Polish coal: enfant terrible of the EU climate policy

Martedì, 29 Dicembre, 2015
Maciej Hacaga and Krzysztof Dzieciolowski

As conservative Law and Justice party is still enjoying its spectacular success in the October Polish parliamentary elections, its recently formed government is already facing a challenge which, if managed inappropriately, has a potential to severely damage its popularity. The once mighty Polish hard coal mining industry is effectively on the brink of disaster. Long disregarded problems of economic inefficiency and bad management in the sector are proving to be lethal in a period of very low world coal prices. What makes the whole situation even more complicated is that both domestic coal is still the cornerstone of the Polish energy generation and that major mining companies remain state-owned enterprises. While short-term solutions are necessary, this has to be seen in the wider context of the EU climate policy which openly aims at decarbonisation. In effect, Poland is becoming increasingly isolated with its pro-coal narrative in Europe.

In order to speculate about the future of the Polish coal and how it can be impacted by current developments, it is crucial to understand the rationale behind Polish preference for coal, often perceived as myopic and irrational by international commentators.

 

Figure 1 – Polish coal basins (courtesy of Austrade).

 

Black gold or relics of the past?


Polish coal mining gained its leading position in the national economy in the second half of the 20th century when the socialist regime provided a strong impulse for the development of heavy, energy-intensive sectors and hard coal became the necessary fuel for those industrialization and modernization processes. The production output rose dynamically from 47 million ton (mt) in 1946 to the record 201 mt in 1979, making Poland one of the leading producers and exporters worldwide. As the socialist state approached its long-awaited end, in 1988 the country was the fourth biggest producer of hard coal worldwide. The mining sector was not only the major  source of income for a considerable part of southern Poland, but also the untouchable symbol of labourers.

 

Figure 2 – Polish hard coal production in million ton.

 

Free market reforms undertaken in 1990s, which would nowadays be called neoliberal, led to the closure of a number of least efficient mines. Following years were characterized by a gradual decline of the industry that was indispensable for the sustainability of the domestic electric energy system. Nevertheless, coal production enjoyed constant support in the form of various subsidies which replaced much needed restructuring and good management. In 2014, the aggregate output of the industry amounted to 72.5 mt, net import was equal to 2 mt and employment totalled 103,000 jobs (down from 407,000 at the outset of the reforms).

 

Figure 3 – Trends in Polish coal production, operating mines and total employment in the coal sector.


Despite this declining trend, the role of domestic hard coal in different aspects of Polish economy is still immense. Firstly, with over 21 GW of installed hard-coal capacity out of a total of 39.3 GW in the whole system, it is the cornerstone of the electric energy mix providing approx. 50% of the produced power in 2014 (lignite satisfies another 34%). Secondly, it has long been the flywheel of development for hundreds of its suppliers, intermediaries and subcontractors – like PKP Cargo, Europe's second largest railway freight provider or Polish mining machinery producers. Moreover, hard coal provides substantial income to the Polish central and local budgets in the form of taxes, fees, etc. In 2013 the coal sector represented 3% of national income.

The scale of the industry is one of the most important reasons for the Polish pro coal stance on the international stage. Authorities are aware of the fact that any non coordinated decarbonisation would cause significant problems for the whole electric energy system and most likely lead to a violent push-back and potential unrest in the Upper Silesia region. Despite the recent problems, the region has traditionally been the most industrialized part of the country, with mines being the major contributing source of income for hundreds of family and municipal budgets.

Another reason for the appeal of coal has to do with coal’s impact on energy markets and is purely economic. According to 2015 Eurostat data, household electricity prices in Poland are the lowest in the EU when expressed in absolute values and comparable to those in Germany and Denmark when presented in purchasing power parity (PPP). Critics of this argument quote studies which show that the cost of electricity for the majority of Polish companies is of marginal significance, while air pollution and other external costs are deemed to be more important. However, despite the complexities and the counter-arguments, it is difficult to question the fact that coal-based generation offers Poles relatively low energy prices. Switching to other fuels would likely increase the energy bills of households and manufacturing companies.

Finally, Poland's past and geographical location explain the country’s preference for energy security based on domestic fuels, such as hard coal. A long history of invasions carried by stronger neighbours and failed alliances with western partners, has left its stamp mark on Polish elites and the rule of energy self-reliance seems to revive in the light of recent Russian actions. Although Poland supports the EU policy of common energy market, the project is still perceived as far from complete and able to provide sufficient security.

 

Time for decisions

This attitude towards Polish coal has been presented over the years by those in power. Despite its pro-coal stance, Poland has made relatively successful attempts to follow the EU climate policy, empowering RES developments, promoting energy efficiency and gradually modernizing its electric energy system. But the coal's position has remained intact.

However, the ongoing crisis in the international coal market (prices are 60% down from 2011 levels) has uncovered all weaknesses of the mining sector. Ever deeper deposits, technological backwardness and questionable competences of state-delegated managers have brought the industry on the brink of bankruptcy in 2014. The former government dominated by the Civic Platform clearly lacked any viable solution and lost itself in a series of short-term measures, unprepared plans and broken negotiations with the unions.

In the recent campaign, the winning Law and Justice party assured miners that their firms have a bright future and it is mostly the previous government that is to be blamed for the current problems. This rhetoric has recently been repeated by Krzysztof Tchórzewski, the newly appointed Minister of Energy. During a recent interview, he additionally blamed Russian dumping export prices and claimed that further mining investments are needed to satisfy the rising electricity consumption stemming from expected economic growth. On the contrary, the future energy vice minister declared that the industry needs deep restructuring and suggested the suspension of production in some facilities. While politicians are faced with a challenging task of balancing between painful reforms and utopian rhetoric, very few options remain open. Some of the mining firms have survived in last few months only due to inventories sell-offs and credit lines from utilities. Necessary investments cannot be financed from the public budget as this would be against the European law. Finally, layoffs and deep restructuring is not an option due to political reasons and the position of labour unions.

In this context, it is increasingly probable that the new government will unfold measures and processes started by their predecessors, i.e. force relatively prosperous state-owned utilities to acquire/invest in mining firms. While economic rationale for such transactions is nowhere to be found, political considerations are quite different: from the political viewpoint, fierce media criticism and loss of utilities’ market value is far less problematic than the continuation of the current state of affairs. Such consolidation/financial engineering, if performed, will provide time for much needed reforms but will not reverse the long-term fate of Polish coal.

This seems to be decided by the decarbonisation being at the centre of the EU climate policy and further strengthened by objective factors such as world prices and increasingly difficult geological conditions. The main question is the way and timing of this process. If restructuring succeeds and investments in profitable deposits are made, this decline can be smooth, with hard coal being progressively replaced by other fuels up until 2040s/50s, not violating EU law and avoiding significant social costs. If these efforts fail, uncompetitive mines will multiply their losses resulting in rapid closures, increasing imports and entailing serious economic and social consequences, including unrests.

 

The former Polish PM argued that Poland cannot “afford” abandonment of coal. The Law and Justice Party, known for being critic about EU climate policy, is expected to produce several more confrontational statements. Yet, it is difficult to imagine that it can go far beyond rhetorical statements and try to question the EU climate policy in the name of the Polish coal – an industry which is far beyond its peak and prosperity.


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