Members of the Polish Electricity Association (PKEE) are aware of climate change challenges and aim at a further sustainable transformation which will at the same time ensure energy security. The Polish energy sector is already committed to contribute to the EU climate and energy objectives through ambitious plans to reduce its GHG emissions, even though this planned shift will require significant investment in the mid- and long-term perspective. For Poland, achieving climate neutrality by 2050 requires significant investment outlays, estimated to reach EUR 179-206 billion (CAKE, KOBiZE[1]) in the generation sector. Therefore, it is necessary to include in the European Climate Law[2] a compensation mechanism for low-income Member States to proportionally compensate for the additional carbon costs resulting from the new climate targets. Otherwise, energy companies will channel their financial resources to cover their current operating costs, instead of investing them in line with the climate objectives.[1]). It is therefore necessary to include in European climate law[2] an offsetting mechanism for low-income Member States to compensate proportionally for the additional carbon costs resulting from the new climate targets. Otherwise, energy companies will divert their financial resources to cover current operating costs instead of investing them in line with climate targets.
Climate neutrality objective needs to be accompanied by coherent support policy instruments
Since every Member State has its own energy policy and a different starting point, the Commission should avoid a ‘one size fits all’ approach. According to recent projections1, the 50% target will result in an increase of the price of the allowances to 34 EUR/tonne and 52 EUR/tonne by 2025 and 2030 respectively. If, however, the reduction target is raised to 55%, the price of the allowances will increase to 41 EUR/tonne and 76 EUR/tonne. From the point of view of the PKEE Members’ investment portfolio, the current EU ETS scheme is robust enough to ensure economic incentives for the transition to low-carbon power generation. The PKEE emphasises that the transition may be more difficult for companies whose OPEX is closely dependent on carbon prices, because if carbon prices are high, their own financial resources for new low-emission investment will become severely depleted, resulting in a slower transition pace. Higher carbon prices also increase a company’s overall economic risk and create additional obstacles in obtaining financing from the financial market.1However, if the reduction target is raised to 55%, the allowance price will rise to €41 per tonne and €76 per tonne respectively. From the perspective of PKEE members' investment portfolios, the current emissions trading scheme (EU ETS) is robust enough to provide economic incentives for the transition to low-carbon power generation. PKEE stresses that the transition may be more difficult for companies whose operating costs (OPEX) are closely linked to carbon prices, because with high carbon prices, these companies' own financial resources for new low-carbon investments will be severely depleted, slowing down the transition. Higher carbon prices also increase a company's overall economic risk and create additional obstacles to obtaining finance from the financial market.
Therefore, the European Climate Law proposal should also tackle the financial dimension of the transition. The European Climate Law should directly stipulate that the compensatory measures ought to be changed proportionally to the additional costs brought about by the new 2030 reduction targets. European climate law should also take into account the financial dimension of the transition. The document should directly state that offsets will be proportionally adjusted to the additional costs arising from the new reduction targets by 2030.
PKEE recommends that with the new 2030 targets, the potential of the Modernization Fund should be reassessed, which should be increased by a factor of five to offset the additional carbon costs of the 55% emissions reduction scenario by 2030. In addition, financial support should also be introduced by doubling the "solidarity pool", as well as increasing the Fair Transformation Fund to €20 billion. It is of key importance to introduce within the European climate law clear and effective mechanisms to mitigate the risks arising from increased levels of ambition.
Revision of the 2030 targets should be accompanied by a country-specific Impact Assessment
According to Article 2 of the European Climate Law proposal, the Commission will “explore options for a new 2030 target of 50 to 55% emission reductions compared to 1990” by September 2020. Current climate and energy targets have been recently agreed under, among others, the ”Clean Energy for All Europeans” package and the revision of EU ETS directive. Ensuring a sufficient level of business certainty requires refraining from amending this framework at such short notice and without a sufficient impact assessment of the expected costs for individual Member States. Additionally, ways of adapting the existing financial support to the possibly increased 2030 targets should be explored. Moreover, the Impact Assessment should also look into how these new targets may impact the prices of CO2 allowances and electricity prices, especially in the Member States that still have a higher share of carbon-dependent generation, as well as considering the aftermath of the COVID-19 epidemic. European climate lawby September 2020. The Commission will explore "options for a new 2030 target of 50-55% emissions reductions compared to 1990 levels." Current climate and energy targets have recently been agreed as part of the "Clean Energy for All Europeans" package and the revision of the EU ETS Directive, among others. In order to provide a sufficient level of business certainty, it is necessary to refrain from changing this framework in such a short time frame and without carrying out a proper impact assessment on the expected costs to be borne by individual Member States. The impact assessment should also analyse how existing financial support could be adapted to possibly increased targets for 2030. Furthermore, the impact assessment should also analyse how the new targets may affect carbon prices and electricity prices, especially in those Member States which still have a higher share of electricity generation from coal. The impact assessment should also consider the implications of COVID-19.
PKEE welcomes the Commission's announcement of its intention to conduct a detailed impact assessment for the proposed 2030 climate targets. The analysis should be based on data provided by all member states to determine the optimal level of ambition and pace of transition in each. However, PKEE also notes that the implementation of the impact assessment for the current 2030 targets and the "analysis of options for introducing a new 2030 target of 50-55% emissions reductions" may be very demanding and it is likely that these documents will not be completed by September 2020. This is due to the fact that the impact of the proposed changes on the whole economy needs to be examined, also taking into account the economic impact of the COVID-19 outbreak. PKEE's position is that any assessment should refer to the EU climate neutrality target to allow Member States to adjust their transition pace to regional conditions and take the most cost-effective action. Moreover, it should be recalled that the EU emission reduction targets are of crucial importance for the EU climate change policy and therefore cannot be the subject of delegated acts - they should be set with the active participation of Member States.
COVID-19 outbreak
The impact of the COVID-19 crisis on the European Climate Law should be assessed and the decision-making timeline adjusted. Furthermore, the Commission’s modelling should take into account the possible impact of COVID-19 on the ability to meet the 2030 targets. In order to do that, the Impact Assessment should be postponed until the impact of COVID-19 is fully comprehended. Even now, the supply chain of green technologies has largely been disrupted. The next COP26 in Glasgow has already been 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. European climate law and adapt the timing of its work to the current situation. Furthermore, the Commission's modelling should take into account the possible impact of COVID-19 on the ability to meet the 2030 targets. Therefore, the impact assessment should be postponed until the impact of COVID-19 has been fully assessed. The green technology supply chain has already been largely disrupted. The next COP26 conference in Glasgow has been postponed and there is no reason to continue to insist on a very tight timetable for the adoption of the impact assessment and the European climate law.
The COVID-19 epidemic changes the investment outlook and introduces a lot of uncertainty across Europe, also with regard to the development of RES. We therefore call on policymakers to ensure that the right investment framework is created to enable the transition towards a realistic 2030 target that takes into account the latest developments in Europe and beyond.
[1] CAKE, Scenarios of low-emission energy sector for Poland and the EU until 2050 2019, available at: http://climatecake.pl/wp-content/uploads/2019/11/CAKE_energy-model_EU_low_emission_scenarios_paper__final.pdf
[2] Proposal for a regulation of the European Parliament and of the Council establishing the framework for achieving climate neutrality and amending Regulation (EU) 2018/1999 (European Climate Law), COM(2020)final
[3] For more details, please refer to PKEE position on JTF (https://pkee.pl/en/position-paper-of-the-polish-electricity-association-on-the-regulation-establishing-the-just-transition-fund/)
DOWNLOAD FILES