Poland’s crippled coal company a symptom of a far larger problem

Bob Burton

The financial crisis engulfing Poland’s publicly-owned hard coal mining company, Kompania Weglowa, has largely been caused by the stubborn refusal of the Polish Government to adapt to Europe’s rapidly changing energy landscape.

Last week the government announced   it had withdrawn a plan to bail out the loss-making coal mining company after the European Commission signalled that it would investigate the support for a possible breach of European Union (EU) laws.  EU laws ban state aid except for mines slated for permanent closure before the end of 2018.

Kompania Weglowa, which supplies coal to about 60 per cent of Poland’s coal-fired power stations, is the largest hard coal mining company in both Poland and the European Union. (Another 30 per cent of Poland’s electricity is generated from lignite, which is mined by the part-privately owned company/utility PGE and another utility, Ze Pak.)

The crisis gripping Poland’s public coal company has been brewing for a long time.

Since the transition to democracy in 1989 and the profound economic upheavals that followed Russia’s diminished role in the region, the coal industry has been on a long slide down. Over 330,000 jobs have gone from the industry. Coal production has plummeted from a 1979 peak of just over 200 million tonnes to just over 140 million tonnes in 2013. (Polish coal production is roughly evenly split between hard coal and its even dirtier sibling, lignite.)

Over the last decade there have been numerous restructurings, mine closures and a few mines privatised. While coal-fired electricity has declined marginally to some 90 per cent today, the industry’s problems have only grown dramatically worse. The cost of extracting coal from deep underground mines has become ever more expensive while most of the coal-fired plants hit old age. (About 70 per cent of Poland’s coal plants are over 30 years old; with some 40 per cent   forty years old.)

While concern about climate change and an energy generation revolution have swept through Europe, Poland’s political leaders have remained wedded to the technologies of the 20th century.

The heavy reliance on coal plants has imposed a heavy toll on public health. According to the European Environment Agency, Poland has six of Europe’s 10 most polluted cities. A mid-2013 study by the Health and Environment Alliance estimated that coal power plants caused 3500 premature deaths a year and imposed health costs of US$3.3 – 9.25 billion a year.

Successive governments have done little to promote policies promoting energy efficiency, wind or solar power. Instead they have remained fixated on promoting coal plants. In the last decade there have been ambitious plans for as much as 30,000 megawatts (MW) of new coal plants as well as pie-in-the sky proposals for coal-to-oil, coal-to-gas and coal-to-chemicals plants. To cap it all off there was the obligatory hype about Carbon Capture and Storage plants as well. To fuel all the proposed plants there have been plans for a raft of new mines.

However, the coal industry’s expansion plans are not going smoothly. Four plants amounting to 3400 MW of proposed capacity have been defeated while another 1600 MW plant is being strongly resisted and hanging in the balance. While a little over 5100 MW of new plant capacity has been built, the costs of proceeding with the remainder would be crippling. While two mines have been expanded and another one is currently under construction, community opposition to mining projects continues.

The ongoing enthusiasm for coal by the Polish government has made the country a poster child for the world coal lobby. In late 2013 the World Coal Association – the global lobby group representing coal companies such as Peabody Energy, BHP Billiton and Rio Tinto – hosted a ‘Coal and Climate Summit’ in parallel to the global climate change negotiations in Warsaw.

Polish energy policy has long been developed as if the outside world and climate constraints don’t exist. Except they do.

The restructuring of Poland’s traditional heavy and manufacturing industries has continued, consumers have bought more energy efficient appliances and power demand has flattened out. Privatised steelworks have bought less metallurgical coal. Polish coal exports collapsed while imports of cheaper coal from Russia, the Czech Republic and Ukraine have grown.

The high global coal prices and strong demand during the recent boom times masked the looming crisis for the Polish coal industry and Kompania Weglowa in particular.

The happy face routine which didn’t work

In March 2014 Poland’s then Prime Minister, Donald Tusk, put on a happy face and proclaimed the need for the European Energy Union to have the “rehabilitation of coal as a source of energy” as one of its six key elements. The happy face didn’t work.

