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Energy Environment 26 May, 2017 9:00 am   
Editorial staff

Poland is not a coal-state (INTERVIEW)

“Contrary to the popular belief, Poland is not “running on coal”. One of the reasons for this is simple enough – the mining sector is small in comparison to the entire economy and for years it has been dragging it down,” says Maciej Bukowski, PhD and president of the WiseEuropa think tank. In an interview with BiznesAlert.pl, he stressed that the ability of Polish mines to produce coal in a commercially viable manner is decreasing.

BiznesAlert.pl: Poland is a coal-state. Over 80% of its energy is produced from coal. Is Poland addicted to coal, just like petro-states are hooked on oil?

Maciej Bukowski, PhD and WiseEuropa think tank president: Absolutely not. The oil industry comprises 20-30% of the economy in the so-called petro-states, while in Poland the black coal mining industry produces only 1% of GDP. In addition, for years its contribution to economic growth has been negative. At the same time its net tax revenue per one employee is half as much as in industry and services. Therefore, contrary to petro-states, mining is not a foundation of our public finance, only a fraction of the income of the state budget and the Social Insurance Institution comes from that sector. Consequently, the conviction that this sector is exceptionally important for the Polish economy is a myth, not a reality. This is an industry that is still somewhat important for Silesia, but that significance is waning in the face of the economic potential of the processing industry, not to mention services.

The mining sector also depends on the coal prices on the stock exchange. Last year, the Polish government was relieved when coal prices were going up. Do think this trend will stay this way in the coming years?

I doubt it. I believe this is a short-term development, although we cannot exclude that in the future steam coal prices will increase on world markets. This is because fossil fuel markets are subject to cyclical fluctuations. Less profitable coal mines are shut down during economic downturn, which causes new price increases. However, the spectacular raw materials boom stimulated by rapid economic growth in India and China is unlikely to come back soon. Coal demand in China will more likely drop. Today, this country’s development stage is similar to Poland’s in the 90s. This means that in the future it should develop in a similar way to Poland – by basing its growth on services and promoting energy efficiency. For a long time, Poland has been developing without increasing its demand for primary energy, especially coal, despite the fact that the demand for electricity actually grew. The same will take place in the Middle Kingdom – reserves of energy efficiency, both in energy generation and consumption, are huge and tolerance for smog in big cities has run out. Additionally, China is experiencing a boom in renewable and nuclear energy, so there is an alternative for coal. Also, I would not count on a huge increase in demand in India, which is reducing its investment plans in coal based energy for similar reasons. Industrialization in India is taking place later, so the technological reality is different, which means it will not walk the same path China took two decades ago.

China is a key player on the international coal market. In recent years many coal mines have been closed due to environmental pollution, but then they were re-opened in the winter when coal demand increased. Is it possible that Chinese policy will impact the situation in Poland?

To a small degree – yes, this is because coal mines in Poland are expensive and very inefficient. Only half is able to provide coal for the local energy industry on competitive basis and produce economically justifiable profit without any subsidies. This is happening despite the fact that the sector has a huge advantage when it comes to location – its customers are placed close enough to make transport costs to power plants very low. The issue is supply, because it has to artificially sustain high production intensity. There is a reason why recently the Polish Mining Group (PGG) has received a significant cash injection – without it, the company would not be able to pay its employees or conduct investments. This is not a medium-term solution, because without substantial investments and changes in employment, labor efficiency will not catch up with the rest of the economy. Such a situation cannot be sustained in the long run – even if today miners earn good money in comparison to the processing industry or services, this may change in a few years because in those sectors productivity and pay are increasing at 3-5% annually. In a few years working outside of the mine may be much more attractive than today.

The Katowicki Holding Węglowy company has been taken over by PGG. The justification behind this decision is that this synergy will allow for easier and more effective management of the companies.

I am not convinced by this reasoning. The assets of both companies require such significant reform that even the biggest benefits of the fusion will not balance the need to search for substantial savings and efficiency reserves. Take a look at the announced figures – PGG has been already recapitalized once, but the money did not translate into a significant increase in output, while investment and production plans have been completed in 75% only. In a sector which is so capital-intensive and whose depreciation is high, a large portion of the gross income has to be spent on investments to keep up the production in the first place. It seems this is not being done with such intensity as it was assumed in earlier expectations, which were very cautious anyway. Without a serious reform it is difficult to hope that the sector will stand on its own feet instead of asking the government for more money in two or three years.

So it is impossible to sustain this sector?

