Janusz Piechociński, Poland’s former economy minister, believes the country’s energy policy should be more pragmatic. “This is better than throwing a fit, after which someone may ask what we won, to which we’ll answer that all we got was a headache,” the BiznesAlert.pl interlocutor said.
BiznesAlert.pl: What has changed in the energy sector in recent years?
Janusz Piechociński: I was the first minister of economy who could be sure that an embargo on oil and gas deliveries from Russia would not bring us to our knees. For half a century we were forced to negotiate prices without having an alternative. Consecutive governments of Poland’s Third Republic, especially between 2005 and 2015, worked to get rid of this burden by stabilizing domestic gas production, exploring for gas, expanding the gas grid and storage units. Those investments were expensive, and we had to think out of the box on how to limit import. This wasn’t just about political and economic sovereignty, with which, e.g. Belarus is struggling even today. We also wanted to develop the chemical industry, which needed gas and oil processing. We started large investments to increase the usage of asphalt and then, thanks to new technologies in road building, we entered into cement technologies. This is an achievement of a group of people who worked across party lines. It was possible thanks to a number of world processes to which we reacted correctly. The shale revolution started in the USA, which allowed it to become no. 1 when it comes to oil production and a huge gas exporter two-three years ago. The technological revolution also increased the competitiveness of their resources. Today America has large export capabilities and growing infrastructure, which allows it to sell their products across the world. In 2013, during the meeting of Baltic states ministers in Petersburg, we talked about the price of resources, and when I stated that the oil price would not go back to over USD 100 per barrel for a long time, prime minister Medvedev was outraged. He still believed that the oil price would continue to go up and reach USD 180 per barrel. However, the world has changed and this is visible in the oil price, which is now below USD 50. The drop in oil prices caused gas prices to go down as well. Additionally, before COVID-19, new gas fields were opened and the advantage of clients over providers in negotiations lowered the real prices significantly. This has been the case for the past couple of years. Renewable technologies are another trend. Forty years ago, from the point of view of the market, the first renewable energy sources were less realistic than space travel. This change is visible, e.g. in the transition that PV and geothermal energy have been undergoing. Today, their costs are steadily going down, while their competitiveness is improving in comparison to other sectors. Since we did not have a domestic technology for PV, we did not want to develop it after 2010 by importing cells and offering high budget subsidies. First, we wanted to develop our domestic potential on the basis of Polish capabilities. This is why I purposefully halted the expectations held by the market that the large RES act from 2015 would strongly support PV. We decided to first support wind energy, because our national potential in this technology was the biggest. In 2014 it still looked like we would be able to achieve the 2020 target for RES participation in the energy sector. Unfortunately, the dramatically stupid decisions made in 2016 on onshore wind energy, made it impossible, unless we would continue to pretend that cogeneration of imported sawdust is also a renewable energy source.
How did the global trends impact Poland?
Oil and gas are the main commodities we import. The plummeting prices and the fact that they stayed low, is one of the reasons for our economic success, the surplus in foreign trade, the ability of many of our sectors to successfully compete, and the smaller expenses of transport companies and households. After all, the good situation on the market allowed Poland’s refineries and PGNiG to bring in terrific profits. Today suppliers fight for customers. Last year, before the embargo on oil from Iran, LOTOS bought oil at only USD 27 per barrel. All of this allowed the harbors and refineries to rake in as they significantly, often to record levels, increased their margins. Fuel distributors and sellers also boosted their profits, because when the retail price was PLN 4-4.6 per liter of petrol, the over PLN 0.2 margin could be paid for by the client, who still remembered the extreme retail prices when oil was over USD 100-110. We managed to build the LNG terminal in Świnoujście on time, despite the difficulties with our contractor from Italy. In result, we were able to start negotiating from a different position. So, today Poland has a completely different position on the European and global hydrocarbon markets. Right now it is worth paying attention to the upcoming changes on the market, such as the EU perceiving gas as a transition fuel. All of this needs to be part and parcel of our strategic thinking.
Is this the case?
After 2015 we did not start the next stage in the investment process in the energy sector, and we are increasing energy import. It went up by 33.5 percent year on year. We are importing more and every day that is 28-50 Twh. In 2016 we were saving the coal industry with simple solutions, such as budget subsidies (coal allowance, cancelling debts, etc.) and merging the energy sector with coal mining. It took the pressure off mining and even generated artificial profits. This is why bigger investments returned, but so did an uncontrolled spike in wages that was not combined with results. The price of domestic coal continued to rise, so in 2018 we imported a record-breaking amount of coal – 21 million tons, out of which three quarters came from the east. It turned out the current government was fine with the idea that Russian gas and oil are a threat to our sovereignty, but Russian coal is cheaper, so it’s fine. Russia uses this coal to acquire dollars, so it subsidizes its export to make it more attractive. Whereas, here in Poland we have almost 20 million tons in storage, we are building central coal storage facilities and at the same time we import more power than ever. There is chaos between the energy sector and coal, mistakes pile upon mistakes and we are saving the financial liquidity on a day to day basis, but at the same time the debt noose is getting tighter.
