The Path to Sustainability in the Electricity and Heating Sector The Path to Sustainability in the Electricity and Heating Sector © 2018 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. 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CONTENTS vi Foreword vii Acknowledgements viii Acronyms and Abbreviations ix Abstract 1 Executive Summary 9 Introduction Setting the Stage: Impressive Achievements but Environmental Challenges Ahead 10 Successful decoupling energy growth from economic growth 11 Emerging Threats to Sustainability 14 Readiness for the Energy Transition 19 Chapter 1 Methodology: The Quest for Sustainability 20 The Electricity and Heating Model 22 Social Impact Model 23 The Emission Reduction Pathways 27 Chapter 2 Analysis Results: The Need for Accelerated Efforts to Achieve Sustainability 28 Environment Costs Matter 30 Meeting the EU ETS Targets Requires Intensified Efforts 31 Modest Impacts on Local Communities but Negligible on the National Economy 37 Chapter 3 The Path to Sustainability: Challenging but Feasible 50 Reference 52 Annex 1 Poland: Energy Efficiency and Renewable Energy Policies 55 Annex 2 Assumptions for the Electricity Planning Model for Poland 60 Annex 3 Computable General Equilibrium Model for Poland Box 43 Box 3.1 Preparing for Off-shore Wind Scale up Figures 10 Figure I.1 Delinking Economic Growth from Energy Consumption, 1990–2015 10 Figure I.2 Declining Energy and Electricity Intensities, 1990–2017 11 Figure I.3 Poland has the Largest Energy Intensity Reduction from 1987 to 2016 11 Figure I.4 Doubling the Share of Renewable Energy in Electricity Production over the Past Decade (GWh) 12 Figure I.5 Poland has the Second Highest PM10 Concentration in the EU‑28 in 2015 12 Figure I.6 Poland has the Highest PM2.5 Concentrations in the EU‑28 in 2015 13 Figure 1.7 Poland has the Third Highest Deaths Attributable to Ambient Air Pollution in the EU28 in 2014 13 Figure I.8 Poland Accounts for Only 1 percent of Global Carbon Emissions from Fuel 14 Figure I.9 Poland’s Energy Efficiency and Renewable Energy Policies Need Improvement 14 Figure I.10 Financial Incentives and Network Strengthening Can Help Scale Up RE in Poland 15 Figure I.11 Scores for System Performance and Transition Readiness 16 Figure I.12 Poland’s Energy Transition requires further efforts 22 Figure 1.1 Econometric and CGE Models to Estimate Spillover Effects 29 Figure 2.1 Achieving EU ETS targets is affordable 29 Figure 2.2 OPT-No ENV: Power Generation Mix [GWh] 29 Figure 2.4 OPT-LG: Power Generation Mix [GWh] 29 Figure 2.3 OPT+L: Power Generation Mix [GWh] 29 Figure 2.5 OPT-LG+: Power Generation Mix [GWh] 30 Figure 2.6 Envisioned Targets: Generation Mix [GWh] 30 Figure 2.7 EU-ETS: Generation Mix [GWh] 30 Figure 2.8 Extended Efforts: Generation Mix [GWh] 31 Figure 2.9 Extended Efforts Scenario: Change in Migration and Employment 32 Figure 2.10 The Extended Efforts Scenario and the Number of Non-Mining Firms 32 Figure 2.11 Effect of Decline in Coal Production on Supplier Jobs by Degree of Dependence 33 Figure 2.13 Demographic Change in Silesia, 1995–2030 33 Figure 2.12 Economic Dependence on Coal: Silesia and the Rest of Poland 34 Figure 2.14 Coal Transition has Negligible Impacts on the National Economy 38 Figure 3.1 Kuznets Curve for Environmental Degradation 39 Figure 3.2 China: Progression of Acid Rain, 1983–2005 39 Figure 3.3 Dark Skies in Beijing 41 Figure 3.4 Energy Intensities of Selected Countries 45 Figure 3.6 Feasible Job Opportunities for Coal Workers in the Silesian Region 45 Figure 3.5 Characteristics of Coal Workers, 2000–2014, Percent 46 Figure 3.7 Labor Market Outcomes, Former Coal Workers and Other Workers. By Age, Percent 46 Figure 3.8 The Coal Wage Premium 47 Figure 3.9 Reasons for Inactivity, Former Coal Workers and Other Workers, by Age Group, Percent 60 Figure A3.1 The Production Function and Energy Demand Tables 24 Table 1.1 Assumptions of Options Explored 28 Table 2.1 Economic and Technical Results of the Analysis 55 Table A2.1 Gross Energy Growth Projections 55 Table A2.2 Generation Characteristics and Costs by Generator Type 56 Table A2.3 Pollutant Emission Factors by Generator Type, Ton/MWh 57 Table A2.4 Costs of Damage Caused by Local Pollutants 57 Table A2.5 Abatement Costs for Global and Local Pollutants 58 Table A2.6 World Bank Future CO2 Prices $/ tCO2e, Constant Prices 58 Table A2.8 Characteristics of Polish Mines 58 Table A2.7 Local and Global Energy Pollutant Emissions 59 Table A2.9 Fuel Costs, $/MBTU vi | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector Foreword Over the past decade, Poland has achieved significant progress towards sustainability - by consid- erably reducing energy intensity and decoupling energy growth from economic growth. Despite this, Poland is facing serious local environmental challenges, having today 36 out of the 50 most polluted cities in Europe. The Polish government has put fighting smog as one of its highest priorities. The Prime Minis- ter has declared a war against smog, and recently launched a Clean Air Priority Program that our World Bank team has had the privilege to help design. In that context, this report, produced in close collaboration with the Polish Ministry of Envi- ronment, aims to provide the government with options to scale up and accelerate the energy transition to cleaner electricity and district heating generation mixes. It hopes to provide ways for the government to both address serious local air pollution and commitments to combat global climate change.  The report draws three main conclusions from the analyses and consultations carried out dur- ing the last six months: • Despite impressive progress towards sustainability, Poland’s coal-dominated energy sector imposes heavy health costs on its population. A recent World Bank report estimated that the cost of ambient air pollution in the country amounts to about US$31-40 billion, equivalent to 6.4-8.3 percent of GDP in 2016. Moreover, deterioration of ambient air quality is responsible for a significant health burden - with an estimated 44,500 premature deaths per year.  • The ambitious strategy to scale up renewable energy sources in the power and district heat- ing generation mix is economically justified, if local and global environmental benefits are accounted for. Poland is moving in the right direction on energy transition with its envisioned targets on renewable energy, but achieving the more ambitious targets under the European Union Emission Trading Scheme requires intensified efforts to scale up and accelerate the penetration of clean energy. • Active labor market policies can help mitigate employment impacts, which are expected to be negligible at national level and modest at local level given a dynamic economy and tight labor markets in the coal-producing Silesian region. However, a “just transition” should leave no one behind - by providing social safety nets and support to coal miners and all affected population during the transition to sustainable and equitable growth. Given the upcoming COP 24 meeting in Poland, this report could not be more timely. The recent IPCC report called for urgent and intensified efforts to mitigate the risks of climate change. We hope that this report will provide insights on the pathways and policy options for Poland’s energy transition towards sustainability. The World Bank Group looks forward to working with the Gov- ernment of Poland in their quest for a low-carbon development path. Arup Banerji Regional Director, European Union The Eastern Europe and Central Asia Region The World Bank Group vii Acknowledgements This study was undertaken by the World Bank team in close cooperation with the Poland Minis- try of Environment and the Institute of Environmental Protection. The World Bank team was led by Xiaodong Wang (Task Team Leader), and comprising of Noureddine Berrah, Debabrata Chattopadhyay, Hernan Winkler, Javier Inon, Jacek Filipowski, Mohamed Ali Marouani, Celia Rong Cui, Michael Stanley, Yun Wu, Grzegorz Aleksander Wolszczak, Filip Kochan, Michael McCormick, Sameer Akbar, and Yewande Aramide Awe. The Energy Planning Model analysis was undertaken by Debabrata Chattopadhyay, Javier Inon, and Jacek Filipowski; and the Econometric and Computable General Equilibrium model analysis on the social impacts of coal mine employment by Hernan Winkler and Mohamed Ali Marouani. This report was prepared by Noureddine Berrah and Xiaodong Wang, with inputs and sup- port from Debabrata Chattopadhyay, Hernan Winkler, Javier Inon, Jacek Filipowski, and Celia Rong Cui. The team would like to thank Mr. Slawomir Mazurek, Undersecretary of State, Polish Ministry of Environment and Mr. Tomasz Chruszczow, the Ministry’s Special Envoy for Climate Change and High Level Climate Champion for initiating the study and their invaluable support; Mr. Michal Kurtyka, Vice Minister of Environment, Ms. Anna Margis, Director of the Coal Depart- ment, Mr. Jonasz Drabek, Deputy Director of the Coal Department, Mr. Maciej Białek, Chief Expert of the Coal Department, Ministry of Energy, and Mr. Andrzej Kaźmierski, the Ministry’s Director of Renewable Energy, Distributed Energy and District Heating Department for their valuable inputs and contributions; and for the insightful feedback and excellent collaboration from the team at the Institute of Environmental Protection, especially Mr. Pawel Mzyk and Mr. Robert Jeszke. The team also thanks Arup Banerji, Carlos Pinerua, Sameer Shukla, and Andrea Liverani for the advice and guidance they provided ; Ms. Anne Grant and Mr. Wojciech Okoń for their edit- ing services; and Malgorzata Michnowska and Thuy Bich Nguyen for their excellent support. The report benefited also from the thoughtful comments of peer reviewers Marianne Fay, Peter Johansen, and Achim Daniel Schmillen. viii | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector Acronyms and Abbreviations ALMP Active labor market programs LNG Liquefied natural gas CAPEX Capital expenditures MJ Megajoule CER Certified emission reductions NDC Nationally Determined CGE Computable General Equilibrium Contributions CNY Renminbi NPV Net present value CO2 Carbon dioxide NOX Nitrogen oxide CSO Civil society organizations OPT+L Optimized with Incorporation DH District heating of Local Environmental Costs EC European Commission OPT+LG Optimized with the EE Energy efficiency Incorporation of Local and EEA European Environment Agency Global Environmental Cost EPM Electricity Planning Model PLN Polish zloty new ETI Energy transition indices PM Particulate matter EU European Union PPP Purchasing Power Parity ETS Emission Trading Scheme PV Photovoltaics GDP Gross Domestic Product RE Renewable energy GIOŚ Chief Inspectorate for RISE Regulatory Indicators for Environmental Protection Sustainable Energy GW gigawatt SDG Sustainable Development Goals GWh gigawatt-hour SFB Single-family buildings HOB Heating-only boilers SO2 Sulfur dioxide IEA International Energy Agency TOE Tons of oil equivalent IPCC Intergovernmental Panel on TSO Transmission System Operator Climate Change TFEC Total final energy consumption JRC Joint Research Centre TPES Total primary energy kW kilowatt consumption kWh kilowatt-hour USD US dollar LC: Least Cost No Environmental WEF World Economic Forum Constraints WHO World Health Organization ix Abstract This report explores options to scale up and accelerate the energy transition to cleaner electricity and district heating generation mixes and reconcile the government’s concerns over the serious local air pollution and commitments to combat climate change. The report draws three main conclusions from the analyses and consultations carried out dur- ing the last six months: • Despite impressive progress towards sustainability, Poland’s coal-dominated energy sector imposes heavy health costs on its population. A recent World Bank report estimated that the cost of ambient air pollution amounts to about US$31-40 billion, equivalent to 6.4-8.3 per- cent of GDP in 2016. Moreover, deterioration of ambient air quality is responsible for a signif- icant health burden with an estimated 44,500 premature deaths per year.  • The ambitious cleaner strategy to scale up renewable energy sources in the power and district heating generation mix is economically justified, if local and global environmental benefits are accounted for. Poland is moving in the right direction on energy transition with its envisioned targets on renewable energy, but achieving the more ambitious targets under the European Union Emission Trading Scheme requires intensified efforts to scale up and accelerate the penetration of clean energy. • Active labor market policies can help mitigate employment impacts, which are expected to be negligible at national level and modest at local level given a dynamic economy and tight labor markets in the coal-producing Silesian region. However, a “just transition” should leave no one behind and provide social safety nets and support to coal miners and all affected popula- tion during the transition to sustainable and equitable growth. 1 EXECUTIVE SUMMARY Poland has made impressive tricity sectors. If not addressed urgently, they achievements in decoupling energy could jeopardize the country’s progress toward growth from economic growth but sustainability. The deterioration of ambient air must now deal with serious local quality has already had dire impacts on Pol- and global environmental threats ish health and quality of life. Of the 50 most due to its heavy reliance on coal. polluted cities in Europe, 36 are in Poland. A recent World Bank report (World Bank, While its GDP increasing by 7-fold since 2018a) estimated that the cost of ambient air the early 1990s Poland has made impressive pollution amounts to about US$31-40 billion, achievements in reining in its energy and elec- equivalent to 6.4-8.3 percent of GDP in 2016. tricity consumptions. These impressive results This compares well with the annual cost of air are in many ways unique considering that the pollution around €26–30 billion recently esti- country was also undertaking comprehensive mated by the European Commission (EC) economic and political reforms to transition and the Poland Ministry of Entrepreneurship. from a command and control to a market econ- Moreover, deterioration of ambient air quality omy and establish a democratic regime. is responsible for a significant a health burden Between 1987, when its energy demand with an estimated 44,500 premature deaths peaked, and 2016, Poland reduced its energy per year. Furthermore, Poland is among the 20 intensity by 30 percent—more than any other highest emitters of carbon dioxide in the world. country reviewed in IEA’s Energy Efficiency The Ministry of Environment has estimated Report 2017. Without the energy efficiency that, without adaptation measures, between gains, Poland’s total primary energy supply 2021 and 2030 costs due to extreme weather would have reached 272 million tons of oil and climate change will reach 120 billion PLN, equivalent (TOE) today, almost triple the cur- or €30 billion. rent level. About 600 million tons CO2 emis- Both the recent World Bank’s Regulatory sions were thus avoided. Indicators for Sustainable Energy report and Between 2000 and 2016, the shares of the World Economic Forum study (WEF and renewable energy (RE), mainly biomass and McKinsey 2018), prepared with analytical sup- wind, and natural gas in the electricity gener- port from McKinsey & Company, found that ation mix more than quintupled, reducing the Poland trails most EU-28 countries in readi- coal share by 12 percentage points. ness for energy transition as well as the policies However, Poland’s energy sector faces seri- and regulations for both energy efficiency and ous environmental problems, because of the renewable energy. Introduction Section C pre- heavy reliance on coal in the energy and elec- sents the detailed findings of these two studies. 2 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector This study focuses on cators at the municipal and postal code level; the transition of the power and then in a CGE model that matches the and district heating sectors main features of the Polish economy to assess towards a sustainable national impacts. and inclusive development Finally, the analyses were carried out in path by 2030 two stages: This study focuses on Poland’s power and • In the first stage, four optimized path- district heating sectors up to 2030 in order ways were explored: (a) Without incor- to identify optimum least-cost paths to meet porating local or global environmental emission reduction targets. Decarbonizing costs (OPT-No ENV); (b) Incorporating electricity is a necessary first step towards only local environmental cost (OPT-L, deeper decarbonization in other sectors, for the external costs of local air pollutants example through the electrification of the are listed in Annex 2); (c) Incorporating transport sector. Achieving long-term local local environmental and global environ- and global environmental targets requires mental costs based on a carbon shadow more in-depth analyses that cover all the eco- price of US$ 30/ton of CO2 during the nomic sectors. However, an economy-wide study period (OPT-LG); and (d) Incor- study to 2050 on Poland’s pathways to con- porating local environmental and global tribute to the EU’s target of carbon neutrality, environmental costs based on a carbon including the industrial, transport and agri- shadow price increasing from US$ 37/ton culture sectors, requires broader and deeper of CO2 in 2018 to US$ 50/ton of CO2 by analyses, cooperation with all concerned 2030 following the World Bank Carbon government departments, and more time and Price Guideline (OPT-LG+). These opti- resources than the present study. mized pathways are used as benchmarks The study analyses are carried out using two to evaluate three alternatives of energy analytical models: (a) the World Bank Elec- transition in the electricity and district tricity Planning Model (EPM), a partial-equi- heating sectors. librium optimization model for electricity and • In the second stage, three options were district heating production and scenario analy- explored: (a) The first reflects the envi- ses; and (b) an econometric and a computable sioned policies now being discussed: general equilibrium (CGE) model to assess power and district heating consump- the impacts of reduced coal production and tion of hard coal remains the same up to coal mine employment on local communities 2030, and RE penetration in the power and the national economy. generation mix would rise to 32 percent The EPM model is used to carry out an by 2030 (Envisioned Targets); (b) The integrated optimization of Poland’s power and second aims to meet the EU ETS target heating subsectors during 2018-2030. It has of reducing CO2 emissions by 43 per- been adapted to the characteristics of the two cent from 2005 to 2030 in the power and subsectors and covers more than 250 power co-generation sectors, which translates plants, cogeneration, and heating-only boilers