Inspired by the theme of the conference held on September, 27 in Katowice, organised by Polskie Towarzystwo Wspierania Przedsiębiorczości [Polish Association for Support of Business ] (described on page 6) we have approached a few people asking to comment on the way they perceive energy security of our country. Despite their often contrasting political and economic views, their answers turned out to be very similar.

Lack of decisions scares away investors

Janusz Steinhoff, the former deputy prime minister, minister of economy:

Poland’s energy security should not be exclusively associated with ownership structure in the electricity production or distribution sector . At the present stage of economic development of Poland, infrastructure of the sector dealing in high power, high pressure gas and operating petroleum pipelines as well as oil terminals should be state owned and it is the government’s duty to grant fair competition to all the participants of the market. The problem of selecting an appropriate privatisation method for the energy sector that arises has always been controversial. In my opinion, there is no obstacle in integrating the sector in a vertical manner and privatising larger businesses. They will thus be competitive on the European market.

Although it is for the energy business owners and particular companies to decide about the choice of the energy resource based on their economic calculations, I am sure that the fact that most of the Polish power plants are coal-fired and lignite-fired will determine the need for taking care of these production facilities. It is important to make use of the production potential that would guarantee the future security of energy supplies of the country.

Possible investments in the energy sector are long term contracts. I have to criticize my successor for the lack of decisions in this matter. One cannot keep on debating over cancelling long term contracts in energy sector (KDT) without ever reaching a decision. This scares away potential investors and makes it difficult for current investors to approach banks for loans. I think that it is important to hold on to the long term contracts in energy sector until their natural expiry, which in most cases will take place in 2008.

Coal-based energy sector has good prospects

Herbert Leopold Gabryś, the former minister in the department of industry, an energy sector expert:

Coal mining sector is doing quite well and it can even do better than we have thought. Coal is now treated with less dislike. The forecasts both for EU member states and other countries around the world indicate a considerable increase in consumption of coal-based electrical energy – obviously in compliance with all environment protection standards. This indicates a quite safe perspective for the Polish fuel market for the next twenty to thirty years. This fact has also very significant implications for the strategy of our energy security. It is good, on one hand, because we have enough coal for the time being. On the other hand, however, it generates significant investment needs. These investment needs result from the international contracts that have been signed. There are still arguments about the size and capacity of the so called unused resources in KSE [National Energy System] both in the context of energy security but also in relation to improving cost-efficiency of electrical energy production. Nowadays this dispute is unjustified. Instead, an inventory of the power units in KSE should determine to what extent they follow environment protection requirements and whether they can compete, considering their cost level. It will become apparent that the status of power reserves is inadequate and the investment needs exceed current financing estimates. This situation brings about one of the most serious challenges for the energy security of our country – where and how to obtain those funds?

The last draft of the energy policy assumptions does not contain such crucial definitions as: energy security, the point of view on vertical consolidation and capital associations. The previously forecasted economic growth and the related energy consumption volumes are not valid anymore.

It is difficult to amend the Energy Law if it is to serve for a longer period of time, without a clearly defined strategy. It would be reasonable therefore to limit those amendments to the most essential elements arising from the need for adaptation to the EU requirements and after genuine preparation and dispute of the energy policy foundations new regulations should be set up.

After a few years of intense efforts this is also a chance for PKE to be allowed to apply its development strategy, including vertical consolidation and further diversification of its business operations and thus increasing its investment capacity.

Prepare for the competition

Leszek Jarno CEO of Jastrzębie Coal Company and Chairman of the Supervisory Board of PKE:

The Polish energy industry should rely on the domestic coal resources, considering their volume. Especially that the costs of coal-based energy are competitive to the gas-based energy.

The energy industry, however, has to prepare for the competition on the open market. There is a great awareness of the need for an organization that would focus on mining, production as well as distribution. Introduction of such an institution is now only a matter of time.

The way to reduce costs

Jerzy Markowski, Polish Senator:

For the moment, the situation is quite comfortable. We have our own coal and lignite resources, which allow us to produce 150 Terawatt-hours of energy and that is the amount our economy uses per year. Any attempts to eliminate coal and lignite from the balance of production means lowering the energy security of our country. Changing the structure of the sector is a very important element of the Polish energy policy. I have always been in favour of vertical consolidation of the energy and mining sector because it is the most logical solution. The businesses are interconnected when it comes to technology they use; therefore they should also share capital. This is a guarantee of costs reduction in the particular segments of production and distribution. We can all benefit from this situation, except maybe for the minister of finance, who shall lose the VAT revenues from two business operations. If a cheap electricity source does not emerge in five years there will be no room for us in the free energy market. Therefore, we have to look for the ways of reducing energy production costs and vertical integration is undoubtedly the way of achieving this.

