Poland free from coal-based power in 10 years’ time? An investment fund is being set up to raise capital for this. Would you consider getting involved? How much can you make by investing in RES?
Will Polish investors as of next year be able to put their money into a fund set up solely to finance green energy investments, such as large scale wind and PV farms? Sebastian Jabłoński of RespectEnergy, a company that trades in green energy, believes he knows how to ensure that as soon as 2030 there will no longer be a need for coal-fired power plants in Poland at all, and that all the electricity we need will come from renewable energy sources (RES) – plus where to get the cash for it. In my book, this is at least worth a listen!
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We know only too well that the production of coal-based energy – on which Poland is currently 90% dependent – is a dead-end street. The government has recently abandoned plans to build a new coal-fired power plant in Ostrołęka upon a realisation that the PLN 6bn investment would be a loser right from the start.
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And rightly so! One megawatt hour of coal-generated electricity costs between EUR 60 and 140 (as reported by Lazard, a financial consultancy firm that publishes annual estimates of the total cost of power generation), and already has a higher price tag than a megawatt hour of wind or solar power. This value range represents a levelized cost, which includes the construction, operation, fuel and maintenance of the plant.
The government has recently been actively promoting domestic PV systems (e.g. by providing grants for solar panels as part of the ‘My Power’ scheme), thanks to which the total capacity of solar panels installed in Poland has recently exceeded 2.5 gigawatts (GW), compared to less than 1 GW just a year before. However, this is still but a drop in the ocean, as the total capacity of Poland’s power plants is 50 GW, of which a whopping 33 GW is generated from coal and lignite.
As long-term plans are to reduce Poland’s dependence on coal-based electricity to a maximum of 40-50% by 2040, the government intends to build a nuclear power plant (estimated to meet one fifth of the growing demand) and develop offshore wind power plants and onshore solar panel systems (covering roughly a quarter of the estimated demand).
To cash in on Poland’s energy transformation
The trouble is that the government’s plans envisage a gradual increase in the share of green energy production in Poland (though this has recently gained somewhat greater momentum under the newly adopted energy strategy for Poland), by phasing out only permanently unprofitable mines, and by incremental investments in the development of RES. Yet some market experts believe that this is too slow. And they put their money where their mouth is.
The Respect Energy Fund is probably Poland’s first investment fund to raise money from investors for big green energy investments. Admittedly, our country has already seen companies that encouraged people to put their hard earned cash in e.g. particular wind farms (with often disastrous results, not only through poor investment management, but also due to volatile Polish law). On the other hand, though, there are billionaire stockholders (such as the Kulczyk family) who successfully invest in e.g. offshore wind farms.
However, there has not yet been an investment fund to finance such large-scale projects by raising money from the market and ‘packaging’ these diverse and multi-faceted investments into share units. The new fund is currently in the set-up phase as negotiations with potential participants are underway.
There is no telling what kind of money is at stake, but reportedly the involvement of large investors (with individual contributions worth millions of euros) is several times greater than what the fund was originally expected to manage. The majority of the assets are likely to be sourced internationally (this is my personal belief, though, as the fund’s representatives are currently withholding any information pending ongoing registration procedures with the Polish Financial Supervision Authority).
The Respect Energy Fund is a Polish take on concepts that already exist in Western countries. A good case in point here is UK’s Green Investment Group, an investment company which focuses exclusively on financing RES investments.
How much can you make on PV and wind?
I have met with Sebastian Jabłoński, the fund’s originator and, over the last several years, President of the brokerage company RespectEnergy (recently rebranded, and therefore better known on the energy market as TRMEW Trading). The company, which trades exclusively in green energy operating at an annual turnover of EUR 1bn, aims to invest EUR 25m of its own capital in the Respect Energy Fund.
Jabłoński explains that the fund’s initial investments in RES are planned for next year, and will involve individual contributions of EUR 5m to 50m, spread among several dozen projects (initially in Poland and later in other countries of our region). These will mostly focus on wind energy (’in Poland, the wind is more consistent than the sunshine’, says Jabłoński), but also on PV.
His key premise is that by 2050, demand for energy from renewable sources in Poland will increase tenfold, from the current 20 terawatt hours (TWh) to at least 200 TWh. Naturally, someone will have to produce and supply this energy, so either domestic companies will come forward, or we will have to rely on green energy imports.
Jabłoński refuses to speak of the expected profits for investors (quoting the same 'PFSA procedures’ excuse), but I have done a bit of my own desktop research to attempt a rough estimate. A similar fund operating on the European market assumed a few months ago that it would roughly triple the investors’ money within ten years. This may seem too brave an assumption, though, as competition on the green energy market will continue to grow and rates of return are expected to fall slightly.
