PGE’s capital expenditures and acquisition investments have focused almost exclusively on coal and lignite (its conventional business) during the 2015-2018 period. More than three-quarters of the total PLN 37 billion invested to date went to coal and lignite, mostly at the expense of renewables, which received just 3% of the total.
Since PGE affirmed its commitment to its 2015-2020 strategy, on September 8 2016, shares have fallen by more than one-third.
PGE’s conventional business accounted for 46% of total EBITDA last year, down from 57% in 2015. The company needs to find a new growth engine beyond coal and lignite. Renewables accounted for 7% of EBITDA in 2018, and so PGE would have to grow this business more than six-fold to replace its conventional generation.
This report reviews past, present and future strategies at PGE, Poland’s biggest electric utility, one of the most coal- and carbon-intensive energy companies in Europe. PGE is presently preparing a new strategy through 2030. We especially focus on the company’s iconic Bełchatów power plant, the world’s largest lignite power plant, Europe’s biggest power plant of any kind, and the continent’s biggest single source of carbon emissions. We consider PGE’s plans to develop a new lignite mine by 2030, at Złoczew, to fuel the Bełchatów power plant until the mid-2050s.
The context for this report is the extremely adverse and worsening environment facing coal and lignite power generation in Europe. Headwinds include EU climate targets and a Paris climate agreement that imply coal phaseout by around 2030 in developed countries; declining investor sentiment; falling costs of renewables; rising carbon prices; diminishing scope for financing and insuring coal; stricter EU air quality standards; and a trend toward mandated coal phaseouts. We expect utilities in Europe will cease coal and lignite power generation in the 2030s at the latest, either by mandate or market forces. The questions thus arise for PGE, why is it developing a new lignite mine, and what alternative businesses should it develop instead to replace falling conventional generation earnings going forward.
PGE is a 57% majority state-owned company in a country whose governments have been traditionally pro-coal. Coal and lignite in Poland are partly a social issue, employing more than 100,000 people. But the greater profitability of renewables, as illustrated in this report, shows that even in the near term there are no winners from doubling down on coal and lignite. Transitioning to renewables will mean a short-term cash outflow, but massive EU modernisation funds have been allocated to Poland so that the country does not have to bear this cost alone. We recommend that PGE actively pursue a stepwise retirement of lignite units at the Bełchatów power plant in favour of alternative electricity sources and industries. Scrapping its plans for the Złoczew mine is only the first step required in a new energy strategy that would also include accelerated investments in renewables.
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