Warsaw, 24 April 2024

Opinion of ZPP Chief Economist Piotr Koryś on the factors driving development in post-World War II Europe

Determinants of European economic development from the end of the Second World War to the present day

The 20th century saw a continuation of the development of Western Europe, interrupted by world wars, the crises of the interwar period and the oil crisis. After the Second World War, there were several waves of dynamic growth in the countries of the European Community and later the EU. Throughout the period, European countries have retained a high capacity to produce human capital. In addition, due to the level of technological advancement of European economies, at least some of EU member states can be counted among the technological leaders. However, in recent decades, development problems have been intensifying due to a number of factors, including demographics and the model of European social policy affecting labour costs. Another growing and serious challenge is the EU’s industrial policy oriented towards the creation of development niches that cannot be exploited. Since the end of the Second World War, European countries have also been benefiting from globalisation as one of the main global manufacturers and suppliers of advanced high-cost services.

The period after the Second World War brought a wave of rapid growth sometimes referred to as economic miracles. This was the case for Germany, France and Italy – key EEC economies. There were several factors behind the first wave of growth. First of all, the economies that had been destroyed by the war and were returning to civilian production had considerable untapped potential in terms of human capital, labour, and in part also material capital and infrastructure (although not always fit for use). Secondly, the American programme for the reconstruction of Europe created suitable conditions for these resources to be used – the inflow of capital, as well as currency that allowed to rebuild trade between European countries, became key drivers of development. Thus, it can be said that the years immediately following the war were a period of a return to past upward development trajectories and a relatively efficient use of production factors.

In addition, American policy at the time was oriented towards creating conditions conducive to economic integration, both at the level of individual companies (co-operation) and states. In the face of mutual lack of trust in war-ravaged Europe and efforts to rebuild national economies, problems related to currency convertibility were an important factor inhibiting these processes, although these were partly solved through bilateral trade agreements. For several years, the partial dollarisation of the European economy facilitated international trade. The Marshall Plan also brought an influx of American technology, new methods of organising production, and direct investment. The commercialisation of US technology in Europe, the growing use of military technologies for civilian applications, US development aid and the restoration of pre-war economic potential with macroeconomic stabilisation led to a rapid increase in the wealth of Western European societies. This resulted in an increase in demand for consumer goods. It should be pointed out that European economies were highly competitive at the time (due to relatively low labour costs, high productivity, favourable demographics and social cohesion).

These were the primary sources of the post-war economic miracles – a period of rapid economic growth, both in absolute terms and in comparison with the USA. The potential for this growth has been exhausted with increasing tensions in the global economy. The collapse of the Bretton Woods system, the decolonisation processes and, finally, the period of stagflation associated with the oil crisis contributed to the slowing down of this dynamic. In the meantime, recognised European brands expanded globally (in such categories as white goods, consumer electronics, the automotive industry as well as specialised capital goods and products in the modernised light industrial sectors, where Italian and French companies were gaining a competitive advantage despite rising production costs).
Several factors were behind the growth at the time, including the closing of the technological gap to the point where European industry took the lead in certain industries and the transformation of European societies into urban societies characterised by mass consumption. This process had already started before the First World War, but was slowed down by years of war and crisis. It was later resumed by the start of the economic integration process.

This third factor was especially important given that,  the Treaties of Rome gave major impetus to the rapid integration of the major economies of continental Western Europe(after a dozen years or so, the United Kingdom also joined this group of countries). The rapid broadening and deepening of the market opened up new prospects for European companies, which were able to grow in size as the European market was becoming a ‘vestibule’ to global markets. Germany soon became one of the world’s largest exporters, with France and Italy also generating significant international turnover.

This period of rapid global expansion allowed many European companies established before the Second World War to rebuild their position and was conducive to the development of new ones, as well. The increase in labour costs served to stimulate the R&D sector and promoted productivity gains. In turn, the falling cost of capital encouraged investment in new industries. The regulatory role of the European institutions was quite limited at the time, and national regulations tended to focus on protecting the interests of workers rather than creating new economic sectors. Environmental regulations began to significantly improve the quality of life for Europeans, while competing labour costs had not yet become a challenge for the most developed economies.

The oil crisis of the mid-1970s brought a slowdown in growth. The internal migration within Europe underway since the 1960s as well as the economic slowdown halted the labour cost dynamics in the countries of the European core (especially Germany, the UK and France). This was due to waves of immigrants both from southern Europe and from behind the Iron Curtain, which kept the European economies competitive.

The subsequent wave of rapid growth was further driven by the enlargement of the European Economic Community in the 1970s and later in the 1980s (what proved crucial was the accession to the European Community of less-developed countries, including Ireland, Greece, Portugal and Spain). This created suitable conditions for the relocation of parts of the manufacturing sector, especially to southern Europe (through direct and capital investment). At the same time, starting in the 1970s, after a decade of stagnation, the integration processes, especially in terms of monetary integration, accelerated. The result was the creation of the European Monetary System, which brought significant benefits to businesses, especially those active on European markets.

An important growth factor for the enlarged Community was the convergence process of the newly incorporated economies. The complementary flows of capital and labour added considerable potential to the European economy.

During this period, the key growth factors were:

• closer economic integration;
• broadening the integration grouping;
• efficient allocation of capital, labour and human capital resources within the integration grouping.

The end of the Cold War, the collapse of the USSR and the subsequent enlargement of the EU contributed to another wave of economic growth in Europe. It was driven by the expansion of the market as a result of two successive waves of expansion of the Community after the end of the Cold War (which included the neutral countries Sweden, Austria and Finland, and later a large group of countries from behind the Iron Curtain). Once again, this made it possible to benefit from the efficient allocation of human and physical capital as well as labour resources (including migration of workers to the countries of the European core from Central and Eastern Europe and investments made in the countries of the region). The need to rebuild and modify the transport infrastructure (such as roads, railways, but also urban spaces) in the newly acceded countries, made possible by EU funds and carried out with the significant participation of experienced companies from the European core, also become a catalyst for growth.

At the same time, the processes of deepening integration accelerated, as reflected by the single political formula of the European Union, a common currency, and the expansion of the Schengen area. This was beneficial for European companies. During this time, however, global competition revolving around labour costs began to intensify. The competition from Southeast Asian countries was, over time, becoming a problem.

At the beginning of the 20th century, and in particular with the advent of the Great Financial Crisis (2008–10), European industry and the competitiveness of European companies started to decline. The positive effects of the subsequent phase of European integration were felt relatively briefly in the European core, although the new form of the Union (with 25–28 members) brought another wave of growth – although driven mainly by processes of convergence and the relocation of industry to the new member states.
Industrial and development policies served as political tools to stimulate development, specifically economic evolution.

Europe’s economic development in recent decades has been linked to new concepts of economic policies designed to foster the development of businesses and especially that of industry. In historical terms, the first wave of post-war industrial policies was linked to the Marshall Plan. The period of economic miracles – the golden age of European economic development – brought in turn a wave of national policies supporting the specialisation of the countries of the European Community. These were based on identifying winners – companies and sectors that were to succeed with state support. At the dawn of the European integration process, the European Coal and Steel Community was established, oriented towards sectoral industrial policy at Community level.

From the 1970s onwards, this strategy was replaced with the idea of liberalisation and moving away from state interventionism towards building a market environment conducive to development. In particular, this meant deregulation and a drive to reduce companies’ operating cost. Industrial policy took on a horizontal approach. At the level of the European Community, it was becoming increasingly clear that the lack of coordination of national development policies (including industrial policies) was a barrier to faster development. This resulted in the introduction of regulations at European level to ensure a favourable market environment, while at the same time fostering national and supranational development strategies, especially those oriented towards research and development in key sectors.

This way of thinking prevailed in the 1990s and 2000s, as reflected in the Lisbon Strategy of 2000, the aim of which was to create a framework for the development of citizens, companies and economies that would make the EU a leading global economic force, both in terms of productive capacity, innovation and the quality of life.
The financial crisis of the end of the first decade of the 21st century brought another change in the approach to development and industrial policies. The involvement of the state in building and restoring domestic industrial capacity and modernising manufacturing processes was a fairly widespread and global, not just European, response to this crisis. The return to industrial policy gained a new dimension when its aim became to create a framework for economic development adapted to increasingly boldly formulated climate policies.

Since then, industrial policy has become a tool integrating both the previous experience of vertical, sectoral industrial policies and horizontal regulatory policies. This type of industrial policy has had a significant impact on shaping the market environment in which European companies operate. Despite their active participation in shaping many of these policies, it has proven to be extraordinarily challenging to confront the challenges of global competitiveness and adapt to regulatory frameworks at the same time.