in limiting the power and district heating (HOB). One of the innovative characteristics CO2 emissions to 98 million tons by 2030 of the model is to link the impacts of the opti- (EU ETS). The EU ETS targets corre- mum generation mixes on coal production spond to the EU Nationally Determined and coal mine employment. The latter results Contributions (NDC) targets committed are then used first in an econometric model to the Paris Climate Agreement. These tar- to evaluate spillover effects on communities gets are EU-wide, not specific to Poland. near coal mines based on detailed data on In this study the EU targets are used as a employment rates, migration, firm level indi- proxy for Poland, an EU member state; Executive Summary | 3 and (c) The third explores the implica- The envisioned RE targets are tions of Extended Efforts beyond the EU a significant step in the right ETS targets, leading to a limit of the power direction, but achieving the EU and heating CO2 emissions to 85 million ETS targets will require intensified tons by 2030 in response to the recent efforts to accelerate penetration of IPCC call for urgent and extended efforts clean energy. in order to cut risks related to extreme heat, drought, and floods, and to poverty The technical and economic results of the anal- (Extended Efforts). yses are provided in the Table below. Net Present Value (NPV) of Costs (US$M) Emissions Global Local Considered Economic Environment Environment CO2 PM NOX SO2 Options Costs Costs Costs (mt) (kt) (kt) (kt) OPT-No ENV 113,953 42,803 46,803 149 30.6 165.6 290.5 OPT-L 119,815 37,288 37,364 139 25.2 165.2 255.2 OPT-LG 124,716 30,344 34,583 117 24.5 160.7 243.1 OPT-LG+ 129,486 40,220 32,446 88 21.6 130.8 200.1 Envisioned Targets 118,097 40,597 45,495 134 30.1 154.5 280.0 EU ETS 123,510 37,146 42,406 98 26.8 126.5 232.8 Extended Efforts 126,704 35,725 41,314 85 25.6 114.7 215.9 Generation Mixes (%) Electricity Electricity and Heat Coal Gas RE Coal Gas RE OPT-NoENV 72.7 7.9 19.0 75.5 6.1 18.1 OPT-L 72.7 7.9 19.0 70.1 11.5 18.1 OPT-LG 66.0 14.7 19.0 64.9 16.7 18.1 OPT-LG+ 49.0 18.6 32.0 51.8 19.8 28.1 Envisioned Targets 60.6 7.0 32.0 66.2 5.4 28.1 EU ETS 44.1 12.6 42.9 53.5 9.7 36.5 Extended Efforts 37.7 14.4 47.5 48.6 11.1 40.0 Note: The sums of percentages may not add up to 100 because of the rounding 4 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector The analysis found that if the external the penetration of clean energy sources in the costs of local air pollutants alone are consid- power and heating sectors. To meet the targets ered (OPT-L), not only can they be reduced of EU ETS, the power sector would decisively by 2030 but so can CO2 emissions from embark on a greener path with a reduction of power and heating. Incorporating both local the coal share in the generation mix by almost and global environmental costs (OPT-LG+) half from 80 percent today to 44 percent in would achieve the optimal results—local air 2030. Gas share would increase to 13 per- pollutant emissions could plunge, and power cent and renewables sources would increase and heating CO2 emissions could be cut to 88 to 43 percent, almost at parity with coal. This million tons by 2030, meeting the EU ETS tar- option would dramatically reduce local air gets, a major reduction from 150 million tons pollutants and CO2 emissions. The NPV of of CO2 under OPT-No ENV. economic costs to achieve the EU ETS target Incorporating local and global environ- would be 5 percent more than that in the Envi- mental costs (OPT-LG and OPT-LG+) could sioned Targets option from 2018-2030, which increase the net present value (NPV) of eco- would be offset by the reduced NPV of local nomic costs by 9–14 percent from 2018-2030, and global environmental costs. The implicit depending on carbon prices, compared to carbon price of about $37–50/ton CO2 is OPT-No ENV. In the meantime, the NPV of much lower than the penalty of €100 or $115/ local and global environmental costs under ton CO2 resulting from non-compliance of the OPT-LG and OPT-LG+ are significantly EU ETS targets. The reduced coal production lower than those under the OPT-No Env under the EU ETS option could cut direct coal from 2018-2030. Therefore, the incremental mining jobs by 20 percent compared to the costs of the OPT-LG and OPT-LG+ would be Envisioned Targets option. fully justified by the environmental benefits of The Extended Efforts option requires reduced emissions. The carbon price matters: a major shift in current policies to scale up and if the price is $30/ton CO2, power and heating accelerate renewables: the RE share in power CO2 emissions could be reduced to 117 mil- generation would need to reach 47 percent by lion tons by 2030, but at the World Bank Car- 2030, surpassing the coal share of 38 percent bon Price Guideline of $37/ton CO2 in 2018 by 2030. This option would cut local air pol- rising to $50/ton CO2 by 2030, the CO2 emis- lutants and CO2 emissions the most. The net sions could be reduced to just 88 million tons present value of the economic cost incurred in by 2030. this option from 2018-2030 would be about The results indicate that the currently 7 percent higher than that in the Envisioned Envisioned Targets will diversify the electric- Targets option, but fully justified by the envi- ity 2030 generation mix by reducing the coal ronmental benefits of reduced emissions. The share to 61 percent and increasing the renew- Extended Effort option could shrink direct able energy share to 32 percent. Gas would coal mining jobs by 25 percent compared to cover the remaining 7 percent. However, in the Envisioned Targets option. this scenario local air pollutants and CO2 emis- Local communities would suffer from the sions from the power and district heating sec- modest spillover effects of reduced coal pro- tors would still be high, reaching 134 million duction and fewer jobs but the impacts on the tons—far above the EU ETS targets of 98 mil- national economy would be negligible. The lion tons by 2030. Since the government plans spillover effects would be small and felt mostly to keep the hard coal consumption at the same in communities within about 10 kilometers level from now to 2030, the number of coal from the coal deposits and in such upstream mine jobs would maintain the same at around service industries as transport and storage, 80,000 by 2030. utilities, and machinery and equipment rent- Achieving the EU ETS target in 2030 als. The direct impacts on jobs and out-migra- would require intensified efforts to increase tion are mostly suffered by men. There is little Executive Summary | 5 to no effect on average wages and manufactur- ing sectors: First, the country can continue to ing jobs. As to the national economy, under rein in future energy consumption, particu- any option, GDP growth and the national larly for the residential and transport sectors. unemployment rate would fall by less than While Poland has delinked energy growth 0.1 percent. from economic growth, there is still consid- Past waves of coal sector restructuring erable potential for energy efficiency gains. had negative but small impacts on employ- Since coal for heating in single-family build- ment, and for several reasons the effects of ings (SFBs) contributes the most to local air new declines will probably be even smaller: pollution in Poland, the most cost-effective (a) Because of the demographic transition, way to reduce both particulates and CO2 emis- younger cohorts will be significantly smaller sions is to switch from noncompliant solid fuel by 2030, and increases in educational achieve- boilers to efficient boilers, natural gas, heat ment mean they will be significantly more pumps, and RE heating systems, together with skilled. That means natural attrition may thermal retrofits of the SFBs. For transport, almost be enough to achieve the decline in the government has adopted ambitious e-mo- coal employment. (b) Past declines in coal bility target of one million electric vehicles by were part of the broad adjustment to a mar- 2025, but in the short and medium term, more ket-based economy that may have exacerbated aggressive fuel standard regulation would limit the negative impacts. (c) Today clean energy the growth of air pollution and maintain the is an alternative source of jobs. For example, energy intensity of the sector in check. improving the energy efficiency of residences Second, intensified efforts are required to in Poland could create as many as 100,000 jobs shift to a greener energy mix. With a dramatic a year. (d) Silesia, the most coal-dependent cost reduction in recent years, renewable region, is also highly industrialized, with high energy is now a low-cost and secure resource demand for labor. (e) Labor markets are much at centralized and decentralized levels. Wind tighter today than in the 1990s; for several power and solar photovoltaics (PV) have the years, Poland’s unemployment rate has been in most potential for rapid and effective develop- single digits. ment. Poland should consider learning from more advanced countries and move directly A path to sustainability is challeng‑ for “net billing” policy for off-take of decentral- ing but feasible, and in Poland’s ized RE generation. The policy can go a step best interest. further with the power sector reforms and the development of an ancillary service market to The analysis shows that to achieve sustaina- encourage storage. A significant increase in the bility, local and global environmental costs share of RE in the power generation mix will need to be integrated in decision making require strengthening of the transmission net- processes. The energy policies need to be work to take advantage of future connection integrated with the environmental, urban, with the European system in the early years transport, and industrial policies, with close to reduce disruption from intermittent RE attention to social impacts. Poland can avoid electricity. In the longer term, a reinforced sys- a  “pollute now, clean up later” path followed tem would allow taking advantage of Poland’s by most developed countries, and adopt strategic position to become a hub of power sound policies and cleaner technologies for exchanges between western and eastern Euro- the transition to sustainability. The policies pean countries. need to be better attuned to the new global The government has an ambitious plan to realities of energy transition and the country’s move into off-shore wind generation. Because global commitments. the costs of off-shore wind are still significantly The four key pillars can guide energy tran- higher than those of on-shore, to bring down sition to sustainability in the power and heat- the costs, Poland can learn from Denmark’s 6 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector experience of off-shore wind auctions. Inter- programs to make residential buildings more national experience has demonstrated that energy-efficient. Active labor market programs bringing off-shore wind generation on line (ALMPs) are useful for fostering re-employ- takes time, and it is crucial to set up a central ment of former coal workers, as in situations agency or one-stop-shop services for approval, where displaced workers have skills for which licensing and permits, spatial planning, and there is labor demand but they need help to certification, in coordination with such agen- access the demand. When the skills of dis- cies as Environment, Maritime, Defense, and placed workers do not match employer needs, Transmission System Operator (TSO). Oth- institutional or on-the-job training will be nec- erwise, fragmented and conflicting approvals essary. Where labor demand is low, small busi- from different agencies could bring off-shore ness support services could be offered. wind development to a halt. Finally, increasing natural gas penetration In conclusion during the transition is important to reducing local air pollution from heating, particularly in Over time coal has contributed enormously the SFBs, and making the power system more to Poland’s economic and social development, flexible for intermittent RE. but local and global environmental trends Third, the energy supply needs to be safer mean that transition to cleaner energy is inev- and more secure. Greening the energy mix with itable, and technological progress has made locally sourced RE would contribute to that. reliance on cleaner energy affordable and Diversifying the supply of natural gas, which cost-effective. Globally, the energy sector is is an increasingly global commodity, will also moving toward sustainability to meet the Paris make the energy mix more secure. This study agreement targets and reduce impacts of local demonstrated that the cost of energy transi- air pollution on the quality of life and health of tion is manageable and fully justified by the the population. environmental benefits of reduced emissions. More than 60 percent of Poland’s installed Finally, it is important to provide safety nets coal power generation capacity is over 30 years for coal mine workers as they will be affected old (IEA, 2017a). The replacement of these by the transition to lower reliance on coal. plants presents the opportunity to reduce Coal mine closures affect workers at different air pollution and the country’s carbon foot- stages of their careers. It will be important to print by shifting from coal to cleaner fuels for assess the competences of those who will lose power generation. The decisions on the type their jobs, and they should have enough notice of replacement of these generation capacities to give them time to plan their transition. Post will strongly shape the future emission trends, lay-off assistance to help support displaced because of the lock-in effect--any coal power workers should be designed so that it does not plants built today would still be in operation dilute incentives to look for jobs. Policies that after 30 to 40 years, or they could become support workers rather than regions are most stranded assets if climate change or local air promising. Fostering the creation of clean pollution worsens. Poland’s energy can be energy jobs sector can also support re-employ- put on a sustainable path, and the window of ment of displaced coal workers in, for example, opportunities for sustainability is closing. Introduction SETTING THE STAGE: IMPRESSIVE ACHIEVEMENTS BUT ENVIRONMENTAL CHALLENGES AHEAD Key Messages • Over the last three decades, while its GDP increasing by 7-fold, Poland has slashed its energy and electricity consumption. Between 1987, when demand peaked, and 2016 it reduced its energy intensity by 30 percent—more than any other country covered in the IEA Energy Efficiency Report (2017a), even Hungary and Czech Republic that were undergoing comparable reforms. • Between 2000 and 2016, renewable energy, mainly biomass and wind, and natural gas increased their shares in the electricity generation mix more than five-fold, pushing down the coal share by 12 percentage points. • However, the heavy reliance of Poland’s energy sector on coal is causing serious environmental problems. If not addressed urgently, they could jeopardize the country’s progress toward sustainability. Of the 50 most polluted cities in Europe, 36 are in Poland. A recent World Bank report (2018a) estimated that the cost of ambient air pollution amounts to about US$31-40 billion, equivalent to 6.4-8.3 percent of GDP in 2016. Moreover, deterioration of ambient air quality is responsible for a significant health burden with an estimated 44,500 premature deaths per year. The country is also among the world’s 20 highest emitters of CO2. The Ministry of Environment has estimated that between 2021 and 2030, unless adaptation measures are taken, extreme weather and climate change will cost Poland 120 billion PLN (€30 billion). • Both the recent World Bank’s Regulatory Indicators for Sustainable Energy report, and the World Economic Forum study, prepared with analytical support from McKinsey & Company, found that Poland trails most EU-28 countries in readiness to energy transition as well as the policies and regulations for both energy efficiency and renewable energy. 10 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector Successful decoupling consumption (TFEC) and with a slight energy growth from decrease in total primary energy consump- tion (TPES; see Figure I.1). Without these economic growth energy efficiency improvements since 1990, Poland’s total primary energy supply would As Poland has made impressive achievements have reached 272 million tons of oil equivalent in delinking energy growth from economic (TOE), almost triple the current level. The growth during its transition from a com- CO2 emissions related to energy consumption mand-and-control to a market economy in that were avoided in the process amounted to 1990–2016, the country managed to increase about 600 million tons. its gross domestic product (GDP) by 7-fold Poland’s improved use of its energy with only a slight increase in total final energy resources is illustrated by the facts that: Figure I.1 Delinking Economic Growth from Energy • Energy intensity has declined: Measured Consumption, 1990–2015 as the amount of primary energy needed to produce one unit of nominal GDP, it 260 dropped from an average annual rate of 240 220 11 percent for 1990–2000 to an average of 6 percent for 2000–2015. Energy inten- Index (1990=100) 200 180 sities, in megajoule (MG)/US$ 2010 cur- 160 rent GDP and MJ/US$ purchasing power 140 parity (PPP), also declined significantly 120 but at lower rates (Figure I.2). 100 80 • Electricity intensity declined at more than 1990 1995 2000 2005 2010 2015 9 percent for 1990–2000 and about 7 per- GDP (USD 2010 prices and PPPs) Population cent for 2000–2015. Poland has one of the TPES TFC CO2 emissions largest district heating markets in Europe, Source: IEA, 2017b covering about half the population. Figure I.2 Declining Energy and Electricity Intensities, 1990–2017 Energy Intensity Electricity Intensity 40 1.6 35 1.4 30 1.2 25 1.0 20 0.8 15 0.6 10 0.4 5 0.2 0 0.0 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 Energy Intensity (MJ/US$, Nominal) Energy Intensity (MJ/US$, 2010 current) Energy Intensity (MJ/US$, PPP) Source: Data from World Bank Statistics, World Bank, 2018b INTRODUCTION | Setting the Stage: Impressive Achievements but Environmental Challenges Ahead | 11 Figure I.3 Poland has the Largest Energy Intensity Reduction from 1987 to 2016 30% POL DNK HUN GRC CZE 2016 reduction from peak 20% GBR ITA ESP PRT JPN SVN LUX DEU NLD FIN IRL BEL NOR 10% FRA CHE USA CHL SWE AUT ISR 0% 1979 1987 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Year of peak energy demand Source: IEA, 2017b • Poland reduced energy intensity more than Figure I.4 Doubling the Share of Renewable Energy in any other EU member, about 30 percent as, Electricity Production over the Past Decade (GWh) registered in 2016 compared with 1987, 180,000 the year of its peak demand (Figure 1.3). 