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Response of the PGE Capital Group to the public consultation on the European Climate Law Regulation

Date

22 Apr 2020

Sections

InfoSociety

PGE Capital Group is Poland’s largest energy sector company. Thanks to the combination of its power generation and distribution infrastructure, PGE guarantees a safe and reliable power supply to over 5 million households, businesses and institutions. PGE is consequently reducing its CO2 exposure aiming at ca. 60 million of CO2 tonnes saved cumulatively within the 2016-2026 timeline. Renewables, such as offshore wind projects – up to 2.5 GW by 2030, PV programme – up to 2.5 GW by 2030, and a switch from lignite and hard coal to natural gas will lower PGE’s CO2 costs and risk exposure. PGE will also contribute to the implementation of the Paris Agreement.

But these projects come along with a high investment burden. The total budget of PGE for low-carbon projects until 2030 amounts to ca. EUR 13 billion – 2.5 GW off-shore: EUR 10 billion, 1.4 GW gas : EUR 1.1 billion, 2.5 GW PV: EUR 1.8 billion. To put this in perspective the company’s worth (capitalization of assets) today is estimated at ca. EUR 1.8 billion. This investment objective is ambitious enough without creating an additional operational burden on utilities which are undergoing major transformation of their energy mix, by further tightening the EU ETS cap and increasing CO2 costs for existing assets. These assets are needed in the system to guarantee security of supply, not all of them can be shut-down and permanently decommissioned overnight.

As seen by our investment portfolio, the current EU ETS scheme is robust enough to ensure economic incentives for the transition to low-carbon power generation. We do not need CO2 prices to reach over 70 EUR/t, as analysis shows might happen in the 55% emissions reduction scenario by 2030, to turn green1.

The total carbon cost for the entire Polish energy sector in the 55% emissions reduction scenario by 2030 will be EUR 68.5 billion. That cost would consume capital required for the new investments needed to replace old coal-fired units. Instead of turning green there is a risk companies with a high share of fossil fuel-based generation fleet will turn bankrupt if insufficient EU support is provided – this should not be the outcome of the new Climate Law.

The net-zero emissions economy by 2050 requires significant investment effort, estimated at EUR 179-206  billion for the  power  sector  in Poland2. Potential social and overall economic impact of the climate neutrality largely exceeds that cost. The most vulnerable regions and sectors should not be left alone in facing this enormous challenge. The proposed Regulation establishing the framework for achieving climate neutrality (“European Climate Law proposal”) falls short of providing any substantial details regarding the EU’s plans to share the investment burden across the continent in line with the principle of solidarity. The biggest concern stems from the proposals to radically increase the 2030 target being a day- to-day change for the power sector.

Need for country-specific impact assessment regarding the binding objective of climate neutrality

The cornerstone of the European Climate Law is to establish a binding objective of climate neutrality in the Union by 2050, which should be achieved in a gradual and irreversible way. However, the European Climate Law proposal goes one step further by paving the way for a 50-55% emissions reduction targets by 2030 and defining policy tools to set up other intermediate trajectories or targets in the 2030-2050 period.

In the opinion of PGE, the decision on increasing emission reduction targets under the energy and climate policy can be made only after conducting a thorough impact assessment. Such an assessment should be carried out not only at the level of the entire EU but also for the individual Member States and should indicate the total costs of achieving the new objectives and their impact on GDP growth at national levels.

Need to adjust financing mechanisms for low income Member States in the forthcoming EU ETS Directive revision

By September 2020 the European Commission intends to review the EU’s GHG emissions reduction target and existing legislation in the light of the climate-neutrality objective as well as explore options for an increased 2030 target. The legislative proposals dedicated to establish a new 2030 target will be published by 30 June 2021. The Commission will assess different options to implement the new target through revised EU legislation, including the EU ETS.

However, there are no details whether the Commission has any plans to assess different options for increasing financing mechanisms for low-income Member States along with increasing this ambition.

Any measures reducing the number of EU ETS allowances in circulation will inevitably translate into an increase in the carbon price leading to higher compliance costs (OPEX) for the electricity sector before 2030. At the same time, Member States with high carbon intensity and low GDP/capita levels would also face significantly higher investment needs (CAPEX) to comply with the new commitments proposed by the European Climate Law regulation.

Therefore the compensatory measures foreseen under the EU ETS Directive such as the Modernisation Fund should be increased five times and solidarity mechanism (the amount of allowances for auctions for less wealthy Member States) should be increased to 20% of the total allocation – to account for the cost resulting from new increased targets.

The Climate Law establishing the framework for achieving climate neutrality should directly stipulate that the compensatory measures should be amended proportionally with additional costs that the new 2030 reduction targets are to introduce. Otherwise, financial resources of energy utilities will be dedicated to cover the additional operational costs stemming from higher CO2 prices, instead of being dedicated to financing new investments that enable their transition.

Need to account for COVID-19 crisis and its aftermath

The impact of the COVID-19 crisis on the European Climate Law should be assessed and the decision-making timeline adjusted accordingly to account for dramatic events that continue to develop in front of our eyes. The COVID-19 consequences for economic growth become already apparent yet many Europeans are eagerly awaiting lifting of the lockdown restrictions introduced in numerous Member States. Assuming this will be swift, which remains unsure, the exact consequences of the crisis on GDP growth in Europe will be better known towards the end of this year and possibly later. As a result, the Commission should account in the modelling for a possible impact of COVID-19 on ability to meet particularly the 2030 . In order to do that the Impact Assessment should be postponed to fully grasp the impact of COVID-

19. Already today, we see the supply chain of green technologies being largely disrupted. The next COP26 in Glasgow is already postponed and there is no good reason to continue insisting on a very strict timeline regarding the adoption of the Impact Assessment and the European Climate Law Regulation.

The COVID-19 changes investment outlook and introduces a lot of uncertainty across Europe, also with regards to RES development. We therefore call on policymakers to ensure that the right investment framework is created to enable our transition towards a realistic 2030 target that accounts for the latest developments in Europe and beyond.

Policymakers also need to ensure consistency and coherence between the new Industrial Strategy and the European Climate Law Regulation that can help industry and energy sectors work together towards restoring economic growth in Europe in a swift and fair way.


1 CAKE for KOBiZE 2019, The European Green Deal impact on the GHG’s emission reduction target for 2030 and on the EUA prices, available at: http://climatecake.pl/.

2 CAKE for KOBiZE 2019, Scenarios of low-emission energy sector for Poland and the EU until 2050, available at: http://climatecake.pl/.

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