European industrial policy today

In many areas, the European Union seeks to be a regulatory reference point, a leader of positive change and a model for shaping the regulatory environment for the whole world. The same is true of EU development and industrial policy. In this case, the aim has become to identify or find niches for the green economy and, through regulatory measures, to create suitable conditions for European companies to succeed in them as global pioneers. In other words, regulatory barriers are supposed to shape the economic playing field in such a way as to foster innovation in desirable sectors and ensure their successful commercialisation.

To understand the difficulties involved in making policy, it is worth taking a look back at the experience of a few key sectors in the European economy. In the case of sectors that are key for green transformation, where global competition is taking place, the niches created have been taken over by external competitors. What is meant here is wind power and photovoltaics, where the EU share in global production has fallen dramatically in favour of China despite the efforts of the European Commission.
The results of attempts to build a strong position in the BEV sector through regulations banning the production of combustion cars have been worrying so far. The position of European car companies, one of the key sectors of European industry, has been unusually weak. This could have an impact on the European labour market due to the high level of employment in this sector.

Climate regulations are also affecting, albeit to a lesser extent, the competitive position of an increasing number of sectors due to the fact that they are not as strictly enforced in many regions competing with Europe. This means that, in addition to high labour costs, European companies are facing another challenge driving up production costs. This raises concerns that the new concept of industrial policy in support of the green transition could, in its current formulation, become a development challenge for the European manufacturing sector. Regulatory pressure is often intended as a response to the misidentified (including by the companies themselves) needs of large corporations, including those in the automotive sector. In turn, support measures provided at EU and national level often limit the possibility for new industries to develop spontaneously from the start-up level. In the US and China, successful automotive start-ups such as Tesla are trying to challenge unprepared and insufficiently agile large European car companies. This, in turn, begs the question whether the model of fostering innovation and shaping the development of the manufacturing sector through regulatory barriers that raise operating costs should be pursued in the current model. The objectives defined in the Green Deal should be pursued, but the way in which they are achieved should be reconsidered so as not to compromise the situation of European businesses. Otherwise, there is a serious risk, at both the political and economic level, of preventing the achievement of these objectives.

See more: 24.04.2024 Opinion of ZPP Chief Economist Piotr Koryś on the factors driving development in post-World War II Europe

Warsaw, 9^th January 2024

 

An infrastructural puzzle.
Official opinion of Piotr Koryś, the Chief Economist of the Union of Entrepreneurs and Employers

 

In a rather interesting interview, Marcin Piątkowski, this year’s recipient of the ZPP Award for Economist of the Year, stated that Poland could follow the path of Spain or Italy, that is, achieve a comparable level of prosperity and subsequently stop catching up with the global leaders of growth. Or gamble like Real Madrid CF and advance to the top league. Piątkowski listed out several factors that may determine this. What characterises the countries that have achieved the greatest economic success, and are in fact today in the top league, is not only their attention to the quality of institutions, audacity in the pursuit of development policies, readiness to implement measured public policies and infrastructural investments – in a nutshell: investing in the future – but also, and perhaps above all, cohesion and continuity of development policies.

Let’s have a look at this in the context of the political changes taking place in Poland, shall we? Continuity concerns infrastructural policies or regulatory and institutional solutions. Disputes regarding the latter group aside, what signals are the “brigands” of the newly formed coalition sending about the projects that are to become a driver of development in the decades to come? I’m not pondering whether they were completely well designed or not; one could probably find a fault here and there. I’m contemplating the modus operandi of the Polish state itself – stretched between two options: policies and investments implemented within the perspective of a single term, or policies and investments implemented beyond political divisions.

Two major projects left by the Law and Justice (PiS) government to their successors are the remodelling of the country’s transport infrastructure basing on a centrally-located airport of an at least regional scale and a high-speed railway network, and yet another attempt to construct a Polish nuclear energy sector, or rather to continue the project initiated by Donald Tusk’s previous government. The former was reduced in the public debate to a three-letter abbreviation: CPK. Some defend it, others question the point of a large airport. Some even consider it to be a supposed symbol of gigantomania, so typical of authoritarians(!).

Nevertheless, CPK is, first and foremost, a project of a thorough modernisation of the Polish transport infrastructure, which may become the starting line to the next development leap. Those were infrastructural investments that allowed “Asia’s next giants” (to quote Alice Amsden) to maintain their dynamics of development. New, fast infrastructure should support the transformation of Poland into the new “industrial heart of Europe” is what Piątkowski talked about in the above-mentioned interview.

In a sense, the nuclear project is complementary. Over the next dozen years, the power units of coal-fired power plants (both hard and brown coal) are to be phased out – a result of not only consumption, but also of the EU’s climate policy. Nuclear power plants can provide a stable basis for the future energy mix: gas-fired energy is insufficiently certain for future development, while renewable technologies are still a far cry from ensuring supply (and probably also price) stability. Stability of energy supplies, along with the process of further electrification of the economy, will be key to ensure we develop. From the point of view of entrepreneurs, it will be one of the crucial decision-making factors when undertaking and developing new investments.

Neither of these projects could be implemented within a horizon of 4 or 8 years, which is a typical term in democratic Poland. Their implementation can only be based on a vision across party lines and in the long term. A vision that is not undermined by petty disputes and conflicts or personal dislikes. One can have a number of reservations towards the policies (and politics) of the previous administration, so perhaps the reasons to hold the predecessors accountable are justified. It must, however, be stressed that PiS had never actually broken continuity in the area of infrastructural projects. This was perhaps the result, critics will surely say, of regulatory pressure from the EU. Infrastructural projects carried out in the first and second decades of the 21^st century were usually largely financed from EU aid funds. Therefore, any redefinition of investment goals was out of the question. Regardless – even if this was the case – the road network project or railway investments were carried out in a continuous manner.

With regard to Law and Justice’s large infrastructural projects, there are varying signals coming from the camp that will soon take over power. There are fears both in relation to CPK and nuclear energy that investments might at least slow down. Meaning, for example, that nuclear power plants may not be built when they are really needed. Perhaps the party that will no longer be in government has only itself to blame – both projects are in their infancy. And yet recently, the politician responsible for CPK assured that the first planes would take off in… 2027.

Both projects are essential. Decisions regarding audits, new investors or better (optimal) solutions are resolutions that postpone their implementation increasingly into the distant future. Just look around. Having made the decision to build an airport near Berlin, its implementation was continued in spite of rising costs and better ideas. Having made the decision to develop nuclear energy in Finland, locations would not change, and no further audits were carried out despite changing government.

These projects are just but two examples. Were the best possible solutions selected? Probably not. This is never the case – no government ever chooses perfectly. However, large public investments have been thus far one of the few areas of political consensus. Abandoning it today will probably mean not only postponing the implementation of these projects that Poland needs into an unknown future, but also starting a new series of conflicts and ruptures in continuity. Who will stop the new champions in 4 or 8 years from doing what is being done today? Unless someone believes again (and this is probably the norm in our country) that they would never lose again…

Piotr Koryś, Ph.D.
Chief Economist of the Union of Entrepreneurs and Employers

See more: 09.01.2024 Opinion An infrastructural puzzle. Official opinion of Piotr Koryś, the Chief Economist of the Union of Entrepreneurs and Employers

Warsaw, 30^th October 2023

 

Opinion of the Chief Expert on Energy of the Union of Entrepreneurs and Employers:
EU’s Renewable Energy Directive RED III vs the possibilities of the Polish energy sector

 

• The European Renewable Energy Directive (RED III) was adopted at the beginning of October this year by the Council of the European Union.
• The document introduces both indicative and binding targets, some of which may turn out to be unrealistic in Polish conditions.
• Poland has 1.5 years to transpose RED III. It is worth using this time to conduct a detailed feasibility study of the document in national conditions and further possible negotiations with the EU in this regard.

Energy transformation comes down to a systemic reconstruction that involves basing the entire energy sector in Europe on renewables. This is the target that the European Commission is pursuing: a global economic process that will revolutionise European industry. It means a metamorphosis of the lifestyle of the citizens of countries where the efficiency of energy use increases along with the progress of electrification. Of course, this mainly applies to countries that are highly developed in terms of technology and possess the ability to finance extensive modernisation and innovate in the area of consumption of energy resources, meaning energy and heat generation.

After the outbreak of the war in Ukraine and following the observed energy problems in almost every European country, it seemed as if the European Commission would slightly revise the transformation pace to enhance the energy security of the continent. On the one hand, this could mean an increase in RES investments. On the other, it might translate into the use of European fossil fuel resources, as well as the return in some countries to nuclear energy. Such an energy mix also seems to be the most rational way to guarantee Europe’s energy security.

