How to Survive the ‘Green Deal’?

For three countries of the Visegrad Group—the Czech Republic, Slovakia and Hungary—the ‘Green Deal’ can be an opportunity to modernize the energy sector and the entire economy. The situation in Poland is different.

The ‘Green Deal’ is not the European Union’s first long-term investment plan. There were several similar projects—the Lisbon Agenda (2000), the Europe 2020 Strategy (2010), Horizon 2020 (2013), or the Juncker Plan (2014).

Under these programs, hundreds of companies received public support from European funds and the European Investment Bank. Many useful technical innovations were also created. The European Union, despite proclamations to the contrary, has not become, however, the most innovative and competitive area in the world. Projects implemented under subsequent strategies and plans were evaluated by officials, who then decided on the public support for them.

The amount of the private funds quoted in the Green Deal Program is still, however, a loose estimate. Private companies will invest in the energy transformation only if they consider it profitable.

Billions of Euros for the ‘Green Deal’

The ‘Green Deal’ is another long-term investment program aiming to modernise Europe’s energy mix with public and private resources, while introducing a number of innovative technological solutions. It differs from previous programs in that the primary objective is to reduce greenhouse gas emissions. This is supposed to force the European Union Member States to deeply restructure their energy systems.

By 2050, the European Union wants to become an area where CO2 emissions will be fully offset by absorption of this gas by plants or its neutralization by human activity. This requires significant investment by the EU as well as by individual governments and the private sector. The strategy involves the use of private funds through different types of financial instruments, bringing the total amount spent on reducing emissions to €1 trillion. One such instrument is the InvestEU program, under which funding from the EU budget will take the form of loans and guarantees. Resources from the EU budget will be leveraged, i.e. they will provide collateral for loans taken out to implement projects in line with the Green Deal.

The ‘green taxonomy’ recognizes natural gas and nuclear power as transitional solutions that are acceptable, but not preferred. On the blacklist, on the other hand, is the coal-fired power generation.

Regions whose economy is now particularly dependent on fossil fuel production are to receive support from the Just Transition Mechanism ( J TM). Between 2021 and 2027, the J TM is to receive €100 billion in total, with only €7.5 billion from the EU budget. The sum of 30-50 billion euros is to be transferred from funds that have so far served other purposes—the European Regional Development Fund and the European Social Fund Plus. The rest of the money is to come from national budgets and EIB loans.

The JTM will support private investment in renewable energy and green transport, which will help regions moving away from coal to find new sources of growth. It will help start-ups and small and medium-sized enter prises to create new jobs in regions undergoing the transition.

The resources from the EU budget, both the additional €7.5 billion and the redeployment of other budget funds, are really there—their use depends only on the final decisions of the European Council and the European Parliament. The amount of the private funds quoted in the Green Deal Program is still, however, a loose estimate. Private companies will invest in energy transformation only if they consider it more profitable than investing in other areas. European Union institutions have yet to come up with specific solutions to encourage such investments.

The Dispute over Criteria

As in previous EU long-term investment programs, the criteria entitling individual countries and companies to benefit from support in the form of grants or loans guaranteed by the InvestEU are of major importance. In December, representatives of the European Parliament reached an agreement with the European Council on new criteria for defining environmentally sustainable activities.

This system of criteria is called the taxonomy of the European Union. In the case of the ‘Green Deal’ it is called the ‘Green Taxonomy’. It will provide investors with information on what projects are worth pursuing, what returns they can expect from their investments and what the prospects are for their income growth. Private companies will be required to disclose all the key data necessary to assess to what extent their investments meet the criteria of the ‘green taxonomy’.

The ‘green taxonomy’ recognizes natural gas and nuclear power as transitional solutions that are acceptable, but not preferred. On the blacklist, on the other hand, is the coal-fired power generation, with this applying to both hard coal and lignite.

The ‘green taxonomy’ will be implemented through Member States’ legislation. Initially, until 2021, criteria covering actions that contribute to climate change mitigation will be introduced into legislation. Later on, criteria will also be introduced for actions related to other environmental objectives. This means that companies and their investors must prepare for major changes in the legislation.

The Green Deal is not, however, without its risks. If it is consistently implemented it will mean a deep interference in the free-market mechanism.

The problem of climate change is of growing concern and campaigns to address this threat are popular, especially in rich Western European countries. The Green Deal is not, however, without its risks. If it is consistently implemented it will mean a deep interference in the free-market mechanism. Many investment decisions influenced by the ‘green taxonomy’ would probably produce losses in free-market conditions. The ‘Green Deal’ could, therefore, reduce the already low growth of the EU economy.

The Visegrad Group—a Reluctant ‘Yes’

Poland was the only country not to declare its support for the solutions of the ‘Green Deal’ at the summit in Brussels on 13 December 2019. The rest of the Visegrad Group countries accepted the program, which had been presented two days earlier by the European Commission, but were reluctant to do so.

They remain poorer than the countries of Western Europe and fear that that the energy transformation forced by the ‘Green Deal’ will overburden their economies. “We cannot allow bureaucrats in Brussels to let poor people and poor countries bear the costs of the fight against climate change”, said Hungarian Prime Minister Viktor Orbán before the meeting. “We must receive clear financial guarantees and we will negotiate their terms.”

The Visegrad Group countries remain poorer than the countries of Western Europe and fear that the energy transformation forced by the ‘Green Deal’ will overburden their economies.

Hungary has four nuclear reactors producing about half of its electricity. 18% of the energy comes from coal and 20% from gas. The government intends to increase the share of nuclear power to 60% and close coal-fired power plants by 2030.