Still, a 10-15 percent annual return on such (large-scale) investments is conceivable. This seems to hold water – investments in stable, dividend-paying companies listed on stock exchanges bring long-term profits to shareholders of 6-7 percent from an increase in market value (also due to an increase in currency issue and inflation), and an additional 2-3 percent per year from dividends. Yet in this case we are talking about riskier ventures on a new (and changeable) market, so a double-digit expected rate of return seems to be a fairly sensible guesstimate.
Will you also be able to buy shares in this fund? For the time being, unfortunately, this is not an investment option for most readers of 'Subjectively on Finance’ – unless you have EUR 10m to spare. But for next year, Jabłoński is heralding something for us as well: funds available to individual investors. To this end, RespectEnergy is considering buying an investment fund company meant to serve as a platform for energy funds accessible to holders of capitals that are a mournfully small compared to the said millions of euros.
These will probably be closed-end funds (so-called Private Equity CEFs), i.e. you will need about PLN 200,000 to access them, and investors’ money will be invested via so-called special purpose vehicles (known as 'SPVs’ in investment jargon).
Two points to prove that RES expansion this is a win-win game
One of the key drivers for the head of RespectEnergy (so far TRMEW Trading) to raise as much money as possible for private investments in RES is the belief that the energy revolution can be fast-tracked in Poland, and that this is the key issue to tackle in order to give the Polish economy a positive kick for the next few decades.
Jabłoński makes two points. Firstly, ‘thanks’ to its energy backwardness, Poland can enter the RES production market at the best possible moment with investment costs basically guaranteeing profitability (unlike the Germans, who invested in wind turbines 10 years ago, when the technology was still a bit expensive).
Secondly, we have to spend that money anyway, and the sooner we do so, the bigger a player we will become on the RES market, and the more energy we will be able to export to other countries. Therefore, as Jabłoński argues, it is worth investing any and all money in renewable energy today, because if we do this soon, we will establish ourselves on the energy market for decades to come.
Besides, we are offered the rare opportunity not to repeat the mistakes of several other countries that started investing in nuclear power stations too late and are now in deep… trouble. The Finnish nuclear power plant was supposed to be operational in 2009 at EUR 3 billion, it is already 12 years behind schedule, and its cost has sky-rocketed to EUR 13 billion. The Slovaks were 10 years behind building theirs as well.
In Jabłoński’s mind, building nuclear power plants has already become expensive (there are a number of conditions to be met that were once unheard of) and is likely to be unfeasible. That is why the Polish Government should withdraw from this project and focus solely on the fastest possible increase in green energy production capacity.
How much money does it take to make a green revolution in ten years? And how do we get it?
How much money do we need to abandon 'dirty’ coal power altogether by 2030, rather than by 2040-2050? Poland’s power plants today have a total capacity of 50 gigawatts (GW), from which we produce 170 terawatt hours (TWh) of energy. Within 10 years, energy consumption will increase, requiring a capacity of around 60-70 GW to generate 200 TWh of energy (no worries, if we have a bit too much, we can always export it).
According to Jabłoński, the development of 1 megawatt (MW) of wind power capacity domestically costs PLN 5m, and we need enough turbines to reach a total capacity of 50 GW. It is hardly difficult to figure out that the cost of such an investment is PLN 250bn, but thanks to this effort we will be able to produce 150 TWh of wind energy, covering three quarters of domestic needs in ten years’ time.
What about the remainder? In Jabłoński’s view, it will be provided by a 20 GW system of PV facilities, capable of generating at least 30 TWh of energy. Today, creating 1 MW of PV capacity takes PLN 3m, which means that the investment cost would be PLN 60 billion. The entire system requires building energy storage facilities, the cost of which will have to come to PLN 30bn, assuming that the energy stored covers one day’s domestic demand for electricity, i.e. 300 GWh (the energy storage technology is currently the most expensive component of the system).
Can Poland afford to invest about PLN 610bn in the RES system over 10 years, i.e. about PLN 60bn a year (or perhaps less, as the generation and storage technologies are bound to get cheaper)? This certainly is a lot of money, but Poland’s annual budget is PLN 500bn. We spend over PLN 120bn a year on health care. PLN 60bn a year is just a little more than the combined cost of the social policy programmes of 'Family 500+’ and 'The 13th Pension’. Jabłoński argues that in terms of value for money, the PLN 60bn may prove to be the best investment in this century of Polish history, and that this is simply the price of Poland’s success over the next few decades.
Jabłoński claims that two things have to be done. Firstly, following the German example, we should redirect the money from coal-based electricity production towards RES funding. Secondly, we need to provide funding for the investments in euros.