Meanwhile, the recently adopted by the Council of the European Union directive known as RED III clearly defines the direction of development of the European energy sector as preferably based on renewable sources. Increasing the obligatory share of green energy in the European energy balance to 42.5% with the option to increase this level to 45% by 2030 is a realistic scenario only for some EU member states, such as Denmark. The entire Polish energy sector produces 175 terawatt hours of electricity per year – green energy accounts for less than 30 TWh, the equivalent of approx. 21% of the country’s energy balance. While we are observing a very promising share of renewable energy generation this year in Poland and the year might end with a new record in this respect, the Polish energy sector under the current regulations is unable to double its installed green capacity by 2030. And this relates to sectoral law and regulations defining general investment requirements alike. Presently, we have approx. 26 GW of renewable generation capacity installed in wind farms, photovoltaics, hydropower, and biomass installations.

By 2030, offshore wind farms with an installed capacity of 5-6 GW can be expected to be launched, which should translate into the production of approximately 15-20 terawatt hours of green energy. With favourable legislation facilitating RES investments (onshore wind energy and large-scale photovoltaics), we can count on an additional production of approx. 10 TWh of energy from these sources by 2030.

Thus, in 2030, with a favourable investment policy towards renewables, the Polish state can expect to produce 60-65 TWh a year. Considering the expected consumption of ca. 180-200 TWh, will constitute only 25-28% of the country’s overall energy balance. This in no way implies a lack of faith in the RED III having sense – on the contrary. Nevertheless, this does not directly impact the enforceability of its provisions within the expected time limit.

To meet the assumptions of RED III, Poland should have roughly 60 GW of renewable generation capacity installed by 2030, which is more than the entire Polish energy sector currently. Such power, counting on average 1,500 hours of full operation (a large part of which are going to be photovoltaic sources with lower efficiency) translates into 90 TWh of energy produced. And only in such a scenario will we be able to fulfil the assumptions of the Directive.

Assuming an average production of onshore wind farms at the level of 2,000 hours of full power (due to the anti-windfarm law, we do not have high-efficiency installations of this kind in Poland, with a capacity of over 3,000 hours of full power, and operating farms often do not even achieve 2,000 hours of full power) and a total of 10-12 GW of generating capacity, we should achieve ca. 20 TWh of production from this source by 2030. Offshore wind farms will produce 18-20 TWh by 2030 according to the 3,500-hour model, multiplied by an installed capacity of 5-6 GW. By then, photovoltaic installations should reach the level of 20-25 GW of installed power, which, with an average production of 700-800 hours of full power, will result in 17-20 TWh of energy produced. Constantly operating sources such as hydroelectric power plants, biomass or biogas power plants, even with significant investment facilitations, will not produce more than 8-10 TWh of green energy annually by 2030.

To sum up energy generation, with a legislative “fast track” for the necessary RES investment laws, Poland might can count on reaching the ceiling of 40-45 GW of installed capacity by 2030-2032, which may translate into energy production of approx. 60-70 TWh a year. At the same time, one must not forget that Poland has a large share of industry in its revenue structure, and Polish industry produces many goods for export, mainly to developed countries, including fellow EU member states. Therefore, with the obligatory use of green energy only in production processes (ESG goals), our industry will require over 50 TWh of green energy for its own needs. RED III assumes a 1.6% annual increase in the use of green energy, which is realistic, but would happen in our domestic conditions at the expense of other sectors of the economy.

Challenges that electric transport as well as heat and power face

Thus far, Poland is not a producer of green hydrogen, although in the future it may constitute a principal element of the national economy. In this context, the target of a 42% share of green hydrogen in the industry by 2030, which is assumed by RED III, seems to be completely unattainable. Moreover, the indicative target of 49% of renewable energy used in buildings provided for in RED III is unattainable for us even in 2035, due to the specificity of our energy sector. Even with a significant increase in green energy production, we must direct it first to industry and transport. Power supply for buildings and households will still be based on coal-fired energy in the longest term. Energy from natural gas will in turn be needed as a stabilising factor for the operation of weather-related renewables. And although, of course, a lot of transformational investments in the Polish heating sector are currently planned and implemented, both the financial condition of the sector and several types of administrative and legal barriers mean that for now low-emission installations are heralds of change instead of a commonplace phenomenon.

If, through the development of the prosumer sector, it is possible to achieve to power 15% of households with green energy by 2030 as a result of self-generation and utilisation, it will be a remarkable success for the Polish economy. Let us remember, however, that from 2024 a dynamic tariff will enter into force. As a consequence, without investing in an energy storage facility, PV panels alone, or worse a heat pump, will become a project of questionable profitability. Support systems will therefore play a huge role here and for that we naturally need funding.

In terms of transport electrification, RED III offers a choice. Either a binding target of 14.5% reduction in greenhouse gas intensity in transport (due to renewable energy use by 2030), or a binding target of at least 29% renewable energy in final energy consumption in the transport sector by 2030. In the context of the great significance of the automotive, transport, and logistics industries in Poland, it seems necessary to confirm that these sectors evaluate these “binding goals” as realistic.

Acceleration of investments in renewable energy is indisputable, but other provisions may need to be adapted to local specificities.

The strengthening of criteria regarding the use of biomass as a source of renewable energy in RED III should be evaluated positively. This is important for the Polish economy not only due to environmental criteria, but also due to the share of the furniture sector in exports and the country’s economy.

The emphasis in REDIII on simplifying the process of issuing necessary investment decisions for RES also seems necessary. The concept of “overriding public interest” best suits the interests of the entire Polish economy in this respect, but also of the EU economy in the understanding of the common energy market.

In my opinion, RED III is a positive and necessary document that indicates quite precisely the direction of development of European economies. As a guiding document, it should be adopted without undue delay by decision-makers in the Polish energy sector (Poland has 1.5 years to transpose it into national legislation). It should be subject, however, to verification of individual partial goals and then adapted them to the capabilities of the Polish economy. It seems that it should now be of key importance to reach consensus regarding local specificities in the transposition of the Directive by individual EU member states.

For example, Belgium raised concerns about whether the sectoral partial targets assumed in RED III guarantee the implementation of climate goals in an economically justified way. Ireland recognised the importance of ambitious 2030 renewable energy targets, but stressed the need to comprehensively consider their implications – noting that impacts may be underestimated. Latvia reported the need to consider the country’s economic and social conditions, energy balance and starting point when setting renewable energy requirements. The aim here would be to ensure that the objectives of RED III are both attainable and beneficial for each EU member state. Therefore, it seems that Poland has a chance to not be alone in its observations and dilemmas regarding the assumptions of RED III, which gives hope for a constructive dialogue at the EU forum.

Włodzimierz Ehrenhalt
Chief Energy Expert of the Union of Entrepreneurs and Employers

 

See more: 30.10.2023 Opinion of the Chief Expert on Energy of the Union of Entrepreneurs and Employers: EU’s Renewable Energy Directive RED III vs the possibilities of the Polish energy sector

Warsaw, 10^th March 2023

 

Opinion of the Chief Economist of the Union of Entrepreneurs and Employers: inflation and growth – what might take place in the months to come

 

In January 2023, the consumer price index amounted to more than 17% year-on-year. This is in fact a very high inflation level; one that raises concerns with regard to inflation in the long term (I shall elaborate on that matter separately). This concern is further exacerbated by the fact that price increases in the euro area have clearly slowed down, whereas in Poland there are no signs of such trend. It seems, however, that in spite of negative signals, one should expect disinflation in the short term – judging from the seasonal price dynamics and a number of other factors.

There has been much talk of disinflation from the beginning of this year, ever since this term was used by FED Chair Jerome Powell. Disinflation is a process of price growth decrease; it is not tantamount to a price decrease though many consumers would surely welcome such a change in prices. In other words (and simpler terms), disinflation is the slowdown in the rate of inflation, as a result of which price growth decelerates or stops. The stabilisation on commodity markets (energy markets in particular), the risk-off or decrease in investment risks (for example related to the Russo-Ukrainian War) are named among the reasons for disinflation that might take place in upcoming months. The economic slowdown that has already been observed is also expected to contribute to disinflation, resulting in a decrease in consumer demand (and thus a decrease in the pressure on price increases).

However, the dynamics of inflation slowdown do not have to be sisgnificant. They will certainly be reinforced by a global economic slowdown with the still looming threat of recession in developed economies, but on the other hand, the situation on the energy commodity markets (and the energy crisis in Europe resulting from it) is far from stable. Last winter was quite mild. Moreover, we saw in Asia a decline in demand for liquefied natural gas due to China’s anti-pandemic policy, as well as due to the very high level of prices in the first half of the year, which limited the ability to purchase on the market by such countries as Pakistan. Nonetheless, these events were of a more or less one-off nature, and this year the availability of natural gas to meet European needs may be lower than a year ago. Should this happen, it might translate into another wave of price increases (natural gas, crude oil, and energy), which in turn could sustain the growth of consumer prices in Europe, including Poland.

