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Energy 15 September, 2017 12:00 pm   
Editorial staff

REPORT: Energy trends in Krynica. Innovations, fuel package, gas hub

During the 27th Economic Forum in Krynica energy was one of the most popular subjects. “Polish Davos” has previously initiated the direction of development of Poland’s energy sector. This time the talks revolved around innovations, electromobility, the fuel package, power synchronization and gas hub.

Synchronization of the Baltics with Europe 

Shortly before the Economic Forum in Krynica, the Polish Prime Minister Beata Szydło met with her counterparts from the Baltic States. Despite the fact that the official press release of the Prime Minister’s Chancellery did not say the topic of power synchronization between the Baltics and the European Union was discussed, one could guess that it was part of the talks. The issue at hand is the direction of synchronization – whether it will go through Poland as Lithuania wants, or via Finland as Estonia and Latvia, which until recently stayed out of the discussion, hope for. According to Tallinn and Riga a synchronization via Poland with one line only – the LitPol Link 1 is too risky. This is why the countries want to synchronize via an offshore link with the Nordic market. However, synchronization using an underwater cable is still a technological novelty, which has not been tested and is expensive. Estonia and Latvia would be willing to synchronize with the EU via Poland, an idea also supported by Brussels, but only provided that the LitPol Link 2 will be constructed. However, Poles are reluctant to agree as they are afraid that cheap energy from Scandinavia, whose exports to the Baltic states are significant, will also flow to Poland. The government in Warsaw does not want to import energy as it would compete against the domestic coal-fired power plants.

Even though the synchronization was not discussed during any of the panels, it was widely talked about on Krynica’s famous mall. In an interview for Biznesalert.pl Andrzej Piotrowski Deputy Minister for Energy said that Poland and Lithuania agreed that synchronization had to be completed as soon as possible. If other Baltic States needed more time they could always join the project at a later stage. He also added Warsaw was surprised the Baltics were not in agreement on the issue. “It looks like someone outside of the EU wanted to introduce chaos into this process. The arguments are not about the economy, and the networks can be synchronized in various ways,” he suggested. Whereas Aleksandra Gawlikowska-Fyk, an analyst at the Polish Institute of International Affairs told BiznesAlert.pl that the discussion between the Baltic States was about the splitting of synchronization costs and was an attempt at deciding who would cover them. Lithuania is prepared the best and Estonia the worst.

Electromobility 

During the panels on electromobility the experts stressed that the trend will be first visible in cities, especially in urban transportation. This will be supported by the state. The National Centre for Research and Development signed a PLN 500 million agreement with cities to buy over 600 electric buses. According to Krzysztof Tchórzewski the Minister of Energy, by 2025 Poland will have 6000 charging points and 500 quick points financed by the government. Local governments are also heading in that direction. By 2030 there should be an electric car factory in Poland and a widely accessible electric transport.

According to the participants of the “Economy 4.0  = Transport 4.0” panel that took place during the Forum, the biggest barriers to the development of electromobility were mentality, infrastructure and batteries. However, according to the Polish government electromobility stands a chance at becoming our national brand. Before the panel the Jagiellonian Institute presented a report on electromobility in Poland. The report’s partner was PKP Energetyka.

Leszek Hołda PKP Energetyka’s board member said that transport 4.0 accumulated the available means to enable the most efficient communication. In his opinion, one of the challenges was to complete the transformation of the infrastructure. He also added that the EU contributed PLN 66 bn to infrastructure while PKP Energetyka was implementing projects that facilitated distribution. The company hopes that Grupa PKP will pursue electrification projects. He also reminded that there were 110 thousand charging stations in Europe, while Poland had 110.

According to Marcin Jastrzębski the CEO of Grupa Lotos, Poland’s main problem were not charging stations, but high costs of the vehicles and batteries, which translated into small demand for this type of cars. “At this point Poland should focus not only on the charging stations, but also on the production of an electric car. This can be done. Battery capacity is another challenge. Buses will be first and Polish companies are leaders in this respect, the case is similar for trucks. The cost and range of electric cars is the problem,” Jastrzębski said.

