unprofitable in the wake of the energy crisis, but such a drastic increase in natural gas prices seems to be temporary. The shift away from fossil fuels and the development of a sustainable energy mix together with renewable energy sources will lead to a decrease in exposure to the risk of further energy crises in the future. It is also necessary to avoid the problem of missing capacity by aligning investments with phasing-out coal units.
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