It is possible, but it won’t last forever. The answer is ‘restructuring’, which entails decreasing employment significantly and focusing on extracting coal from deposits that are economically viable. Production should drop, but not because we are investing too little in all mines, but because we should concentrate on locations with the best perspectives, which will keep on producing profits at least in the next decade. We cannot produce coal in mine A with losses and cover them with profits from coal mine B, which is doing better. This kind of thinking makes Polish miners a lot less efficient than, e.g. American miners. This is caused by the fact that production is sustained for too long in locations without good perspectives, while the better ones are underinvested, this leads to over-employment in the sector as a whole. Mining should be treated like any other branch of the economy. It should not be perceived as a welfare tool, it should be assessed from an economic point of view, which  takes into consideration the global setting and supra-local trends. Obviously some mines in Poland can be profitable for many years to come and are able to satisfy local needs, but this not mean ‘all needs’. It is hard to plan on the basis of an expectation that there will be another raw material boom – it’s like buying a house and hoping to pay for it after winning the lottery. It is better to act more modestly by reducing employment and extraction in unprofitable places to generate surpluses that will allow the sector to act independently, even when the coal prices will be relatively lower. Every other model is economically unstable. Most likely there will not be another fusion.

On the other hand, Australians from Prairie Mining are interested in opening new mines in Poland…

That’s true, but the Jan Karski mine that the company is closest to opening, is to be launched in the Lubelskie Region. The scale of the projects and extraction volume are not very significant to the Polish market; however, they would be a good addition of coal supply if the restructuring of Silesian coal was done in line with economic rules. By 2030 coal extraction in Poland will be dropping because of the disappearing economic potential of Silesian mining. It will be going down even if PGG will pull out all the stops in trying to fix its assets and avoiding the possibility of collapse, which remains real. Mines in the Lubelskie Region can be a useful addition to our fuel balance. However, they will not change the general tendency which reveals that profitable black coal extraction will be dropping in our country by 2-3 million tons on average a year, or maybe even faster. However, the Lubelskie Region is in a different situation than Silesia, where unprofitable mines should be shut down and where the economic value of what is on the surface is significantly higher than what is under it. Silesia is an industrial region that is using functional integration with Europe when it comes to the processing industry and modern services.

It is no coincidence that our Czech neighbor will no longer be extracting coal. In developed countries the time of coal mining has passed, as other branches of the economy contribute to its growth a lot more, unless that economy has exceptional geological conditions that justify extraction. In Silesia, where coal has been extracted for the past 150 years, there aren’t many locations like that. In the Lubelskie Region where the potential of industry development is smaller, geological conditions are good and coal mines would be build in uninhabited areas, the prospects of realizing economically viable projects are better. However, their energy potential is not comparable to Poland’s energy needs in the 2050 perspective. Therefore, putting other issues aside, if we want to sustain coal energy production, we have to come to terms with the fact that our fuel demand will soon be covered mostly by imports. This will take us even further away from the petro-states you mentioned earlier.

Despite that, Polish government put its money on coal and wants the European Commission to drop the winter package regulation on public help for power plants that emit less CO2 than 550g/kWh. Are we in danger of a confrontation with Brussels?

I would not say it is a confrontation, rather a difference in perspectives. For years we have refused to notice that the world has changed. No other European country, including the Visegrad Group mythologized in the Polish press, supports our view about the huge developmental significance of energy based on coal and black coal mining. Other states are shutting down the last mines and are writing detailed plans of full decarbonization of their energy industries.

This means that contrary to Poland, those states long ago have stopped deliberating whether to reduce CO2 emissions in the energy sector and industry. They are actually wondering how to achieve it, so that their economy can benefit from the changes as much as possible. Therefore, instead of talking about goals, they are talking about means and they are expecting a significant technological change in their energy system by 2030, not to mention 2050. We should also take a pragmatic approach to this by accepting the inevitability of changes, and applying our investment plans in the energy sector to the changing reality.

If we had a long term plan, for the next 30-40 years, to gradually replace coal in our energy system with renewable energy sources, gas or nuclear energy, it would be a lot easier for us to take a realistic look at the actual production potential of our coal industry. However, we do not have such a plan and every government – contrary to facts – convinces itself that our economy is based on coal. We are the last people in Europe who believe in this, and we don’t notice that this kind of conviction is considered irrational even in countries like China and India. Instead of trying to convince ourselves that the rest of the planet is wrong, we should be looking for an opportunity in the changing energy landscape of the world. Maybe this would force Polish companies to create a reasonable strategy that would make them ready for higher prices for CO2 emissions, and teach them to spend money on investments that would cater for the long-term interests of their shareholders and clients instead of the interests of the employees of the coal sector.

As a born optimist I believe that this will happen, and I am calling on the government to get as much funds for supporting low-carbon investments as possible during the negotiations with the European Commission. However, at the same time the government needs to admit that sticking to the status quo is a trap that will make us lose more than win.



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