160,000 (IEA, 2017b) Coal • An impressive diversification of the power 140,000 Hydro generation mix took place between 2000 120,000 Solar Wind and 2016, as efforts to promote RE and 100,000 Oil natural gas quintupled their share in the 80,000 Natural gas mix. Meanwhile, gas and RE, mainly wind 60,000 Waste and hydro, not only met all the growth in 40,000 Biofuels Other sources electricity demand but also helped bring 20,000 down the coal share by about 4 percent 0 (Figure I.4). 1990 2000 2010 2016 Source: IEA, 2017b Low-energy-intensive growth began with the Energy Act in 1997 and was sustained thereafter by 27 policy initiatives and regula- Emerging Threats tions that promoted energy efficiency and dis- to Sustainability tributed RE solutions (Annex 1). The impressive achievements since the early 1990s are in many ways extraordinary Local Environmental Threats for a country undergoing difficult and com- prehensive economic and political reforms to For historical and social reasons, Poland’s transition to a market economy and establish energy sector has been heavily reliant on coal, a democratic regime. However, without imme- which accounted for (a) 50 percent of TPES, diate action the severe problems confronting compared to 17 percent on average in IEA Poland’s energy sector could jeopardize these countries and about the same in the EU-28; achievements. and (b) about 80 percent of electricity gener- 12 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector ation, compared to averages of 28 percent in tion in Warsaw on Monday morning exceeded IEA countries and 23 percent in the EU-28. 115 micrograms per cubic meter (μg/m3) The heavy reliance on coal has led to serious while PM10 concentration was at 125 μg/m3. local and global environmental concerns. The World Health Organization’s recommended Ambient air quality is deterioriating. In maximum 24-hour mean is 25 μg/m3 for PM2.5 2017, according to the World Health Organi- and 50 μg/m3 for PM10.” zation, of the 50 most polluted cities in Europe In 2015, Poland’s PM10 concentration was 36 are in Poland.1 On December 18, 2017, the second highest in the EU-28. It exceeded Radio Poland reported that: “Poland’s Chief both the WHO standard and the daily limit set Inspectorate for Environmental Protection by the EU of 50 μg/m3 (Figure I.5). PM2.5 con- said the particulate matter (PM2.5} concentra- centration was the highest (Figure I.6). Figure I.5 Poland has the Second Highest PM10 Concentration in the EU‑28 in 2015 150 100 µg/m3 50 0 ni a nd nd m en tia rg ds ce ny tria ain al ark um via nia ic ta nia akia ary ly nia rus ece and aria to inla rela gdo wed roa bou rlan ran rma us ug i t a bl al a Ita ve l Sp ort enm elg La ithu epu M om ov ng Cy p Gr e Po Bul g Es F I in S C m h e F e A P B R Sl Hu Sl o K x e et G D L R d h ite Lu N ec Un Cz Source: EEA 2017. Notes: (1) The graph is based, for each Member State, on the 90.4 percentile of daily mean concentration values corresponding to the 36th highest daily mean. For each country, the lowest, highest, and median percentile 90.4 values (in μg/m3) at the stations are given. The rectangles mark the 25 and 75 percentiles. At 25% of the stations, levels are below the lower percentile; at 25% of the stations, concentrations are above the upper percentile. The daily limit value set by EU legislation is marked by the blue line. (2) Based on Air Quality e-reporting database (EEA, 2017). Figure I.6 Poland has the Highest PM2.5 Concentrations in the EU‑28 in 2015 50 40 30 µg/m3 20 10 0 a a l k s m any atia nce tria via rus nia ry ni en nd nd m in g ni our uga ar alta nd lic taly ece akia enia land aria to ed inla rela gdo Spa ua t m iu M erla elg erm Cro Fra Aus t p a ub I e v g ga Es Sw F I in ith emb Por en La Cy om ep Gr Slo Slo v Po Bul Hun K L D th B G R R x ite d Lu Ne ec h Un Cz Source: EEA, 2017 Notes: (1) The graph is based on annual mean concentration values. For each country, the lowest, highest, and median values (in μg/m3) at the stations are given. The rectangles give the 25 and 75 percentiles. At 25% of the stations, levels are below the lower percentile; at 25% of the stations, concentrations are above the upper percentile. The target value set by EU legislation is marked by the blue line. (2) Based on Air Quality e-reporting database (EEA, 2017) 1. https://www.nytimes.com/2018/04/22/world/europe/poland-pollution.html. INTRODUCTION | Setting the Stage: Impressive Achievements but Environmental Challenges Ahead | 13 In its assessment of exposure and disease Figure 1.7 Poland has the Third Highest Deaths Attributable burden,2 the WHO stresses that “air pollution to Ambient Air Pollution in the EU28 in 2014 is a clear marker for sustainable development, 70,000 as sources of air pollution also produce cli- mate pollutants (like CO2 or black carbon).” 60,000 The 2030 Agenda for Sustainable Development, adopted by the United Nations in September 50,000 2015 has three air pollution-related indica- tors, which fall under the WHO’s reporting 40,000 responsibility: mortality rate attributable 30,000 to household and ambient air pollution for the health goal (Sustainable Development 20,000 Goal [SDG] 3); annual mean levels of fine particulate matter (PM2.5) in cities, popula- 10,000 tion-weighted for the urban SDG (11); and proportion of population with primary reli- 0 ance on clean fuels and technologies for the te P Ita y d o ly ng nd F om m ce S ia H lga n un ria Cz Ne Gr ary h rla ce Be ub s lg lic Au ium Sl tug a l a De ed ia Li m n ua k La nia Fi tvia ov d Ire nia Lu C ton d xe yp ia bo s M rg ta ov a p d m ru an th ar r ri Cr aki i n e Sl lan Es lan an Swoat Bu pa al u Ro ran ec the ee Re n Po st Ki la e g d m n sustainable energy goal (SDG 3; WHO 2016). er G In Air Quality in Europe—2015 Report,3 ni U the European Environmental Agency (EEA) Source: EEA 2018 estimated that in 2012, PM2.5 emissions alone caused an estimated 44,500 premature deaths as developed EU members like France and in Poland, the third highest after Germany and the United Kingdom (Figure I.8). According Italy, two more populated countries (Figure to IEA databases, its CO2 intensity was about I.7). The World Bank report also estimated 0.31kg/USD (PPP), which is higher than the that the cost of ambient air pollution amounts average EU-28 and world intensities. to about US$31-40 billion, equivalent to 6.4- 8.3 percent of GDP in 2016 (World Bank, Figure I.8 Poland Accounts for Only 1 percent of Global 2018a). This compares well with the annual Carbon Emissions from Fuel cost of air pollution around €26–30 billion India: 6% recently estimated by the European Commis- Russia: 5% sion (EC) and the Poland Ministry of Entre- United Japan: 4% States: 15% preneurship. Germany: 2% South Korea: 2% Iran: 2% Global Environmental Threats Canada: 2% Saudi Arabia: 2% Despite Poland’s progress in controlling China: 28% Brazil: 1% Mexico: 1% energy consumption and diversifying the Indonesia: 1% energy mix, coal still accounted for about 80 South Africa: 1% percent of total electricity generation in 2016 United Kingdom: 1% (Figure I.3). Australia: 1% Rest of world: 21% Italy: 1% In 2015 Poland was among the 20 highest Turkey: 1% emitters of carbon dioxide in the world. Its France: 1% emissions from fuel combustion amounted to Poland: 1% about 1 percent of global emissions—as much Source: (Union of Concerned Scientists, 2018) 2. A global assessment of exposure and disease burden. World Health Organization 2016, http://who.int.. 3. https://www.eea.europa.eu/downloads/945260c75bd34248ab696d46a85e9573/1461254126/premature-deaths- attributable-to-air-pollution.pdf. 14 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector Readiness for A new WEF report provides “energy tran- the Energy Transition sition indices” (ETIs) for 114 countries that “provide both a high-level assessment of coun- tries globally and individually against a defined The World Bank Regulatory Indicators for benchmark” to base decision-making on a fact- Sustainable Energy (RISE) report investigates based framework as “governments face new policies and regulations that enhance sus- challenges and opportunities to ensure energy tainable energy – including electricity access, systems deliver on the triple goals of energy energy efficiency, and renewable energy and access and security, contribution to economic a pilot study on clean energy. RISE presents growth, and sustainability” (World Economic indicators that can be compared across 133 Forum and Mckinsey , 2018). economies—and over time, from 2010 to The results of the in-depth analyses also 2017. The RISE report measures the level of offer an assessment of country performances: policy adoption in countries related to the Sustainable Development Goal 7 indicators • The system performance scores are based pillars. RISE can help national policymak- on three imperatives: economic develop- ers benchmark the energy sector framework ment and growth (5 indicators), environ- against regional and global peers (World Bank mental sustainability (4), and security and 2018c). access (4). The RISE report found that Poland trails • The transition readiness scores are based on OECD countries in both energy efficiency six enabler dimensions: capital and invest- and renewable energy policies and regulations ment (3 indicators), regulation and policy (Figure I.9). Poland has a higher energy effi- (3), stable institutions (3), infrastructure ciency score than renewable energy, reflecting and innovative business environment (4), its achievements in reducing energy intensity. human capital and consumer participation For renewable energy, while the country has (2), and energy system structure (3). an excellent legal framework, RE financial incentives and transmission network strength- The spider graphs in Figure I.11 show ening can help scale up RE (Figure I.10). Poland’s scores against the averages of the 114 Figure I.9 Poland’s Energy Efficiency and Figure I.10 Financial Incentives and Network Renewable Energy Policies Need Improvement Strengthening Can Help Scale Up RE in Poland 100 Carbon Pricing Legal framework and Monitoring for renewable energy 90 80 RISE score (out of 100) 70 100 61 100 50 60 Planning for 50 Counterparty renewable 77 31 45 Risk energy 50 18 expansion 30 0 68 20 0 6 10 0 0 0 Network connection Incentives 2010 2011 2012 2013 2014 2015 2016 2017 and pricing and regulatory support Poland - Energy E ciency Poland - Renewable Energy for renewable energy Attributes of nancial OECD High Income - Energy E ciency and regulatory OECD High Income - Renewable Energy incentives Source: RISE, World Bank 2018c Source: RISE, World Bank, 2018c INTRODUCTION | Setting the Stage: Impressive Achievements but Environmental Challenges Ahead | 15 Figure I.11 Scores for System Performance and Transition Readiness a. Transition Readiness b. System Performance Institutions & Governance Energy Access & Secaurity Energy system Human capital structure & consumer participation Regulation Infrastructure & Political & Innovative commitment business environment Environmental Economic Growth Capital & Investment Sustainability & Development Poland EU 28 World Source: Based on data from WEF 2018 countries covered (WEF 2018) and the EU-28 ability. It trails all other EU countries on system averages (computed by the study team based performance, readiness for transition, or both. on the WEF data). The main impediments to Poland’s transi- tion to sustainability highlighted in the WEF • On sector performance: Poland scored as study are structural; they arise from lack of well as or better than the average of the 114 integration of energy and environment poli- WEF countries except for energy system cies, a timid approach to technological innova- structure, where it scored much lower, and tion, inadequate incentives for efficient use of to a lesser extent regulation and political resources, and a quite outdated energy struc- commitment. Among the EU28 it scored ture that is not aligned with the country’s mar- less, especially on energy system struc- ket economy. ture, than the average except on capital and This study is designed to inform govern- investment, where its score was higher. ment decisions about the scale and pace of • On readiness for energy transition: Poland the energy transition in line with the “war on scored better than the WEF study average smog” and the government’s commitment to for energy access and security and close to combat climate change. It explores different the EU28 average, but it scored less than options for electricity generation and district the averages for the 114 WEF countries and heating to reduce local air pollution and CO2 the EU28 on economic growth and devel- emissions and meet Poland’s contribution to opment and environmental sustainability. the EU ETS CO2 emission reduction targets by 2030. The options are designed to identify Figure I.12 presents the performance/ what would need to be done to meet certain readiness matrix provided by the WEF report emission reduction targets at least cost. The (bottom panel) and the same matrix for the study also assesses the impacts of energy tran- EU28 countries (top panel) (World Economic sition in the power and district heating sectors Forum, 2018). For the transition, Poland is on coal mine employment, local communities, classified among emerging countries, close to and the national economy. Finally, it recom- Vietnam and behind Thailand. Compared to mends energy and social policy measures to EU28 countries, Poland is better positioned put the electricity and district heating sectors only than Bulgaria for the transition to sustain- on a sustainable path. 16 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector Figure I.12 Poland’s Energy Transition requires further efforts 90 Potential challenges Leading countries Sweden 80 France United Kingdom Denmark Spain Netherlands Finland 70 Lithuania Portugal Ireland Austria Slovenia Latvia System Performance (%) Romania Greece Slovakia Italy Belgium Hungary Cyprus Germany Croatia Estonia Malta Luxembourg 60 Czech Republic Poland 50 Bulgaria 40 Emerging economies Leap frog potential 30 25 30 35 40 45 50 55 60 65 70 75 Transition Readiness (%) 90 80 70 System Performance (%) 60 50 40 30 25 30 35 40 45 50 55 60 65 70 75 Transition Readiness (%) Source: Based on data from WEF 2018 INTRODUCTION | Setting the Stage: Impressive Achievements but Environmental Challenges Ahead | 17 The fact that the study was limited to elec- study also excluded the industry, transport, and tricity and district heating and goes no farther agriculture sectors. An economy-wide study to than 2030 leaves many questions unanswered 2050 would require broader and deeper analy- about the country’s long-term emissions tra- ses, close cooperation with all the relevant gov- jectory and Poland’s contribution to meeting ernment agencies, and more time and resources the EU’s goal of carbon neutrality by 2050. The than those available for the present study. Chapter 1 METHODOLOGY: THE QUEST FOR SUSTAINABILITY Key Messages • This chapter outlines the approach and methodology used for the study and briefly describes the two models used: (a) the World Bank Electricity Planning Model (EPM), a partial- equilibrium- optimization model for electricity and district heating production and scenario analysis; and (b) an econometric and a CGE model to assess how less coal production and fewer mine jobs could affect both local communities and the national economy. • The innovative characteristics of the EPM model recognizes constraints that apply to operating power systems and coal mines. This model has been adapted to Poland’s power and heating sector characteristics, which incorporates over 250 power and co-generation plants and heating-only boilers (HOB). Its integrated analysis of the power system generation mix and the operation of coal mines from 2018 to 2030 facilitates investment and operational decisions. • The reductions of coal production and coal mine employment in selected EPM scenarios are first used in the econometric model to evaluate the spillover effects on communities near coal mines with detailed data on employment, migration, and firm-level indicators at the municipal and postal code level; and then to assess the impacts on the national economy using a CGE model calibrated to the main features of the Polish economy. • The study first analyzed four optimized pathways to be used as benchmarks: (a) without external environmental costs; (b) incorporating local air pollution costs only; (c) incorporating local air pollution costs and a carbon price at $30/ton CO2; and (d) incorporating local air pollution costs and a carbon price based on the World Bank Carbon Price Guideline of $37/ton CO2 in 2018 rising to $50/ton CO2 by 2030. • Then, the study evaluated three alternative options to explore energy transition in the electricity and district heating sectors: (a) The first reflects the “Envisioned Targets” still being discussed: Power and district heating consumption of hard coal remains the same up to 2030, and renewable energy in the power generation mix would amount to 32 percent by 2030 (Envisioned Targets); (b) The second aims to achieve the 2030 EU ETS targets of 43 percent CO2 emission reduction from 2005 to 2030 in the power and co-generation sectors, which translates in limiting power and district heating CO2 emissions to 98 million tons by 2030. These EU ETS targets are also in line with the EU NDC targets committed to the Paris Climate Agreement. These targets are EU-wide, not specific to Poland. In this study, as Poland is an EU member state, the EU targets are used as proxy for Poland; and (c) The third option explores Extended Efforts, beyond the EU ETS targets, limiting power and heating CO2 emissions to 85 million tons by 2030 in response to the recent IPCC appeal for urgent and extensive efforts to cut the climate change risks related to extreme heat, drought, floods, and poverty. 