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Power in Poland Beating Germany on Shortage: Energy Markets

Power in Poland Beating Germany on Shortage
Seventy percent of Poland’s coal-fired power plants are more than 30 years old, according to Krzysztof Zmijewski, an adviser to the Polish government. Photographer: John Guillemin/Bloomberg

Poland’s electricity is becoming more expensive than Germany’s as the country fails to build enough plants to meet demand, threatening to make eastern Europe’s biggest economy dependent on power imports.

Prices in Poland traded as much as 2.47 euros ($3.25) a megawatt-hour higher than in Germany on Nov. 8, the biggest premium since April, compared with an average discount of 1.42 euros this year, according to broker data on Bloomberg. The next-year contract traded above its western neighbor’s on 32 of the past 40 days, the data show.

An economy growing at more than twice the euro-region average, coupled with power-plant construction that’s lagging behind demand, is bolstering Polish prices, increasing its attraction for exporters. At the same time Germany is facing an electricity glut that may deepen until 2013 as it builds solar and wind plants to meet pollution targets, according to UBS AG.

“Poland is an island in Europe because it doesn’t have overcapacity,” said Pawel Smolen, the Berlin-based head of strategy for Vattenfall Europe AG, a unit of the Nordic region’s biggest utility. The global economic “crisis has not curbed demand and as a result the country may face capacity shortages given a lack of advanced investment projects,” he said.

Polish power for delivery next year traded at 193 zloty (49.07 euros) a megawatt-hour on Nov. 8, when the comparable German contract was 46.60 euros a megawatt-hour, according to broker data. Bloomberg tracks power prices from brokers including GFI Group Inc., ICAP Plc and Spectron Group Ltd. German electricity was 22 euro cents more expensive on Nov. 25.

Polish Power Rising

Electricity demand in Poland jumped 4.2 percent in the first 10 months of this year, compared with the same period in 2009, according to PSE Operator SA, the Konstancin-Jeziorna-based grid operator. Demand will keep increasing in 2011, Fitch Ratings said at a Nov. 15 presentation in Warsaw.

Polish exports of electricity to Germany, Sweden, the Czech Republic and Slovakia fell 40 percent between 2006 and 2009, according to PSE. Imports from the same countries rose 55 percent in the same period.

Poland will build 860 megawatts of lignite coal-fired capacity next year and decommission 206 megawatts, according to data from PSE and PGE SA, the country’s largest utility. No new hard coal or gas-fired plants are scheduled to come online before 2014, while PGE plans to decommission a further 412 megawatts by 2013, the Warsaw-based company said in October 2009.

Aging Plants

Seventy percent of Poland’s coal-fired power plants are more than 30 years old, according to Krzysztof Zmijewski, an adviser to the Polish government and former chief executive officer of PSE.

“In the long run, Polish power prices will be rising as new capacity won’t come on line as fast as demand is likely to grow,” said Michal Czaplinski, a power trader at GDF Suez SA in Brussels. “In the short run, the spread may keep shifting from negative to positive given the high volatility of German prices and the relatively stable Polish prices,” he said by e-mail.

Poland, the only European Union country not to slide into recession in 2009, said yesterday that gross domestic product grew 4.2 percent in the third quarter, the fastest pace in two years. That compares with 1.9 percent for the 16-member euro region. The zloty strengthened 2.8 percent versus the euro in the six months through the end of October, boosting the country’s power prices when converted into the single currency.

German Renewables

Germany is building more power plants even as it closes some of its oldest facilities to counter excess supply, Deutsche Bank AG analysts including Paris-based Mark Lewis and London- based Martin Brough said in a Nov. 17 report. The nation may start 39,000 megawatts of fossil-burning plants and renewable energy units by 2014 to 2015, while closing more than 20,000 megawatts of coal and natural gas-fired plants, they said.

“In the next two to three years German power prices may not be rising given new capacity that will come on line, sluggish power demand and the extension of life span for nuclear power plants,” Jacek Kawalczewski, associate director at Fitch Ratings, said in an interview in Warsaw on Nov. 15.

Profits that E.ON AG and RWE AG get at coal-fired power plants in Germany have fallen to the lowest level since at least September 2007, when taking into account the price of power, fuel and emissions costs in 2011. The return was 2.16 euros a megawatt-hour today, compared with an average of 6.77 euros in the past year.

‘Suffering From Overcapacity’

“Germany, along with other markets in northern Europe, is suffering from overcapacity, while demand still hasn’t recovered,” said Smolen at Vattenfall. “As a result, margins on power generation are either low or sometimes negative” in Germany, he said.

The Polish government and EU haven’t yet agreed on how many carbon emission permits generators will need to buy if they build new plants, creating another risk for local investment in capacity.

Under the EU’s Emission Trading System, Poland’s old and inefficient power plants get permits for free, and will keep benefitting from them after 2012. New units that could emit less carbon will be barred from free allowances.

“There’s a concern that subsidized output from old generators will be cheaper than electricity from new plants, which as a result will be producing less and their economics will suffer,” Smolen said. “In consequence, investment projects are too uncertain and don’t get completed.”

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