Were Poland’s investments in renewable energy sources to be financed by euro-denominated loans, Poland would save PLN 24bn on the PLN 600bn investment in annual interest alone thanks to lower bank margins and interest rates. But how to arrange funding in euros if Poland is outside the Eurozone? Institutions such as the Polish Development Fund and the BGK Bank would have to come forward e.g. by issuing Eurobonds and making the capital obtained this way available to Polish companies 'at cost’.
The other source involves… Polish citizens’ bank deposits. Currently, PLN 900 billion is being wasted in accounts with interest rates as low as 0.0001 percent. Perhaps, along the lines of the fund described above, some of the savers would be willing to contribute to the energy revolution and still earn money from it.
Germany’s concept of a rapid shift to RES. Food for thought for us as well?
So, what is this German system about? Well, they have come up with a solution that is based on tenders for… the speed of shutting down coal-fired power stations! Under the scheme, the government will give the more money in the form of ‘free gifts’ to the power station operators, the more they can get ahead of their competitors in closing their own power stations. Of course, in order to close something quickly, you have to be able to switch to renewable energy production. But those who are acting faster will get more of the money they would have to spend anyway.
Simple enough, isn’t it? The first tender to pay for the closure of Germany’s coal-fired power stations was supposed to take place in September (I’m not sure if this actually came through because the European Commission has not yet approved the German programme).
In 2018, the German government set up a committee made up of representatives of the industry, government and NGOs in order to find a widely accepted method of shutting down a substantial proportion of coal-fired power stations. Despite its longstanding leadership in wind and solar power generation, Germany still had 44 GW of capacity in coal-fired power plants as of late 2019, and some of the country remains economically dependent on coal (as in Poland).
The scheme provides for the closure of all coal-fired power stations by 2038, with more than half closing by 2030. How is this meant to work? In September, a tender was scheduled for the closing date of 4 GW of coal-based capacity. The maximum compensation per 1 MW of decommissioned capacity is EUR 165,000. This amount will decrease over time, and ultimately the compensation amount will drop to EUR 89,000 per megawatt for the coal-fired units closed on schedule.
It is easy to calculate that if someone is able to 'outbid’ all others with their deadline for decommissioning the plant, they will 'make’ EUR 640 million (twice as much as they would be getting by closing the plant on schedule’).
Jabłoński says that a similar system should be set up in Poland, as this is the only way to spur owners of coal-fired power plants to convert their production capacity quickly and to invest in energy generation from renewable sources. Besides, the Polish government (directly and through State Treasury companies which continue to subsidise the Polish Mining Group, i.e. the state coal-mining network) spends several billion zlotys a year supporting coal production anyway.
Given the current price gap between RES and coal-based energy, this would be a perpetual motion machine. Jabłoński estimates that if we produced 100 percent of our energy from RES, with the current price of 1 MW of coal-based energy at about PLN 240, we would be saving PLN 32bn annually. So, each 10-percent investment in converting coal into renewable energy sources brings PLN 3 billion in guaranteed savings for the Polish economy.
Granted, in order to convert that 10 percent of the energy sector, we need to invest PLN 60 billion in the construction of wind and/or PV systems, and in storage facilities (cf. the calculations above indicating a total investment of around PLN 600bn). And probably a little more in compensation for miners (although some reports suggest that there are more potential jobs in RES than in coal-mining).
The price of renewable energy is PLN 90 per 1 MWh, and it is in decline. That of coal-based power is PLN 240, and it is on the rise
There is something about it. It is hardly debatable, that there are few large-scale investments which offer a guaranteed return of over a half of their value right on the outset. And this is hardly the entire spectrum of savings. The cost of coal energy continues to grow (for example, through the rising long-term cost of carbon emission allowances), while renewable energy will come at an increasingly low cost (as the technologies are becoming more widespread, the marginal cost of using them will continue to fall; storing energy will also come down in price).
A recent report from Portugal has revealed that the Ministry of Energy there has contracted 500 MW of renewable energy at an average price of EUR 20 per MWh, which translates into PLN 90. We produce that same 1 MWh from coal at PLN 240. It seems sensible to pay any and all severance payments for miners and power sector workers, and the costs of mine and power station closures, no matter how high they are, and to replace coal-based electricity with equivalent green capacity.
Lower energy prices are also an additional economic driver with a positive effect on the competitive edge of companies and their turnovers (i.e. their taxable incomes), which also seems measurable. And yet another thing: if we manage to 'go green’ quickly, we will be cashing in on energy exports instead of paying for energy imports from Germany and Scandinavia, as we do now.
However, the implementation of the plan that my interlocutor is putting forward requires that those in power have cojones of steel and a long-term vision that goes well beyond the three years left until the next elections. For the time being, the government’s intellectual capacity hardly suffices to plan a large mega(lo)-airport, on which – especially in view of the pandemic-induced collapse of aviation and tourism – the rate of return is much more uncertain than on building green power infrastructure.