The costs of decarbonisation can be high, but the consequences of neglect will be even greater
Poland's energy policy until 2040, approved at the beginning of February 2021, caused a great response in the public debate even before the publication of the full document. In addition to the plan to significantly reduce the share of coal in the energy sector, gradually replaced by renewable energy sources, nuclear energy and gas, many comments were raised by the estimated cost of the energy transformation, which, according to the document, will amount to approximately PLN 1.6 trillion.1
More than half of this amount (PLN 867-890 billion) is to be allocated to the fuel and energy sectors. However, referring to the loudest point of the public debate, which is the structure of electricity generation, it should be noted that the expenditure on this sector is to range from PLN 320 to PLN 342 billion. 80% is to be allocated to emission-free generation capacity, i.e. renewable energy sources and nuclear energy.
Carbon-free energy sources are an extremely important element of the energy transformation. However, they are involved with a high capital cost. According to PEP 2040 estimates, we will spend PLN 196 billion on RES investments in the years 2021-2040. Offshore wind farms with a total capacity of 11 GW will cost the most, as much as 126 billion, 5.9 GW of which is to be commissioned by 2030. Despite relatively high investment costs, renewable energy sources such as wind farms or photovoltaic panels are characterized by low costs of their subsequent use.
The planned nuclear power plants are the second largest electricity investment. The cost of construction for 6 blocks with a total capacity of 6 to 9 GW will amount to PLN 105 billion, more than half of which (PLN 63 billion) are funds provided for the construction in 2031-2035. However, these blocks will not be put into operation immediately - the first one with a capacity of 1-1.6 GW is planned for 2033. The next ones are to be put into operation every 2-3 years.
However, the costs related to the investment in generation capacity and subsequent energy production are not the only ones related to the power system. These also include, among other things, the investments in the expansion and modernization of transmission and distribution networks.
According to the plans approved by the President of ERO, Polskie Sieci Elektroenergetyczne, acting as the transmission system operator, and the five largest distribution system operators (Enea Operator, Energa Operator, PGE Dystrybucja, Tauron Dystrybucja and Innogy Stoen Operator) have allocated PLN 52 billion for this purpose for the period 2020-2025. Some of these funds will relate to the adaptation of infrastructure to use green energy, inter alia, thanks to the construction of connections with offshore wind farms.2
Expenses (not) to be avoided
The amounts included in PEP2040 may seem high. However, it should be remembered that many of them, such as expenditures for the modernization of transmission grids, would also be incurred if not to invest in new emission-free generation capacities.
What is important, the scenario of staying with coal would create many alternative costs. According to the forecasts of Polskie Sieci Energetyczne, by 2040 an increase in electricity demand from the current 160 to 204 TWh per year should be expected. It is connected with the necessity to build new generation capacities. The costs of the modernization or replacement of the current coal-fired units could also be high, which would be necessary due to the passage of years - the average age of a power plant in Poland (commissioning the first unit) is 47 years. The situation is similar in the heating sector - the four largest CHP plants in Poland were put into operation almost 60 years ago.3
According to the estimates of the Polish Economic Institute, in the event of staying with coal (the so-called "status quo"), the costs incurred by the fuel and energy sector can amount to as much as PLN 1064 billion, exceeding the cost specified in PEP 2040 by over PLN 170 billion. The important fact is that these estimates do not include the costs of EU ETS emission allowances, for which, in the "status quo" scenario, even an additional PLN 400 billion can be paid.4 If decarbonisation does not occur, one should also consider the loss of EU funds provided for this purpose.
Not only energy
When it comes to the costs and benefits of decarbonisation (or not), environmental, health and social issues should also be considered. They are usually omitted in the calculations due to the difficulty in their more accurate estimation and comparison with financial costs. Pollution related to coal combustion in power plants is an example of such a cost. In Poland, it causes 5,830 premature deaths per year.5 It is also worth mentioning that mining is one of the leading producers of waste, as well. Mining by-products account for as much as 48% of all waste produced.6
The minimization of energy poverty is also an important issue included in the decarbonisation strategy. Combustion of poor-quality fossil fuels in obsolete furnaces not only increases the amount of pollutants in the air, but also increases the risk of respiratory, cardiovascular, and musculoskeletal diseases among the inhabitants of poorly heated buildings. Obsolete and poorly operated furnaces in households are also the cause of nearly every tenth fire in Poland.7
In addition, decarbonization brings specific economic benefits. According to the McKinsey report, abandoning the combustion of fossil fuels, which are largely imported, can significantly improve the Polish trade balance. Investments in renewable energy sources, the production of electric vehicles or electric heat pumps can also provide additional growth in Poland's GDP (1-2% by 2030) and from 250,000 up to 300 thousand new work vacancies.8
Chart 1. Capital expenditures on the expansion of production capacity (in PLN billion), including financing costs during construction (capital interest included in the initial value of fixed assets).
Author: Adam Juszczak, analyst from the Climate and Energy team at the Polish Economic Institute
The title and subtitles were prepared by the TOGETAIR editorial team
1https://www.gov.pl/web/klimat/polityka-energetyczna-polski-do-2040-r-przyjeta-przez-rade-ministrow
2https://www.ure.gov.pl/pl/urzad/informacje-ogolne/aktualnosci/8874,Prawie-52-mld-zlotych-na-inwestycje-sieciowe-w-elektroenergetyce-w-najblizszych-.html
3https://pie.net.pl/wp-content/uploads/2021/03/Tygodnik-Gospodarczy-PIE_11-2021.pdf
5https://pie.net.pl/wp-content/uploads/2021/04/Tygodnik-Gospodarczy-PIE_13-2021.pdf
6https://pie.net.pl/wp-content/uploads/2021/04/Tygodnik-Gospodarczy-PIE_13-2021.pdf
7https://ibs.org.pl/publications/jak-poprawic-jakosc-zycia-osob-ubogich-energetycznie/
8https://www.mckinsey.com/pl/~/media/mckinsey/locations/europe%20and%20middle%20east/polska/raporty/carbon%20neutral%20poland%202050/neutralna%20emisyjnie%20polska%202050_raport%20mckinsey.pdf