Poland Defies Power Slump in $3.7 Billion Gamble: Energy Markets

Poland is seeking to avoid a looming power shortage by forcing the nation’s biggest utility to build a $3.7 billion coal plant its chief executive officer says will be unprofitable after prices fell to a five-year low.

PGE SA, majority-owned by the government, can afford to expand the Opole utility in the southwest because it is making money elsewhere, Deputy Prime Minister Janusz Piechocinski told reporters in Warsaw on Nov. 6. Electricity prices need to rise by about 50 percent to make it viable, according to Krzysztof Kilian, the Warsaw-based utility’s CEO.

Poland, which the International Monetary Fund says will exceed the euro area’s growth by at least 1.4 percentage points through 2018, needs to replace 28 percent of its coal-fired generation by 2020 to provide a stable flow of power. Europe’s record renewable energy output is damping prices and making supplies more unpredictable. The government says PGE must complete the Opole expansion because the nation may face shortages in as little as four years.

“The power market in Europe is in deep crisis,” Kilian said in an interview Oct. 28. “Decisions on investments are based on what’s happening in the market today.”

The price of next-year Polish power contracts are headed for a second annual decline, according to broker data compiled by Bloomberg. The contract slid 15 percent in 2013 to trade at 150.55 zloty ($48.41) per megawatt-hour today. Shares of PGE gained 0.5 percent this year, compared with a 2.3 percent advance in the WIG30 index of the nation’s leading stocks.

EDF Accord

PGE’s plans for the 20-year-old Opole facility, 9 kilometers (6 miles) outside the town of the same name, will add two new 900-megawatt units in 2018 and 2019 costing as much as 11.6 billion zloty ($3.7 billion). A supply of 1,000 megawatts can power two million European homes.

The company will be able to avoid losses from the plant by securing state-backed guarantees on prices, similar to the agreement won by Paris-based Electricite de France SA in the U.K., Kilian said. EDF, the world’s biggest atomic-energy producer, will build the first new reactor in the U.K. since 1995 after the British government offered a power price almost double today’s market rate.

“Opole is a very, very risky investment,” said Marek Buczak, a fund manager at the Quercus TFI SA mutual fund in Warsaw which manages $1.14 billion of assets, including PGE shares. “If current regulations won’t change, giving up construction of Opole would be much better from a minority shareholder’s point of view.”

Leaving Poland

The new plant would be the biggest power project in Poland since the fall of communism in 1989. The region’s population of 1.01 million is the fastest shrinking in the country, Henryk Galwas, head of the Opole Business Chamber, said in an interview on Nov. 8.

“Young people are leaving the region to work in Germany and are staying there,” he said. Expanding the plant may create 3,000 jobs, encouraging people to return, he said.

Opolskie’s population shrank 5.2 percent in the 10 years through 2012, compared with a 0.8 percent increase across Poland, according to the Central Statistical Office.

European power prices plunged from their 2008 peak as the euro-area’s longest-ever recession curbed demand and nations flooded the market with electricity from solar and wind plants to meet the region’s 2020 renewable energy targets.

Power output from mainly solar and wind jumped 88 percent in the five years through 2011 in the European Union, excluding Croatia, according to Eurostat data compiled by Bloomberg Industries.

Rural Commune

“Who knows where the price of electricity will be in 40 years,” said Henryk Wrobel, the head of the rural commune of Dobrzen Wielki, 15 kilometers from Opole. “Projecting the investment’s value based on today’s prices is not quite justified,” said Wrobel, an economist by training who worked on financial projections for the existing Opole plant in the 1990s.

PGE may tell contractors to start building the plant as early as Dec. 15, the company said in August.

Nations from Germany to the U.K. are boosting output from renewable sources by subsidizing solar and wind power and giving those sources priority access to the grid, which means less profitable running hours for plants burning coal and gas.

Burning Money

It makes no economic sense to build any type of conventional power plant today, Grzegorz Gorski, head of Paris-based GDF Suez SA’s operations in Poland, said Nov. 6 by phone.

“With subsidized renewable output, power-plant operators are mostly burning money in their generators as it’s difficult to cover any type of costs,” he said.

The European Union should abandon subsidies and improve power market regulation, the heads of Europe’s 10 biggest utilities said at a joint press briefing in Brussels last month.

The profit margin from generating electricity from coal in Germany, Europe’s biggest power market, fell 20 percent in the past two years, according to data compiled by Bloomberg using next-year prices. Gas-fired power plants in Germany will be unprofitable until at least 2016, the data show.

PGE wrote down almost the entire value of its 1,500-megawatt coal-fed Dolna Odra power plant in Poland, the company said in February, citing the utility’s losses.

Lubelski Wegiel Bogdanka SA, the nation’s most profitable coal producer, decided against investing in a 500-megawatt power plant GDF Suez may build in southeast, CEO Zbigniew Stopa told reporters in Warsaw on Nov. 7.

April Cancellation

PGE canceled the Opole expansion in April to focus on plants burning lignite, a less costly coal variety, as well as wind farms and a nuclear power plant. The government reversed the decision in June.

Poland will be short of 800 megawatts of power at peak times in 2016 and 1,100 megawatts in 2017, according to the Economy Ministry. The gap would swing into a 114-megawatt surplus in 2018, assuming 3,000 megawatts of new coal- and gas-fired plants including Opole, are built, the ministry says.

The government says PGE can afford to build the new Opole plant after arranging a deal with Katowice-based coal producer Kompania Weglowa SA, also controlled by the state, for a long-term supply contract.

PGE also will receive payments for keeping reserve capacity on standby, Piechocinski said. Measures may be in force as early as next year, according to Urzad Regulacji Energetyki, the country’s Warsaw-based energy market watchdog.

The country is working on a set of measures that would help power plant operators, including price guarantees, and has yet to choose an optimal solution, Marek Woszczyk, the head of Urzad Regulacji Energetyki, said by e-mail.

Debt Free

Unlike GDF Suez and EDF, which are both in debt, PGE has net cash, which will allow it to pay dividends as Opole is expanded, Pawel Puchalski, an analyst at the Warsaw-based unit of Banco Santander SA. The utility will be limited in its ability to make additional payments to investors, he said.

After Polish Prime Minister Donald Tusk initially said on April 9 that it “seemed rational” for PGE to cancel the Opole expansion, about 60 lawmakers from his own Civic Platform party in the Opole and coal-producing Silesia regions signed a petition in May demanding the project be saved. Tusk changed his position on June 6.

Local projects depending on the expansion of Opole include the construction of a new bypass and a heated water park, Tomasz Kostus, deputy chairman of the Opole Province local assembly, said in an interview Nov. 8.

“We estimate that some 30 percent of the value of the investment will stay in our region, boosting the local economy and jobs,” he said.

The Opole University of Technology also started departments in energy and mechatronics, a discipline combining mechanical engineering and electronics, on the assumption the expansion would proceed, the university’s Rector Marek Tukiendorf said in a Nov. 8 interview.

“We’ll not die without this investment, but canceling it wouldn’t be responsible,” he said.

To contact the reporters on this story: Marek Strzelecki in Warsaw at mstrzelecki1@bloomberg.net; Maciej Martewicz in Warsaw at mmartewicz@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net

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