Also, the geopolitical situation in Eastern Europe is far from stable. Recent reports speak of a growing risk of conflict escalation. Such an escalation will impact risk perception and, consequently, will probably stimulate growth of raw materials prices. The same goes for all subsequent operations aimed at limiting the export capacity of the aggressor, that is Russia. That country remains one of the main suppliers of crude oil and natural gas in global terms, in spite of sanctions imposed by Western countries which significantly reduced their scale of exports or their stream of revenue in particular.

Finally, it is worth recalling that, in recent years, the concept of deglobalisation, meaning the collapse of global supply chains and value creation, has become part of the glossary of economic experts, mainly due to the growing tension between the US and China, the increasing uncertainty concerning the geopolitical situation, and the collapse of the political and economic order under the leadership of the US after 1989. Deglobalisation will not be conducive to price drops, because part of the production may “come back home” from low-cost regions to places where labour costs more due to non-economic reasons.

Therefore, factors that may potentially lead to a slowdown in inflation, at least in the short term, might in an unfavourable scenario be offset by factors further driving it. This in turn would prolong the inflation phase of the current crisis. Furthermore, it is also possible for inflation to return after a relatively short period of disinflation. Historical experience supports this assumption: periods of increased inflation would often interweave with temporary periods of price slowdown preceding subsequent waves of increases. One can also expect that post-crisis economic recovery may be of an inflationary character, backed by yet another wave of fiscal expansion and equally expansive monetary policy, boosted by elections in a number of developed countries, including the US. Moreover, there are significant long-term conditions conducive to the inflationary environment looming on the horizon, including, in particular, unfavourable demographics in the entire developed world and beyond, but this is a topic for a separate discussion.

Should we then in this context expect 2023 to be a year of recovery from the crisis for the West and Poland, as indicated by the recently published macroeconomic forecasts? Possible, although not yet certain. To boot, I would expect the crisis to take shape of the one we had seen in the 1970s. A period of slow growth might be a long one, and between the waves of recession, moments of recovery can turn out to be rather shabby.

Growing uncertainty regarding the future, declining real income caused by inflation (not to be changed by disinflation) – these factors will not be conducive to the recovery of some sectors of the economy. Demand for cars has been decreasing astonishingly fast in Western Europe and the US in recent years. This year, that trend may continue. Consumers’ decreasing purchasing power will also reduce the demand for a number of services, such as tourism or HORECA. This will not always translate into a deterioration of the situation of Polish providers of such services: some consumers may resign from going abroad in favour of enjoying their holidays in Poland (although others will give up holidays altogether). The decline in demand also affects the real estate market. Unless the situation changes this year, we might observe a decline not only in real but also in nominal real estate prices.

Therefore, let us expect a fall in inflation, but let us not hope this is the end of our problems. With that same attitude, let us look forward to an economic recovery, but knowing it may be weak and short-term. Even though Poland may indeed benefit from the reallocation of production following deglobalisation. Let us hope this year there will be less economic turbulence than in previous years. However, the economic situation in Poland, Europe and around the world is such that unfortunately there is no guarantee whatsoever.

Piotr Koryś Ph.D.
Chief Economist of the Union of Entrepreneurs and Employers

 

See more: 10.03.2023 Opinion of the Chief Economist of the Union of Entrepreneurs and Employers inflation and growth – what might take place in the months to come

Warsaw, 7 February 2023

 

Opinion of the Chief Economist of ZPP – summary of 2022 and prospects for 2023

 

The year 2022 could be called interesting, in the sense in which the Chinese use the curse “may you live in interesting times”.  The beginning of the year brought concerns about inflation (although even pessimists predicted a peak in consumer inflation of approximately 10% year-on-year).  It was supposed to be influenced by the rising prices of energy raw materials and the rebound in the Polish and global economies after the pandemic.  This rebound started in 2021, but many forecasts, especially those from 2021, indicated its continuation in the following months. This, in turn, was expected to affect prices.

Even before the aggression against Ukraine, Russia began to apply a policy of a limited supply of energy resources to Europe. This was possible due to the dependence of European countries on Russian gas (supplied via pipelines, which meant that there were not many stimuli to change the supplier; in fact, Europe’s dependence on Russian gas has been deepening, not weakening, as a result of German policy in recent decades), oil ( flowing through the Przyjaźń oil pipeline – again, there is no cheaper and easier form of import, hence Central European countries, in particular, were dependent on Russian supplies) and its distillates (especially diesel oil was imported to Europe in significant quantities). The beginning of the year also brought the last significant wave of COVID, during which the government still tried to apply restrictions limiting mobility. 

At the same time, hopes for the sustainability of a post-COVID economic rebound in the conditions of logistical issues (due to COVID, or rather anti-COVID policies) made us think with concern about the length of the aforementioned inflation impulse.  It was supposed to be caused primarily by excessive demand in relation to the production capacity of companies struggling with rising costs and supply disruptions.  Optimists; however, expected another year of stable economic growth and a slowdown in inflation after the expiry of the pandemic state aid.

The Winter Olympics in Beijing, which took place in February, were supposed to be a symbol of the success of China’s “zero COVID” policy and the effectiveness and agility of Chinese foreign policy.  The Olympics venues were often closed to spectators, who were few in number anyway – foreigners had virtually no chance to enter China for health and hygiene reasons.  Despite this, the following months showed that the Chinese pandemic was an even greater failure than the European one. Subsequent lockdowns slowed down the recovery of the economy, and the end of the year brought a relaxation of that policy (probably due to the economic situation and growing internal unrest) and a rapidly growing wave of the pandemic. Its scale is difficult to assess due to the censorship of information by the Chinese authorities. China’s efforts to organise the Olympics in times of peace were only partially successful – it may have postponed the date of Russia’s invasion of Ukraine – but only by 2 or 3 weeks … The year of the Chinese Olympics will not be remembered as a year of peace, at least in the West.  However, China and its policy must be remembered because, as it turned out at the end of the year, the Chinese accidentally threw a life belt to Europe in the middle of an energy crisis.

And this crisis began at the turn of February and March, when, as a result of Russia’s invasion on Ukraine, the EU launched a policy of sanctions limiting imports of energy resources. A similar policy of limiting exports by Russia became an offset to the above. Later on, the size of future supplies was affected by the explosion of the Nord Stream gas pipeline: since it was temporarily closed anyway, its impact was negligible; however, it called into question the possibility of a rapid return to a business-as-usual policy with Russia.  The concerns about supplying Europe with energy resources, which are crucial especially in winter (when RES efficiency is often negligible), led to an increase in the prices of natural gas and oil on regional and global markets. This, in turn, translated into an increase in the prices of fuel and energy – one of the two drivers of inflation, which turned out to be much higher than anyone had expected, not only in Poland but almost everywhere in Europe and, more broadly, in the world. Europe’s energy problems; however, were largely resolved thanks to the supplies of liquefied natural gas. At the end of the year, it turned out that the increase in those supplies was made possible mainly by the collapse in demand in China. There were two reasons for that collapse – the aforementioned policy of shutting down the economy and, to some extent, the increase in supplies from Russia (which was trying to find buyers for its hydrocarbons).  In 2022, the driver of inflation was also the fiscal policy of the previous years. Thee successive measures to support citizens and businesses resulted in an increase in debt in European countries and also in excessive money issuance.

The increase in energy prices in Europe affected the condition of some manufacturing industries, especially energy-intensive ones,  e.g.,  BASF moved most of its chemical production from Europe to the USA. It also affected the situation of households, which had to and still have to face a sharp increase in energy and fuel prices. On top of that, rising prices fueled inflation and, consequently, consumer prices in Europe are 15-25% higher than two years ago.

The following months brought an increase in tension in Ukraine: the Russian offensive, which collapsed, Ukraine’s counter-offensive in the autumn, and finally, the new tactics of Russian attacks on civilian critical infrastructure facilities. It was not until late autumn that the situation stabilised. It is worth mentioning that the assistance of NATO countries played a key role in terms of Ukraine’s combat capability and ability to wage the war against Russia.  Poland remained one of the leaders of that assistance throughout the year.

The war also triggered a massive wave of emigration from Ukraine, which I have already written about. Approximately 1.5 million new emigrants from Ukraine stayed in Poland, either for a shorter or longer period of time.  Some of them decided to bind their fate to the Republic for a while, taking up work here, setting up businesses and sending their children to school.  This is almost 1 million people who still remain in Poland, have valid PESELs, and will potentially rejuvenate the population and replenish the labour force.