20 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector The study approach built on recent work to esti- Integrating coal production and electricity mate the effects of emission reduction targets and heat generation is useful for deciding how for electricity generation and coal production emissions of carbon and other pollutants can in Poland (World Bank, 2017b). The World be effectively mitigated through a mix of fuel Bank energy optimization planning model switching (e.g., coal to gas or to renewables) (EPM—Electricity Planning Model) was cal- and through associated decisions on mines. ibrated to Poland’s power and heat sectors spe- Based on the current generation mix, demand cific characteristics4. The study then applied projections, reliability and cost parameters, the EPM results first to an econometric and emissions targets, technology choices, and then to a CGE model to estimate the impacts coal supplies, the model helps policymakers of lower coal production and employment on address the following questions: both local communities and the national econ- omy. These analyses were designed to identify • What is the best approach for planning to policy and structural changes that would help meet emissions targets? the country to achieve sustainability.5 -- What is the optimal mix to replace Poland’s coal fleet with other technolo- gies, such as gas and RE? The Electricity and Heating Model • Which coal mines will supply fuel to the most efficient plants? -- How does imposing emissions targets Overview change the ranking of mines to keep open or to close? The preliminary energy planning assessment, -- Does the equation change by taking based on the EPM,6 a partial-equilibrium opti- into account the number of employees mization model for electricity and heat pro- at each mine? duction, is designed to support investment and -- Taking the cost of transportation into operational decisions about coal production account, which are the cheapest mines and use. For each scenario, the model deter- to operate? mines (a) the dispatch of individual power -- To what extent does supplying coal stations over a specified period; (b) optimal to plants that must be kept in service selection of new projects to meet demand and (e.g., for co-gen facilities that provide emissions constraints; and (c) production and heat and electricity) change the equa- closure decisions for individual mines. tion for certain mines? 4. It should be noted that the EPM model does not include transmission and distribution, demand side energy efficiency, and storage investments. 5. Energy sustainability here means “access to adequate and reliable supplies of environmentally and socially acceptable forms of energy at competitive prices, without compromising the energy and environmental needs of future generations.” The definition is adapted from the report of the UN Commission on Environment and Development “Our Common Future,” published in 1987 (the Brundtland Report). Local and global environmental concerns have heightened since 1987. 6. EPM was developed using the General Algebraic Modeling System (GAMS, www.gams.com) with an Excel front end; IBM’s CPLEX solver is used to deal with the Mixed Integer Programming (MIP) problem. CHAPTER 1 | Methodology: The Quest for Sustainability | 21 By imputing costs to all activities (e.g., plant divided into 30 “load blocks” between peak capital and operating costs, mine operating and and off-peak. The model incorporated closing costs, and emission control costs), the model determines where costs are lowest across • Plant characteristics: capacity, heat rate, the relevant value chain (i.e., coal mining, trans- minimum loading, energy limits, pollution port, and use in power plants and heating-only emission factor, and links to coal mines boilers (HOBs)), while meeting local through • Renewable energy (RE) profile for solar global emissions reduction targets. and wind The Polish version of the EPM covers more • Capital costs for power plants and emis- than 250 power plants and HOBs. The results of sion controls integrated analysis of the generation mix and the • Limits on emissions reduction for each operation of coal mines from 2017 to 2030 can control in terms of its efficiency and cost facilitate investment and operational decisions for • Fuel price forecasts for all eight categories of fuels modeled (among them imported • Power plants: annual generation per plant, coal, coking coal, lignite, and gas) retirements and plant additions, annual • Coal Mine characteristics: maximum and fuel use by type. minimum production limits, costs, and • HOBs: fuel supply (i.e., coal and gas or productivity ratio (workers per ton of switching from coal to gas) needed to meet coal production) heating demand, expressed as HOB capac- • Cost of transporting coal from mines to ity factor. power and heating plants • Emissions controls: installation of equip- • For the 30 blocks, annual load curve for ment at individual plants and how they are 2017 and forecasts for 2018–30 operating to reduce pollutants. • The price duration curve for each load block • Coal mines: production and supply to con- • Emission limits for each policy scenario nected power plants, whether the mine • Pollution abatement costs is open or closed, number of employees, • Minimum reserve needed to keep the plant transportation costs, and productiv- power system reliable. ity per employee. The model optimizes total discounted The model determines how, based on power generation and heating system costs over amount of coal produced, power generation by the study period related to capital investments downstream plants should be adjusted. It opti- for new power plants; fuel, non-fuel variables, mizes coal production by capturing the produc- and fixed operations and maintenance costs tivity of individual mines (number of employees of all power plants and HOBs; power imports per ton of coal produced), the minimum tech- (represented as a price duration curve); invest- nical production level necessary to supply coal- ment in new emissions controls and their oper- fired plants, and the mine’s costs; it also takes ating costs; penalties for not meeting power into consideration the lowest economically fea- demand and reliability thresholds; and costs sible employment and production levels. associated with jobs lost in mine closures.7 The model recognizes constraints that Optimization Parameters apply to operating the Polish power system and Constraints and coal mines, such as For the 2018–30 period, the model has been • Capacity of power plants and HOBs, max- set up in annual increments, with each year imum capacity factor and minimum load 7. The model includes a linear production-to-labor ratio for each coal mine that is used to compute the number of employees needed given the level of production endogenous to the model. 22 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector level for coal plants, and maximum per- • First, the impacts on coal areas and com- centage of imported coal that plants and munities are disentangled, using an HOBs can use econometric model with detailed data on • Maximum coal supply limit from each employment and migration for about 2,500 mine and each mine-power plant link municipalities, and firm-level outcomes at • Minimum production of each coal mine the postal code level. below which the mine must be closed • Second, the impacts on the national econ- • Limits on power imports omy are estimated using a CGE model cal- • Profile of variable RE (wind and solar ibrated to match the main features of the generation profile for 30 blocks that are Polish economy. derived from hourly profiling that accounts for their correlation to load) As shown in the second chapter, both mod- • Meeting electricity demand for each load els are consistent and generate a similar set of duration curve block findings. Figure 1.1 shows a simplified version • Limits on CO2 and local pollutants of the two models. • Maintenance of the minimum reserve. Econometric Model The results of the coal mine closures and labor outputs in the selected scenarios will The econometric model estimates how the be used in a social impact model to assess the decline in coal employment will affect demand impacts on the national economy and regional for goods and services in the local economy labor and spillover effects. (Winkler, forthcoming). Intuitively, a decline in coal employment would lower incomes and thus the purchasing power of households Social Impact Model whose main livelihood relates to coal. The mag- nitude of the impacts would be affected by the The economic impacts of less coal production ability of displaced workers to find new jobs and fewer jobs are estimated using two com- without moving, the decline in wages, the num- plementary approaches: ber of households that must move to another Figure 1.1 Econometric and CGE Models to Estimate Spillover Effects Econometric Model Spillover Spillover Direct to coal to the national e ects communities economy Re-employment Wages Demand Coal jobs for local goods Out-migration GDP and services Unemployment Coal mine closures Labor demand Retirement/Safety nets Coal production Upstream sectors CGE Model CHAPTER 1 | Methodology: The Quest for Sustainability | 23 area, and the pensions and safety nets available ers become jobless. Second, this initial direct to displaced coal workers. For example, if they impact has negative effects on sectors that are can easily find a job without migrating, the buyers or suppliers of products and services to spillover impacts on the local economy would the coal industry, in this case business admin- be negligible. However, the steeper the drop istration, agriculture, communication, con- in wages, holding constant the fall in employ- struction, electricity, finance, manufacturing, ment, the larger the spillover impacts (Winkler, mining, real estate, trade, transport, and water. forthcoming). Third, the final impacts will depend on how well The econometric model assumes that the economy can adapt to the shock. The model impacts would depend on the proximity to coal makes it possible to consider impacts on differ- deposits: the closer a municipality or a firm is ent types of workers, across such dimensions to a coal deposit, the more spillover effects it is as age, gender, and education level.8 Annex 3 likely to suffer if coal jobs are cut. (It is impor- describes the details of the CGE model. tant to mention that this is not imposed on the Unlike the econometric model, the CGE model; the model is flexible: it estimates the model does not consider impacts on local spillover impacts based on distance to the coal coal areas. Instead, it estimates economy-wide deposits and lets the data speak for themselves.) impacts on GDP and the unemployment rate. The econometric model makes it possible Intuitively, because it aggregates the impacts to disentangle the spillover impacts of a general on coal and non-coal areas, it assesses the net decline in demand for local goods and services effects. While this is a limitation, it also has the from the impacts of a decline in coal sector advantage of incorporating the general equilib- demand for intermediate inputs from upstream rium effects of the initial coal shock. The CGE industries. Using data from the input-output model also has the advantage that it takes into matrix for Poland, the analysis first identified account the possibility that a decline in coal which sectors are most dependent on the coal production and coal-based energy may be com- sector, measuring dependence as the share of pensated (partially or fully) by an increase in the sales to the coal sector in total upstream oil and gas energy, with associated implications sector sales. The model uses the decline in coal for employment. production predicted by the EPM for each sce- A serious limitation of both the CGE and nario as an input. The main hypothesis is that the econometric model is that they do not the larger the share of the coal industry in a incorporate the direct and indirect impacts sector’s total sales, the more that sector will suf- that emerging RE may have on employment fer if coal production drops. The final impacts creation through positive health or environ- would be mediated by such factors as the abil- mental externalities. This will bias downward ity of non-coal sectors to redirect production the results by overestimating the negative eco- to other industries or locations, and the extent nomic impacts of the energy transition. to which affected firms can engage in different economic activities. CGE Model The Emission Reduction Pathways CGE is a multisector, dynamic general equi- librium model. It considers three possibilities: First, the closure of mines has an immediate Finally, the analyses were carried out in two direct impact on employment as coal work- phases (Table 1.1): 8. For a detailed description of the other blocks of the model see Marouani and Robalino (2012), “Assessing Interactions among education, social insurance and labor market policies in Morocco,” Applied Economics, volume 44, No 24, pp. 3149-3167. 24 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector Table 1.1 Assumptions of Options Explored* CO2 emissions RES RES Coal production in power & heat share share for Heat & Power sector in 2030 Externalities (2020) (2030) sector OPT-No ENV Unconstrained No externalities >19% >19% Unconstrained Local Pollution Costs OPT-L Unconstrained > 19% > 19% Unconstrained included Local and Global Costs OPT-LG Unconstrained included, CO2 price > 19% > 19% Unconstrained at $30/ton Local and Global Costs OPT-LG+ Unconstrained included, CO2 price: $37/ton > 19% > 19% Unconstrained in 2018 to $50/ton in 2030 Envisioned The same level Unconstrained No externalities > 19% > 32% Targets from 2018 to 2030 EU ETS 98 million tons No externalities > 19% > 32% Unconstrained Extended 85 million tons No externalities > 19% > 32% Unconstrained Efforts * All prices are in 2018 USD • Four optimized pathways were identified as (d) Incorporating the social costs of benchmarks to evaluate the options for the local air pollution and global climate electricity and district heating sectors: change based on shadow price of CO2 rising from $37/ton of CO2 in 2018 (a) Without consideration of external to $50 in 2030 (OPT-LG+).10 environmental costs (OPT-No ENV). The penetration of RE in the power • Three alternative options were explored: generation mix was constrained to 19 percent and in the district heating (a) The first reflects the envisioned mix to 15 percent by 2020 because government targets, still under dis- these targets are specified in the cussion, would hold consumption Poland Renewable Energy Directive; of hard coal for power and district (b) Incorporating only the external envi- heating the same up to 2030, and RE ronmental costs of local air pollution9 penetration in the power generation (OPT-L); mix would reach 32 percent by 2030 (c) Incorporating the social costs of local (Envisioned Targets); air pollution and global climate change (b) The second aims to achieve the based on a carbon shadow price of EU ETS targets of reducing power CO2: $30/ton of CO2 (OPT-LG) dur- and co-generation CO2 emissions ing the study period; and by 43 percent from 2005 to 2030, 9. The external environmental costs of local air pollutants are based on estimates for Poland from Štreimikienė (2015) and EEA (2014), and the values are provided in Table A2.4 in Annex 2. 10. Based on the low assumption in World Bank future CO2 prices in Guidance Note for Economic Analysis (World Bank 2017c), $/ tCO2e (constant prices) provided in Table A2.6 in Annex 2. CHAPTER 1 | Methodology: The Quest for Sustainability | 25 which translates in limiting power (c) The third explores the Extended Efforts and district heating CO2 emissions to surpassing the EU ETS targets by limit- 98 million tons by 2030. The EU ETS ing power and heating CO2 emissions targets are in line with the EU NDC to 85 million tons by 2030 in response targets, and are EU-wide. In this study to IPCC appeal for urgent and extended the EU targets are used as proxy for efforts needed to cut the climate change Poland (EU ETS). risks related to extreme weather events and poverty (Extended Efforts).11 11. https://www.theguardian.com/environment/2018/oct/08/global-warming-must-not-exceed-15c-warns- landmark-un-report. Chapter 2 ANALYSIS RESULTS: THE NEED FOR ACCELERATED EFFORTS TO ACHIEVE SUSTAINABILITY Key Messages: • If external costs of local air pollutants alone are incorporated, not only can local air pollutants be reduced by 2030 but so can power and heating sector CO2 emissions. Incorporating both local and global environmental costs would achieve the optimized results: a dramatic drop in local air pollutant emissions, and a cut in power and heating CO2 emissions to 88 million tons, meeting the EU ETS targets. Taking into account the external costs of both local and global environmental costs could increase the net present value (NPV) of economic cost by 9–14 percent than the option without external costs, depending on carbon prices, but would be fully justified by the NPV of the environmental benefits of reduced emissions. The carbon price can make a major difference: a price of $30/ton CO2 could reduce power and heating CO2 emissions to 117 million tons by 2030, but a sliding scale from $37/ton CO2 in 2018 to $50/ton CO2 by 2030 would cut the carbon emissions to 88 million tons. • The Envisioned Targets option would significantly diversify the electricity generation mix, a good move for energy transition, but local air pollutants and CO2 emissions would stay high, way above the EU ETS targets of 98 million tons in power and district heating emissions by 2030. • Achieving the EU ETS targets requires intensified efforts to scale up and accelerate the penetration of clean energy. The share of coal in power generation would need to be almost halved, from 80 percent today to 44 percent by 2030, with RE penetration rising to 43 percent and gas to 13 percent. This scenario would dramatically reduce local air pollutants and CO2 emissions. Although the net present value of the economic costs would be higher by 5 percent than in the Envisioned Targets scenario, the environmental benefits would more than compensate. The implicit carbon price is about $37–50/ton CO2, much lower than the penalty of €100 or €115/ton CO2 if the EU ETS targets were not met. This option could also reduce direct coal mine jobs by 20 percent compared to the Envisioned Targets option. • The Extended Efforts option requires a major shift in current policies to scale up the RE share in power generation to 47 percent by 2030, reducing the coal share to 38 percent. Local air pollutants and CO2 emissions would ultimately be lowest in this option. Though it would cost 7 percent more than the Envisioned Targets scenario in terms of NPV of economic costs from 2018-2030, the environmental benefits would be far more significant. The reduced coal production could lead to a 25 percent reduction in direct coal mine jobs by 2030 over the Envisioned Targets option. • Though mining suppliers and communities within 10 km of coal deposits would feel the spillover effects of less coal production and fewer mining jobs, the impact on the national economy would be negligible. Under any option, GDP growth would fall by less than 0.1 percent and the impact on the national unemployment rate would be similar. Previous waves of restructuring in the coal sector had negative but small impacts on employment, and the effects of new declines would probably be even milder, given demographic changes and the structural transformation Poland has been experiencing for several decades. 