How do you assess the situation on the energy market?
We have the highest wholesale price of energy and inflation. The cost of power for households has gone up and is increasing inflation to the highest level in Europe. These issues hit the poorest households, which feeds into politics, because “election is coming, the 13th pensions needs to be paid out.” The sate-owned energy companies apply to the Energy Regulatory Office for permits to increase prices, but it either refuses, or creates new burdens to not increase energy prices. If the retail price increased by 9 percent just this year and is growing at record levels, upping imports is an attempt at stabilizing the price on the domestic market. In result, the dependence on energy imports is growing, because of the fear of another price hike, which destroys energy-intensive industries and causes serious social tension, as well energy poverty, but not only. In result, we have a completely jumbled market and relations between the resource, producers, distributors and energy consumers, growing cost of CO2 emissions combined with a drop in coal output, stable level of employment and an increasing extraction inefficiency in many coal mines. This means the entire coal sector, apart from Bogdanka and some JSW mines, is approaching insolvency.
Even before the lockdown, at the end of 2019, Poland’s biggest energy companies were able to acquire new loans worth PLN 10 bn. Anybody can read about the tensions between the government and Polska Grupa Górnicza (PGG, Polish Mining Group). The domestic coal extraction dropped, but despite that over 80 thousand people remain employed in the sector, including 70 thousand people in Silesia. Even if we receive the money for transition as part of the European Green Deal at a good cost, a large portion will be spent on social protection and staff restructurization, instead of investments and modernization. The capacity market fee will also put an additional strain on the prices. Not even a small piece of the coal-fired power generation sector and the energy industry as such is healthy. When in 2019 Bogdanka had good results, the wages were increased, which was the right decision. Still, even in mines without a profit and in those that had losses, pay increases were extorted – in January by 6 percent, even though trade union leaders knew that it was a nail to the coffin. During the latest talks, to appease the miners “for now”, a declaration was made that their benefits would be guaranteed at the level of their current pay. This is how in practice politicians paid off the union support in the last and this year’s election. Then the coronavirus spread and a ridiculous situation occurred – Bogdanka had to slow down production, even though it has new deposits, because there was no space to store coal. Extraction was limited at a place where there were no losses. It was done to save companies that are not profitable. In the middle of year the Vice President for Finances says that the PGE Group will control liquidity, and the CEO says openly that if the coal assets are not separated from the energy sector by the end of next year, come companies may have to fold. At the same time, we also have a declaration on paper that the energy sector will turn from lignite and hard coal to the green side. The Power Point presentations look beautiful, but we need to ask where to get the money from.
How is Poland doing when it comes to managing the subsidies that should be invested?
Efficiency and climate protection will be subsidized with EUR 750 billion from the European Green Deal. Passive solutions to maintain employment level in the coal sector, which prevents social outrage, will only decrease the pain of facing reality. However, we are not unlocking our potential. There are a few skeletons in the closet, such as the question about the Ostrołęka C power plant on which over PLN 1 billion had been already spent. It was easy to decide it should not run on coal, so let’s see how it will be switched to gas. So far, nothing in this regard has happened. How much more will PKN Orlen need to spend? We are already hearing rumors about expanding the Three Seas Initiative Fund, so is this the way Orlen will go international? There are discussions on whether Poland should buy deposits in Romania, which Lukoil refused to purchase. Add to that the decisions on killing the wind energy. The Proximity act will not be amended, and we are investing in offshore wind farms. The problems Finland has had with nuclear power and Germany with the airport in Berlin are showing that it will be difficult to stick to the 2025 deadline. Add to that financial burdens. Energa has had a loss of over PLN 0.5 billion, because of its obligations towards investors in renewables. Whereas Orlen does not include them in its results, and only shows quarterly profit. Did Orlen not take over those obligations? Only half of those conflicts have been resolved. Some companies had to repurchase wind farms from those investors to settle conflicts. We have heard that these agreements will not impact the companies, but this is just a skilful slogan that hides the real size of the damage. Since investments are dropping, the potential of contractors, including Rafako, is weakening. This means brutal bankruptcies of other companies. This means problems for other companies with a huge potential, which had to go through a restructurization. By limiting investments, using big international players that really do contribute financially to a project, like in the case of Polimery Police, by having problems with getting loans for coal assets, we are exacerbating the situation. The energy sector is full of mines, it is governed by contradictions, there isn’t any consistency.
The legislation that is needed for the sector, also for energy sovereignty, is slowly escaping because the Sejm has lost its ability to conduct serious analysis, due to political conflicts that exclude voting across party lines. Frequent staff changes are taking place, and the staff is not the best. The scale of rotation, when it comes to supervisory boards and company management is amazing. The staff issues in Silesia were handed over to unions, but the favourites of the unions are not always cut out for substantive work. Sometimes one needs to go against the current, instead of increasing salaries by six percent. One-time awards were a better idea, and the Salary Fund should not have been made so rigid.