Central and Eastern European countries want guarantees that the costs of switching to energy production emitting less greenhouse gases will be financed by the European Union budget. Hungary, the Czech Republic and Slovakia fear that the Just Transition Mechanism will not support nuclear power, which is neutral in terms of CO2 emissions, but from which Germany is withdrawing.

Poland is in the most difficult situation, for its power industry is still based on coal. Lignite-fired power plants account for 23% of the country’s energy capacity, hard coal-fired power plants for 45%.

“It is important to make sure that no one stops us from building nuclear units,” Czech Prime Minister Andrej Babiš said before going to the summit in Brussels. Babiš stressed in a tweet that achieving carbon neutrality in the Czech Republic would cost CZK 675 billion (around €26 billion), or one-fourth of the Just Transition Mechanism money, whose resources—€100 billion—are not yet guaranteed.

The Czech Republic has six nuclear reactors producing about a third of its electricity. 49% comes from coal, 6% from biofuels, and 4% from solar and wind power. The capacity from renewable sources has been growing rapidly since 2000, but this energy is subsidized.

In Slovakia, 55% of electricity comes from nuclear power plants, 17% from hydroelectric power, 12% from coal and 7% from natural gas. Slovakia buys gas exclusively in Russia.

Poland is in the most difficult situation, for its power industry is still based on coal. Lignite-fired power plants account for 23% of the country’s energy capacity, hard coal-fired power plants for 45%, gas-fired power plants for less than 7%, and wind power plants for 16%. Poland is the only country of the Visegrad Group without nuclear power plants. The latest draft of the State Energy Policy until 2040 provides for the construction of 6 reactors with a total capacity of 6-9 GW, to be gradually put into operation from 2033. This would mean that in 20 years’ time 20% of electricity would come from nuclear power plants.

According to the analysis of the Ministry of Energy, transformation of the energy sector consistent with the goals of the ‘Green Deal’ could cost as much as 210 billion euros.

Dilemmas of Polish Energy Policy

For the three Visegrad Group countries—the Czech Republic, Slovakia and Hungary—the ‘Green Deal’ may be an opportunity to modernize their energy sector and the economy as a whole, provided that its subsequent versions do not eliminate atomic and gas-based energy from the list of acceptable technologies. The problem of these countries may be, however, the growing dependence on gas supplies from Russia and Russian nuclear technologies.

Poland’s situation is different than in the three remaining countries of the group. According to the analysis of the Ministry of Energy, transformation of the energy sector consistent with the goals of the ‘Green Deal’ could cost as much as 210 billion euros. Even if these estimates are exaggerated, the cost of the transformation in Poland will certainly be much higher than in any other EU country. The exorbitant costs will come not only from building new power plants, but also from the liquidation of coal mines, which today employ about 100 thousand people.

The Polish government cannot openly question the European climate program, even if it considers it disadvantageous for the Polish economy, as well as for the economy of the entire European Union, which has to compete with countries taking a less restrictive approach towards climate change—the United States, China and India. Poland will probably announce at the European summit in June 2020 that it is joining the ‘Green Deal’, at the same time setting a number of conditions for financing the energy transformation.

An additional problem is that the vast majority of electricity in Poland is generated by four companies, controlled by the State Treasury. In recent years, the government has purchased several large power plants from foreign investors. The state-owned companies perform tasks commissioned by the government (e.g. they finance inefficient coal mines), which means they have little funds for their own investments. In Poland, the power industry is seen as part of the public sector, which, however, has no means of financing the transformation. A de facto government monopoly in the power industry will also be an obstacle to raising funds from private investors.

Privatization should therefore be the first step opening up the possibility of implementing a program of investments in climate-neutral energy. The government should lift the restrictions on wind energy introduced several years ago and encourage private entrepreneurs to invest in this area. A hopeful signal is the signing in October 2019 of an agreement between the US-Japanese company GE Hitachi Nuclear Energy and the chemical company Synthos, controlled by a private Polish businessman Michał Sołowow, on cooperation in the possible construction of a small 300 MW nuclear power plant in Poland. Small modular nuclear power plants, which are cheaper and have a shorter construction period, could be an alternative to traditional ones, requiring huge expenditures and reluctantly financed by private investors.

The Polish government cannot openly question the European climate program, even if it considers it disadvantageous for the Polish economy, as well as for the economy of the entire European Union.

It is also important to introduce competition on the natural gas market, which is dominated by the state-owned company Polskie Górnictwo Naftowe i Gazowe (PGNiG). The Polish government’s actions are aimed at completely halting gas purchases from Russia and relying on liquefied gas bought in the USA and gas from the North Sea fields. These steps have some political justification, as Poland, unlike the other three Visegrad Group countries, has experienced tense relations with Russia for years. Measures to guarantee gas security largely ignore, however, the economic side. Gas-fired power plants should be an alternative to coal-fired ones, and the Polish government should try to ensure that investments in them are treated as compatible with climate objectives.

The Polish government’s actions are aimed at completely halting gas purchases from Russia and relying on liquefied gas bought in the USA and gas from the North Sea fields.

Finally, in order to attract foreign investment, Poland needs to sort out the chaos in the judicial system caused by attempts to subordinate the courts to the government. Uncertainty about the independence of the courts may be the biggest obstacle to raising EU and private money.

It is also difficult to imagine effective energy transformation if the government is geared, as it has been so far, towards short-term political goals, above all maintaining voter support. The transformation towards climate-neutral energy does not enjoy as much support in Polish society as in Western European countries, and government propaganda attempts to show that the government is doing everything possible to avoid giving in to the EU on climate issues.