Subsidising the past

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Apr 8, 2014 - 1 Warsaw Institute for Economic Studies (2014), The hidden bill for coal. An economic analysis of support
Subsidising the past How public aid and ignoring external costs keep Poland’s coal-based energy system alive

A new report prepared by the Warsaw Institute for Economic Studies 1 reveals that cumulative public financial support for coal-based power in Poland amounted to PLN170 billion (€40.5 billion2) between 1990 and 2012. In addition, it is estimated that Poland’s coal sector caused at least PLN700 billion to PLN2,200 billion (€167 billion to €524 billion) in pollution and health costs over the same period. The report assessed state aid, subsidies and economic support schemes that provided coal-based power with a competitive advantage over other means of energy generation. This briefing summarises the main findings of the report. Coal-based power receives different forms of financial support throughout its whole chain of production, including coal mining, R&D and infrastructure, electricity generation and contracting. The different forms of financial support in the chain of production have provided a cost advantage to coal-based electricity. Prime Minister Donald Tusk, however, claims that not pursuing a renewables law3 has “saved Polish families billions of złotys”, concluding that too much support for renewables would be fatal to the economy4.

Mining Firstly, the financial support for coal mining includes direct subsidies awarded to mining companies. State support is provided for retrofitting and closing old mines. Subsidies also include exemptions and deferrals of social contributions and required payments to the central budget, local governments and special purpose funds financed from environmental charges. Stranded costs of bankrupted mines are covered by the state, as are land reclamation and employment restructuring costs. In addition, the state contributes to lower labour costs for the mining sector by providing miner pension payments. An average miner benefits from the general pension scheme for up to nine years longer than do other general pension scheme affiliates. Each Polish złoty contributed by a miner to the social security system increases state liabilities not by 1 złoty as is the case in the general social security system, but by 1.5 to 1.8 złoty5.

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Warsaw Institute for Economic Studies (2014), The hidden bill for coal. An economic analysis of support for coal electricity and mining sector in Poland. (Ukryty rachunek za węgiel: ANALIZA WSPARCIA GOSPODARCZEGO DLA ELEKTROENERGETYKI WĘGLOWEJ ORAZ GÓRNICTWA W POLSCE). www.greenpeace.pl/ukryty_rachunek 2

Conversion rate used is €1 = PLN (złoty) 4.2 Implementation of EU Directive 2009/28/EC on Renewable Energy 4 http://www.wnp.pl/wiadomosci/222282.html 3

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Depending on whether the miner works underground (1.8-fold weight) or on the surface (1.5-fold weight)

In two particular years, namely 1990 and 2003, subsidies to the mining industry reached 2% of GDP – five times more than annual state spending on science, research and development. Counting the total financial support awarded for the entire period, the mining sector received more public aid than science. In total, the amount of subsidies in the years 1990 to 2012 was PLN135.944 billion (€32.368 billion).

% of GDP

bln PLN

2,5%

140

2,0%

120 100

1,5%

80

1,0%

60 40

0,5%

20 0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0,0%

Subsidies to coal miners' pensions (% GDP) Subsidies to coal mines (% GDP) Cumulative subsidies, bln PLN (right axis)

Grants and subsidies given to coal mining and subsidies given to miners’ pensions, 1990-2012 in % of GDP, and the cumulative amount of support in billions of PLN (in 2010 prices).

Electricity generation The biggest utility companies in Poland are state-owned firms (PGE, Tauron, Energa, Enea). They receive the lion’s share of subsidies. By 2013, utility companies operating coal-fired plants were receiving free emission allowances under the EU’s Emissions Trading Scheme (creating so-called ‘windfall profits’ by passing on carbon costs to electricity consumers through electricity bills). Finally, coal-fired plants benefit from a generous support scheme for the co-firing of coal with small shares of biomass (5-10%). This support could be used to support solar, wind or other renewable technologies and installations, but the current policy design helps to keep old coal power plants in operation.

R&D and infrastructure Coal-fired plants have also benefited from EU funds like Regional Operational Programmes, the Infrastructure and Environment Programme and Innovative Economy (e.g. nitrogen oxide reduction installations for two boilers in the ‘Rybnik’ power plant6, and the creation of the Clean Coal Technologies Centre – CCTW7). Stranded costs of long-term electricity contracts termination The state compensates utilities for stranded costs due to long-term power sales contracts termination. Having secured the electricity price for a longer period, energy companies decided on modernisation investments that could not pay off after they had been forced to terminate such contracts. That is why all end users have to pay in their energy bills an additional amount of money to compensate for these stranded costs. In total, the amount of subsidies in the years 1990 to 2012 was PLN68.451 billion (€16.298 billion euro).

bln PLN

Total financial support On average, the support for coal power in 2005-2012 reached around PLN6 billion per year (€1.43 billion per year) (about 0.5% of GDP). In total, the amount of financial support for electricity produced from coal was PLN170.400 billion (€40.571 billion euro) from 1990 to 2012. In this figure, only the share of financial support for coal mining that can be accounted to electricity production is taken into account (excluding coal that is used in heating or industrial processes).