28 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector Environment Costs Optimized without External Environ- Matter mental Costs (OPT-No ENV) (Figure 2.2): This benchmark pathway does not account for the high discounted local and global envi- The main results of the options are presented ronmental costs of nearly $90 billion born by in the following sections (all assumptions can the society. be found in Annex 2). Tables 2.1 summarizes Optimized Incorporating Local Environ- the results of the analyses. mental Costs (OPT-L) (Figure 2.3): Table 2.1 Economic and Technical Results of the Analysis Net Present Value (NPV) of Costs (US$M) Emissions Global Local Considered Economic Environment Environment CO2 PM NOX SO2 Options Costs Costs Costs (mt) (kt) (kt) (kt) OPT-No ENV 113,953 42,803 46,803 149 30.6 165.6 290.5 OPT-L 119,815 37,288 37,364 139 25.2 165.2 255.2 OPT-LG 124,716 30,344 34,583 117 24.5 160.7 243.1 OPT-LG+ 129,486 40,220 32,446 88 21.6 130.8 200.1 Envisioned Targets 118,097 40,597 45,495 134 30.1 154.5 280.0 EU ETS 123,510 37,146 42,406 98 26.8 126.5 232.8 Extended Efforts 126,704 35,725 41,314 85 25.6 114.7 215.9 Generation Mixes (%) Electricity Electricity and Heat Coal Gas RE Coal Gas RE OPT-NoENV 72.7 7.9 19.0 75.5 6.1 18.1 OPT-L 72.7 7.9 19.0 70.1 11.5 18.1 OPT-LG 66.0 14.7 19.0 64.9 16.7 18.1 OPT-LG+ 49.0 18.6 32.0 51.8 19.8 28.1 Envisioned Targets 60.6 7.0 32.0 66.2 5.4 28.1 EU ETS 44.1 12.6 42.9 53.5 9.7 36.5 Extended Efforts 37.7 14.4 47.5 48.6 11.1 40.0 Note: The sums of percentages may not add up to 100 because of the rounding CHAPTER 2 | Analysis Results: The Need for Accelerated Efforts to Achieve Sustainability  | 29 • If only the external costs of air pollution Figure 2.1 Achieving EU ETS targets is affordable are incorporated in the optimization, both local air pollutants and CO2 emissions a. CO2 Emissions from b. NPV of Economic Costs from Different Options Different Options would be reduced. • Since the main source of air pollution is 140 128 coal for heating, the share of coal in the 120 126 heating mix would be reduced from 85 per- 100 124 Million Tons 122 US$ Billion cent under OPT-No ENV to 61 percent 80 120 under OPT-L, and the gas share for heating 60 118 would rise to 24 percent by 2030. 40 116 • The net present value of economic costs 20 114 would increase by $6 billion from 2018- 0 112 Envisioned EU-ETS Extended Envisioned EU-ETS Extended 2030, or 5 percent, compared to OPT-No Targets E orts Targets E orts ENV, but would be more than compen- sated by the reduced local and global envi- ronmental costs borne by the society of Figure 2.2 OPT-No ENV: Figure 2.3 OPT+L: Power US$15 billion. Power Generation Mix [GWh] Generation Mix [GWh] 250,000 250,000 Optimized Incorporating Local and Global Environmental Costs (OPT-LG (Figure 2.4) 200,000 200,000 and OPT-LG+ (Figure 2.5)). These options Generation [MWh] Generation [MWh] account for the financial costs and externalities 150,000 150,000 that are not reflected in financial prices. Incor- porating both local and global environmental 100,000 100,000 costs would achieve optimal results: 50,000 50,000 • Local air pollutants would be dramati- cally reduced, and CO2 emissions relat- 0 2018 2020 2025 2030 0 2018 2020 2025 2030 ing to power and heating could be cut to Coal Total CokingCoal Coal Total CokingCoal 88 million tons by 2030, meeting the EU Gas RE Total Other Gas RE Total Other ETS target. • With higher carbon prices, the share of Figure 2.4 OPT-LG: Power Figure 2.5 OPT-LG+: Power coal in power generation would drop from Generation Mix [GWh] Generation Mix [GWh] 80 percent today to 49 percent by 2030, with RE rising to 32 percent and gas to 19 250,000 250,000 percent by 2030. • Depending on the carbon price, this 200,000 200,000 could push up the discounted economic Generation [MWh] Generation [MWh] cost by 9–14 percent from 2018-2030 150,000 150,000 compared to OPT-No ENV, but the cost 100,000 100,000 would be outweighed by the environmen- tal benefits. 50,000 50,000 • The carbon price matters: at $30/ton CO2 emissions would be reduced to 117 million 0 0 tons by 2030; if the higher prices prevail, 2018 2020 2025 2030 2018 2020 2025 2030 CO2 emissions would be just 88 million Coal Total CokingCoal Coal Total CokingCoal tons by 2030. Gas RE Total Other Gas RE Total Other 30 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector Meeting the EU ETS • The implicit carbon price to achieve the EU Targets Requires ETS targets is $37–50/ton CO2—much less than prospective penalties of €100, or Intensified Efforts $115/ton CO2 if the EU ETS targets were not met. Envisioned Targets. The envisioned targets • This scenario would reduce direct coal are steps in the right direction with the gov- mine employment by 20 percent, com- ernment’s envisioned RE targets, and would pared to the Envisioned Targets option. cut power and heating CO2 emissions to 134 million tons by 2030 and reduce the share of Extended Efforts (Figure 2.8). The Ex- coal in the power mix to 61 percent by 2030 tended Efforts option requires a major shift (Figures 2.6). in current policies to more actively promote EU ETS (Figure 2.7). Meeting the ETS tar- clean energy: gets require intensified efforts to accelerate the penetration of clean energy: • By 2030 the RE share in power generation would need to reach 47 percent, with the • The share of coal in power generation coal share dropping to 38 percent. would need to be almost halved, from 80 • This option would bring local air pollutants percent today to 44 percent in 2030, with and CO2 emissions down the most. RE penetration rising to 43 percent and gas • It would cost only 7 percent more than the to 13 percent by 2030. Envisioned Targets option and would be • This option would dramatically reduce fully justified by its environmental benefits. local air pollutants and CO2 emissions. • This option could lead to a 25 percent • The net present value of economic costs reduction in direct coal mine jobs by 2030 would increase by $5.4 billion from than the Envisioned Targets option. 2018-2030, or 5 percent, compared to Envisioned Targets option, but would be Sensitivity analyses were undertaken to justified by the reduced local and global test the robustness of the results in case of environmental costs borne by the society lower coal prices than assumed in the study. of US$6.5 billion. Two prices were considered through the Figure 2.6 Envisioned Targets: Figure 2.7 EU-ETS: Generation Figure 2.8 Extended Efforts: Generation Mix [GWh] Mix [GWh] Generation Mix [GWh] 250,000 250,000 250,000 200,000 200,000 200,000 Generation [MWh] Generation [MWh] Generation [MWh] 150,000 150,000 150,000 100,000 100,000 100,000 50,000 50,000 50,000 0 0 0 2018 2020 2025 2030 2018 2020 2025 2030 2018 2020 2025 2030 Coal Total CokingCoal Coal Total CokingCoal Coal Total CokingCoal Gas RE Total Other Gas RE Total Other Gas RE Total Other CHAPTER 2 | Analysis Results: The Need for Accelerated Efforts to Achieve Sustainability  | 31 study period: US$ 70/ton and US$ 50/ton. workers can find a job in another sector, occu- The results show that lower coal prices dis- pation, or location; (b) whether businesses place gas with very slight changes to RE shares, can create new, less coal-dependent, firms; indicating the robustness of the conclusion to and (c) the generosity of retirement packages scale up RE development. and severance payments—and their cost for The conclusion is unavoidable: current current and future taxpayers. Factors such as growth trends and their social costs are unsus- demographic changes and overall economic tainable; the envisioned targets would put activity will also shape the eventual impact of Poland’s the power and heating sector on the energy transition on labor markets. a more sustainable path. But meeting the EU Though previous declines in coal employ- ETS targets will require more efforts. The tran- ment and coal production in Poland were neg- sition to sustainability requires recognition ative, they had little impact on local commu- of local and global environmental costs in nities. A previous decline equivalent to that the decision-making process and considering envisioned by the Extended Efforts scenario new and coordinated policies and effective was accompanied by more out-migration results-oriented implementation. from coal areas. In particular, net migration rates declined by an additional 2 people net flows per 1,000 inhabitants from areas within Modest Impacts 10 kilometers of the coal deposits compared on Local Communities to areas further away (Figure 2.9 a). Employ- ment rates—the percentage of employed but Negligible on people as a share of the working age popula- the National Economy tion—also declined, by 2.3 percentage points more within the 10-km distance from the Energy transition programs can have signif- deposits than in non-coal areas (Figure 2.9 b). icant social consequences. A simple static Both impacts on migration and employment approach naïvely suggests that the impacts were only suffered by men, and include both could be large. In Poland, almost 90,000 peo- the direct impacts on former coal miners as ple, from both the hard coal and lignite mines, well as the indirect impacts on other workers. depend directly on the coal sector for their incomes. Adding in workers in coal power Figure 2.9 Extended Efforts Scenario: Change in Migration plants, the number surpasses 110,000 workers and Employment ( JRC, 2018). Moreover, other industries are affected by what happens in the coal sector, a. Migration Rates b. Employment Rates among them machinery, clothing, and secu- 0.5 0.5 rity services; indirectly, an estimated 140,000 0.0 0.0 jobs also depend on Poland’s coal industry -0.5 -0.5 Percentage points Percentage points ( JRC, 2018). Thus, more than 250,000 fam- -1.0 -1.0 ilies would be affected by erosion of coal pro- -1.5 -1.5 -2.0 -2.0 duction and jobs. Since these jobs are often -2.5 -2.5 a family’s main source of income, the num- -3.0 -3.0 ber of affected people could be considerably -3.5 -3.5 higher. However, these figures do not consider -4.0 -4.0 the fact that workers, businesses and regions NMR, NMR, NMR, Employment Employment Employment total men women Rate rate, men rate, women may be able to find and create new jobs, cush- 10 km or less 10-20 km 20 km or more ioning the final impacts on the economy. Note: Only dark blue bars are statistically different from zero. The net migration rate is the In fact, the ultimate economic impact of number of individual inflows minus the number of individual outflows, per 1,000 inhabitants. a reduction in coal jobs and production will Each bar shows the decline in net migration and employment rates in municipalities within the radius compared to those outside as coal production declines according to the Extended depend primarily on (a) whether displaced Efforts Scenario. The employment figures exclude those in firms with 9 employees or less. 32 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector These effects are small but they demonstrate deposits (Figure 2.10). Slightly further away that changes in the coal industry do come with the impacts were smaller (about 1.4 percent) costs that may not be suffered by everyone but but also significant. However, there were no hit some socioeconomic groups harder. impacts on jobs in manufacturing, which is For some sectors past energy transi- highly diversified and need not depend heav- tions were harder than others. Firms selling ily on local consumers for its survival. These non-tradable products were particularly vul- impacts reflect pure spill-over effects outside nerable because they depend almost exclu- the coal sector. sively on local purchasing power. Thus, when The dramatic reduction in the coal indus- coal production declined by an amount try that Poland has experienced since the equivalent to that of the Extended Efforts sce- 1990s has tested the capacity of coal areas to nario, the number of businesses dealing with recover. Firms that depend closely on the coal non-tradables fell by more than 2.5 percent sector to buy their products and services were more in areas within 10 kilometers of coal severely affected; in fact, they cut employment by 40 percent when coal production fell by Figure 2.10 The Extended Efforts Scenario and the Number the magnitude contemplated in the Extended of Non-Mining Firms Efforts scenario (Figure 2.11). This is a large effect, particularly considering that national Non-tradables Tradables 0.0 employment rates were not much affected -0.5 by the past transition. This suggests that while some firms shrank or closed, cushion- -1.0 Percentage points ing mechanisms were in place. Since few dis- -1.5 placed workers migrated, these findings hint -2.0 that either new businesses in non-coal-de- -2.5 pendent sectors were successful, or that exist- -3.0 ing businesses expanded. -3.5 Several factors suggest that any new 10 km or less 10-20 km 20 km or more restructuring of the coal sector would have at Source: Data from the REGON firm registry, 1995-2009. Excludes SOEs. most smaller effects than those experienced Note: Only dark blue bars are statistically different from zero. in the 1990s. First, the earlier changes were part of a major change in how the economy Figure 2.11 Effect of Decline in Coal Production on Supplier was organized, with privatization of several Jobs by Degree of Dependence state-owned enterprises and transformation of the public administration as part of the Low Medium-low Medium-high High 0 general transition to a market-based economy. The resultant major disruptions in the labor -5 Percentage points market are unlikely to be repeated. Second, -10 today Poland’s economy is highly resilient -15 and labor markets are tight, with the national -20 unemployment rate comfortably in the single digits in recent years. Strong labor demand -25 suggests high capacity to absorb displaced -30 workers. Third, the availability of new forms -35 of clean energy may in themselves create new -40 job opportunities. -45 Moreover, coal regions in Poland are sub- stantially more economically diversified today Source: Orbis data for a balanced panel of firms, 2000–19. than they were in the 1990s. In Silesia, min- Note: Each bar shows the average decline in percentage points in number of private supplier employees when coal production as in the Extended Efforts scenario. . ing value-added currently represents only CHAPTER 2 | Analysis Results: The Need for Accelerated Efforts to Achieve Sustainability  | 33 about 5 percent of total value- added. And Figure 2.12 Economic Dependence on Coal: Silesia and the while in 2000 prime-age coal workers repre- Rest of Poland sented over 25 percent of total employment, 30 today their share is down to about 16 percent (Figure 2.12). The region has become a major 25 manufacturing center, particularly for the automotive industry, which tends to require 20 Percentage points the same type of skills as mining. Moreover, the region is strategically located close to 15 richer EU markets. By 2017, its unemploy- 10 ment rate was well below the national average, and 5 of the 10 Polish cities with the highest 5 average private-sector wages were located there ( Jan Witajewski-Baltviks, 2018). 0 1995 2015 2000 2014 2000 2014 Finally, the aging of the population will Mining VA Mining employment Mining employment be contributing to a smoother transition. (% of total VA) (% of total employment), (% of total employment), working age males 25-44 year old males Younger cohorts throughout Poland are sig- nificantly smaller both numerically and as Silesian Province Rest of Polish Provinces (average) a share of total population (Figure 2.13). Source: Institute of Statistics data. While in 1995 there were about 330,000 men aged 20 to 29 in Silesia (14 percent of the were college graduates, in 2017 37 percent province’s male population), in less than 10 were. Thus, natural attrition would reduce the years the number is expected to fall to about coal workforce faster than in the past, so that 215,000 (10 percent). When that happens, it the spillover impacts would also be smaller. will be harder for coal mines to recruit work- A recent study found that most coal work- ers, especially since the younger generations ers are already near retirement age, and that tend to be better-educated and aspire to other a large reduction in coal employment in about types of jobs. For example, while in 2000 12 years is feasible without any layoffs ( Jan only about 8 percent of young male cohorts Witajewski-Baltviks, 2018). Figure 2.13 Demographic Change in Silesia, 1995–2030 40 400,000 35 350,000 30 300,000 Percentage points Number of people 25 250,000 20 200,000 15 150,000 10 100,000 5 50,000 0 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Male Population, ages 25-34 (% of total population), left axis Male University Graduates, % of population Total Male Population, ages 25-34, right axis Source: Data from Eurostat and the Polish Institute of Statistics. 34 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector These conjectures are supported by a rig- Among the reasons are that coal workers con- orous modeling strategy: The CGE model stitute only a small fraction of total employ- calibrated to the Polish economy shows that ment in Poland, and that an increase in their even in the most dramatic scenario, a reduc- supply through layoffs together with a strong tion in coal production will have negligible demand for labor contribute to creating jobs effects on GDP and unemployment, not even in such labor-intensive sectors as manufactur- reaching 0.1 percent by 2030 (Figure 2.14). ing, electricity, and unskilled services. Figure 2.14 Coal Transition has Negligible Impacts on the National Economy a. Impacts on GDP Growth b. Impacts on the Unemployment Rate 0.08 2030 2020 2026 2028 2029 2024 2023 2022 2025 2027 2019 2021 0 0.07 0.06 -0.01 Percentage points 0.05 Percentage points -0.02 0.04 -0.03 0.03 0.02 -0.04 0.01 -0.05 0 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 -0.06 EU-ETS Envisioned targets Ddec Source: Simulations using the CGE model. Chapter 3 THE PATH TO SUSTAINABILITY: CHALLENGING BUT FEASIBLE Key Messages • Because energy and electricity permeate all aspects of people’s lives and economic production, energy policies and regulations must be integrated with related policies, such as environment, urban, transport, and job policies. • Policies governing the transition to sustainability should be anchored in the principles of (a) integration of energy and environmental policies to incorporate external environmental costs; (b) avoidance of the “pollute early and pay later” formula followed by most developed countries; and (c) close coordination and collaboration between relevant agencies (horizontal) and between central and local levels (vertical). • Poland can continue on its low-energy-intensive development path by tapping the still-large potential for energy efficiency, shifting to a greener energy mix, and leapfrogging to the most advanced technologies available. The country may consider better aligning decision-making processes with the changing structure of energy consumption and recognizing the emerging challenges and opportunities to ensure that energy systems contribute to economic growth and sustainably meet citizen needs for mobility and comfort. • The options explored in this study indicate that the additional costs of the transition to sustainability are less than the benefits that will result from lower local and global emissions. • Finally, the declines in the coal sector would likely have less impact than past coal sector restructuring on employment, and the growing energy efficiency and clean energy markets could largely compensate for coal jobs lost. The vibrant manufacturing sector in the main coal areas will also help absorb any displaced workers. However, policies to facilitate the transition of coal workers to new jobs will be central to a smooth transition. 