Profitability of lignite power generation and mining

Lignite-fired power plants belonging to the Polish Energy Group (PGE) will cease to be profitable. Depending on the price level of European Emission Allowances (EUA) in the late 2020s, PGE's EBITDA (earnings before interest, taxes, depreciation and amortization) will drop to 1/3¹ or be negative², according to the report  by the American think tank Institute for Energy Economics and Financial Analysis (IEEFA)³.

Why energy from coal will no longer be profitable?

Factors affecting the profitability of energy production in Poland:

• electricity imports from abroad due to lower wholesale energy prices in the majority of Polish neighbors;
• EU environment and climate change policies aiming at achieving climate neutrality by all member states by 2050 — the EU sets emission reduction targets, which will result in a gradual increase in EUA prices in the coming years;
• Best Available Techniques (BAT / BREF) conclusions on electricity generation;
• necessity to adapt open-pit mines and power plants to the Water Framework Directive and the Groundwater Directive — it may cause additional costs for both mines and lignite-fired power plants;
• higher costs of insurance and repairs of coal-fired power units resulting from the Paris Agreement — costs of   mining equipment purchase and refinancing the debt of mines and companies that produce the majority of energy from coal will also increase;
• increase in failure rate of coal units as they age (especially the oldest lignite blocks);
• decrease in costs of renewable energy technologies (mainly solar farms and offshore wind farms);
• decrease in natural gas prices and increase in security of gas supply, which will make it more competitive with coal;
• increase in wage expectations of lignite sector employees, caused by the growing salaries of the general public and increasing income in other economy branches .

Insurers focus on renewable energy

The world's largest insurers successively quit investments in coal companies and limit insuring mines and coal-fired power plants. It is a part of more pronounced trend among the financial giants, which aims to reduce the risks associated with financing fossil fuels extraction, while interest in investing in renewable energy sources is increasing. This will result in the increase in insurance costs for coal-fired power plants and lignite mines and costs of refinancing the debt of companies such as Polish Energy Group.

Footnotes:

¹ Assuming an increase in EUA prices to 30 euros per ton in 2030.

² Assuming an increase in EUA prices to 40 euros per ton in 2030.

³ The report analyzes possible scenarios for the development of PGE and the profitability of further electricity generation based on the fossil fuels or renewable energy sources.

Sources:

1. IEEFA report: Poland’s PGE must invest in renewables to replace declining coal profits.
2. European IPPC Bureau - Reference Documents
3. The EU Water Framework Directive - integrated river basin management for Europe.
4. Paris agreement.