Enea and Energa completed their analyses on the Ostrołęka C project, which concluded that gas is the best fuel for the new unit. PKN Orlen, which joined the project as its third partner, wanted to replace coal with natural gas, which causes less emissions. This change begs further questions for the investors – writes Bartosz Sawicki, editor at BiznesAlert.pl.
Gas replaces coal
Enea and Energa, shareholders of the Elektrownia Ostrołęka company responsible for the last coal-fired power plant in Europe announced that their analyses concluded that replacing coal with gas was the way to go. This decision was influenced by the EU’s climate policy that imposes increasingly more strict emission limits, raising energy production costs in the EU by pushing up the prices of CO2 emission allowances. Additionally, the investment, which is worth a few billion dollars, is already raising doubts among some banks, despite being based on gas. Financing the coal version would be even more challenging as Europe’s financial institutions are removing coal from their investment portfolios. On 2 June Enea, Energa and PKN Orlen signed a tripartite agreement, which lists the rules for further cooperation on the project, including PKN Orlen’s participation as a partner.
Capacity contract at risk
The construction of the gas power plant with a capacity of about 1 GW, i.e. the capacity of the original coal-fired unit, may take about 36 months after the contract is signed. To compare, the construction of a coal-fired power plant with a similar capacity takes between 55 and 58 months. Even if the project goes smoothly and the new location and environmental permits are issued quickly and the tender is organized, completing it on time, i.e. in 2023, may be a difficult task. According to its capacity contract, the new unit at the Ostrołęka power plant is scheduled to provide energy in 2023.
However, the delay may be small, and if it is, so will be the contractual penalties. According to calculations made by Karolina Baca-Pogorzelska, the maximum fines for not submitting this document may exceed PLN 500 million within three years. An optimistic scenario says that if the investment goes well, it may be about PLN 100 million. However, it seems likely that the gas unit may require a new tender. Additionally, new applications will have to be submitted for environmental and location permits. The new unit will have a different emissions level as it is based on a different technology, uses different fuel and needs a different amount of water.
How much gas will Ostrołęka need?
Polska Grupa Energetyczna is to construct two new gas-fired installations, 700 MW each in the Dolna Odra power plant. The units will use between 1 and 1.5 bcm of gas a year. Therefore, it can be estimated that the gas unit or units in Ostrołęka, whose capacity will be 1 GW will need about 1 bcm of gas a year. However, there are rumors that the unit’s capacity may be smaller, between 700 and 750 MW. In such a case, the gas demand would oscillate between 500 and 700 mcm annually. However, considering the amount of gigawatts contracted on the capacity market, such a solution seems less likely. In 2018, the coal-fired version of the Ostrołęka power plant contracted on the capacity market a total of 852.6 MW of capacity obligation for 15 years.
According to the contract between the special purpose vehicle Elektrownia Ostrołęka, whose shareholders are Enea and Energa, and GE Power, the contractor responsible for building the coal-fired unit, there is a possibility to temporarily suspend some, or all of the contractual duties. The project can be suspended for a total of 90 days. This has already happened. The companies also informed about the necessity to spend another month on conducting the necessary analyses, which were concluded at the beginning of June. So what about the construction contract? The new project will need a new tender. GE is probably secured against this kind of turn of events. To avoid any penalties, the investors will probably start negotiations with the US company. It is worth adding that GE has already worked with PKN Orlen on the construction of the gas and steam power plant in Włocławek. The request to suspend all work at the Ostrołęka power plant entered into force on 14 February 2020. Up until that moment 5% of the planned works had been completed, their cost was PLN 5 billion. This mostly pertains to preparatory works, earthworks and foundation works.
So far, the special purpose vehicle Elektrownia Ostrołęka has received PLN 912.5 million as its own capital and a loan of PLN 58 million paid out on the basis of a contract from 17 July 2019. It also signed a contract with Energa on 23 December 2019 to receive a loan of a maximum of PLN 340 million paid out in installments. Before the financing was suspended as part of this contract, the special purpose vehicle received PLN 177 million. According to the company 5% of the entire sum has been settled, which is about PLN 300 million. However, BiznesAlert.pl found out that it might actually be PLN 400 million. Since the end of February the sum might have increased, because the invoices for all the works before this date had to be paid.
What about the deal with Polska Grupa Górnicza?
