Cheap is in the past

In recent months the world has been battling an economic and an energy crisis. What will the energy sector look like in the coming years? Aleksander Tretyn, editor at BiznesAlert.pl, takes a look into the future of energy prices.

What to expect on the energy market

The growing prices in the energy market affect everyone. Higher energy prices have led to higher prices for both products and services. Currently, one of the main factors behind the very dynamic inflation is the increase in prices for energy raw materials, and therefore energy itself. Should we expect changes in the energy market in the coming years?

Gazprom has been working hard to launch the Nord Stream 2 pipeline. Although the pipeline itself has recently been completed, European countries see it as an energy and geopolitical threat. One the reasons why the newly built pipeline that connects Germany and Russia cannot be launched, is the fact that it doesn’t have proper certification, which results from the fact that it is perceived as a threat.

In a tit for tat move, Russia uses the project for blackmail and limits the amount of gas on the exchange. Less gas on the market and an increase in demand for this raw material has led to a significant increase in the price. At this point we should not expect stabilization in this market. Prices are likely to continue to climb until the Nord Stream 2 pipeline is operational. Although the Baltic pipeline is about to be launched, it is only able to cover gas supplies contracted from the Yamal pipeline. Currently, other gas connections are also in operation and LNG terminals will be developed, but in the face of a significant increase in the demand for this raw material, deficits will still be covered by purchasing gas on the exchange.

In addition to rising gas prices, the energy sector is also facing higher coal prices. In the face of the gas crisis, the share of energy generated from coal has increased, as it has recently gained popularity as an energy raw material and is being used to a greater extent. Coal production has increased in China and India, among others. As Germany moves away from nuclear power and launches coal-fired power plants, the demand for coal has also increased there.
Also in Poland, this raw material was in greater demand in 2021. Energy produced from coal was much cheaper, which increased its consumption in power plants, at the expense of gas.

Coal consumption last year was quite high, therefore stocks in Polish power plants and mines fell to a record low level. In December 2021, they decreased to only 7.5 million tons, which sparked discussions about a possible blackout. Low coal reserves have caused many energy companies to fall below the minimum resource reserve program provided for by Polish law.

However, the growing production of energy from coal is not due to the climbing domestic demand for electricity, but because of increased exports to neighbouring countries. Due to the attractive price, Poland is one of the largest exporters of electricity. In view of the growing demand for coal and the need to rebuild reserves, energy sector analysts also predict an increase in coal prices and, consequently, energy prices may also rise.

A third factor that has recently contributed to the increase in energy prices has been the relatively low production of energy from renewable sources. Wind farms produced less electricity than expected, while solar generation was negligible in winter. Land-based wind farms have been developing relatively well in Poland up to a certain point, but their growth has been effectively stopped by the introduction of the Distance Law. Although more turbines would not solve the problem of poor wind power, the development of energy storage technologies would certainly help to support the electricity system.

Energy prices are also affected by the cost of CO2 emissions allowances. Over the past year, the price of allowances has almost doubled, and the price level predicted in Poland’s Energy Policy Until 2040 has been already reached. Unfortunately, in the near future the cost of these allowances will not go down. On the contrary, it is likely to reach new price records in 2022. The ever-higher prices of allowances will be passed on to energy companies, which means ultimately they will be covered by the end users.

Unfortunately, the very high costs of CO2 emissions are indirectly caused by a misguided climate policy. The funds, which in many cases should have been allocated for the transformation of Poland’s grid and the development of low-and zero-emission energy sources, have been misused, the consequences of which will be felt in the coming years.

Sadly, energy prices will increase in the near future and little will change. With the intensification of the European Union’s green policy and high-level targets for reducing greenhouse gas emissions, the development of green investments will be stepped up. Unfortunately, the cost of these green investments will be borne by, among others, end-users.

These costs could probably have been avoided if the funds from the allowances had been used in due time. An important factor that effectively inhibits the development of green and at the same time the cheapest energy is unstable legislation that effectively blocks the development of new low-carbon sources of generation, such as onshore wind power.