Watch out for the EU regulations

Wiesław S. Blaschke, prof. dr hab. inż., Politechnika Śląska, Wydział Górnictwa i Geologii [Silesian University of Technology, Faculty of Mining and Technology], Polska Akademia Nauk, Instytut Gospodarki Surowcami Mineralnymi i Energią [Polish Academy of Science, Mineral and Energy Economy Research]:

Energy security is generally understood as a guarantee of the supply of energy and fuel for all its users. The Polish state and the minister of economy in particular are responsible for this security – according to the Energy Law. The process of shaping the energy policy in terms of energy security is implemented via the state energy policy guidelines, introduced by the Polish parliament. fter Poland’s accession to the EU, the energy policy guidelines and European strategy for the security of energy supply have also become obligatory in our country. The European Union does not have sufficient enough energy resources. It is dependant, to a large degree, on the imported primary energy sources. This is the reason why the European Union has recognized the need to put special emphasis on its own primary energy resources. In practice this means promoting the domestic primary energy resources of the EU member states. At the end of the nineties, the European Commission has recognized the need to keep the production of primary energy in the EU member states at a certain minimum level. All those actions focused on eliminating the risks of large dependence of European Union on energy supply from the outside world. In 2000, the European Union set out the so called Green Paper Towards a European Strategy of Energy Supplies. This document emphasized the need for measures granting access to the domestic coal resources. Probably under the influence of September 11 events in the USA, in October 2001 the European Parliament has adopted a resolution admitting the importance of coal as the domestic energy resource. The above mentioned document helped in introducing the regulation allowing further state aid to mining industry. This was also caused by the fact that the majority of mining production in the EU cannot compete with imports. The Council Regulation (EC) No 1407/2002 regulates operations of the unprofitable part of coal mining sector. It should be added that the EU resolutions are to be applied directly and entirely in all member states. This means that they are not subject to transformation into national regulations. After Poland’s accession to the European Union, the minister of economy has prepared the so called Doktryna zarządzania bezpieczeństwem energetycznym [Energy Security management Doctrine]. This document represents an organized set of norms pertaining to energy security. That is why it is called a doctrine. The document spells out general guidelines of the energy policy, assures security of energy supplies, including a 20-year forecast for the sector and describing measures that can be taken for the development of energy market and fuel market. The doctrine describes the security factors, distribution of responsibilities and mechanisms for assuring security. A new Act of Parliament concerning the Energy Law together with executive regulations will be prepared on the basis of the doctrine, taking into consideration the EU legislation. On September 7, 2004 the Council of Ministers has adopted drafts of the following two documents: Plan dostępu do zasobów węgla kamiennego w latach 2004 – 2006 and Plan zamknięcia kopalń w latach 2004–2007 [Plan of access to coal resources in 2004 – 2006 and Plan of coal mine closures in 2004–2007]. Those documents will be presented for information to the European Committee in October this year.

I am not going to comment on those documents. I voiced my doubts and comments to the secretary of state in the Ministry of Economy in the middle of August this year. Those comments pertain to the both above mentioned projects but they still remain valid even after the amendments presented to the Council of Ministers. The Council Regulation (EC) No 1407/2002 was mainly prepared for the conditions of the European Union mining sector, prior to the new member states accession. In many aspects it is not applicable to the Polish conditions. Unfortunately it is not possible to amend it. The regulations should be applied without any exceptions. Polish document drafts mentioned before, tailored especially to the Polish conditions might be thus difficult when it comes to their approval. The same applies to aid funds. The problem is more complicated because the European Union has provided aid only for the electricity and coke production units. In order to be profitable, other types of mines will have to sell their product at least at production cost plus margin. Otherwise they will have to go out of business in the free market conditions. Sales of coal at the cost justified prices may lead to the increase of costs of products based on this resource. This may put many mines out of business. According to the accession plans, by the year 2010 a considerable number of mines will have become unprofitable, if their production costs are higher than the so called import parity. It may simply be more profitable for customers to import coal in this situation. The unprofitable mines, which may obtain aid to cover their current losses or for the so called initial investments will also face problems. These businesses will have to sell their product at the prices of the import parity, which will be estimated at the moment purchase. High international prices cause the import parity to be on a very high level. In this situation, the production cost of electricity or coke will be so high that it may be more profitable to import these products; this especially considers electrical power sector.

Poland’s accession to the EU, apart from introduction of the free market rules, makes it necessary to apply the EU regulations and requires setting up new foundations for Energy Law as well as projects which aim would be to adapt the mining industry to the rules governing the free market. These comments do not apply to the profitable companies, which operate just like any other types of businesses.

Energy security of the country should be first of all based on domestic resources. Coal-based energy production is 93% in South Africa, 76.9% in Australia, 76.2% in China, 78.3% in India, 66.7% in Czech Republic, 62.3% in Greece, 52.0% in Germany, 49.9% in the USA (according to Coal Facts – 2003 Edition). Energy Security of our country should also rely on coal and lignite resources. The structure of mining and coal-based energy sector has to be changed in order to achieve this. It is indisputable that vertical structures must be organised, i.e. mining and energy sector organisations. Only these solutions can safeguard the sector from the traps of the free market, at the same time helping the companies avoid the need for public aid to influence the production costs of the final product – electricity. Poland can also guarantee energy security of the European Union.