The Energy Regulatory Office will come under pressure from politicians to not agree to significant increases in 2021. In result, energy companies will cut investments and sell their assets, or force the Polish Development Fund to engage more. In consequence, we will print more and more money. It is worth reminding that only this year the increase in paper money broke all records. We have the biggest budget deficit in Europe. The way companies are managed looks bad. If in the mid-year we had over 20 million tons in storage, and we sold a little more than we extracted only for the second month in a row, it will be difficult to put this all together. Moreover, the price of energy generated from coal is impossible to accept, considering the regulatory authority will not agree to a raise.
Maybe nuclear power will help?
Even though we are already facing serious issues, the nuclear power plant is being postponed. We were criticized for preparing a plan for nuclear power, which cost a lot in 2015. Where are we in 2020? Have we moved forward? No. We are considering whether we will build an NPP with Americans, or with some other investors. We are still talking whether we want a large NPP, or small modular reactors. The investment is estimated at PLN 60-80 billion. We had already talked about this in 2015. We had prepared a number of locations, while research and social consultations had already started. And yet no decision has been made to this day. We have witnessed a number of symbolic meetings, which resulted in nothing. We don’t have a location, which could help secure spatial development plans, so that housing estates are not built there.
But we will have the Baltic Pipe.
We are thinking about the Baltic Pipe in a political way. We are not talking about the costs and goals of the pipe. It was the current government that once boosted hopes that shale oil and gas would give us independence. I warned that the environmental standards would raise costs, which had happened in Great Britain. Trump sped up the shale revolution by getting rid of those restrictions in the US. We should be happy that Poland found deposits in the North Sea, but we should stay calm and continue thinking pragmatically. We need to sign strategic contracts on deliveries from that direction and buy gas on the spot market at cheap prices. If the price is good, we should import as much gas as possible from Norway, but if it is expensive we should buy elsewhere. This is why the current government is pragmatic about increasing oil imports from Russia, and that is the right thing to do. For instance, if Libya decided to enter the market, we should sit down and talk. Iraq wanted to deliver hydrocarbons to Poland, but nobody was interested. Even though the US introduced sanctions on Huawei, Samsung was allowed by Americans to sell components to the Chinese. Americans buy nuclear fuel from Russia without any reservations, and they recently signed a delivery deal until 2040. It’s time to be pragmatic about the energy sector, and to not enter into propaganda wars where it is not necessary. We should follow our plans without emotions. We may and we want to be a solid partner to NATO and the EU, and at the same time have relations with other players in the market. If we have a contract with Qatar, new deliveries from the US, we should monitor who will enter the LNG market to sell gas in Central and Eastern Europe next. However, when thinking about energy sovereignty, the price should be taken into account. We should never bend our knee, but what if sovereignty is going to cost two, three times more from one direction, because we don’t want to import from another. We are not consistent and pragmatic enough. Why complain about oil from Russia if its import is growing, because it is the cheapest? Iranian oil went off the market, but Libya’s has not come back yet. We win nothing by being radical. Denmark got a lot for the Baltic Pipe, but did not give back much. We are talking about a gas hub and another terminal at the Bay of Gdańsk, but at the same time we are building for over PLN 10 billion a large gas pipeline to the south, hoping that our gas, which will be unloaded in Świnoujście, will flow to the Visegrad Group. Have we discussed any letters of intent or deals with our clients in the south? If we want to give Hungary an alternative, should we not check with whom it signed new deals? And it did – with Gazprom on deliveries via gas pipelines and with Croatia on LNG. If our infrastructure remains empty, it will only add gigantic costs. So I am calling for rationality and pragmatism.
It is worth giving an example from a different area. In 2016 many were praising the buying of EDF’s assets for PLN 4.3 billion, but today the modernization necessary to meet the EU regulations costs a billion PLN a year. Even considering the latest drop in prices for CO2 emission allowances, it is worth asking whether it was a good decision, just like in the case of buying old wind farms. We bought the “old” farms to modernize them, instead of building new ones to increase potential and efficiency. It is easy to announce a program on building offshore wind farms in the Baltic, and then frantically look for a consultant to build a land connection. And in the process bankrupt a company in Szczecin, which built steel constructions. On the other hand, recently we have been throwing accusations at our key partner – Germany, instead of calmly reminding Berlin that it is still the biggest CO2 producer and is reaching for more and more lignite, and should better understand Poland’s dilemmas and problems in the context of the Green Deal. Germany’s energy transition will cost more than the original estimates. Poland does not want to repeat those mistakes, we are decreasing emissions, but we have less time and we have to draw conclusions from German mistakes. This is a better way than throwing a fit, after which someone may ask what we won, but we’ll only be able to answer that all we got was a headache.
Interview by Wojciech Jakóbik