Kompania Weglowa’s finances went from bad to worse. European coal demand has slowed and the global oversupply glut eroded the price of coal in the export market. In 2014 alone, Kompania Weglowa racked up losses of US$670 million.

The Polish Government hired the Boston Consulting Group to draft a ‘Repair Plan for Kompania Weglowa S.A.’, which was released in January 2015. In it the consultancy outlined the dire prospects for the company: increasing costs, declining sales and growing losses. Of Kompania Weglowa’s 14 mines it proposed closing four – which at the time accounted for 6.5 million tonnes of coal – and keeping the remainder of the mines open.

With an estimated 10,500 people employed in the mines slated for closure, it was not going to be an easy change, especially with a national election scheduled for late October 2015. After protests from unions and coal region communities, the government backed down. Instead of closing the loss-making mines it proposed to subsidise their ongoing operation one way or another.

A plan was floated to have power generators buy the mines which supplied them. When this was greeted with little enthusiasm, the plan was dropped. Instead the company proposed a plan to sell stakes of a range of other government-owned companies and the proceeds pooled to buy a stake in Kompania Weglowa. With a cash infusion, the company could stagger on a little longer. This plan attracted limited support, with only three government-owned companies expressing interest.

With the European Commission flagging concern about plans to subsidise domestic coal production, the Polish Government has gone back to the drawing board.

However, it faces huge challenges. Since the ‘repair plan’ was drafted in January, Kompania Weglowa’s finances have become even worse. In the first quarter of 2015 the company’s production fell by a further 17 per cent. At the time of the ‘repair plan’ the benchmark Newcastle thermal coal price was US$70 on the international market. At the time the plan pointed to a range of analysts – from the boosterish WoodMac through to the World Bank and the International Energy Agency –   all arguing that thermal coal prices would slowly rise over the next few years.

Instead, they have fallen and are now nudging down towards US$50 a tonne and have even dropped under it in the European market.

With the general election scheduled for October 25, the two largest parties are vying to be more pro-coal.   The ruling Civic Platform government, which trails the opposition party Law and Justice (PiS) by over 10 points, is desperate to retain its support base in the coalfields. To retain government, it has pinned its hopes on preventing Kompania Weglowa and the wider domestic coal industry from collapsing.

While renewables are booming elsewhere in Europe, Deputy Economy Minister Jerzy Pietrewicz has vowed that existing coal plants will not be closed but simply upgraded to higher efficiency plants, an echo of the World Coal Association’s preferred policy. However, there are substantial doubts that upgraded plants would be financially viable [Google Translate of article in Polish] or even able to meet EU pollution control standards. (Scrubber technology has not been trialled on Eastern European lignite.)

The new Polish president, Andrzej Duda from PiS, recently argued that Poland should even seek to exempt its coal industry from the European Union’s energy and climate policies. His argument may well become official government policy if PiS wins the forthcoming election.

In many ways the crisis engulfing Kompania Weglowa is symptomatic of how the Polish Government has become the prisoner of the coal industry. Instead of pursuing the lowest cost options – from both a financial, public health and climate perspective – of efficiency and renewables, the government prefers coal.

The government’s continual deferral of a transition to efficiency and renewables is at best delaying the day of reckoning. Opposition to new mines, power plants and pollution grows while the cost of renewable electricity falls.

A little over a month after the election it is highly likely that a new right-wing Polish Government will front up to the climate negotiations in Paris and once more be the darling of the coal lobby.

However, having the Polish Government extolling the virtues of coal while its largest publicly-owned coal mining company teeters on the brink of bankruptcy and demands hundreds of millions of dollars in subsidies will only serve to highlight what a policy dead-end backing coal has become.

Bob Burton is the Hobart-based Editor of CoalWire, a weekly bulletin on global coal industry developments. (You can sign up for it here.) Bob Burton’s Twitter feed is here.