At the same time, after the summer price rallies, fuel and energy prices stabilised. With storage facilities full and supplies secured, prices began to fall back to the pre-war levels towards the end of the year.  The falling prices further fueled growing fears of a recession, possibly global in scope.  Especially since strained supply chains, risks related to the uncertainty associated with the course of the conflict and the carelessness of economic policies during the COVID period are also conducive to that.

Inflation triggered a response from other central banks; therefore, a cycle of solid increases in interest rates, not seen for a long time, was noticeable both globally and in Poland this year – the time of zero cost of capital is over, at least for now.  This, in turn, began to translate into the cost of servicing debts, private ones – such as housing loans in Poland – and public ones.  In the autumn, the increase in UK bond yields (meaning a drop in market valuation) threatened the stability of the market and the UK pension system so much that it prompted a multi-billion dollar liquidity intervention by the Bank of England. During the same period, the Polish government refrained from issuing PLN bonds due to the compensation expected by the market for borrowing capital. It was replaced by issuing dollar-denominated debt – much cheaper but exposed to currency market turbulence.

And those turbulences were serious.  On the main EUR-USD currency pair, annual volatility reached several dozen per cent. EUR fell 20% against USD in the period from January to September, and then strengthened by 10%.  The volatility of peripheral currencies, such as PLN, was even greater.  This volatility, as many times before, protected Polish exporters but, at the same time, had a negative impact on energy prices and the situation of not only importers but also foreign currency borrowers.

At the end of the year, the situation in the world and in Poland became stable.  However, the last 12 months led to a deterioration of the situation of Polish entrepreneurs (inflation, the wage-price spiral and especially rising energy prices played a key role here) and even more serious problems for consumers. For the first time in a very long time, real wages fell due to inflation, while the cost of living skyrocketed.  The reduction in consumption (also evident through the fall in lending) is more and more painfully felt by entrepreneurs. One can only hope that the worst is over, although this is not certain.

With regard to Polish politics, which is worth mentioning at the end, the most important issue in the field of economy, apart from disputes over inflation and interest rates, was the matter of the National Recovery Plan – the EU funds allocated for the post-COVID recovery of the economy, the transfer of which the European Commission made conditional on the Polish government achieving a number of milestones.

The year 2022 was so interesting that it remains only to wish that the upcoming 11 months of 2023 will be at least as peaceful as January.

Dr hab. Piotr Koryś
Chief Economist of ZPP

 

See: 07.02.2023 Opinion of the Chief Economist of ZPP – summary of 2022 and prospects for 2023

Warsaw, 6 December 2022 

 

Opinion of the Chief Energy Expert of ZPP: Worrying conclusions from the Conference of the Parties on the future of Polish renewable energy industry

 

At the end of November, the Ministry of Climate organised an event, the Conference of the Parties to the Sectoral Agreements, with the aim of summarising the progress of work in the area of RES development in Poland. The Ministry signed four sectoral agreements on the promotion of investments in renewable energy sources in 2021 and 2022:

• Sectoral Agreement for the Development of Offshore Wind Energy,
• Sectoral Agreement for the Development of the Photovoltaic Sector,
• Sectoral Agreement for the Development of the Biogas and Biomethane Sector,
• Sectoral Agreement for the Development of the Hydrogen Economy.

The aim of the sectoral agreements is to remove barriers to the development of this energy sector, and to promote investment in this area.

Sectoral agreements were signed by both leading Polish companies in the renewable energy sector and representatives of the Ministry, local authorities and the main renewable energy industry associations.

The absence of the onshore wind sector seems to somewhat distort the view of renewables as a whole and is due to the protracted process of passing an amendment to the law blocking the development of this type of investment.

It is not a particularly revelatory observation that increasing regulatory pressure from the EU is forcing Poland to take urgent action to decarbonise its industry. Energy prices have risen significantly. Polish companies must keep up with the changes, otherwise they will go under. Meanwhile, the key to saving money and making businesses low-carbon has been sitting in the parliamentary freezer for five months, and there are still no new windturbines.

I have been following the recent dynamic changes in the Polish energy market with concern, and it is not conducive to the growth and security of Polish entrepreneurs today. One of the key challenges for companies today is the availability and price of electricity, which has increased by almost 500% for some businesses in just two years. The energy price freeze planned for next year is only a temporary measure that does not solve the problem, but rather suspends it for a few months, and only for some entities.

In the current energy crisis, Polish companies, especially industrial ones, need cheap green electricity to meet the ambitious requirements imposed by EU directives. Onshore wind power, which has been the cheapest source of power generation for years, is crucial for saving money and achieving low carbon emissions. It is high time to combat all barriers to wind technology, but first the so-called distance law, which has been crippling the industry for years, should be liberalised.

The interests of enterprises, including those that are more or less energy-intensive, are increasingly under threat. Electricity prices strongly affect the economics of companies, including large enterprises, often ruining the monthly budget. The government’s efforts to freeze prices would not have been needed if solutions had been implemented in time to directly inhibit the cause of the electricity price increase. Allowing new wind power plants to be built in Poland will mean that in 2-3 years’ time, when more wind power will be in the system – we will have significantly reduced the risk of large price fluctuations.

The energy crisis calls for new wind power investments that will give us energy sovereignty. The fact that wind is the cheapest source of electricity is confirmed by energy auctions and, in addition, it permanently lowers the final bill for the consumer by affecting the result of the merit order based mainly on coal in Poland.

The transition of companies to green energy is also one of the main business trends at the moment. It is driven by the desire to reduce the cost of energy consumed, but also by growing expectations from customers and business partners who expect supply chains with a minimal carbon footprint. Corporations in the transition to green energy are often driven by ambitious targets in their strategies or even pressure from competitors. The surge in corporate interest in green, clean energy in recent years has become widespread across Europe.

Building a stable legislative and regulatory environment is crucial from the perspective of any industry when making investment decisions.

The aim of the aforementioned Conference of the Parties was to illustrate the development potential of renewable energy sources against the background of legislative needs, as well as to show the potential of Polish industry in building a new energy system in Poland.

As Chief Energy Technology Specialist at the Union of Entrepreneurs and Employers, but also because of my other functions, I had the opportunity to lead a panel discussion: Prospects for the development of photovoltaics in Poland – Opportunities and threats. I addressed one of the threads that is an essential piece of the wider puzzle.

The conference was divided into two parts. The first one discussed the prospects for the development of renewable energy sources in Poland against the background of the country’s security, in the context of Poland’s changing geopolitical situation.  

The second part of the Conference was devoted to the thematic panels of the Sectoral Agreements, where the challenges associated with each type of renewable source were discussed.

The conference was attended by the Minister of Climate, Ms Anna Moskwa, the Minister of Economic Development and Technology, Mr Waldemar Buda, the Secretary of State, Mr Ireneusz Zyska and the Head of the Energy Supply Unit from the International Energy Agency, Mr Christophe McGlade.

The first part of the conference, with a panel on the country’s energy security issues, showed how complicated the whole Polish economy was as a result of the military threat from Russia. I don’t think anyone doubted that the new geopolitical situation is permanent and that energy security is highly vulnerable to hostile acts, as shown by Russia’s actions in Ukraine.

Distributed power generation therefore takes on a different meaning than we have so far expected. In addition to its role in modernisation, and economic or social importance, it can be a key element of the country’s security. Renewable energy is the primary mechanism for building a distributed energy system in any country.

It was clear from the statement of the President of the Energy Regulatory Office, Mr Rafał Gawin, that the way the entire Polish transmission and distribution system functions needs to change. Also the President of the Management Board of the Polish Power Transmission and Distribution Association (PTPiREE), Mr Robert Zasina, emphasised the role of DSOs in the future as a key player in the energy market. The Union of Entrepreneurs and Employers has long raised the issue of the commercialisation of low and medium voltage lines and it is a pity that this idea has not been discussed in more depth. The forthcoming law on direct lines fits perfectly into this theme, although the project has encountered a competence dispute between ministries and it is as yet unclear which ministry will continue to work on this regulation.

Mr Józef Węgrecki, Member of the PKN Orlen’s Management Board, pointed out how important a role investments related to distributed energy, hydrogen policy and renewable energy sources play in the company’s policy. Minister Ireneusz Zyska assured the full support of the Ministry of Climate for all measures to increase the level of investment in the green energy sector.  

Together, we must do everything possible to create a national supply chain for the industries involved in new energy investments. The administrative regulations currently in place, which block the development of investments in distributed energy, are becoming an extremely serious barrier to development.

