Energy prices are scouring the bottom … Will energy companies ask for an additional “price freeze”?

Look at the Towarowa Giełda Energii website and be optimistic about the future. The wholesale market’s energy prices are falling and scouring the bottom. Of course, a unique combination of circumstances helps – deficient energy consumption in the days leading up to the New Year (virtually no industry), warm weather and strong wind strengthening RES production, pushing energy from conventional sources (those listed on the power exchange) out of the market. Nevertheless, the numbers are impressive at 29.12.2023.  – The primary TGE BASE index is 79.69 PLN/MWh, but it seems it is missing one zero before the decimal point. A few days ago, prices were oscillating around a few zlotys – by the way, the average of the entire European market was 1 Euro/MWh. A year ago – prices were going wild and reached 400-500 Euro/MWh at peaks; generally, the average in 2023 will probably be at 700 – 800 PLN/MWh.  Today, the price is plummeting rapidly downward, and even if it will increase when energy demand wakes up after the New Year’s break, there is still a chance that it could stabilise at levels of 300-400 PLN/MWh – due to declining commodity prices and a drop in the price of emission allowances. Long-term growth prospects for global industry (and therefore demand for raw materials and energy) are pretty conservative, so as long as there is no particular escalation of geopolitical events (war) – prices will remain relatively low.

At the same time, less than a few weeks ago, the Parliament passed a new law freezing the price for individual consumers – the price of the energy component (the equivalent of what we end users pay for energy from the wholesale market) was set for basic consumption levels as 414 PLN/MWh (0.41 PLN/kWh). In a while, it may turn out that fears of high energy prices (colloquially “electricity”) may turn out to be exaggerated and energy in the free wholesale market (and mainly imported energy) may be cheaper than the frozen thresholds (even taking into account sellers’ margins). In the short term, there has been a “complete reversal of the market.” – now the problem will not be that energy prices are too high, but precisely that they will be too low!!! The Polish coal power industry uses Polish coal (today, mining offers it at about 520 PLN per ton with production costs of 500-600 PLN/MWh.  Incidentally, the mining industry sells its coal at gigantic losses (estimated average mining costs are 930 PLN/ton) and requires further subsidies (about 7 billion PLN per year minimum). Low wholesale prices and low prices for residential users (which, as if there were a free market in a few months, may fall below the frozen level) will push both mines and the fossil fuel power industry into a spiral of losses.

So it can be assumed … that energy companies will ask to keep the maximum prices!!! (because they will be higher than market prices anyway) and appeal for government subsidies and subventions. One thing is sure in the Polish energy market: subsidies must be available. When prices are high – individual consumers have to be subsidised (estimates of subsidies in 2023 are about 30 billion PLN minimum); when prices are low, miners and power producers will have to be subsidised (here, in turn, probably 15 billion in 2024).  This results from an attempt to marry full regulation in a fully liberalised market – in Poland, it will take a minimum of 2-3 years to return to some rational state of the energy industry.  Unless you use a novel approach – regardless of price levels, you have to subsidise with taxes, give people energy for free, and only maintain the market with subsidies. Only this model has yet to be tried on public television.

Odyssey of Ostroleka turns to compensation lawsuits. Soon, additional insurance costs will appear on “electricity” bills.

Pre-New Year’s energy news circulated information about ENEA’s plans to start compensation proceedings related to investment decisions for the Ostrołęka C unit.  ENEA S.A., citing, among other things, a post-inspection report by the Supreme Audit Office (NIK), is likely to prosecute former managers (the board of directors) for the decision to build the new coal-fired unit.  Recalling 2018-2019, first, a controversial decision was made to create the last large coal-fired unit (1000 MW capacity) in the Polish power industry (this is Ostrołęka C – there are already 3 200 MW (coal) units and a coal-fired CHP plant there). The big Ostrołęka C block was supposed to respond to the EU’s climate policy (Poland still wanted to use domestic coal). The investment was started despite many criticisms (the very need for construction and the size of the block and especially the profitability of the investment given the rising prices of emission allowances – at that time, they cost 7 euros per ton (and quickly began to rise) and a modern coal-fired power plant requires an additional cost of certificates of about 0.72 t per MWh of energy produced.  After a lot of construction work (including more than 100m towers for the power boiler), the investment was put on hold (at that time, the cost of emissions jumped to almost 30 Euro/ton, record-breaking they even rose to nearly 100 Euro and are now at 70 – that is, in each MWh of high-efficiency “coal” production is today a cost of about 230 PLN for CO2 fees). Ultimately, after negotiations with the supplier (GE, among others), it was decided to build a power unit in gas technology (gas-steam system), now nearing completion. Ostrołęka C will soon begin operation (burning gas – the gas-steam system is burdened with half the emission fees, and current gas prices are low). Additional costs (technology change, unnecessary work and demolition of existing elements) are estimated at PLN 2 billion. Now, ENEA S.A. has just announced the start of claiming these additional costs – according to the company’s information, it is about PLN 656 million (Enea was a partial investor together with its partners – that’s why such a sum of compensation).

The Ostrołęka C example alone shows the ineffectiveness of defending coal in the face of the energy revolution (new technologies) and especially the illusion of being able to stop or modify EU energy policy. Investment decisions at the time were supported by calculations (and probably projections of how CO2 emission fees would change) – all of which turned out to be untrue in contact with reality. Coal is completely losing its competitiveness, not only because of CO2 fees but also because the cost of coal in the Polish market is too high (in the face of foreign competition and gas prices falling after the nervous fever associated with the war in Ukraine). Today, the total cost of production from a gas-fired power plant is ultimately lower than a coal-fired power plant (what a paradox for Poland). The project also shows, through a lens, the swings in today’s fossil fuel power plant investment market. The unpredictability of emission costs, the significant volatility of raw material prices (and also, as mentioned earlier, the price of energy itself on the exchanges) and the flight of all concerns (and investors) from building anything not only on coal but also on gas (now fashionable only RES and storage).

The compensation lawsuit is a novelty in the Polish market and may have some consequences, including satirical ones. To date, there has been no case of recourse for damages to the Boards (here, too, the then Ministry of Energy pushing this project should be implicated). The proceedings themselves will undoubtedly be lengthy and require the analysis of thousands of documents (indeed, there were justifications for the investment and documents of consulting companies where the investment looked profitable). In addition, the amount (more than 650 million) seems astronomical and unimaginable (possibly seizure of 3/5 of the salary as the bailiff can do will give a total opportunity to recover losses probably after more than 1000 years, also counting inflationary adjustment). Just being on the boards of corporations and making investment decisions becomes comparable to the work of a sapper in a minefield and will bring additional thousands of analyses and calculations (before each subsequent decision).

Meanwhile, it is enough to listen to the voice of reason and not do anything by force against market trends. I’m afraid that the final result (because no one will ever collect 650 million from the accounts of the decision-makers of the day) will be an avalanche of additional liability insurance for board members for their decisions – and thus another million-dollar cost. Energy companies will rewrite this compulsorily in the end to our bills, and soon perhaps we will see an additional item (insurance fee) on our bill (e.g. PLN 0.5 per month) – which will allow them to collect about 70 million from the market – enough for good board insurance. This is how the energy market develops to the satisfaction of lawyers (lawsuits), billing companies (software changes), banks (more bills) and bloggers and satirists…