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Wednesday, June 24, 2015

The Pope's Message and Poland: The Irresistible Force Means the Immovable Object?

The Pope's new encyclical "Laudato Si" contains a unmistakable repudiation of Polish energy policy devoted to long-term reliance on coal as a major source of electricity and heat in the country.[1]  The reference to reliance on coal could not be more explicit: ""We know that technology based on the use of highly polluting fossil fuels – especially coal, but also oil and, to a lesser degree, gas – needs to be progressively replaced without delay."

The irony of this message is that Poland is at once the most devout Catholic nation and the most reliant on coal for energy. 

This new theological mandate to change the Polish system comes in the wake of many major economic and technological pressures in the same direction.  The huge Norwegian investment fund just announced an end to investment in coal-based assets. The large German utility companies have suffered enormous losses in the operation of their coal-fired plants and are divesting them. Virtually all of the international development assistance funds (the World Bank, EBRD, etc.) have suspended investment in new coal-based projects. China has stopped construction of new coal-fired plants and is now the world leader in new investment in renewable energy. The cost of burning coal in Europe is expected to sky-rocket as the carbon emission prices grow in 2020 and beyond. Except for Poland, the construction of new coal-fired power plants has virtually stopped throughout the world.

New studies are quite unequivocal on the health damage caused by coal emissions in Poland. We have the biggest problem in Europe in this regard. A majority of the ten largest polluting facilities in Europe are also located in Poland. Thousands of children are injured or even die every year because of this situation.

Simultaneously, the public-owned coal mines in Poland are bankrupt and only held up by the use of taxpayers' money. This itself is illegal under EU law and will be stopped by the European Commission in the near future.  Polish coal is only 50% of what it was in 1990 and is inevitably going to be less and less.

Up to now, the Polish Government and the major political parties have resisted all of the economic, technological, and legal pressure and tried to keep doing "business as usual." No serious person privately believes that this is a sustainable course or winning strategy, but it has been the predominate political response.   

But now, as the pro-Catholic party, Law and Justice, rises in the Polish polls, winning the Presidency and looking good for the Parliamentary elections, a new factor weighs in. How will the devout Catholics of Law and Justice and their voters react to this Encyclical?  A realistic dialogue about transitioning from coal to other energy would seem to be the minimum response. The Pope recognized that the shift away from coal would have to be "progressive," not immediate.  But apparently the need to make the transition is now a religious duty as well as a smart policy.


[1] Excerpts of Laudato Si: "Regrettably, many efforts to seek concrete solutions to the environmental crisis have proved ineffective, not only because of powerful opposition but also because of a more general lack of interest. Obstructionist attitudes, even on the part of believers, can range from denial of the problem to indifference, nonchalant resignation or blind confidence in technical solutions. We require a new and universal solidarity. As the bishops of Southern Africa have stated: “Everyone’s talents and involvement are needed to redress the damage caused by human abuse of God’s creation”. SOUTHERN AFRICAN CATHOLIC BISHOPS’ CONFERENCE, Pastoral Statement on the Environmental Crisis (5 September 1999). All of us can cooperate as instruments of God for the care of creation, each according to his or her own culture, experience, involvements and talents.

"There is an urgent need to develop policies so that, in the next few years, the emission of carbon dioxide and other highly polluting gases can be drastically reduced, for example, substituting for fossil fuels and developing sources of renewable energy.

"If the simple fact of being human moves people to care for the environment of which they are a part, Christians in their turn “realize that their responsibility within creation, and their duty towards nature and the Creator, are an essential part of their faith.” JOHN PAUL II, Message for the 1990 World Day of Peace, 15: AAS 82 (1990), 156 [also condemning the burning of fossil fuels due to its ecological and health effects].

"We know that technology based on the use of highly polluting fossil fuels – especially coal, but also oil and, to a lesser degree, gas – needs to be progressively replaced without delay."

NOTE: The MPs from PiS are consistently upset at the potential noise levels from windmills that maybe affect ten thousand people in minor ways in all of Poland. Millions of Poles are sick from air pollution from coal and thousands actually die every year. Where are the PiS Christians on this issue? I think I know where Jesus would be......

Friday, June 19, 2015

Another Study Demonstrates the Futility of Polish Policy on Coal Mining

Every year less and less of the Polish demand for coal is met by domestic production. Only about half of the amount of coal mined in 1990 in Poland is mined today. The cost of mining Polish coal from the state-owned companies is much more than the market value of the product. Successive "bail outs" have failed because the money has always been used to perpetuate the old mining system and not to truly restructure it.