38 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector For an energy and electricity sector that now Leapfrogging to a New Paradigm depends heavily on coal, progression toward sustainability must resolve inherent tensions The new paradigm requires: between securing the energy supply and pro- tecting the environment. Abundant, low-cost • Integration of energy and environmen- domestic coal has helped Poland reduce its tal policies. A major hurdle to achieving dependence on foreign energy supplies, mak- a sustainable energy future in most coun- ing the energy system less vulnerable to supply tries is that environmental externalities disruption and sudden price hikes. However, are not integrated into energy policy, plan- in its quest for economic growth Poland has ning, and investment decisions. Although suffered considerable environmental damage. full integration of externalities poses huge Electricity and district heating, major challenges, failing to consider them in deci- components of the total energy system, are sion-making ensures that development will usually guided by energy policies and regula- not be sustainable. tions. Like energy in general, they permeate • Avoidance of “pollute early, pay later.” all aspects of people’s lives and economic pro- This requires tunneling through the loom- cesses. That is why energy policies and regu- ing obstacles of rising local pollution linked lations guiding them must be integrated with to income levels suggested by the Kuznets related policies. In other words, an effective Curve (see Figure 3.1)— An integrated energy policy should purposefully embrace energy and environmental policy is fun- all important relationships within the energy damental to a successful transition to sus- sector and between it and other elements of tainable growth of the electricity and heat- the economy and society. This calls for a new ing subsectors. paradigm for future policies. • Comprehensive approaches. Electricity and district heating policies must be part Figure 3.1 Kuznets Curve for Environmental Degradation of a comprehensive energy policy that addresses the needs of all social and pro- duction sectors and takes into account Point of In ection securing adequate supplies through all the links of the different fuel chains. • Horizontal and vertical coordination. Central government ministries and agen- Enviromental degradation cies need to build consensus for the policy framework and coordinate their activities for its implementation. Energy policy is traditionally seen as an aspect of economic policy, but urban development and trans- portation policies must be closely coordi- nated with it because of how they influence Incresing degradation Decresing degradation the quantities and types of energy that will be needed. Energy policies should be GDP per capita closely coordinated with and integrated into Source: (Desmond Mcneill, 2011) the war on smog and climate policies. This CHAPTER 3 | The Path to Sustainability: Challenging but Feasible  | 39 study also demonstrate the importance of Figure 3.2 China: Progression of Acid Rain, 1983–2005 linking energy and environmental policies with job policies for coal miners.. There is a. 1983 b. 1990 anecdotal evidence that state organizations sometimes send conflicting messages to lower government levels, which suggests a need for horizontal coordination. The local governments in turn should chart courses of action for implementing policy. They must take advantage of the synergies and opportunities for cooperation between the diverse regions of the country, which calls for vertical coordination. PH < 5.0 PH < 5.6 PH < 7.0 PH > 7.0 c. 2000 d. 2005 Recent experience in China shows local pollutant emissions can exceed the limits of the environment’s absorption capacity, and con- cerned government efforts on energy transition can clean up air pollution. After China launched economic reforms in the second half of the 1980s and there was a surge in energy and espe- cially power consumption mainly based on coal, the dramatic increase in local pollution has had highly damaging impacts: (a) exacerbation of the harm caused by acid rain, especially where PH < 4.5 PH 4.5-5.0 PH 5.0-5.6 PH < 4.5 PH 4.5-5. energy and electricity consumption are high, PH 5.6-7.0 PH > 7.0 PH 5.0-7.0 PH 5.6-7.0 and significantly reduced agricultural yields, Source: Energy Research Institute. which threaten the country’s fundamental food security goals (Figures 3.2); and (b) darkening Figure 3.3 Dark Skies in Beijing skies over major and medium-size cities (Fig- ure 3.3), severely undermining health through higher rates of pulmonary disease, mostly affecting children and seniors. These manifesta- tions having made the Chinese public intensely aware of the damage done by local pollution, the government launched a momentous nation- wide Air Pollution Prevention and Control Action Plan, which specifically mandated the most polluted region to reduce its annual aver- age PM2.5 concentration by 25 percent between 2012 and 2017. To achieve this target costs Chinese Yuan Renminbi (CNY) 1.8 trillion (US$280 billion) nationwide, and CNY 250 billion (US$40 billion) for the most polluted region. The amounts were primarily used to limit coal consumption and promote cleaner energy. The ambitious targets to reduce PM2.5 concentration were achieved in 2017, and air pollution has been significantly improved. 40 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector Making the Transition tration of cleaner RE and more flexible gas to Sustainability units. Meanwhile, concerns about the secu- rity of supply, particularly of gas imports, The four inter-related themes that should and about the vulnerabilities of such criti- guide the development of a policy for sustaina- cal infrastructure as LNG import terminals bility—reining in future energy consumption; must be addressed. shifting to a greener energy mix; enhancing • Fourth, a “just transition” should leave supply security; and providing a social safety no one behind - by providing social safety net for coal miners —can be summarized nets and support to coal miners and all as follows: affected population during the transition to sustainable and equitable growth. Active • First, Poland needs to continue to control labor market policies can help mitigate energy consumption by tapping remain- employment impacts. The growing energy ing opportunities for energy efficiency. efficiency and clean energy markets could Poland has successfully delinked energy largely compensate for coal jobs lost. and electricity growth from economic growth. Maintaining low-energy-intensive Curbing Future Energy economic growth is fundamental: with- Consumption out it, the objectives of supply security and environmental safeguarding may be Keeping energy consumption growing at a rate jeopardized. But keeping this fundamental substantially lower than economic growth will objective at the forefront will be more diffi- become more difficult, largely because elec- cult in the future than it was in the last two tricity consumption might grow faster given decades. government plans to deploy more electric cars • Second, to safeguard the environment, (the e-mobility program) and digitization and intensified efforts are needed to shift to with increasing demand for large databases a greener energy mix. Environmental deg- that will require more servers. radation caused by the present energy sys- Poland has already decoupled energy tem, particularly use of coal, has already growth from economic growth. However, the had severely adverse effects on human efficiency potential is still significant because health and amenities and, arguably, on its energy intensity is higher than those of IEA agricultural productivity. Accelerating and Europe and advanced countries like Spain, the expanding RE penetration is vital. It can United Kingdom, and Denmark (Figure 3.4). also contribute to a more secure energy For Poland, energy efficiency must con- supply and mitigate the energy price vola- tinue to be the foundation of its quest for tility associated with fossil fuels. long-term sustainable development. This will • Third, the energy system must be better pre- require pared to withstand supply disruptions, and it is vital energy installations be made more • enforcing regulations governing energy-us- secure. Poland has not taken full advantage ing capital stock; of its integration into the global energy • adopting advanced technologies for the economy and the far-reaching technologi- most efficient energy use in all energy-con- cal (decreasing prices of RE technologies, suming sectors (leapfrogging), giving pri- digitization, etc.) and structural (increased ority to those with the most growth poten- integration of the global gas market and of tial; and regional electricity markets) advances that • launching a strong communications pro- are changing the global energy landscape gram to involve the whole society in an and creating the opportunity to diversify endeavor that is vital to the energy security energy balances and to increase the pene- and well-being of future generations. CHAPTER 3 | The Path to Sustainability: Challenging but Feasible  | 41 Figure 3.4 Energy Intensities of Selected Countries 200 180 160 140 toe/USD million 120 100 80 60 40 20 0 Es a a a Re nd ic Ze s Au nd Be lia Sw m en Re 29 Po ic H nd Fr y ce N an he ay Tu s Au y G tria G y Eu e Po pe al n U xem taly Ki urg De om k itz nd nd ew te nd r e an ar d ni re c ai bl bl ug ga iu ra N orw rk an IE ree ed p na ro la la la Sw rela la to Sp N Sta ak EA nm Ko d s bo ni pu pu m I rla Ja lg rt st ec Fin er un ng Ca er I I d A te et h d Lu te ov U ni Cz Sl Source: IEA (2016a), Energy Balances of OECD Countries 2016, www.iea.org/statistics/. Note: GDP in real numbers for USD per purchasing power parity (PPP), in 2010 values. Continued efforts will depend on clear Shifting to a Greener Electricity Gen‑ policy guidelines that stress energy savings as eration and District Heating Mixes a major objective of sustainable development. These guidelines should include Several energy modeling exercises have shown that Poland could meet its long-term energy • a clear baseline and a reliable energy needs using advanced technology to produce reporting and accounting system to prop- clean fuels derived mostly from RE sources. erly assess achievements; The scenarios explored indicate that if local • a measurable target outcome for each of the and global environmental concerns are to main energy-consuming sectors; become the basis for investments in technol- • a focus over a relatively short period on ogies for electricity and district heating use the largest, least-efficient consumers for and production, the RE share would have to maximum leverage in energy-efficiency climb to 43 percent in the EU ETS option and gains; and 47 percent in the Extended Efforts option. • reliance on a two-pronged approach with This important scale-up is driven by the differentiated policies for efficient use of dramatically lowered costs of RE technolo- energy-consuming equipment and the gies, especially intermittent ones like wind and acquisition of new capacity. solar PV. Wind and solar are close to becoming low-cost options, despite their intermittency, A recent study (World Bank, 2017a) rec- and are in general securer sources at central- ommended acceleration of boiler replace- ized and decentralized levels. Recent wind and ment, fuel switching, and thermal retrofits PV auctions are also driving costs down and it for heating; enacting and enforcing anti-smog is expected that the results of large-scale auc- resolutions; and tightening solid-fuel qual- tions would lead to further RE penetration, ity standards. These are essential for boiler especially wind and PV, at the centralized and replacement and fuel switching in single-fam- decentralized level. High RE penetration in ily buildings and could be supported by the 2030 to put the sector on a sustainable path Anti-Smog and Energy Efficiency Fund and would call for integration options to safeguard subsidies for the poor. the safety and integrity of the system. 42 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector As previously mentioned, Poland scored of the kWh to the system. Advanced European very low on the energy/electricity system countries are moving to net billing after two- structure compared to the averages of the 114 way metering was contested by utilities as the countries in the WEF study and the EU28. share of RE increased significantly in countries The low power sector score is not competitive like the Netherlands and Germany. Poland’s and is compromised by a fragile transmission Virtual Storage approach has been successful system, as was made clear by the failure of at this early stage of RE penetration but might attempts to transmit power from Germany to face the same problems as two-way metering. Austria. Encouraging communities to rely on Poland should leapfrog to approaches based local systems to meet their energy demand is on the same principles that justified the move the right response to delayed capital-intensive to net metering and begin deploying the most investments in transmission. These efforts advanced metering that would lead to a fair could be reinforced by promotion of decen- power trade and demand response to optimize tralized rooftop PV. However, this approach use of power assets and empower customers. has limits because Poland is further integrating The government has an ambitious plan into the European grid. With a stronger trans- to charter off-shore wind territory. The costs mission system well-connected with neigh- are still significantly higher than for on-shore boring countries, Poland could become the wind, but Poland can learn from Denmark’s hub for power trading between western and use of off-shore wind auction schemes to bring eastern European countries and improve the down the costs. International experience also performance of its own power sector. demonstrates that development of off-shore The generation mix to put electricity on wind takes time; a clear conclusion is the a sustainable path includes more reliance on importance of setting up a central agency or gas generation, which will increase the flexibil- one-stop shop services for approval, licensing ity of the system to deal with intermittent RE. and permits, spatial planning, and certification, In Germany and Denmark, existing coal power in coordination with other relevant agencies, plants are retrofitted to increase their flexibil- such as Environment, Maritime, Defense, and ity to accommodate more RE in the grids, and TSO (Box 3.1). Otherwise, the fragmented should be considered in Poland. For example, and conflicting approvals from, e.g., ocean, coal power plants in Denmark are able to reg- maritime, defense, and environmental agen- ulate at 3–4 percent per minute, with a mini- cies could block off-shore wind development. mum 10-percent capacity factor. Demark also Finally, increasing natural gas penetration showcases an excellent example of heat storage during the transition is important to reduce for coal-based cogeneration plants to increase local air pollution from heating, particularly their flexibility in the winter to accommodate in the single family buildings, and make the more wind in the grids. These options will ease power system more flexible to accommodate the integration of RE generation into the sys- more RE. tem at the early stage of the scale up. Poland also scored lower than Europe as Making Energy Supply Safer a whole on infrastructure, business develop- and More Secure ment, and innovation. Scaling up RE technolo- gies to the level of the EU ETS will require not Poland’s wish to enhance its energy security only a stronger transmission network to take is justifiable, but international experience advantage of connection with the European demonstrates that security issues from geopo- system to increase the flexibility of the sys- litical uncertainties, price volatility, and nat- tem but also increased digitization and more ural disasters are manageable. Furthermore, sophisticated metering to allow power trading “a fundamental structural change has occurred between distributed generators and transmis- in natural gas trade due to: (a) the LNG supply sion companies and utilities based on the value becoming substantially more diversified and CHAPTER 3 | The Path to Sustainability: Challenging but Feasible  | 43 Box 3.1 Preparing for Off-shore Wind Scale up Costs and Risks of developing Offshore wind are high– careful planning and piloting will reap huge gains for Poland • Preparing to go offshore and join the leading countries in this field is commendable. Poland could learn much from the successes and failures of other countries. Clear decisions about the appropriate legal framework in advance of any substantial projects are vital. • Envisage pilot and demonstration projects for offshore development. The aim of initial demonstration should be to gain experience in offshore specific technology and approaches—not to demonstrate turbine technology. Two major tasks should be undertaken as soon as possible and their results assessed prior to full-scale development of medium-to-deep offshore programs. They include the preparatory activities to create an enabling environment and demonstration projects. The preparatory activities include at a minimum the following: • Defining the legal regime and institutional arrangements: These should assess current responsibilities and functions of institutions involved in regulating offshore activities and gradually developing a legal and institutional framework that can improve coordination for offshore wind. • Addressing grid development and integration issues: This activity should define appropriate high-voltage connection points and circuits, as well as respective responsibilities, and schedule for development and completion an offshore grid code as an extension of the existing codes and regulations. • Developing a database and identifying appropriate sites: This is particularly crucial for offshore development. This could be achieved through (a) the development of a master GIS that will assemble data on wind speed, undersea and bathymetric data, wave height, and so forth; (b) the initiation of wind speed measurements and computational model studies using a standardized (national) approach in consultation with industry; and (c) requirement of at least 12 months of wind measurements on site prior to preparation of the feasibility study. • Determining government support for a