Today, the liberalisation of administrative barriers is becoming a major focus for ministries connected to the energy market, as well as the creation of a friendly investment environment for investments in renewable energy sources. Blocking the development of onshore wind energy sector certainly does not help to create such an environment.

The panel I moderated, dedicated to photovoltaic sources, illustrated what development potential this source of green energy has. The current slowdown in investment in this sector, too, is solely due to legislative delays. A representative of Bank Ochrony Środowiska (“Bank for Environmental Protection”), Ms Anna Żyła, emphasised that banks are fully prepared to finance investments in photovoltaics.

The conference was a summary of the activities of the various parties to the sectoral agreements to date, with the exception of the hydrogen agreement whose representatives did not attend. While the attempt to take a holistic view of the future shape of Poland’s energy sector is to be welcomed, the Conference focused on the country’s rather distant energy future.

Meanwhile, the immediate problems of our energy and heating industry are already starting to be clearly felt by both the Polish economy and society. And these are both supply and cost problems. They are connected with the prices of energy sources and the scarcity of both renewable and conventional energy.

The Union of Entrepreneurs and Employers sees the need for ad hoc measures to optimise the effects of crisis phenomena in the Polish energy sector and the Polish heating sector by 2030. Only then will we be able to plan for the optimum development of individual distributed energy sectors.

Such measures, according to the Union of Entrepreneurs and Employers, can include:

• Liberalisation of the law blocking onshore wind energy sector development
• Legislative support for direct lines
• Continuation of the Bloki 200+ (“200+ Blocks”) programme, in its justified part
• Passing a law to facilitate green investment on brownfield sites.

As representatives of employers and entrepreneurs from most economic sectors, we would like to call for a significant acceleration of legislative procedures concerning basic laws and regulations enabling investment decisions to be taken quickly in the Polish energy sector to stabilise energy prices and supply in the coming years.

The future of the entire Polish economy may depend on the pace of these investments.

This is particularly important in the area of local distributed energy, where it should be made easier for companies to invest in their own generation sources as well as in local transmission networks.

 

Włodzimierz Ehrenhalt,
Chief Energy Expert of ZPP

 

See: 06.12.2022 Opinion of the Chief Energy Expert of ZPP: Worrying conclusions from the Conference of the Parties on the future of Polish renewable energy industry

Warsaw, 14 November 2022 

 

Opinion of the Chief Energy Technology Specialist at the Union of Entrepreneurs and Employers (ZPP) on the place of oil and natural gas in Europe’s modern hydrogen-renewable economy

 

On Wednesday, 3 November 2022, during the conference Energy security in times of war, co-organised by the Union of Entrepreneurs and Employers (ZPP), we had the opportunity to initiate a discussion aimed at demonstrating the role of conventional energy carriers in the future in which energy sources are expected to be converted into hydrogen and renewables. We attempted to show the future of oil and gas over time in the global and European economy and outline the future of fossil fuels in the Polish energy system.

The discussion was moderated by Włodzimierz Ehrenhalt, Chief Energy Technology Specialist at ZPP. The invited panellists were experienced practitioners specialising in the sector of renewable energy sources and oil and gas market experts. Maciej Bando, long-standing President of the Energy Regulatory Office and Chairman of the Advisory Board of the OZE POWER Congress, participated in the discussion. The Orlen Group was represented by Mr Tomasz Jarmicki, Director of the Research and Innovation Department of PKN Orlen, Central Branch of PGNiG in Warsaw, and the Polish Wind Energy Association was represented by  Janusz Gajowiecki, President of the Association. Bogdan Pilch, General Director of the Polish Chamber of Power Industry and Environmental Protection, and Tomasz Surma, Regulatory Affairs and Public Relations Director of Veolia Energia Polska S.A., also took part in the panel.

In the context of predictions of what the future of natural gas and oil will be and whether hydrogen and RESs will be able to replace current energy carriers, all discussants agreed that this would vary around the world depending on the region. The rapid development of renewables in Europe will certainly lead to the gradual elimination of oil and gas as energy resources in the foreseeable future. Based on the statements of the European Commission and past experience, it can be predicted that renewables, together with hydrogen facilities, will replace gas and oil in transport and heating around 2045. In the energy industry, this will probably happen a little sooner. 

The experience resulting from the war in Ukraine and Russia’s raw material policy has shown that only complete energy autonomy can save Europe from the crisis we are currently facing. Europe will certainly learn from the current extremely complex situation and will probably reduce its demand for gas and oil to the supply level guaranteed by European suppliers. This will, however, mean that both of these raw materials will be back-up and complementary sources for renewables and hydrogen. Of course, they will continue to remain basic raw materials for the purposes of the large-scale chemical industry.

Europe is likely to remain a leader in the zero-carbon electrification of economic life and industrial processes. Other parts of the world will, of course, develop green energy, but coal, oil and natural gas will play key roles in their economies for a long time to come. It is important to keep in mind that today China is a major investor in green energy; to secure its position as an export leader, it will be forced to move quickly from carbon to zero-emission energy, especially in the supply of energy to its industry.

During the discussion, the question was raised about the fate of petrochemical companies in the new electric and hydrogen economy in Europe and, in the future, globally. Extensive corporate investment programmes in renewable and hydrogen energy sources can already be observed. The scale of investment made by the largest companies in non-fossil energy sources is enormous and will enable their gradual business reorientation. There are many cases of mergers or equity investments between oil companies
and entities operating in the green energy sector.

The development of renewable energy sources and perhaps a return to modern nuclear power is likely to make Europe completely independent of fossil fuels. According to experts, the development of wind power in Poland and Europe is progressing, and it is now an irreversible process, not least because of the need to generate large supplies of green energy for green hydrogen production processes.

The Polish nuclear power plant is expected to be operational in 2033. The project involves the construction of three units with a capacity of 3 GW, which will reduce coal consumption in the national energy system by at least 15 to 20 per cent. If this happens, it will be a positive signal for the entire energy sector in Europe. Three gigawatts of energy from Poland’s first nuclear power plant equates to more than 25 terawatt-hours of clean energy, which is as much as we are now producing from all renewable sources.

However, while looking forward to the construction of the first nuclear power plant, we must not forget the current challenges facing the energy industry. As a country, we should focus on the short-term problems of our energy and heating industry. And, according to industry representatives, the situation is becoming dramatic. The blocking of the development of onshore wind energy by the so-called 10H Act has led to a slowdown in investment in the entire renewable energy industry in Poland, which prevents the dynamic growth of RESs, makes it impossible to sufficiently influence the reduction of energy prices and may lead to local power outages, especially in the areas where the existing infrastructure is outdated and overloaded. The speed at which the liberalisation of the “anti-wind” legislation is proceeding does not allow for rapid investment in modern generation sources and slows down the modernisation of transmission lines. Probably, already around 2025, we will be forced to import a lot of energy, especially green energy, for companies exporting products to European markets. And until we get our own offshore wind farms and nuclear power plant up and running, this is unavoidable. Perhaps the launching of the “Bloki 200+” (200+ Units) project, which is a programme of refurbishments to make the 200MW units more flexible and adapt them to work with renewable energy sources, could alleviate the energy shortage, but it has also been put on hold.

The situation of district heating in smaller centres is particularly difficult. We have approx. 400 district heating systems, mainly based on coal technologies. Converting these systems to gas appeared to be the simplest solution so far. But is this sensible in the current situation? Will gas price dynamics return to that observed before 24 February 2022? Although we do not know the answer, Poland seems to be prepared for increased gas needs related to the stabilisation of the operation of renewable energy sources, and in the future, once the gas market in Europe has stabilised, the share of gas in the Polish energy mix is likely to be significant despite the current problems. All the more so as some investors are already working on upgrading their gas systems using hydrogen. In the future, district heating equipment could be powered exclusively by hydrogen. Green combined heat and power plants are the future of the heat market in Europe. The experiences of countries such as Denmark, the Netherlands and Norway in this area are paving the way for other European countries to achieve this goal.

Conclusions

It is completely incomprehensible that, in the face of the energy crisis, legislative delays are holding up investments in wind energy of 10 GW, i.e. approx. 30 TWh of cheap green energy production. The wind energy sector is prepared for rapid investments and sees opportunities to reduce the green energy shortage and significantly lower energy prices in the Polish market. In general, in the opinion of the experts, gas and oil are still expected to be used in the energy industry as carriers complementing renewable sources. The use of these raw materials in chemical processes is also undeniable.

The state of the Polish energy industry and the problems facing the energy and gas market are cause for concern. Investment delays in virtually every sector of the energy industry may result in high prices, as well as insufficient supply of energy and heat. The short-term solution to this problem is import, at prices that are difficult to predict. Although transmission capacity is far from sufficient.