Now another report, this one from the Warsaw Institute for economic studies, looks an the reality of the economics of Polish coal and finds that it will continue to decline in the future. Without radical restructuring and closing unprofitable mines, the whole sector might collapse by 2020.

The fight to keep economically unjustified coal mines operating has cost the Polish taxpayer a lot of money and offered no great benefits to the Polish economy. See WISE report.

One problem that will not go away, even with restructuring, is the inherently higher cost of underground mining versus surface mining. Surface mined coal is much more competitively priced and with global transportation costs now much lower, it is impossible for Polish deep mined coal to compete even in the domestic market. No Polish politicians seem inclined to be truthful about the reality of Polish coal.
So a sort of collective delusion will likely be inevitable until the sector simply collapses of its own dead-weight.

The problem is amplified by the aging Polish lignite and coal-fired power plant infrastructure. As old plants must close, the Polish Government is using its clout as a shareholder to push construction of new coal blocks. This effort is quite remarkable, since Poland is alone in the world in pursuing this approach. See plenary panel discussion, POWER GEN Europe 2015, Amsterdam, June 11, 2015. Certainly in the EU, with the coming of higher CO2 prices, this plan is foolish and extremely ill-advised. In the not to distant future, even if these new Polish coal plants can keep operating, unlike modern coal plants in Western Europe which are closing, it is likely that they will not be mainly burning Polish coal.

Adding to this dilemma, the emerging Polish political party on top in the polls (PiS), of course, maintains its unqualified support for all things coal as well as proposing to obstruct Polish wind farm development.  As cross-border grid interconnections grow in Poland, this will mean that German imported wind energy will receive the "green preference" in the order of merit in Poland, further shutting out the market for Polish coal and lignite supplied electricity. There does not seem to be a rational Polish politician on these issues with any hope of even causing an open dialogue about the subject.

The best that can be said is that the inevitable and harsh consequences of  vacuous policies will create a new situation in which the issues cannot be avoided.                

Friday, June 12, 2015

EC State Aid Guidelines Bias in Favor of Big Conventional Utilities?

My speech at PowerGen 2015 in Amsterdam has gotten some substantial press here and here.

My thesis is that the large conventional utilities prevailed on the Commission to restrict renewable and distributed energy in important ways that favor their interests. This includes the requirement that everything above 500 kW be connected to the grid (restricting distributed energy on many types). The requirement that every project over 1 MW compete in an auction, where large utilities have shown historical dominance and market power (replacing guaranteed support systems that have nurtured a decentralized power model in Europe). And finally an incomprehensible provision that takes away the renewable energy classification for green energy that is stored and used later (potentially devastating to efforts to encourage the critical development of energy storage in Europe).

The auction system is proven to be a "box of lose gears" that does not produce a predictable amount of renewable energy at a predictable price. A European Commission-funded study concluded just months before the new state aid guidelines that require auctions were proposed:
“…finding a compromise between encouraging high implementation rates without reducing the number of market participants too much proved to be a difficult task.…it remains to be seen whether auction schemes can eventually achieve the desired effectiveness.” 
EcoFys, “Design features of support schemes for renewable electricity,” January 2014.

Some of these issues addressed to the EuroLectric representative in the plenary session produced no cogent answer. 

Wednesday, June 03, 2015

More Unintended Consequences from the Auction Scheme

Some really bad things will start to happen as the auction in Poland for renewable energy support gets closer. Despite the long discussion over the new law and the guidelines from Brussels (which were relatively rushed through without full consideration of their consequences), there are some real problems looming.

First, the auctions to be competitive under EC policy should have at least as many losers as winners. This allegedly allows for competition in the bids for support. The reality is that the small auction (below 1 MW) will have much larger support offered than will be covered by bids. There will be no serious competition and the reference prices will set the limits. That, of course, could be done without an auction and would achieve a much higher rate of quality projects.

But the large auction (over 1 MW) is likely to have many more bids than awards. Thus, the EC rule of thumb of 50% losers may occur. That means that 50% of the projects ready to go in Poland will not proceed. Neutral third-parties rank Poland as one of the majority of Member States that will not meet the 2020 target for RES. Why would any rational policy-maker deliberately set out to establish a system that cuts the available new RES capacity by 50%? [Clue: the answer depends on what your objectives are and if they are not to create the necessary renewable energy capacity but to protect the status quo, the auction approach makes a lot of sense].