During the panel tiled “Automotive Sector is Gaining Speed,” the Vice-President of the Industrial Development Agency Andrzej Kensbok talked about the fact that last year LG Chem started to construct a car battery factory near Wrocław.

“It is a huge investment. If all the stages are finished, the Koreans will pay more than PLN 6 bn. This will be one of two places on the planet where LG Chem will produce their batteries,” Kensbok said. He also added the Agency wanted to propose that the Koreans cooperate with Polish contractors, who apart from joining the supply chains could also participate in battery recycling.

Oil, electricity or hydrogen? 

The idea of electromobility has entered the discussions in Krynica only recently. Apart from oil, electrobility is to fuel cars across the world, including Poland. Hydrogen was this year’s novelty at the Forum. While hydrogen propulsion did crop up during previous gatherings, this year Toyota Mirai, a hydrogen fuel cell vehicle, was the mall’s attraction.

Agata Rzędowska, editor at BiznesAlert.pl, wrote that millions of tons of hydrogen are produced and stored in Poland. Globally the production of hydrogen is 50 million tons a year. Its leading producers are: the USA (8 million tons), Germany (3 million), South Korea (1.1 million) and Poland (1 million).

Toyota representatives claimed there were two parallel paths for electromobility’s development: batteries with power and hydrogen propulsion. Hydrogen fuel cell cars produce electricity onboard. The experts ensure there is no problem with range and long charging. Fuelling takes about 3 minutes and behind Poland’s western border, on the Berliner ring there are already 4 hydrogen stations. The US has declared it would construct 600 hydrogen stations by 2025.

However, the costs are an obstacle. During the panel “Innovation – Key Element of the Competitiveness of Energy Companies”, Aleksander Zawisza Deputy at the Development Division at Gaz-System pointed to the fact that the production and storage costs of hydrogen were still very high and that we still need to wait for the technology to become more widespread. He used bus prices as an example. A hydrogen-fueled bus costs about PLN 4 million, which is two times more than an electric bus and four times more than a gas-fueled bus, not to mention the traditional one.

Innovations 

During the panel “Can Poland Afford Investments in Energy?” Energy Vice-Minister Michał Kurtyka stressed that in general innovation was a process in which the main role was played by a specific culture, environment, ecosystem – factors that facilitate the development or implementation of new solutions. In his opinion innovations could also be defined as a result of expectations made by a client of an energy company. “The energy consumer is becoming more informed, has new possibilities and expectations, e.g. about the energy sources,” he said and added that the strategies of energy companies had to be adapted to those expectations through innovations. “And I started to notice that the Polish power industry does display a level of innovation,” he added when commenting on PGE and Tauron’s new strategies. According to Grzegorz Należyty the Vice-President of Siemens Polska, the Polish energy sector is currently in a place which allows it to experiment with sources or methods, which will fully develop in 20-30 years. Additionally, energy companies should look for interesting start-ups and finance them hoping they will be able to expand their solutions in the future. This should be done with the full understanding that some of those projects will fail.

During the panel “Innovation – Key Element of the Competitiveness of Energy Companies,” representatives of Poland’s biggest energy companies debated on the participation of their sector in innovations. They stressed that electromobility will record the biggest growth and that distributed generation should be perceived as an opportunity, not a threat. The panelists also underscored the significance of security when implementing innovations.

Jarosław Broda, Tauron’s Vice–President of the Management Board for Asset Management and Development, said it was no coincidence that at his company research and development was in the same department as assets. “We are already witnessing the results of this strategy. We included in our strategy the requirement of 0.4 % of income from innovations. The annual budget to this end is PLN 80 m. This is not an end in itself. The budget is used depending on our needs, we are flexible,” Broda said.

Piotr Adamczak, Enea’s Vice-President for Trade, announced that in result of updating the company’s strategy, Enea identified 31 areas related to innovations and made Enea Innovation responsible for their development and implementation.