two- to three- year program: This would preferably be done through developing prefeasibility level cost estimates for select projects and determining the level of government support and incentives. The demonstration project and knowledge building task require the following: • Pilot projects (for immediate development): Two to four potential sites should be selected and wind measurements conducted for at least 12 months to begin pilot projects. The projects should be in the range of 30–50 MW with approximately 10 turbines. The objective at this stage is to gain knowledge and experience on foundations, logistics, erection, and maintenance. The government support is expected to be higher for these projects. competitive with the entrance of two new big sub-sector to attract needed investments players (US and Australia); (b) LNG becom- and technologies. ing an avenue for internationalization of the gas Creation of a path to greener development market; and (c) LNG providing a benchmark in an economy dependent on coal will require price for international gas trade even in the innovative actions to reconcile energy supply cases that do not involve long-distance trans- security with environmental protection and portation of gas” (Razavi, 2018) Poland has to reinforce international cooperation in using taken advantage of these structural changes by the most advanced energy technologies. signing the first contract for importing LNG Deployment of local RE resources on a large from the United States and is exploring how to scale and achieving energy efficiency gains are secure another source of supply. among the most cost-effective solutions to Energy supply uncertainties and risks can mitigate supply uncertainties, and risks. They be mitigated and effectively addressed with a would also reduce damaging local pollution comprehensive national energy policy that and help meet Poland’s commitment to com- stresses supply diversity, energy efficiency, bat climate change. Aggressive deployment of RE, and a more market-oriented oil and gas these technologies would attract investments 44 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector and create opportunities for high-skilled jobs entering the labor market are rapidly getting in manufacturing and lower-skilled jobs in smaller, making it increasingly harder for coal maintaining RE assets, especially PV systems. mines to recruit the workers they need to keep Strengthening the transmission system their labor force constant. Moreover, younger would not only improve integration into the cohorts are significantly more skilled than grid of renewable electricity generation but older cohorts, and the coal industry may not also make the supply more reliable. Develop- offer the jobs they aspire to. For instance, in ing the transmission system on an ad hoc basis 2030 the share of young male workers without would lead to unpredictable disruptions. a college degree is expected to be less than half Building up the transmission system also that of 1995. Moreover, a simple labor demand provides an opportunity to better protect the and supply model suggests that coal wages, installations, change the design of power sys- which are already substantially higher than the tems, and develop measures to minimize resto- average for Poland, would go up even more as ration time. Digitization is essential to produce the supply of potential coal workers shrinks, the data necessary to efficiently manage the and higher labor costs would challenge the electricity sector and meet consumer require- financial situation of the sector even more. ments. All these considerations will, however, The rest of this chapter offers policy rec- raise the construction and operating costs ommendations based on the findings of this of power systems. Safety of the installations report and the lessons learned compiled in the entails that “the usual economic considera- report Managing Coal Mine Closure: Achieving tions may have to be strained to new limits, and a Just Transition (World Bank, 2018d) in some instances ignored” (Pansini 2004). Policies drafted should take into account the fact that reductions in coal employment Providing Displaced Coal Miners affect workers at different stages of their with Social Safety Nets and Access careers. While early retirement would be an to New Jobs option for older workers, options to facilitate the transition of younger workers to new jobs Despite past waves of restructuring, coal would be necessary. In Poland, more than regions continue to depend on the sector as 90 percent of coal workers are 54 or younger a source of direct and indirect jobs. While the (Figure 3.5 a). Since coal workers may retire results of this report show that the aggregate in their 40s, about half may qualify for early impacts of a reduction in coal employment retirement options. Young workers not fully and production are negligible, they are not invested in the coal sector would be more likely equally distributed. Coal regions and unskilled to engage in training or be re-employed locally coal workers may suffer disproportionately. or elsewhere. In Poland, workers aged 15 to 24 Thereby, the political economy aspects of the represent only about 5 percent of all coal work- coal transition should not be disregarded. ers. Middle-age workers, who constitute about The role of trade unions and their impor- a third of coal workers, are more tied to the tance for Silesia’s cultural identity imply that community and may therefore require more from a political economy perspective, even assistance to cope with joblessness. relatively small job losses may create substan- It will be important to assess the skills and tial resistance. competences of those who will lose their jobs, Nevertheless, one overarching message and they should be given enough notice to emerged in Chapter 3: Poland’s demographic plan the transition ahead of time. Since about aging may do most of the work in accelerating 90 percent of coal workers are high school the transition away from coal.12 Young cohorts graduates (Figure 3.5 b), assessing their skills 12. This hypothesis is confirmed by Witajekwski-Baltvilks et al. (2018) CHAPTER 3 | The Path to Sustainability: Challenging but Feasible  | 45 for re-employment elsewhere may be neces- Figure 3.5 Characteristics of Coal Workers, sary. It is recommended that social service pro- 2000–2014, Percent grams be launched before workers leave their jobs to (a) establish eligibility, and assess inter- a. Age est in, temporary income support, ALMPs, or 100% retirement options; (b) profile worker skills 80% to inform each of appropriate training and 60% assistance options; and (c) provide initial job counseling and placement services, preferably 40% at the work site. 20% Silesia is much more diversified today than 0% 2000 2002 2004 2006 2008 2010 2012 2014 it was 20 years ago and can well absorb less- skilled coal workers. Since coal jobs require 15-24 25-34 35-44 45-54 55-64 a spectrum of skills, those with a technical or b. Education college degree would also have good chances of finding a job in another sector or region, 100% but the skills of most workers in the sector 80% may be less transferable. Their jobs dispropor- 60% tionately involve such routine manual tasks 40% as controlling machines and processes and 20% making repetitive physical motions and such nonroutine manual tasks as operating vehicles, 0% 2000 2002 2004 2006 2008 2010 2012 2014 mechanized devices, or equipment, and per- Primary or less Secondary Tertiary forming work that requires manual dexterity. Source: LFS data. Nevertheless, a large fraction of jobs in Silesia Note: The data only identify mining generally. However, this was used as a proxy for coal also rely heavily on routine manual skills, such workers because they represent the majority of mine workers. as manufacturing jobs in the auto, metallic and non-metallic products, chemicals, pharmaceu- transport, and storage also require nonroutine ticals, wood and paper products, and furniture manual skills similar to those in the coal sec- industries (Figure 3.6 a). Jobs in construction, tor (Figure 3.6 b). Figure 3.6 Feasible Job Opportunities for Coal Workers in the Silesian Region a. Jobs Requiring Routine Manual Skills b. Jobs Requiring Non-Routine Manual Skills 1.0 Pharmaceuticals 1.0 Jobs intensity in Non-Routine Manual Skills Wood and Paper Construction Coal Jobs intensity in Routine Manual Skills Metals Coal Furniture Non-metallic products Chemicals Transport and Storage 0.5 Motor Vehicles 0.5 Metals Textiles Machinery Electronics Sewerage and waste Electronics Non-metallic products Construction Information & Communication Wood and Paper Electricity and Water Food Sewerage and waste Furniture Machinery Motor Vehicles Pharmaceuticals Chemicals 0 0.0 Professional Services Electricity and Water Textiles Food Real Estate Apparel Transport Professional Services Education Arts and recreation and Storage Real Estate Information & Communication -0.5 Hotels and Arts and recreation Apparel Public Sector Restaurants Education -0.5 Finance Wholesale Wholesale Public Sector Hotels and Health Restaurants -1.0 Retail Health -1.0 Retail ICT ICT Finance -1.5 -1.5 5 10 15 20 25 30 5 10 15 20 25 30 Hourly Wage (euros) Hourly Wage (euros) Note: Each bubble shows the average skill intensity of jobs and the average hourly wage of each sector. The sample consisted of male workers in Silesia with a high school education, aged 20 to 39 years. The size of the bubble is proportional to the number of jobs in the sector. The blue rectangle highlights jobs with skill requirements similar to those of the coal sector. Skill intensity is measured using the Acemoglu and Autor (2011 methodology. The task content of jobs from O*NET is applied to the 3-digit ISCO 08 occupational classification from the Structural Earnings Survey (2010). 46 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector Figure 3.7 Labor Market Outcomes, Former Coal Workers and Other Workers. By Age, Percent a. Former Coal Workers b. All Workers 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 inactive employed unemployed Source: Data from LFS 2000–2014. An important factor that may deter the tran- about one-third of beneficiaries had no inter- sition of coal workers to jobs in other sectors is est in looking for a job, the package introduced a large pay gap—coal mine hourly wages tend in 2015 removed the conditionality clause to to be substantially higher than hourly wages strengthen worker incentives to remain eco- in other sectors. In fact, in Poland former coal nomically active after leaving the coal mines workers, even young ones, are more likely than (Witajekwski-Baltvilks, 2018). In addition to the average to remain economically inactive. removing the conditionality clause, redun- While nationally only about 10 percent of all dancy payments may be phased out gradually Polish people aged 40 to 44 are not working to smooth the transition out of coal. or looking for a job (Figure 3.7 a), 80 percent Coal wages are not only high but have been of former coal workers in the same age group rising over time, even when comparing coal and are inactive in the labor market (Figure 3.7 b). non-coal workers with the same characteristics, To increase the incentives for coal workers to such as educational attainment (Figure 3.8). remain economically active, redundancy pay- In addition to encouraging inactivity among ments may not be conditional on employment former coal workers, this has other unintended status—a lesson learned from the Mining consequences: (a) It weakens incentives to Social Package’s redundancy payments, which invest in human capital, as the coal wage pre- used to contain a conditional payment that mium tends to reduce the returns to education was reduced for those who found a job. Since (Black, McKinnish, and Sanders (2005). (b) It may increase labor costs in industries where Figure 3.8 The Coal Wage Premium unskilled manual labor is in demand because they may have to bid higher to attract work- 0.30 ers. Ensuring that future growth in coal wages 0.25 tracks labor productivity growth would facili- tate the transition of workers and regions as coal 0.20 employment falls. This could be achieved by 0.15 tying wage growth to indicators of coal produc- 0.10 tion per worker at the mine level, or by using 2009 2010 2011 2012 2013 2014 measures of regional value added per worker Without controls With Controls from the official statistics. Note: Each line shows the earnings premium associated with working in the coal sector. The ALMPs are an important tool for re-employ- vertical axis is the change in the probability of being in the top 60 percent of the earnings distribution in 2008. The coefficients are estimated using OLS and are all statistically ment of former coal workers. These typically significant at the 1 percent level. Controls include age, education, gender, and region fixed have three components, used alone or in com- effects. Winkler (forthcoming) shows the regression tables for different specifications using the pooled sample. bination: First, employment services are effec- CHAPTER 3 | The Path to Sustainability: Challenging but Feasible  | 47 tive for displaced workers who have skills that workers, who are the bulk of those displaced are in demand but who need help accessing the when coal mines close. demand. These services include labor exchange Migration is another important mecha- services that can refer workers (e.g., electri- nism to cope with labor market displacement cians, security guards) to non-coal industries; in Poland because former mining workers who vocational counseling to assess individual inter- move to another location are more likely to be est in and aptitude for a different occupation; employed than those who stay behind. How- and transit assistance to facilitate migration ever, only prime-age workers with secondary to regions with better labor market prospects. or tertiary education seem to use this strategy. Encouraging the use of the public employment Providing assistance to overcome credit con- office to search for jobs could be beneficial for straints and lack of information about jobs in former coal workers, who are less likely to do so other regions for workers with less education or than others who are unemployed. This could be with mobility barriers may be an effective way promoted on-site before they leave their jobs. to facilitate their re-employment elsewhere. Second, institutional or on-the-job training Because coal mine jobs can undermine is necessary when the skills of displaced work- worker health, it will be important to under- ers do not match employer needs. Only 22 stand whether the reluctance of young dis- percent of former mining workers aged 20–24 placed coal workers to re-enter the labor market who are not currently employed attend school, is due to a high reservation wage, discourage- compared to about 65 percent of other jobless ment, or inability to work due to disability or individuals of the same age. The gap is also sig- illness. In fact, in Poland almost 40 percent of nificant for workers aged 25–29. To improve former coal workers aged 20–39 are inactive for the employability of displaced workers, it is health reasons (Figure 3.9). It will be important important to create the right incentives for for- to provide a safety net for this group. Disability mer coal workers to return to school. This pol- seems less prevalent for coal workers aged 40 icy could be particularly effective if targeted to to 64 years, but this could be driven by the fact younger workers without family responsibilities that they are entitled to a pension, and thereby who are still not fully invested in the coal sector. they may report being “retired” even if they are For older workers who are the main providers unable to work for physical reasons. in the family, more flexible options combining more specific skills training with on-the-job Figure 3.9 Reasons for Inactivity, Former Coal Workers and learning may be a better fit. Other Workers, by Age Group, Percent Third, services to support small businesses could be offered if some displaced workers can- a. 20–39 years b. 40–64 years not find jobs despite a strong labor demand. 100% 100% Other reasons The most common services are technical assis- 90% 90% Belief that tance, micro credits and grants, and small busi- no work 80% 80% is available ness incubators that offer an entrepreneurial Retirement 70% 70% environment, professional networking, and Education or training mentoring opportunities all in one place. 60% 60% Other personal Fostering the creation of clean energy jobs 50% 50% or family responsibilities can also support re-employment of displaced 40% 40% Looking after coal workers. The potential of this policy should 30% 30% children or incapacitated not be underestimated. According to some cal- adults 20% 20% culations, improving the energy efficiency of Illness or 10% 10% disability residential buildings in Poland can create as Awaiting recall many as 100,000 jobs a year (Lewandowski, 0% Others Former coal 0% Others Former coal to work (persons on lay-o ) 2018). More importantly, most of this increase workers workers in labor demand would be directed to unskilled Source: Data from LFS 2000–2014. 48 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector Minimizing Spillover Effects impacts are more equally distributed across the local population. It would be important Previous coal mine closures had negative but to stimulate dialogue in local communities to small effects on local labor markets. Some provide workers and firms with more options workers coped by moving to other regions, about how to respond to a decline in coal but this did not prevent employment rates production. Layoffs do not have to be the from declining in the affected areas. The only option; local communities may prefer spillover effects of coal mine closures on a temporary wage freeze or a reduction in the migration and employment affect munici- number of hours of work while coal miners palities within a 10–20 km radius from the search for jobs outside the sector. Where this coal deposits (Winkler, forthcoming). Tak- is the case, laws and regulations may have to ing into account employment in nontradable adjust accordingly. Another major reason to sectors that depend heavily on the purchasing promote wage flexibility is that affected areas power of the local community, the spillover would benefit from a more competitive man- effects reach as far as 100 km away from the ufacturing sector. coal deposits. Policies targeted to helping regions In contrast to these adjustments to affected rather than workers should be care- employment levels, in coal regions wages fully designed. Large subsidies or other ben- have remained mostly stagnant. When wages efits could have the unintended consequence are rigid, most adjustments to a labor market of postponing—instead of preventing—the shock take place through changes in employ- negative effects of a reduction in coal employ- ment levels. This has serious implications for ment. If they raise prices and labor costs, these the distributional incidence of the shock. If all policies can damage the competitiveness the the adjustment takes place through a decline region needs to support a successful manufac- in employment, the shock is mostly experi- turing sector. In contrast, policies to protect enced by those who lose their jobs. 