Jacek Sasin Deputy Prime Minister and Minister of State Assets told the RMP FM radio station that state-owned companies will no longer import coal. This decision may make it harder to purchase cheap coal, which will in turn increase costs of energy production – writes Bartłomiej Sawicki, editor at BiznesAlert.pl.
No embargo, but…
The deputy prime minister declared that state-owned companies, including Polska Grupa Energetyczna (PGE) and Węglokoks, will no longer import coal. He did not provide any details on how this would go about. The minister said that there would be no embargo on coal imports from Russia due to EU regulations. He stated that PGE has already frozen deliveries of imported coal and other state-owned companies are to use domesticly produced coal only. Meanwhile the demand for Polish coal is declining. Because of the warm winter heating plants, 90% of which are powered with coal, are not operating at their highest capacity. Moreover, the quality of the Polish coal, especially its calorific properties often do not meet the expectations of power plants. On top of that the coal price offered by Polska Grupa Górnicza (PGG) is high and does not match the current situation on world markets. In short, coal prices on the market are dropping which is why imports are growing.
A drop in imports is unrealistic
In 2019 Poland imported a little over 16.5 m tons of coal. It’s 3 m tons less in comparison to 2018. However, this does not mean that as of 2019 the consumption of local coal increased and imports will continue to drop. The production of hard coal in Poland in 2018 was at 63.4 m tons, which was 2 m tons less than in 2017. This year it may drop even further. In the first months of 2019 the production was at 46.1 m tons. So why did import drop? It wasn’t the government’s doing, it was the market’s. Companies import coal because they want to buy as cheaply as possible. In the face of the growing demands of climate policies, energy companies have to cater to the well being of the company itself and at the same time meet the owner’s expectations, in this instance the state’s expectations. And the state does not want electricity prices to go up.
Can’t import coal? We’ll import energy
Since PGG is selling expensive coal and state-owned power plants did not receive a permission to increase electricity prices, despite their application to the Energy Regulatory Office (URE) at the end of 2019, they need to look for a different solution. The answer is to import energy. According to Polskie Sieci Elektroenergetyczne (Poland’s grid operator), domestic electricity consumption was at about 169.4 TWh in 2019. In 2018 it was 170.9 TWh. Energy production in the country dropped to about 158.8 TWh. A year earlier it was at ca. 165 TWh. Becasue of that electricity import increased to 10.6 TWh year on year. This is almost twice as much as in 2018. The reason why both import and consumption of domestic coal are dropping is that less energy is produced with this raw material. The production of energy from lignite dropped by 15% and from hard coal by 5%.
The record-breaking energy import and drop in energy production from coal cause a decline in imports of coal and in consumption of domestic coal. Sometimes it is more cost effective to import energy because of the growing costs of its production. However, it remains to be seen how PGE will replace the missing imported coal. This is mostly about fuel for the PGE Energia Ciepła, which is responsible for the 'heating’ aspect of the entire group. PGG’s coal prices are still high. Considering the company’s trade unions push for wage increase, PGG will most probably not offer any discount.
Coal import vs energy prices
If power companies are forced to buy coal that is currently in storage and use the more expensive Polish coal, energy production costs will go up. According to data from the Ministry of State Assets (MSA), in mid January coal reserves at Poland’s coal mines exceeded 3 m tons. Power companies have coal reserves as well, mostly due to strategic reserves which are used almost at a maximum level. At energy companies this is about 1 m tons.
Bearing in mind the risk of growing energy prices, it is worth remembering that the new tariffs for Enea and PGE Obrót are valid until 31 March 2020. PGE has already decided that provisions must be created, which had been already included in Q4 2019 and amounts to 220-260 m PLN. Minister Sasin himself said in the interview that companies import coal because it has competitive price and quality. „We should manage coal companies better, so that we have cheaper and better quality coal that is sold in a more efficient way. This is what we’re trying to achieve,” Sasin explained.
Decision time
The window for making a decision on the future of Polish coal is about to close. The MSA announced it would present a plan for the future of PGG. This was right after the crushing report by the Supreme Audit Office, which said the restructuring plan for Poland’s coal sector yielded poor results. According to the report, despite being bankrolled by investors and benefiting from increasing coal prices, the restructuring of PGG was not as expected. The high fixed production costs did not drop, while efficiency went down by 2%. Despite that the average salary increased by 13%. Will the new plan for PGG be a continuation of the 2015 and 2016 blueprints, i.e. will it result in merging power production with coal mining? If that happens state-owned companies may face a financial burden that will hinder their engagement in green energy production.