Vice–President for Innovations at PGE, Paweł Śliwa said that last year the company’s strategy was presented in Krynica, and it made innovations its key element. The company has a department responsible for innovations and each of its business lines has a special office that manages innovations. PGE is looking for innovations in the area of extraction, production, distribution and sales. “PGE wants to spend PLN 50 m on innovations plus PLN 50 m from the market year on year,” Śliwa revealed.

During the Forum the webpage of PGE’s special purpose vehicle for innovations and start-ups was launched. By 2020 PGE Venture will receive from PGE about PLN 20 m a year, while PLN 30 m will be spent on R&D and any plans to commercialize ideas. PGE hopes the business sector will support the company’s endeavors. “Cooperation with start-ups is the foundation of our activities in the area of innovation and new technologies. We are doing our best to conduct a selection of start-ups that is efficient, honest and in line with best practices used by the leading CVC funds in Europe and across the world. The goals of PGE Ventures is to ensure the inflow of new business ideas to the Group and in result income,” CEO of PGE Henryk Baranowski said during the inauguration of the project.

The Polish Development Fund is also planning to support start-ups. Paweł Borys, the President of the Fund, opened a panel on the “Polish Start-ups 2017” report. He reminded that the Fund was opened eighteen months ago and that the way it functions resembles start-ups. “Our strategy is based on creating a strong drive for innovations, ensuring financial support, which will help in facilitating their development and achieving a significant international position,” he said. “We launched a ventures capital platform. We talked with various funds, entities and start-ups. The result of those meetings is that we are mobilizing the first funds. The Starter Fund will commence bankrolling this year already. We still need to work on improving business activities. The money will be available in the perspective of 5-7 years. During that time it will be spent on start-ups and innovations,” he added.

Fuel package 

During the panel “Challenges for the Polish Fuel Sector,” Marcian Banaś Vice-Minister for Finance said that until 2016 the defrauding of millions of Zlotys wase treated as a misdemeanor, not a crime. “This was a pathological situation. Should this continue, the consequences could be even more severe. The fuel package says that defrauding more than PLN 10 m is now subject to a minimum 5-year prison sentence,” the Vice-Minister said. He also pointed that thanks to reorienting the tax services it was possible to create an efficient mechanism that deals with the black market. Legislative action has also taken place, it includes the fuel, energy and transport packages. This allowed to acquire additional funds for the budget.

The ministry’s data shows that in the first quarter of 2017 VAT budget income increased by PLN 17.5 bn. According to Maciej Małecki, Secretary of State at the Chancellery of the Prime Minister, the legislative changes introduced by the Law and Justice government created a situation where the “fuel mob is in retreat,” and the market “is witnessing a chance for honest competition.”

The fuel industry was also impacted by those decisions. Zbigniew Leszczyński, member of Orlen’s board responsible for sales, said that in the first half of 2017 fuel sales increased by 26%.

Foreign companies are also seeing the change. Shell’s CEO Piotr Dziwok stressed during a panel on constructing a gas hub in Poland, that the cooperation with the Polish government in the area of oil was very good and gave the fuel package as an example as it increased the company’s fuel sales by about 30%.

Energy sector financing 

During the Forum, the European Investment Bank (EIB) granted almost EUR 1 bn in loans for strategic investments in the energy and research and development sectors. The EIB gave a EUR 250 m credit to Energa to modernize and expand the power grid in northern and central Poland.

The bankrolling in the form of innovative hybrid bonds has been guaranteed by the European Fund for Strategic Investments (EFSI), which is the main element of the European Investment Plan (so-called Jucker’s Plan). Thanks to two additional credits awarded by EIB, Poland will receive EUR 730 m to finance innovations and research and development conducted by research institutes, schools of higher education and companies. These EIB projects are the first ones in the new financial instrument called InnovFin Science, which was created thanks to EU’s financial support as part of the “2020 Horizon” program.

A day later Tauron announced it received hybrid financing from Poland’s Bank Gospodarstwa Krajowego (BGK). The bonds are worth PLN 400 m and will become due in 12 years. The company’s Vice-President Marek Wadowski added that energy consumption will increase by 4%. He also added that the EU-bonds could not be spent on supporting coal. The money will be spent on the grid and filters necessary to meet the emissions norms. He also mentioned that the money from BGK could be used to adapt installations to the BAT and BREF requirements. “However, we are not planning this and the adaptation to those requirements will be financed from other sources,” he said.