8

0,8%

6

0,6%

4

0,4%

2

0,2%

0

0,0%

EU subsidies (R&D and infrastructure)

Green certificates for co-firing

EU ETS windfall profits (free allowances)

Stranded costs of long-term constracts termination

Mining subsidies embedded in coal

Total as % of GDP (right axis)

Total financial support given to coal energy in bln PLN from 2010 and in % of GDP (right axis)

External costs Forming a special type of subsidies are the external costs of coal paid in the form of the negative public health impacts. With the increasingly stricter emission standards imposed on coal energy, these costs have steadily decreased since 1989 (both in absolute terms and as a percentage of GDP), but they are still among the highest in Europe. If they were included in the electricity bill, the overall bill would be approximately PLN100 to PLN500/MWh (approx. €23.8 to €119/MWh) higher than the market price.

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http://www.mapadotacji.gov.pl/projekt/1223298 http://www.mapadotacji.gov.pl/projekt/1204767; http://www.cctw.gig.eu/en/clean-coal-technologies-centre.html

In total the amount of external costs between 1990 and 2012 was (average) PLN1,480 billion (€352.4 billion). % of GDP 25% 20%

15% 10% 5%

0%

Uncertainty range

Average

External costs of coal in Poland as % of GDP 1990-2012

Annual amount of support for mining and electricity production per one Polish citizen in PLN/euro Category

2012

Average from 1990-2012

Hidden costs not included in energy bills Special social security system for miners

90 / 21.4

76 / 18.1

Mining restructuring costs

10 / 2.4

78 / 18.6

Support from EU funds

7 / 1.7

1 / 0.24

Support included in energy bills Stranded costs of long-term contracts termination

18 / 4.3

9 / 2.1

Free emission allowances

35 / 8.3

21 / 5

Green Certificates for co-firing

40 / 9.5

8 / 1.9

Hidden costs paid in health losses External costs (average) SUM

899 / 214

1,682 / 400.4

1,099*/ 261.6

1 876 / 446.6

* In 2012, the average monthly income per capita in a Polish household was PLN1,270 (€302.4)8.

Who pays the bill? About two-thirds of the financial support from 1990 to 2012 were in fact paid by final consumers in their energy prices (e.g. fees covering the stranded costs of long-terms contracts termination, the cost of green certificates and emission allowances), while the remainder was paid from different sources (e.g. state subsidies

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http://www.stat.gov.pl/gus/5840_1160_PLK_HTML.htm

awarded to the national mining sector, EU funds). For instance, in 2010-2012 each electricity end consumer was obliged to pay hidden subsidies for coal-derived electricity – about PLN33/MWh (€7.86 euro/MWh) more due to existing subsidies in his/her electricity bill and an additional PLN13/MWh (€3.1/MWh) in state support.

Conclusions Without the subsidising of coal mining and coal-based electricity production, the Polish mining industry would probably not be able to compete on the global market without a significant restructuring effort. This support is wrongly treated by politicians and many experts as the cost of maintaining energy security in a situation where the social costs of restructuring are deemed too high. While in the past such an approach could be justified due to a lack of innovative technologies, it cannot be continued with now: domestic renewable energy sources and energy efficiency can provide energy independence through modern technology. Greenpeace’s proposal to modernise Polish energy production, cut emissions and reduce dependence on imported fossil fuels is presented in the Energy [R]evolution scenario for Poland 9. The Polish government has to make a strategic decision about the future of the Polish energy market. The results of this report should be included in its strategic decision-making, along with the public opinion. According to an opinion poll conducted by Poland’s CEM Market & Public Opinion Research Institute (in November 2013), the majority (67.2%) of Polish people want the government to stop subsidising coal and support renewables instead. Major public support for renewables instead of coal has also been proven by other opinion polls conducted in Poland (e.g. CBOS, November 2013 10 and TNS Polska, March 201411). The Polish government should step up its ambition level on renewable energy and energy efficiency and support an ambitious set of three binding European climate and energy targets for 2030: for renewables, greenhouse gas emission reductions and energy efficiency. Furthermore, the Polish government should phase-out all forms of fossil fuel subsidies. Moreover, the renewables law under preparation should be designed to support new investments in renewable energy generation capacity, including microgeneration, offshore and onshore wind energy and geothermal energy, rather than continuing the support for co-firing biomass with coal.

For more information, please contact Anna Ogniewska, Climate and Energy Campaigner at Greenpeace Poland [email protected], +48 506 124 689

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Greenpeace (2013), Energy [R]evolution Poland http://www.energyblueprint.info/1832.0.html?&L=0%27%20and%20char%28 10 http://www.greenpeace.org/poland/pl/press-centre/dokumenty-i-raporty/Badanie-opinii-publicznej-Zdecydowanawikszo-Polakow-woli-energi-odnawialn-od-energii-z-wgla-i-atomu/ 11

http://www.euractiv.com/energy/polish-public-swings-eu-climate-news534245?utm_source=EurActiv%20Newsletter&utm_campaign=92a3f3bf7fnewsletter_daily_update&utm_medium=email&utm_term=0_bab5f0ea4e-92a3f3bf7f-245528861