The contract between Energa and Polska Grupa Górnicza (PGG, Polish Mining Group) from 2 December 2016 says that the Ostrołęka C power plant should receive 2 million tons of coal a year. The agreement will be binding for 10 years starting from the moment the new block is launched. The coal costs are tied to the power plant’s profitability. According to real prices from September 2016, the contract was worth PLN 3.9 billion. The agreement can enter into force if two conditions are met – the financing phase of the project needs to end and the general contractor needs to start works. While the second requirement has been met, the financing model had not been completed before the works were suspended in February. It was unknown where the investors would acquire the missing PLN 800 million, or even PLN 1.8 billion. In February Energa and Enea were analyzing the future of the project. “Until the analyses are completed, commenting on the financing model of the project is not justified,” Energa informed in February. This means one of the terms of the contract with PGG has not been met. The future of this contract is currently unknown. We also don’t know if it provided for contractual penalties in case one of the parties withdraws from the agreement.
Where will the gas come from?
BiznesAlert.pl has previously written about a few potential gas sources for Ostrołęka. It is possible to connect the new power plant to the Yamal gas pipeline and to import gas from the east on the border with Belarus, or from the west via the physical reverse flow in Mallnow, provided the Polish gas compressor station will be modernized. However, this investment is economically uncertain. In the long-term perspective, Russians will lose interest in the Yamal pipeline, as they want to transmit gas mainly via Nord Stream 1 and 2. Of course it is possible to import Russian gas to Ostrołęka via the Yamal, but the Polish government is skeptical about this idea.
Ostrołęka is located about 75 km away from Yamal’s compressor station in Ciechanów and about 50 km from Zambrów where another compression station is located. Therefore, in theory the power plant could be connected to the Yamal gas pipeline, which would mean the gas would be imported from Russia. Back in January, Deputy Prime Minister and Minister of State Assets, Jacek Sasin commented on this possibility “we are not diversifying the sources and directions of gas supply to go back to buying gas from Russia”.”Let me remind everybody that at the end of last year PGNiG informed Russia it would not extend the Yamal contract that will expire in 2022,” Sasin added.
Alternatively, the power plant could be connected to the Poland-Lithuania gas pipeline (GIPL), we have written about this previously. The gas pipeline is to be ready in the third quarter of 2022, once the gas compressor station in Gustorzyn is completed. The station will make it possible to transmit gas from, e.g. the Baltic Pipe to Lithuania and via the Gustorzyn-Wronów pipeline to Warsaw and Puławy, which will need more gas because of the growing heating and chemical sectors. The GIPL could deliver gas to Ostrołęka either from the domestic transmission system (i.e. the LNG terminal and Baltic Pipe – Poland’s gas projects aiming at diversification), or from Lithuania (provided LNG imports from that country’s FSRU are cost-effective).
The Poland-Lithuania gas pipeline is to be completed by the end of 2022. Its interconnection capacity from Poland to Lithuania and other Baltic states will be 2.4 bcm a year and in the Polish direction 1.9 bcm annually. If the investor decided to change the project and connect the new installation in Ostołęka to this gas pipeline, it could turn out the gas would have to be imported from Lithuania. This is possible thanks to the floating LNG terminal in Lithuania’s Klaipeda. However, the challenge might be the pipe’s capacity. The pipeline, which is already underway is able to import 1.9 bcm a year. This means the project implemented by Poland’s Gaz-System may have to updated and have its capacity increased with consideration to other potential clients as well.
The operator points out that the GIPL will supply gas to the north-east part of Poland and will allow to build a gas grid to provide gas to the regions of Podlasie, Warmia and Masuria. The company has already acquired all the necessary legal decisions and administrative permits to start construction. If the capacity is increased, new construction permits would have to be acquired and new market research on gas volumes that would be sent to Poland would have to be conducted. This means the construction of the pipeline could be delayed.
A smaller unit running on gas from Lithuania, or a bigger one running on gas from Yamal?
Gaz-System stressed that the new power unit in Ostrołęka is one of the reasons for constructing the GIPL. However, at this moment an application to connect this unit to the gas grid has not been filed yet. If it turns out the pipeline will supply gas to the new power plant in Ostrołęka, the power plant would have to be of smaller capacity than the one currently planned. Therefore, the investors will have to decide to either build a smaller gas-fuelled plant running on gas from the GIPL, or to construct a bigger one, but dependant on the Yamal gas pipeline, whose uncertain future puts this solution into question.