Position of the Union of Entrepreneurs and Employers on rising energy prices

Warsaw, 10^th October 2018

Position of the Union of Entrepreneurs and Employers on rising energy prices 

Electricity prices constitute a very important parameter for all participants of a state’s economy. For entrepreneurs, naturally, expenditures on electricity embody a cost that is particularly acute for production enterprises with high energy consumption. For distributors, rising electricity prices mean higher risks (these entities become, in principle, hostages of the situation they found themselves in – they distribute a product whose prices grow in a fashion completely independent from them). From the point of view of a consumer, more expensive electricity (ergo higher costs of enterprises) is associated with an increase in the prices of products and services. In addition to all of the above, everyone obviously uses electricity also at home, independently from their economic activity. In connection with the above, rising electricity prices are no good piece of information for market participants. Therefore, it is necessary to consider the reasons behind this phenomenon and potential ways of solving this very problem.

Offer prices for energy sales for 2019 for business oscillate at a level, depending on the specifics, circa PLN 350-480 per one megawatt hour (1MWh), whereas this year the business was getting electricity for PLN 210 per 1 MWh. This means that next year at least a large part of entrepreneurs will have to pay for electricity more than a half more than they paid over the present year. This state of affairs will not remain without impact on the entire economy, including – which seems to be particularly sensitive from a political point of view – the situation of consumers and households. Therefore, drastic increases in electricity prices have recently become such a popular topic in the media.

First and foremost, it should be noted that the problem is not of a temporary nature. A transient increase in electricity prices would obviously be worrying at the time, but in the long run, it would not have significantly impacted the economy. However, according to estimates of the Institute for Renewable Energy, after 2020, Poland, having set up an energy mix based in half on coal and supplemented with nuclear energy and renewable sources, will have the highest in Europe wholesale energy prices and tariffs for all recipient groups. Such forecasts indicate that the problem of rising energy prices in Poland is of a strategic nature and does not constitute only an interim economic hardship.

As for the reasons for rising electricity prices, one must state that they are largely external and, as a rule, independent from Polish decision makers. One of the basic reasons mentioned by analysts is a drastic increase in the prices of CO₂ emission fees.

Within the European Union, there is a system of emissions trading, which is a de facto key element of the Community’s climate policy. It consists in the fact that every year, there is a certain number of CO₂ emission permits on the market. Such a permit gives the holder the right to emit one metric tonne of carbon dioxide. In 2013, the number of 2,084,301,856 permits was established, which until 2020 will be decreasing annually at the rate of 1.74%, and from 2021 to 2030, by 2.2 %. Emission permits are allocated to companies through auctioning and can then be sold on the open market by means of a stock exchange. In the autumn of 2017, the price of one permit equalled on average approximately EUR 6. At the moment, the price has increased to EUR 25, and in the near future, it is not entirely impossible that it breaks the level of EUR 30, and some analysts mention the possibility of reaching the level of EUR 100 in the long term. The Polish power industry, based in 85% on coal, is additionally high-emission (about 770 kg of CO₂ per one megawatt hour, whilst in Germany, it is only about 420 kg per 1 MWh), which means that changes in the prices of permits for CO₂ emissions directly translate into energy prices in our country. In the long term, the problem may turn out to be even more severe, as due to the fact that Poland had surpluses of CO₂ emission permits, some producers received them for free. In the near future, these entities will have to participate in auctions, which means an increase in demand for permits, and therefore a further increase in prices.

Considering the above, one must not forget about the second, no less important, component of the problem, that is coal prices. At the beginning of July this year, coal prices in Australia exceeded the level of USD 120 per metric tonne. Coal was so expensive for the last time in 2012. The increase in coal prices is almost directly attributable to China’s growing demand for this raw material. Undoubtedly, there are several reasons for the increased demand – analysts indicate, among others, an exceptionally warm summer, but it is not without significance that Chinese industry is growing dynamically, and at the same time, China does not have any CO₂ emission limits adopted by EU countries. Coal prices on world markets are very important for Poland, as about 20% of the raw material used in the country is imported. Coal mining in Poland is expensive, because it comes from proper mines, not strip mines, as it is in Australia.

To recapitulate, in view of the current perturbations on the global markets, two unfavourable factors – from the point of view of energy prices in Poland – accumulated, which are: the increase in the prices of permits for CO₂ emissions and the increase in coal prices. At the same time, more and more expensive electricity in Poland is at the moment only part of the problem, because, in the long term, we can even expect a gap in electricity supply. According to estimates, our demand for power may increase by 2030 from 26 gigawatts to 33 gigawatts. Simultaneously, there are no new power plants in Poland that could meet growing needs for energy, and more than 60% of existing installations are already this old that soon they will no longer be able to continue their operations. Consequently, the power grid in Poland requires far-reaching and continuous modernisation, which would cost the budget tens of billions of zlotys.

Taking into account the above facts and forecasts, one must admit that the discussed situation has a direct negative impact on the competitiveness of the Polish economy. Within a few years, we may have the most expensive electricity in Europe, and already at the moment, large customers pay significantly more per one megawatt than other countries in the region (approximately EUR 69 in Poland vs. EUR 57 in the Czech Republic or EUR 38 in Germany). This, of course, translates into operating costs of enterprises, their competitive position relative to other European entities, product prices, and ultimately also into the costs of maintaining a household. No wonder, then, that the problem was addressed by both the Ministry of Energy, which explained the reasons behind higher prices, as well as the largest Polish energy companies that discussed their investment plans during the proceedings of the Energy and Treasury Committee of the Polish Sejm.

Pursuant to the above-mentioned facts, we consider it reasonable for the government to conduct remedial actions as part of the formulation of Poland’s energy policy. Therefore, we draw attention to the need to create a framework and to stimulate the formation of energy clusters, i.e. agreements concluded by means of contracts between locally operating entities that deal with the production, consumption, storage and sale of, among others, electricity (but also heat or fuels). Investing in distributed energy, as well as improving the regulatory framework for energy clusters (the definition of a cluster was only introduced into our legal system in mid-2016, and is, therefore – from a legal point of view – a relatively young formula), becomes necessary to balance future demand for energy – clusters concentrate in different energy sectors, and by strengthening the decentralisation of production, storage and supply, they also significantly reduce the risk of a blackout.

At the same time, efforts should be made to increase the share of “green” sources in the Polish energy mix, including in particular wind farms, along with those built on the sea. This is a de facto necessity resulting from both permanent and objective conditions, such as inefficient methods of extracting the key raw material for the Polish energy industry, which is coal and growing demand for electricity, with insufficient number of production units, as well as political conditions resulting from climate regulations adopted at the level of the European Union. For this reason, in order to maintain the competitiveness of Polish entities on international markets, we call for – apart from reacting to the current situation – long-term and strategic activities.

Union of Entrepreneurs and Employers

Fot. magro_kr/ na lic. Creative Commons/ flickr.com