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Washing- Scientists: https://www.ucsusa.org/glob- ton, DC: World Bank. al-warming/science-and-impacts/science/ each-countrys-share-of-co2.html#.W-DFYy- World Bank (2018d) Managing Coal Mine Closure: 3My9Y Achieving a Just Transition Witajekwski-Baltvilks, J. L. (2018). Managing the World Economic Forum and Mckinsey . (2018). coal sector transition under the ambitious emission Fostering Effective Energy Transition A Fact- reduction scenario in Poland – Focus on Labor. Based Framework to Support Decision-Making. IBS Research Report. World Economic Forum. Retrieved November 5, 2018, from World Economic Forum: http:// World Bank. (2017a). Poland: Diagnostic Assess- reports.weforum.org/fostering-effective-en- ment and Analysis of Energy Efficiency Opportu- ergy-transition-2018/country-profiles/?do- nities and Strategies in Single-Family Buildings. ing_wp_cron=1541460698.39401197433471 (Unpublished). 67968750#economy=ALB World Bank. (2017b). The Effects of Carbon Limits World Health Organization: A global assessment on Electricity Generation and Coal Production of exposure and disease burden. World Health : An Integrated Planning Approach Applied to Organization 2016. Poland. Washington, DC: World Bank. Winkler, Hernan. forthcoming. (2018). “The Labor World Bank (2017c). Guidance Note on Shadow Market Effects of Energy Transition Policies Price of Carbon in Economic Analysis, Nov in Developing Countries”, World Bank Policy 12, 2017. http://pubdocs.worldbank.org/ Research Working Paper (forthcoming) en/911381516303509498/2017-Shadow- Price-of-Carbon-Guidance-Note-FINAL- CLEARED.pdf 52 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector ANNEX 1 Poland: Energy Efficiency and Renewable Energy Policies13 (Source: IEA Polish Energy Policy until 2030) Policy # Title Year Status Policy Type Policy Target 1 Loans from the National 2015 In force  Economic instruments; Industry; industrial Fund for Environmental fiscal and financial processes, residential Protection and Water incentives; loans  appliances, energy Management utilities, Co-generation of Heat and Power 2 Act on obligation to provide 2015 In force  Regulatory instruments, Multisectoral policy  information on energy other mandatory consumption by energy- requirements  using products  3 National Energy Efficiency 2014  In force  Policy support  Multisectoral policy  Action Plan for Poland, 2014 4 Elimination of low- 2013 In force  Economic instruments; Multisectoral policy, emission sources through (Feb 28th) fiscal and financial existing buildings, support of energy incentives; grants and buildings efficiency and development subsidies  Building code, energy of dispersed renewable performance, buildings energy sources. Part 2: pilot program KAWKA Building type—residential, buildings Nonresidential—new buildings  5 Energy-efficient street 2013 Ended  Economic instruments: Lighting  lighting  fiscal and financial incentives, grants and subsidies; economic instruments: fiscal and financial incentives, loans  6 Energy-efficient houses  2013 In force  Economic instruments: Buildings: existing and fiscal and financial new incentives; grants and Building type: residential  subsidies 7 Low-emission urban 2013 In force  Economic instruments: Transport: Transport transport: GAZELA BIS  fiscal and financial systems; infrastructure  incentives; grants and subsidies  8 Energy-efficiency target 2013 In force  Policy support: strategic Multisectoral Policy  declared in response to the planning  EU Directive (2012/27/EU) 13. https://www.iea.org/policiesandmeasures/pams/poland/name-24723-en.php ANNEX 1 | Poland: Energy Efficiency and Renewable Energy Policies | 53 Policy # Title Year Status Policy Type Policy Target 9 Energy-Efficient Public 2013 In force  Economic instruments: Buildings: nonresidential Buildings: LEMUR fiscal and financial Buildings: residential  incentive; grants and subsidies; loans  10 Report summarizing 2013 In force  Buildings: existing energy-efficiency measures buildings implemented in Polish Multisectoral policy  voivodeships, 2008–11 11 Second National Energy 2012 In force  Multisectoral policy  Efficiency Action Plan (2011)  12 Sustainable Energy 2011 In force  Economic instruments: Multisectoral policy  Financing Facility (updated fiscal and financial (PolSEFF²) 2015) incentives; loans  13 Energy Efficiency Act of 15 2011 In force  Information and Multisectoral policy  April 2011 education: information provision; regulatory instruments Economic instruments: market-based instruments; white certificates  14 Executive orders to the 2011 In force  Policy support  Multisectoral policy  Energy Efficiency Act - connected with the white certificate scheme 15 Energy Efficiency in 2011 Ended  Industry  Industry program 16 Energy loan for energy 2010 Ended  Economic instruments; saved fiscal and financial incentives; loans Economic instruments: market-based instruments  17 National Environmental 2009 In force  Policy support: strategic Multisectoral policy  Policy for 2009–12 and the planning  2016 outlook 18 Program for renewable 2009 Ended  Economic instruments: Energy utilities: CHP  energy and high efficiency fiscal and financial cogeneration projects incentives; loans  19 Polish Energy Policy until 2009 In force  Policy support: strategic Industry: industrial 2030 planning  subsectors; cross- industry; energy utilities Multisectoral policy  54 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector Policy # Title Year Status Policy Type Policy Target 20 Green Investment Scheme 2009 In force  Economic instruments: Multi-Sectoral Policy  (GIS) fiscal and financial incentives; grants and subsidies Policy support: institutional creation Economic instruments: market-based instruments; greenhouse gas emissions trading  21 Act on making 2008 In force  Information and Multisectoral policy  available information education: information on the environment provision and its protection, Policy support: social participation in institutional creation  environmental protection and on environmental impact assessments 22 Energy Efficiency Action 2007 In force  Policy support: strategic Multisectoral policy  Plan planning  23 Red Certificate System 2007 In Force  Economic instruments: market-based instruments  24 Act on electricity 2007 Ended  Regulatory instruments’ Energy utilities: CHP  production from monitoring  cogeneration 25 Energy Policy of Poland 2005 Superseded  Policy support: strategic Until 2025 planning  26 Poland 2025—Long-term 2000 Ended  Policy support: strategic Multisectoral policy  Strategy for Sustainable planning  Development 27 Baltic Energy Efficiency 1998 Ended  Policy support: strategic Multisectoral Policy  Group (BEEG) planning; institutional creation  Information and Education: information provision 28 Energy Law Act 1997 In force  Regulatory instruments: Multisectoral policy other mandatory requirements; obligation schemes 55 ANNEX 2 Assumptions for the Electricity Planning Model for Poland The study team gathered data used in the model from government reports, special studies, spe- cialized databases, and interviews. The following tables provide the data for load, generators, fuel prices, environmental parameters, and mines. Load and Energy Assumptions Table A2.1 shows expected demand through 2030. The medium gross demand growth is compat- ible with the Polish Transmission System Operator (TSO) analysis through 2030. Table A2.1 Gross Energy Growth Projections Year: 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Medium: 175 176 178 180 182 185 187 190 193 195 198 202 205 [TWh] Data Assumptions on Generators Table A2.2 Generation Characteristics and Costs by Generator Type Capacity CAPEX FOM per Effi- Number MW per kW MW ciency CF max of Plants MW $/kW $/MW-yr VOM % % Existing Plants TPP Coal 91 218 50,000 2.5 36 0.79 TPP Gas 5 259 27,000 1.5 40 0.85 TPP Lignite 32 287 50,000 3.0 38 0.66 TPP Coking Coal 1 320 50,000 2.5 32 0.69 TPP Municipal Waste 1 24 80,000 2.5 29 0.80 TPP Oil 1 347 25,000 2.5 31 0.84 TPP Biogas 1 230 80,000 0.0 28 0.69 TPP Biomass 3 278 80,000 2.5 34 0.85 Hydro Run of River 16 61 45,000 0.0 100 0.35 Photovoltaic (PV) 17 12 12,000 0.0 100 0.18 Wind On-Shore 16 376 40,000 0.0 100 0.29 Power Import 1 500 0 0.0 100 0.98 Heating-only Boilers (HOB) 37 946 16,203 3.9 83 0.36 56 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector Capacity CAPEX FOM per Effi- Number MW per kW MW ciency CF max of Plants MW $/kW $/MW-yr VOM % % Plants Being Built TPP Coal 9 465 1,597 50,000 2.3 41 0.78 TPP Gas 6 349 745 27,000 1.7 52 0.85 TPP Lignite 1 485 2,016 50,000 3.0 45 0.71 TPP Municipal Waste 2 40 3,048 80,000 2.5 28 0.80 Possible New Capacity TPP Coal 1,429 50,000 2.5 47 0.84 TPP Gas 921 27,000 1.9 56 0.85 TPP Lignite 2,000 50,000 3.0 46 0.81 TPP Municipal Waste 3,048 80,000 2.5 28 0.80 TPP Biomass 2,000 80,000 5.0 33 0.84 PV 1,024 12,000 0.0 100 0.18 Wind Offshore 3,192 90,000 0.0 100 0.40 Wind On-Shore 1,318 40,000 0.0 100 0.29 HOB Gas 100 10,000 2.0 95 0.50 HOB Biomass 500 18,500 5.0 91 0.50 Table A2.3 shows average emission factors for each power plant type. The CO2 emission fac- tors are adapted from KOBIZE (2018), and the emission factors for SOX, NOX, and PM are cal- culated using average fuel heat content, power plant efficiency, and average pollutant content in power plant exhaust. These values are summarized in Table A2.4. Table A2.3 Pollutant Emission Factors by Generator Type, Ton/MWh CO2 PM NOx SO2 Existing Plants TPP Coal 0.8464 0.00007 0.0007 0.0009 TPP Lignite 0.9391 0.00014 0.0015 0.0020 TPP Gas 0.4472 0.0005 HOB 0.4138 0.00039 0.0008 0.0026 Plants Being Built TPP Coal 0.7630 0.00002 0.0004 0.0006 TPP Lignite 0.7446 0.00004 0.0008 0.0012 TPP Gas 0.3429 0.0003 ANNEX 2 | Assumptions for the Electricity Planning Model for Poland | 57 CO2 PM NOx SO2 Possible New Capacity TPP Coal 0.6263 0.00002 0.0003 0.0005 TPP Lignite 0.7284 0.00004 0.0008 0.0011 TPP Gas 0.3106 0.0003 TPP Biomass 0.00003 0.0008 0.0004 HOB Gas 0.1758 0.0002 HOB Biomass 0.00001 0.0003 0.0001 Environmental Parameters Emissions costs and total emissions are compiled separately. Damage costs for local pollutants, based on Štreimikienė (2015) and EEA (2014), are expressed in $/ton of pollutant. Table A2.6 shows the emissions costs for NOX, SOX, and total particulate matter (PM) using the 2010 values in Table A2.5. Table A2.7 shows the evolution of the CO2 based on the latest World Bank guidelines for economic analysis. The model is evaluated using the low price estimation. Table A2.8 sets out the Polish power and heating sector emissions of CO2 and local pollutants. Total PM, NOX, and SOX, are drawn from European databases. Table A2.4 Costs of Damage Caused by Local Table A2.5 Abatement Costs for Global and Local Pollutants Pollutants -Poland Pollutant Environmental Costs [$/ton] $/ton NOX 7,712 2010 SO2 8,219 NH3 15,247 PM 30,344 NMVOC 592 CO2 30 NOX 7,712 SO2 8,219 PM 30,344 2020 NH3 10,740 NMVOC 161 NOX 11,250 SO2 9,594 PM 29,220 Source: Štreimikienė 2015. 58 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector Table A2.6 World Bank Future CO2 Prices Table A2.7 Local and Global Energy Pollutant $/ tCO2e, Constant Prices Emissions Year Low High Average CO2 Total PM NOX SOX Source Year [mt] [kt] [kt] [kt] 2017 37.0 75.0 56.0 OECD 2018 38.0 77.0 57.5 Stats Air 2016 34 192 274 Emissions 2019 39.0 78.0 58.5 ETS data 2016 153.7 2020 40.0 80.0 60.0 ETS data 2015 153.7 2021 41.0 82.0 61.5 ETS data 2014 152.3 2022 42.0 84.0 63.0 2023 43.0 86.0 64.5 2024 44.0 87.0 65.5 2025 45.0 89.0 67.0 2026 46.0 91.0 68.5 2027 47.0 94.0 70.5 2028 48.0 96.0 72.0 2029 49.0 98.0 73.5 2030 50.0 100.0 75.0 Source: World Bank: Guidance Note for Economic Analysis (World Bank, 2017c) Mine Production Assumptions Generators that use different types of coal may be supplied domestically or by imports. Polish mines are characterized by estimated reserves, annual production rate, minimum staff needed for operations, and the cost per ton. TableA2.8 shows the averages for these. The minimum amount of coal extracted is also established, but the average is not shown because it is mine dependent. A matrix connects these mines to the generation plants that use coal, and the relationship is characterized by the price of coal and the costs of transportation to the plant. Table A2.8 Characteristics of Polish Mines Production Staff Per Number Reserves Rate Thousand Tons Cost Per Ton Fuel of Mines Mt t/year pp/1000t $/t Local coal 21 2,784 63,124,168 23.8 82 Lignite 6 935 63,800,000 2.0 15 Coking coal 7 465 14,031,220 8.8 100 ANNEX 2 | Assumptions for the Electricity Planning Model for Poland | 59 Pricing Assumptions Fuel prices and power imports are mainly drawn from the IEA WEO (2017) report and the IRENA Biomass Report (2014). Power imports are priced based on the day-ahead market clearing prices for Germany and Austria shown in the PHELIX index Day Ahead Prices (EPEX 2018). Table A2.9 Fuel Costs, $/MBTU Fuel 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Local coal 2.9 3.2 3.3 3.5 3.7 3.8 4.0 4.2 4.4 4.5 4.7 4.8 4.9 5.1 Imported coal 3.8 3.8 4.0 4.2 4.4 4.6 4.8 5.1 5.3 5.5 5.6 5.8 5.9 6.1 Lignite 2.1 2.1 2.1 2.2 2.2 2.3 2.3 2.4 2.4 2.5 2.5 2.6 2.6 2.7 Coking coal 3.9 4.2 4.5 4.9 5.2 5.6 6.0 6.4 6.8 7.0 7.2 7.4 7.6 7.8 Oil 23.2 23.2 23.2 23.2 23.2 23.2 23.2 23.2 23.2 23.2 23.2 23.2 23.2 23.2 Gas 5.2 5.7 6.2 6.7 7.2 7.7 8.3 8.9 9.4 9.8 10.2 10.6 10.9 11.3 Biomass 9.1 9.9 10.6 11.4 12.1 12.9 13.7 14.4 15.2 15.9 16.7 17.5 18.2 19.0 Source: IEA New Policies Scenario in WEO 2017. 60 | Poland Energy Transition: The Path to Sustainability in the Electricity and Heating Sector ANNEX 3 Computable General Equilibrium Model for Poland The general equilibrium model applied in simulating energy transition in Poland is a multisector, sequential dynamic general equilibrium model. It is designed to assess the impact energy reforms may have on the labor market in Poland. Three factors are considered: (1) Closure of coal mines has an immediate direct impact on employment as coal workers become jobless. (2) This initial direct impact can have negative ramifications on other sectors that trade as buyers or suppliers of products and services with the coal industry. (3) The ultimate impacts depend on the extent to which the economy can absorb the initial shock. The model makes it possible to consider heterogeneous impacts on different types of workers, across such dimensions as age, gender, and education level. The main features described here relate to the modeling of the energy demand and labor mar- ket blocks.14 The Production and Demand Block The economy is disaggregated into 15 sectors. Within sector, production factors are subdivided into capital, energy, and two labor categories, unskilled and skilled. The production function is nested (Figure A3.1). At the highest level, the production of each sector is assumed to be a Leontief function (complementarity between output and inputs) of value-added and non-energy intermediate consumption. Demand for capital, energy, and the two skill levels is modelled through a nested constant elasticity of substitution (CES) function at two levels, which makes it possible for the different factors to have differentiated elastic- Figure A3.1 The Production Function and Energy Demand ities of substitution. The capital-energy bundle is also decom- Total Output posed into capital and energy following a CES function. At the next level, energy is Non-Energy Labor, Capital & Energy a CES function of fossil energy and electricity. Intermediate Input Finally, fossil energy is a CES function of coal and oil and gas. Labor Capital & Energy The labor side of the production function is also decomposed, first in two labor bundles Capital Energy by education (unskilled: from no education to lower secondary; skilled: from higher sec- ondary to tertiary). The second CES function Fossil Electricity allows the imperfect substitution between workers by age (young workers are aged up to Coal Oil & Gas 35; old workers are 36 and above). Finally, the analysis also considers the imperfect substitu- tion of workers by gender. Oil Gas At the macroeconomic level, wages are set by skill following a curve that allows a trade-off 14. For a detailed description of the other blocks of the model see Marouani and Robalino (2012), “Assessing Interactions among education, social insurance and labor market policies in Morocco,” Applied Economics, volume 44, No 24, pp. 3149-3167 ANNEX 3 | Computable General Equilibrium Model for Poland | 61 between wages and unemployment. Sectoral wages are linked to macroeconomic wages by exog- enous wage differentials that reflect differences in productivity. Defined for each sector and skill are eight exogenous wage differentials based on skill, age, and gender. The model has four closures: a macro closure, a government closure, an external balance clo- sure, and a labor market closure. The macro closure is savings-driven (marginal propensity of households to save is exogenous). The government closure consists in fixing government spend- ing as a constant share of GDP and tax rates and leaving the budget balance endogenous. An alter- native could also be to fix the government budget balance and leave government spending endog- enous. The foreign balance closure consists in fixing the exchange rate and leaving the current account balance endogenous. Finally, the labor market closure consists in a joint determination of unemployment and average formal wage through the wage curve. The model dynamics are sequential. Capital accumulation is sectoral. Each year the stock of capital of each sector corresponds to the sum of the stock of last year plus new investment and minus depreciation. Sectoral investment is modeled as a function of the sectoral stocks of capital, sectoral rates of return to capital, and capital acquisition costs. The Data The Social Accounting Matrix (SAM) was built using 2011 data from the Global Trade Analy- sis Project (GTAP) global database. The correspondence between the GTAP and LFS classifi- cations, given the study’s focus on energy issues, explains the decision to aggregate the SAM in 15 sectors (administration, agriculture, coal, business, communication, construction, electricity, finance, manufacturing, mining, real estate, trade, transport, and water). Employment data are from the Labor Force Survey (LFS) of 2011, and wage data from EUROSTAT (EU-SILC 065) because the LFS has information only on wage deciles. Because the classification is not similar, it was necessary to make some hypotheses, for example that wages in coal and other mining activities are the same.