Only ad-hoc legislative and investment measures can reduce the threat of reduced power supply for industry and households.

We consider the following issues to be particularly important:

• Unblocking investment opportunities in onshore wind energy (Bill 10 H),
• Facilitating investments in renewable sources in post-industrial and post-mining areas,
• Intensifying investments in offshore wind farms – rational state support in this area,
• Accelerating works on the Act on Direct Lines,
• Implementing the programme concerning the regeneration of the most efficient 200 MW units (“Bloki 200+” programme),
• Launching the business prosumer programme – providing assistance and support to companies building their own energy sources,
• Commercialising low and medium voltage lines (local transmission grid).

The proposals presented above do not exhaust the catalogue of needs – the scope of necessary changes in legislation is much greater, and the lack of coordinated work in this area exposes the Polish economy to the loss of attractive export markets for the domestic industry.

Włodzimierz Ehrenhalt,
 Chief Energy Technology Specialist at ZPP

 

See: 14.11.2022 Opinion of the Chief Energy Technology Specialist at the Union of Entrepreneurs and Employers (ZPP) on the place of oil and natural gas in Europe’s modern hydrogen-renewable economy

Warsaw, 6 October 2022 

 

OPINION OF THE CHIEF ECONOMIST OF ZPP ON THE IMPORTANCE OF DEMOGRAPHY FOR THE RECONSTRUCTION OF UKRAINE

 

Ukraine’s military success, the probability of which is as high as never before (although this is only probability, not certainty, and the war still continues), will result in the recovery of some (more likely) or all of the territories lost to Russia after 2014. Those territories are largely depopulated as a result of internal resettlement caused by hostilities, refugeeism, forced relocations deep into Russia and, finally, losses caused by the warfare.

The military success of Ukraine makes us think with increasing optimism about the upcoming challenge of rebuilding the country after the war. The scale of the damage is severe and the reconstruction will cost billions of dollars. The discussion on the reconstruction of the country, the model of its financing and the way of engaging private enterprises, in particular Polish ones, should be supplemented by considering the great challenges that Ukraine faces in the short and medium term.

First, the question arises of what to rebuilt and how. Should the transport, transmission and industrial infrastructure or settlement network be restored first? Already before 2014, the eastern regions of Ukraine were struggling with development challenges (somewhat similar to those experienced by the industrial regions of Upper and Lower Silesia in Poland). The infrastructure and material capital inherited from the USSR was consumed rapidly and was restored to a far insufficient degree. The process of depleting the economic potential of the region was further accelerated by the policy of the oligarchs,  who were often looking for ways to maximise their income in the short term.

Therefore, the project of reconstruction of Ukraine should be a civilisational undertaking on a scale similar to the systemic transformation in Central and Eastern Europe, with the transformation of economic structures, expansion of foreign capital, reduction of the scale of corruption and arbitrary actions of the administration. As part of that project, it is necessary to answer the question of what the economic future of the eastern regions of Ukraine should be. To do so, an assessment of the actual state of the material and human capital of the region is necessary.

It is important to remember that the initial optimism of the reconstruction period can quickly turn into disappointment and frustration of local communities. Considering the globalised world of open borders, this may result in further waves of migration. At the same time, a rational strategy is of great importance, taking into account the potentially rapid first wave of financial aid. The aid should be well administered, as with equal probability, successive waves of financial support – once the memory of the war and success fade away to some extent, will be smaller and smaller. And the risks associated with the allocation of the aid are considerable. European companies, including Polish and American ones, will be involved in the reconstruction project – and will be interested in achieving short-term benefits (especially as they will be affected by the recession that has just begun). Therefore, the participation in the reconstruction of Ukraine may turn out to be another way of boosting Western economies mired in recession or recovering from it. It is worth reminding that similar goals (apart from those officially declared) were pursued by the Americans during the Marshall Plan, or by the Germans during the reconstruction and integration of FRG-GDR in the 1990s.

However, a more serious challenge awaits Ukraine in the longer term. For decades, the country has been struggling with a very deep demographic crisis, which is the result of a low birth rate, still low life expectancy, large scale of emigration and territorial losses. The country, which at the beginning of its existence had a population of over 50 million, according to the partial e-census conducted 2 years ago, was inhabited (in government-controlled areas) by approximately 37 million people, including 5.8 million children under the age of 14. According to estimates by the IOM, approximately 7 million people left the country due to the war. Based on the survey conducted by the IOM in July, at least two-thirds of them (i.e., approximately 5 million) are not planning to return, at least not yet.

Who has emigrated from Ukraine? Mostly women and children. According to PESEL (Polish resident indentification number) data, out of the 1.3 million Ukrainians who have obtained that number, 580 thousand are  children (under the age of 18). Assuming that approximately 400-450 thousand of them are under the age of 14 and that the structure of the Ukrainian population in other countries is similar, 1/3 of the refugees, or 2-2.5 million people, are children of that age. This means that 30 to 40% of children under the age of 14 have left Ukraine! To realise the consequences: this generation will be entering the Ukrainian labour market in 4 years, and there will be 3-3.8 million workers within 14 years (assuming no returns but also no further waves of migration). Let us compare the above to the generation leaving the labour market at that time (let’s say those born between 1961 and 1975). During that period, between 687,000 and 843,000 babies were born each year,  with an average of 740,000.  In total, more than 11 million children were born (let us assume that approximately 9-10 million actually live in Ukraine and are professionally active). The difference (loss of employees) can therefore reach 6-7 million in 14 years! The cohorts entering the labour market will amount to 200-250,000 –  to compare, between 330,000 and 400,000 children were born in Poland in the last decade.

The demographic crisis may constitute a fundamental barrier to development. That need not be the case – there are countries and regions that have experienced periods of rapid growth under the conditions of both dramatic population decline and long-term unfavourable demographic trends. After World War II, West Germany experienced a period of impressive development despite huge losses due to the war. Reconstruction has also been successful in many other countries, including Poland – although it must be remembered that the aversion towards migrants and refugees “helped” in that case and supported returns after the war. Things are going to be different now. Additionally, at that time, further development was supported by demographics – the post-war baby boom.

Countries and regions in Central and Eastern Europe struggling with demographic challenges also experienced a period of development after the transition: Hungary and East Germany are good examples. In those cases, however, we are dealing with slow demographic changes rather than a rapid population decline (Hungary), or with internal migrations balanced by the policy of convergence within the country (Germany).

Thus, while there are considerable hopes for the reconstruction of Ukraine, factors such as demographic conditions raise concern for its future – they may cast a shadow over hopes for rapid reconstruction and convergence with Europe afterwards. The role of politicians is to look for solutions that would reduce the consequence of those processes.

Dr hab. Piotr Koryś
Chief Economist of the ZPP

 

See: 06.10.2022 Opinion of the Chief Economist of the ZPP on the importance of demography for the reconstruction of Ukraine

Warsaw, 12 July 2022 

 

Opinion of the Chief Energy Expert of the Union of Entrepreneurs and Employers (ZPP): The prospects for the development of wind farms and photovoltaic sources in light of the laws currently under way

 

In spite of the holiday period, legislative work on investment issues in the area of renewable energy sources remains intensive. This is, of course, understandable, as our energy industry finds itself in an extremely difficult position, due to both the geopolitical situation, which is new for our country, and the legislative backlog in the field of energy from previous years.

On 4 July 2022, the Council of Ministers adopted a draft amendment to the Act on Investment in Wind Power Plants and certain other Acts (UD 207). The draft will now be directed to parliamentary work. This is an amendment to the so-called “10 H” law, introduced in 2016 and essentially preventing the development of onshore wind farm investments. By passing such a controversial law, work on new wind farm projects was made practically impossible, fortunately leaving the possibility to invest in those projects that already had building permits. The deceleration in investment has occurred just now, when essentially all buildable structures have been constructed on the basis of building permits issued before 2016.

In the meantime, onshore wind power has become the cheapest source of electricity, which becomes particularly relevant in the current situation related to the war in Ukraine. Work on the shape of the amendment took quite a long time and was initially carried out in the Ministry of Development, but it was only after the Ministry of Climate and Environment took over the work that the procedure for the document gained momentum and specific provisions, restoring investment opportunities, saw the light of day. The restoration of investment opportunities for onshore wind energy is very good news, not only for investors, but also for the Polish economy in general.

