Power to the people
Still, prices for private customers are not likely to drop, as Poland will have to shut down a host of aging plants and adhere to strict EU environmental requirements
Starting July 1, the distribution and retail sectors of the electric-energy market will be separated, freeing Polish customers from dependence on their current electricity provider. In other words, the owner of the cables and wires physically supplying Polish households with energy will not necessarily be the company selling the power.
"July 1 will be a breakthrough - it will allow even the smallest energy customer to chose his own provider," said Andrzej Pazda, office director of the Polish Association of Electric Energy Transmission and Distribution (PTPiREE).
Energy expectations
Experiences with market liberalization vary from country to country. In the UK, 48 percent of customers have changed providers since the market was opened in 1998. In Finland, one-third of customers have done so since liberalization took place 10 years ago. On the other hand, in Germany, the figure stands at a mere five percent, despite the fact that the market was opened in 1999.
Electricity distributor RWE Stoen's director of energy sales, Andrzej Zwierzchowski, expects the number of clients switching electricity providers to be closer to the German figure. "We expect no more than four to five percent of customers to change providers in the next two to three years," he said. Pazda also doesn't expect a large migration of customers. "A change of five percent countrywide by the end of the year would be a lot," he claims.
The experience of market liberalization for institutional clients provides some hint as to how the post-July 1 situation will look. Although the institutional-client energy market has been open for over two years now, not many companies have taken advantage of their right to choose their own supplier. According to RWE Stoen's calculations, only 30 clients have changed electricity providers, out of nearly two million eligible entities.
After July 1, any company that obtains a license to sell energy can start offering its own services. Technically, any company with a billing system (and the necessary license) could start acting as energy provider - Pazda names Polish Railways (PKP), as an example. He added that he expects a large number of electricity retailers to enter the market, but thinks that many of them will fall out of the market with time. He is counting on customers' brand awareness.
"Clients will not trust some completely new company," he remarked. Pazda also thinks that many of the new firms will be eliminated by simple economics. "In this business you either must have large clients, or operate on a large scale," he said. "The really big business is with the large institutional energy consumers."
Wallet worries
Of course, what interests customers most is the effect liberalization will have on energy prices. At present, energy prices in Poland are set by the Energy Regulator Office (URE). Pazda claims that those who believe that liberalization will lead to price decreases, "have no justification for their assumptions. Energy is a product and its price will be a result of simple rules of supply and demand," he explained, adding, "Prices will fall when there is a surplus of energy production."
Krzysztof Noga, the director of the trading department at Polish Power Grid (PSE), doesn't think that Polish electricity bills are particularly high. He pointed to a study by Boston Consulting Group which showed that 25 percent of clients in Poland are a source of losses to their suppliers and 60 percent of individual clients in Poland have bills that do not surpass zł.60. "We must look at how much we are paying for cable TV or for internet," Noga said. "Electricity will be valued in relation to other consumer goods," he said.
Others agree, suggesting that market conditions will value energy at a higher price than currently. "One can demand a minimal price, but that may mean that electricity won't always be available," said Jan Bogolubow, Deputy Director of the Energetics Department in the Economy Ministry.
Geriatric plants
In fact, Poland could be facing serious electricity shortages in the future, and not necessarily the distant future, as the country's power plants are aging. "In the next 10 years we will have to close 25-30 percent of our production capacity," Bogolubow predicted. Around 40 percent of Poland's energy production comes from plants that are over 30 years old, while a further 34 percent is generated in units that were built 20-30 years ago. Only eight percent of Poland's production capacity started operation over the past five years.
This proliferation of old plants could pose serious problems for Poland. "It's a ticking time bomb," Pazda said. He remarked that, on one hand, using old technologies will lead to growing CO2 emissions and further conflict with the EU, which has already set an emissions cap for Poland which many see as disadvantageous. On the other hand, if older plants are closed down, Poland will not be able to cater to the energy needs of its booming economy.
"We will either have to produce more or import electricity," says Bogolubow. Electricity consumption in Poland stands at 2,700 kilowatt hours (kWh) per person - a level much lower than the average for industrialized nations, which stands at 5,500 kWh.
The environmental angle
Building production facilities is one thing, but establishing transmission infrastructure is quite another. Bogolubow thinks that environmental requirements will pose a problem to covering the country with an electricity transmission grid. "Just like there was the Rospuda Valley issue, we will have to deal with similar valleys," the Economy Ministry representative said.
CO2 emissions are another serious environmental problem. The EU has set a limit of 208.5 million tonnes annually for Poland for the 2008-2012 period. The country's 2005 emissions level was 203 million tonnes and the Ministry of the Environment is countering with its own proposal for a limit of 284 million tonnes of CO2.
Zwierzchowski thinks that the CO2 emission limits imposed on Poland could lead to an increase in electricity prices. "Producers will have to buy emission permits and that will affect prices," he said. On the other hand, he claims that restructuring and privatization are the eventual keys to lowering energy prices.
Consolidation concerns
According to Andrzej Pazda, liberalization will be far from complete after July 1 when it comes to providing electric energy, since only the retail energy market will be opened. Energy distribution, on the other hand, will not be liberalized and the distribution price, paid by the providers to the owners of the infrastructure, will be determined by URE.
In general, the electrical-energy sector as a whole is far from being privatized. According to RWE Stoen's statistics, only 25 percent of power plants and 14 percent of companies providing energy to end users have been privatized. Moreover, the transmission network, which carries electricity from power plants to distributors, is 100-percent controlled by the Treasury Ministry.
Government representatives say privatization will eventually come. "[The goverment's current policy of] consolidation aims at preparing companies for privatization," said Bogolubow. He added that thanks to consolidation, the value of the companies grows, and claimed that consolidation will also be a remedy for the lack of funds for the necessary investments. "Big, strong groups have better creditworthiness," Bogolubow said.
However, "we are not going to stop at consolidation," Bogolubow assured, pointing to government plans to float state-owned Polska Grupa Energetyczna (PGE) on the bourse. However, he added that the terms of the flotation will have to ensure that the Treasury maintains a controlling stake in the company.
The Treasury Ministry announced that it would present a scheme in July for the bourse listing of not only PGE, but also of the Energetyka Południe holding. The Ministry has mentioned that it plans to list the two energy groups in 2008 while keeping controlling stakes. Deputy Treasury Minister Michał Krupiński said that work is being conducted on consolidating another energy group, Grupa Energetyczna Centrum.
"We would like one of the groups to debut in 2007, and it could be Grupa Centrum," Krupiński hinted. In the meantime, complete liberalization of the market seems a far-off prospect.