During the panel on the cooperation between the Adriatic, Baltic and Black Seas, Jan Fousek Chairman of the Supervisory Board at the Czech Solarni Asociace said that the only way to build new nuclear power plant units was to use the government’s support, which has to step in anyway. The politicians who managed the Czech ČEZ say the same. Fousek underscored that over 70% of stocks belongs to private investors. “How is the government supposed to ensure the operation of the facility? Without a contract for difference or some other kind of support it will be impossible. Therefore, any politician that wants to build the atom has to guarantee to the investor that they will give about EUR 10 bn of support and I think nobody has this kind of money,” he assessed. Whereas a strategy analyst at NATO’s Allied Powers Europe Headquarters in Turkey argued that China would be leader of nuclear power plant construction across the world.

Wojciech Hann, BGK’s board member, during the panel “Energy Policy Dilemmas – Innovation or Carbon Market?” was asked how a nuclear power plant could be financed. He replied that in Poland we were facing dilemmas about our energy mix and the way it could be bankrolled. When it comes to the nuclear power plant, he pointed out that we still did not know what technology and model would be used, which made it difficult to say whether the cost of PLN 75 bn announced by minister Tchórzewski was accurate. He also added it would be important to sustain coal-fired power plants until 2050 because of the raw material’s significant participation in the energy mix. He said we should not exclude the possibility that our German neighbors would need coal as well. Hann stressed that the Polish mines will be present in Poland for the next 50 years and that no mega-trends would change that. Regarding nuclear energy he said three models of financing were available: French, Finnish and British. He pointed that the British model had the highest prices, but was stable and ensured the project would be completed. “In order to finance a nuclear project we need stable regulations and a framework for our energy system to spend the money,” Hann underscored.

A turning point for Poland’s energy policy?

At the Economic Forum in Krynica representatives of the government and state-owned companies implied they were ready to adopt an energy policy that is less dependent on coal and suggested gas could be one of the solutions. They also talked about Poland’s nuclear power plant.

“Despite the efforts of the coal lobby Polska Grupa Energetyczna (PGE) stuck to its original plan to build a gas unit at the Dolna Odra power plant near Szczecin. In June the word was still that the new unit would be coal-fired. While gas is more expensive on the Polish market than coal (PLN 5.5-6 m to PLN 2-3 m per 1000 MW), the construction of the facility and costs resulting from the European Union’s climate policy are lower,” wrote Wojciech Jakóbik, editor in chief of BiznesAlert.pl.

In an interview for the Polish Press Agency Piotr Naimski the Government Plenipotentiary for Strategic Energy Infrastructure admitted that “in the Polish power generation system there is room for a few gas units, which will perform regulatory functions.”

“In a domestic power generation system where 6 GW constitute renewable energy sources, we need to have balancing elements – units that can be quickly turned on and this function could be performed by gas units,” Naimski told journalists behind the scenes of the Forum. In June he talked about one unit only.

It is worth reminding in this context that PKN Orlen uses gas units in Płock and Włocławek. PGNiG Termika, which is constructing gas units in Stalowa Wola and Żerań, also wants to promote this kind of power generation.

During the panel “How to Create a Modern Gas Hub for CEE in Poland,” Marcin Roszkowski, the President of the Jagiellonian Institute said that energy prices would go up. He also reminded that the EU was working on the winter package, which makes gas an important part of the future energy mix. Gas consumption in Poland will be growing because of the necessity to limit CO2 emissions. In his opinion Poland will use more power in the heating sector. “PGE decided to power the Dolna Odra power plant with gas,” he stressed.

Gas hub in Poland

When and will a gas hub be established in Poland? During the panel “How to Create a Modern Gas Hub for CEE in Poland” the guests discussed the opportunities and barriers such an endeavor will have to face. Ramboll, a Danish consulting company and Shell, the world’s biggest LNG producer, shared their recommendations on the issue.