The green energy supply deficit is growing and wind farms are the most promising renewable energy technology for investment. However, let us be aware that the provisions of the amendment will not immediately result in an abrupt increase in expenditure. There will remain for some time a distrust of the sustainability of the state’s energy policy in the area of renewables. As a result of the virtual ban on investment in onshore wind energy in 2016, many investors suffered tangible losses, which reverberated negatively for the industry as a whole in Poland, and it must take time to restore confidence in the legal framework guaranteed by the State.

The law has been refined by the Ministry of Climate and Environment and approved by the Council of Ministers. This is very good news for the Polish economy in general, and the Ministry of Climate and Environment should be commended for its determination in this matter. However, as someone who has been investing in onshore wind farms for twelve years and has some experience of the investment process for this type of energy source, I am concerned whether a rapid increase in investment can be expected in the light of the provisions of this amendment. Probably not, as the level of complications concerning the arrangements related to obtaining a building permit and the uncertainty as to the fate of the project after the arrangements have been made, related to possible public opposition, will discourage some investors from starting new projects. The amendment will certainly make it possible to complete those projects that have a significant degree of progress, for example, having obtained an environmental decision in the past, which remains in force. This is far too little. The requirements of the Polish economy are about 10 GW of new onshore wind projects, from now until 2028.

An additional factor limiting investment will be the upcoming election period, which will affect the restraint of the institutions set up to issue decisions. Meanwhile, the legislation leaves a considerable gap in interpretation and the possibility of stalling the issuing of decisions.

In conclusion, the passing of the amendment to the 10 H Act is very positive news proving that our authorities are returning to a green deal policy, giving a wider room for negotiation with the European Commission as to the pace and dimension of Poland’s energy transition. It also reopens investment opportunities for both private investors and state-owned companies in onshore wind energy. However, in my opinion, the regulations will need further liberalisation and fine-tuning if we want these investments to reach the desired scale for the economy.

When discussing the role of wind power in the Polish energy balance, it is also worth assessing the potential of offshore wind power in the overall supply of green energy for the Polish economy. According to the Polish authorities’ assumptions, at least 6 GW of offshore wind power should be built in the next decade, and further plans even talk about 10 – 12 GW of installed capacity by 2040. Even the former involves a very tight, albeit manageable, implementation schedule. However – subject to close cooperation between legislators, the regulator and investors. We do not see any particular momentum in this area, and we desperately need the energy from such investments. These are fairly stable and affordable sources of energy. With the commitment of the above-mentioned parties, the economy could receive the first megawatt hours from offshore wind as early as 2025, to be followed by a significant upward trend in the subsequent years. Recently, the issue of the European Commission’s notified maximum price for offshore wind energy has come up in industry discussions, which is putting an increasingly heavy burden on investors in the face of changing investment conditions (war, inflation, disrupted supply chains, rising raw material costs, changing reference interest rates, increasing global activation within offshore wind). Especially as regulatory solutions are emerging that potentially put additional strain on project budgets and may lengthen project timelines. An example is the idea of certification of the onshore section of an offshore wind farm infrastructure, which de facto duplicates existing regulations and procedures already present in the area of quality assurance and grid safety. Offshore wind power is an extremely important part of the overall Polish economy due to the creation of a new sector and thousands of jobs, which will increase the potential production capacity of Polish industry. Any legislative barriers should be removed immediately in this sector.

Onshore and offshore wind power should be complemented by solar investment, as their joint operation results in a more stable energy supply for consumers. Large-scale solar plants are low-complexity investments, with minimal environmental impact, and as desirable as possible in terms of our energy balance. Everything possible should be done to facilitate the rapid development of these investments. These are also socially anticipated projects that do not raise such concerns as wind investments.

Meanwhile, the draft amendments to the Act on Spatial Planning include proposals to make investment in photovoltaic sources more difficult. This is because the draft stipulates the obligation to locate solar sources with a capacity of more than 1 MW on the basis of an MPZP (Local Development Plan). This is a change that blocks the further development of such renewable sources and is highly detrimental to the Polish economy. The effects of such an obligation could be similar to those caused by the 10 H Act in wind investments. Organisations affiliated to the Coordinating Council for the Development of Photovoltaics, under the Ministry of Climate and Environment, protested against such restrictions and put forward a different proposal – promoting the development of solar sources. The need to draw up a Local Development Plan would arise for investments whose area would exceed 10 ha, which translates – with the use of modern photovoltaic panels – into a farm with a capacity in the range of 12 to 15 MW. And such a farm would already constitute a significant supplier of green energy. A hybrid power plant consisting of a 15 MW solar farm, a 25 – 30 MW wind power plant and stabilised by a 7 – 10 MW gas block is an optimally designed source of low-cost energy. It can be said to be a model example of distributed energy in Polish conditions. The price of energy from such a source should not exceed PLN 300 – 350 per MWh of energy, which suggests the use of such a source for heating. Let us bear in mind that today’s electricity prices in contracts for 2023 have already exceeded PLN 1500 per MWh. The Coordinating Council’s proposal has been supported by some of the state-owned companies, which are proposing even broader facilitation of investments. Companies have post-mining and post-industrial sites on which renewable installations can be built quickly and cheaply, subject to legislative facilitation. Both proposals should be supported as they can significantly facilitate investment in photovoltaic sources which, working together with onshore wind farms, increase the country’s energy security while guaranteeing a sustainable and reasonable level of energy prices. And this, in turn, enables the development of CHP based on green sources. The problems associated with the modernisation of heating industry are currently posing a huge challenge in the energy transition process.

 

Włodzimierz Ehrenhalt,
Chief Energy Expert

 

See: 12.07.2022 Opinion of the Chief Energy Expert of the Union of Entrepreneurs and Employers (ZPP): The prospects for the development of wind farms and photovoltaic sources in light of the laws currently under way

 

Warsaw, 6 April 2022

 

Opinion of the Chief Energy Technology Specialist at The ZPP: achieving energy autonomy requires additional legislative action

 

On Thursday, 31 March, a signing ceremony took place for an appeal to unlock investment opportunities in onshore wind energy. Known as ’10H law’, it can be considered a key piece of legislation for the Polish energy sector in the context of the country’s current geopolitical situation. As a result of the war in Ukraine, energy independence is becoming a priority both politically and economically. This is an aspect that requires us to act in an extremely quick and focused manner.

The only sources that can rapidly replenish our energy balance in the near future – significantly increasing the supply of energy – are onshore wind farms and large-scale solar sources. ZPP has been calling for a special legislative priority to streamline these investments for a long time, presenting the benefits for the entire Polish economy of such projects.

In the face of a rapidly increasing green energy deficit, both of these sources are crucial, especially for companies exporting to European markets. Investments in the developing distributed energy also have an impact on the security level in the country. The war in Ukraine has shown how easy it is to take over large power stations and the consequences this can have on a security level in the country. In contrast, it is more difficult to disrupt a million of small, distributed solar and wind installations.

We believe that every action towards increasing security and achieving energy independence in Poland should be strongly supported, hence our decision to join the appeal for a quick unblocking of investment in onshore wind energy. This is particularly important if we want to save a certain proportion of our coal-fired power generation from political death, and thus obtain the Union’s approval to extend the process of moving away from coal. Only consistent action in this area can ensure our energy autonomy.

The development of distributed energy will be important for the entire Polish economy, provided that it is an integral part of the whole programme of energy transformation in the country. The recently presented assumptions for the revision of the Energy Policy of Poland assume dynamic development of this form of energy, so we hope that the rapid restoration of investment opportunities for onshore wind energy will be one of the most important objectives of the Polish government.

We would like to once again draw attention to the enormous potential offered by the development of large-scale solar sources on post-industrial areas. A large part of these places is in the hands of state-owned companies with investment and connection capacities. The only problem in this case is the exceedingly long time it takes to obtain building permit.

Legislative shortening of the deadlines for issuing these permits on post-industrial and post-mining sites would give us an additional 4 to 5 GW of green power in just 3 to 4 years. Amending the Wind Power Investment Act that would liberalise the 10H rule provide another 5 – 7 GW of capacity, thus making the achievement of 20 – 25 GW of installed green powers in 2027 fully feasible. This, in turn, translates into 40 to 45 terawatt hours of energy per year, which would come from distributed onshore installations.

Based on the above calculations, it can be assumed that in 2027 we would be able to produce 25-30% of our energy solely from land-based, distributed and renewable sources, and this would already constitute a clear step towards Poland’s energy sovereignty. We turn to the decision-makers and urge them to act quickly in proceeding and passing the necessary legislation that will enable us to achieve autonomy in the area of energy supply.

 

Włodzimierz Ehrenhalt
Chief Energy Technology Specialist at the ZPP

 

See: 06.04.2022 Opinion of the Chief Energy Technology Specialist at The ZPP: achieving energy autonomy requires additional legislative action