Energy 2 March, 2023 10:00 am   
COMMENTS: Konrad Świrski

Coal prices are dropping. The worst is either behind us, or not here yet

36-Weglokoks Węgiel. Picture by Węglokoks

Winter is coming to an end and warmer days are here, so fuel prices are dropping on the markets. The doomsday forecasts did not come true and the combination of warmer weather with a weakening economic situation, as well as diversification of fuel imports from around the world is giving Europe energy stability. The newspapers are proclaiming that “the worst is over” and (coal) prices will be low, but doesn’t that prophesy a disaster? – asks prof. Konrad Świrski from the Warsaw University of Technology.

The quasi-optimistic scenario for the upcoming political events, where the hostilities in Ukraine are not getting worse and the process of replacing Russian fossil fuels on European markets has stabilized, provides for further decline of price indices. On February 25, 2023, the ARA index was USD 150 per ton – roughly equivalent to the levels from July or November 2021, which is still well above the price lows (even below USD50 / ton), but at the same time far from the record USD 460/ton (immediately after the outbreak of the war). In the medium term the trend is decreasing and if the conflict doesn’t escalate, it looks like the coal prices will continue to go down. The problem for Poland and the Polish energy sector is that this quasi-optimistic world scenario does not have to be the same for the Polish energy and mining sector and in 2023, when elections will be held, may take a very pessimistic turn.

The Polish energy sector is still based on coal (75 percent still in generation statistics), where more than 50 percent of power is produced from hard coal. This means that in a sense it is a hostage to the coal lobby, that is skilfully slowing down or completely stopping the energy transition. If the electricity in the power outlet depends on coal, then the best way for the sector to have a peaceful future is not to optimize costs and instead eliminate competition. Consequently, there are practically no changes on the RES market (superficial amendments to the 10h Act), but there are strong lobbying arguments claiming that the grid cannot accept more renewable sources (and the number of refusals of new connections), and there is the never-ending narrative about unstable RES and exorbitant gas prices (which did indeed soar higher than coal’s – even several times – up to EUR 350 per MWh, but are now in the same downward trend as coal, dipping to EUR 50 per MWh).

Many analyses and modifications to the energy strategy prepared for the election year, are suggesting that actually there is no point in replacing coal with natural gas (as a transition fuel), and that nothing should change and coal should stay, so that later on it can be converted to large Gen III+ nuclear power plants and an astronomical (considering the current commercialization state) number of SMRs. There is no use hiding that today the “conservative” energy sector is by and large promoting the stopping of the transition and replacing coal with the atom (in the end everybody knows that it takes at least 10 years to build an NPP, and we haven’t built anything yet).

Unfortunately, with the dropping commodity prices (and unless there are new great global perturbations), this proposal seems to be heading for a wall. The mining sector results in 2023 reveal a systemic inability to transform and achieve competitiveness (despite record coal prices, mining recorded a decline in production!). Of course, one can say investments and time are needed, but I do not think that in this instance there is any room for growth. At record prices, of course, profitability indicators were positive, but with one more side effect – a high increase in prices and overall costs and the absence of any savings. Today’s coal mining costs are actually more than PLN 450 / ton (it is worth waiting for the yearly statistics, but I do not think it will be less). Mining is profitable only thanks to the extreme situation on the market. When one considers the real competition in the world markets (USA, Colombia, Indonesia, Australia), it becomes apparent that mines elsewhere have completely different parameters (nobody in the world will extract coal from deposits as deep as ours), and in some cases the efficiency per employee is 10 times higher than in Poland (nobody even dares to suggest that mines and miners should work 7 days a week). In addition, the “sword of Damocles” hangs over the head of Polish mines in the form of proposals for European methane directives (stopping mining or imposing methane emission costs – practically all mines in Poland). All meaningful analyses claim thermal coal mining in Poland has no economic future. However, instead we are witnessing attempts at reversing this claim and undermining the mine closure program with a pre-election narrative about strategic security and cheap energy, neither of which is true.

Therefore, it is possible to draft a fairly likely scenario, which is not optimistic at all. Coal prices on world markets fall below USD 100 / ton, competition is growing, mining is protesting against increasing imports (which is obvious), power plants are protesting against maintaining high prices on the Polish market and blocking competition (which is obvious), the wholesale price of energy on the Polish market is at the highest European level (because the EUA for CO2 certificates is already 100 euros/ton). Emissions from the Polish energy sector are breaking EU records (further 730 g CO2/kWh), which foreign companies are desperately pointing to, because in their ESG reports, emissions from Polish factories are red, and green energy cannot be bought on the market. Then, mining begins a protest in defense of jobs, because suddenly it turns out that profitability has become negative, billions are lost again and mines are facing liquidity issues, and are unable to pay out miners’ allowances. The price of energy for individuals, but also for those protected by the “freezing” laws, is high, so large subsidies are needed (to frozen prices), so funds from the sale of emission certificates are used (and by the way, there will be an explanation that energy is expensive because of EU regulations, but it is getting cheaper, of course, thanks to the same EU funds). During the election year, the political narrative is sure to intensify together with claims about national treasures and the need to burn Polish coal (more expensive) to protect Polish jobs.

Unfortunately, it seems that there is no use in hoping for any rapid moves in the energy transition, the powdering of the 10h bill will be announced as a “new opening”, and the problems will be pushed aside as “bureaucratic decisions of the liberalized part of the Union”, and when it comes to the necessary changes – we can already see that the establishment of NABE is delayed. The whole message of the new concept of transformation is the mentioned launch and acceleration of the nuclear energy program and already… in 2035 we will see the first results (and on the way there will certainly be another election). The practical lack of funds from the National Reconstruction Plan causes a big problem with the more ambitious projects for network changes – so we will continue to have big problems connecting RES and the program of offshore wind farms will get more and more visibly delayed (although this will help, of course, again in maintaining the dominant position of the coal sector). Nihil novi, actually. We have been through this many times and the explanation will be that “you cannot make controversial decisions before the elections”.

All that will remain is a controversial and aggressive discussion on TikTok and Twitter in the form of colorful images with text (devoid of substantive content) and a struggle for votes with increasingly extreme positions. Is the worst yet to come?