Fredrik Ovlisen, Ramboll’s senior economist, gave a presentation on the conditions needed for a Polish gas hub to emerge. He said the attractiveness of the Polish market was growing together with the increasing consumption and usage of the raw material in the economy. The Dane also explained what barriers such a project will face. In his opinion those will mostly include the regulatory environment and the law on gas storage, which on the one hand increases security, but on the other may inhibit competitiveness and gas trade. It would be good to include traders when developing Poland’s gas hub. The obstacles related to the terms of storage should be removed. In his opinion, Poland should open up to other markets in the region.
Shortly before the panel, Piort Dziwok Shell Polska’s President of the Board talked with the Polish Prime Minister on the development of a Polish gas hub. He said that Poland made an effort to construct the LNG terminal and that the diversification of gas sources could facilitate the development of the gas hub. However, he also believed that the Act on reserves cast a shadow over this idea because it impedes trade and forces some companies out of business. He still stressed that despite the differences a gas hub could still emerge in Poland.

Paweł Jakubowski, Director of the Development Division at Gaz-System said that a number of factors have to come together for Poland to develop a gas hub. Infrastructure needs to be built to secure gas consumption in Poland and enable gas transmission to our neighbors. “First we need to have the hardware to make our market more flexible and reach the final client. This means we need to construct infrastructure and then the other elements that will make our market more flexible,” Jakubowski explained.

During the same panel, Marcin Roszkowski stated that a real diversification had to be based on the construction and expansion of infrastructure. He reminded that the procedure for storage will be very a-typical and one should get used to it as it will be binding until December 2022. He also mentioned the Three Seas Initiative, which needs an economic agenda.

PGNiG is also interested in a Polish gas hub as it is an opportunity to buy cheaper gas. In an interview for BiznesAlert.pl, Maciej Woźniak said the company keeps its portfolio up to date by restocking it with the cheapest gas. The Russian gas offered to Poland is a lot more expensive than the gas on European markets, which is why we are doing our best to buy only as much as the ‘take or pay’ clause forces us. We complement the portfolio with other beneficial offers. These are the possibilities of the spot market. We sign only those spot contracts, which fit our needs when it comes to the price. We monitor the market non-stop – a market that is becoming more and more liquid. We monitor indexes across entire Europe and we choose attractive offers only,” the PGNiG’s Vice-President explained.

In a conversation with BiznesAlert.pl Gaz-System’s CEO Tomasz Stępień said that it was plausible that the gas price from the Northern Gateway would be competitive in comparison to the offer from Nord Stream and Nord Stream 2. Still, a lot depends on the details and the way the price will be calculated. Gas’s world prices are impacted by a number of factors – negotiation time, its formula, comparisons, etc.

“Currently Gaz-System is working on an investment program that will make it possible to transmit the gas from the LNG terminal to any point in Poland. As an operator, it is our duty to ensure constant security of supply. At the same time, in five years when the long-term contract with Russia will run out, the possibilities to contract imported gas will change. Gaz-System has to be ready for that moment and be able to deliver gas to Poland’s entire economy,” the CEO said in an interview with BiznesAlert.pl.

When talking to the Polish Press Agency Stępień stated that after the Open Season procedure is over and the contracts are signed, the parties will need to take economic tests on the basis of rules approved by regulators from both countries, they will also need to acquire corporate permits. “These are standard processes, which have to be completed on both sides. If we sign the deal in December 2018 we will meet our expectations, if we do this earlier it will be even better,” he said.

PGE Energia Cieplna will be developed

PGE’s second novelty, apart from PGE Ventures, was the presentation of the name of a new company responsible for the Group’s heating assets. PGE wants to conclude the takeover of France’s EDF Polish assets. To manage those the company established a subsidiary called PGE Energia Ciepła S.A. This is also part of the company’s strategy to enter the cogeneration sector. “We will gradually move these six pieces of assets to make sure we do not complicate their management,” Henryk Baranowski PGE’s CEO said during a press conference at the Forum.



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