Second, an additional new complication arises on the grid capacity. All of the projects must have grid connection conditions. The Polish grid operator already is reporting that there is too much "fictional" grid capacity approved and that this makes planning actual online future capacities difficult. See Gramwzielone, May 3, 2015. Auction bidders must have approved grid connection conditions, so that 50% of the large projects will effectively be reserving grid space for projects that will not win in the auction.

This nonsense started in Brussels at the urging of Eurolectric, the cabal of big utilities in Europe. I, for one, do not think that the objectives are either transparent or salutary.

Monday, May 25, 2015

Polish Presidential Election: Implications for Renewable Energy

In the opinion of many, Civic Platform (PO) has grown a bit arrogant and very non-transparent in its model of governing. Pundits will have a dozen explanations for the election of Andrzej Duda yesterday, but wide-spread support for his party, Law and Justice (PiS), is not one of them. Voters signaled their concern about PO and wanted something else....just about anything else.

If this trend continues into the Parliamentary elections, as I think it will to a lesser degree, expect PiS gains but no majority. A weaker coalition government with PO, PSL and possibly SLD is the most likely outcome.

It is important to remember that all of the political parties are publicly pro-coal and none of them have a real program to address the growing economic and technological challenge in Polish energy to shift to the "next thing."  PiS is more likely to make foreign energy investors nervous, however, with their more xenophobic rhetoric.

PiS is widely described as anti-wind energy and worked hard in the so-called "Landscape Law" to restrict the possible locations for wind farms. It is difficult to see how this issue will be re-visited without an overwhelming PiS majority in the Parliament, one of the least likely scenarios.

PO stood alone against the prosumer amendment in the new renewable energy law. Some of the support for the law was obviously opportunistic, but PO has come out of the RES legislative experience with a reputation of being anti-green energy. The close connection between PO and PGE, the biggest state-owned utility and largest coal-fired power producer in Poland, has been notable. Will a new government inevitably bend the same way as the inducement of hundreds of political patronage appointments in the energy sector warps their perspective? In Poland, probably so.

 A weakened PO increases their need to rely on other political parties to form a government. And all of the options are for inclusion of parties with a somewhat greater sensitivity to green energy than PO. An outright PiS majority in Parliament could adversely affect wind energy in the auction mix in the future, but it is very difficult to come up with replacements for that much green electricity.

Since almost no politicians in Poland have any understanding of renewable energy and distributed energy (and largely want to remain ignorant), chaos theory will be the best predictor of the future of RES. Large amounts of inertia will prevail with a spattering of deliberate actions which will be in essentially random directions.

Don't look for any big changes.

Wednesday, May 20, 2015

Fossil Fuel Subsidies: The Myth of a Free Market Shattered

My Republican colleagues typically comment on renewable energy, that if it is viable it would survive without subsidies. They point to fossil fuels and claim that green energy should receive the same treatment, i.e. only market-based revenue and investment. But this myth is wholly at odds with the reality around the world.

Fossil fuels have been one of the most heavily subsidized human endeavors in the history of the world. The International Monetary Fund report, just released, notes that globally fossil fuels receive approximately $600 million a HOUR in government support. See PL article. The basis of this huge cost figure is the externalities of fossil fuel burning (mainly coal). There are several new reports of the huge external cost of burning coal in Poland (which leads Europe in air pollution for fossil fuels).

But even the narrow definition of subsidies for internal costs results in a big figure for support. Over 10 billion Euro a year in Europe (where the policy is to allegedly decarbonize the economy). In Poland, from 1990 to 2012, the Warsaw Institute for Economic Studies estimated that 40 billion Euro was spent in direct subsidies for the coal industry, excluding a much higher external cost.  Even Germany, last year provided more support for coal than any other technology in the energy mix except for PV solar.Even the majoprity of renewable energy support in Poland ended up going to support coal-fired power plants by virtue of rewarding co-firing vastly more than its actual costs.See Mott's Blog, "The New Law Must Reduce Support For Co-Firing To Reflect Its Actual Low Cost Of Production," October 8, 2014.

Exploration for oil in the United States amount to over $5 billion a year. See Harvard Magazine 2014.

Some point out that renewable energy globally gets proportionally more support than fossil fules (about three times as much per energy unit). But the notion that fossil fuels developed and arfe sustained solely by market mechanisms is a myth.

We are also witnessing the achievement of parity in the market place between many forms of renewable energy and conventional fossil fuels. This date has long been anticipated, but has already arrived in some geographic regions of the world.

Tuesday, May 19, 2015

Simulated Auction by Polish Wind Association: Predictable Problems

The Polish Wind Energy Association just conducted a mock auction for renewable energy support using the system included in the new Polish law. The results foretell the problems we can expect in the actual auction and are not surprising.

The main take-away by the association was the under-bidding in the large auction (over 1 MW projects) and less than 4000 MWhr/MW. The prices were unrealistically low. This phenomenon is very common in RES auctions. Bids are speculative and below the real costs of doing the projects in the hope of snagging the support. This is a very common - maybe unavoidable  - problem with reverse auctions:

While auctions aim for a specific amount of electricity to be produced or capacity to be installed, empirical experience has shown that a shortfall of the auctioned amount is a rather common phenomenon. This is mainly due to ‘underbidding,’ which results in economically non-feasible projects.” EcoFys, Design features of support schemes for renewable electricity, January 2014,  page 45 [Report to the European Commission].

“A tender scheme creates competition between bidders and, thus, inherently encourages them to bid as low as possible. However, the evidence in France, Portugal, Nova Scotia, U.K., India, China and Brazil shows that they may overestimate their capacity factors, underestimate their costs (because, for example material costs turn out to be higher than they were expected to be) and follow strategic behavior in bidding (i.e., win the bid, then adjust).” Del Rio et al, “Back to the Future,” Renewable and Sustainable Energy Reviews 35 (2014)., supra, page 51.

“Empirical evidence indicates that low implementation rates caused, e.g. by underbidding or the 
existence of non-cost barriers, are one of the main drawbacks of auctions used for RES-support… remains to be seen whether auction schemes can eventually achieve the desired effectiveness.” EcoFys, supra, page 72 (emphasis added).

The auction mechanism always produces an unpredictable amount of actual projects and capacity. The gap between what is awarded in bids and what is built is an inherent result of the system. To avoid this problem, some countries have created major pre-qualification barriers to bidders. But this, in turn, reduces the number of bids and adversely affects competition. The added risk factors cause bids to increase. In Brazil, a 10% deposit of total project costs was required and still only a fraction of the projects were built. In Germany in 2015, the PV auction illustrated that the risk factors may not lead to any savings by using the auction mechanism.

If reference prices are set too low, however, it is possible to have no bids at all (Brazil 2013).

In a report prepared for the European Commission, EcoFys et al noted in January 2014: “…finding a compromise between encouraging high implementation rates without reducing the number of market participants too much proved to be a difficult task.” Design features of support schemes for renewable electricity, January 2014, p. 5. 

The Polish mock auction vividly illustrated the problem of unrealistic bidding. The last British PV auction is another example of the same thing. See Mott's Blog, "What the UK RES auctions Prove and Do Not Prove."Auctions in Brazil were also plagued by lack of actual construction.  In Italy, which is held out as a positive example by the Polish Ministry of Economy, auctions have not resulted in a sufficiently high number of realized projects. 

EcoFys concluded that the auction mechanism is "still undergoing a learning phase." Id. page 77.
Given that the 2020 mandatory deadline is only a few years away, you have to wonder if this is the best time to experiment. On this issue, the DG Competition is as much to blame as the Polish Government.  It seems certain that the auction mechanism will deliver less renewable energy, reduce competition across technologies, and create unnecessary uncertainty over everything.

The predictable winners in the mock auction - we have to wait to see the detailed results - appear to be on-shore wind in over 1 MW, less than 400 MWhr; PV in under 1 MW less than 4000 MWhr, and more expensive technologies in the over 4000 MWhr categories. In same cases, the theoretical winning bids were virtually the same as the reference prices (which the Government predicted to be the case during the February 2015 Parliamentary debate for the small auction). That being the apparent case, there is a real dispute over whether the auction achieves anything in the small project scheme of support, except to limit the number of projects due to higher transaction costs. The Commission's State Aid Guidelines provide that “´competitive bidding process´ means a non-discriminatory bidding process that provides for the participation of a sufficient number of undertakings and where the aid is granted on the basis of either the initial bid submitted by the bidder or a clearing rice. In addition, the budget or volume related to the bidding process is a binding constraint leading to a situation where not all bidders can receive aid.” Section 1.3(43).

This will not be the case in the Polish small auction. So the issue is why have an auction at all.

Finally, the auction mechanism - when it is "working" - leads to a large number of rejected bids. Now these bids are all projects that have building permits, resources committed in the form of wind, biomass, biogas substrates, etc. The losing projects have to await another auction and may well not get built at all. This costs society the loss of readily available renewable energy resources which may remain undeveloped. The price of alleged competition, if it successful, is lower renewable energy development.

All and all, the system appears to be a dicey gamble, more likely than not to have problems.