1. External costs of power plants in Poland
Mariusz KUDELKO
Wojciech SUWALA
Jacek KAMINSKI
Mineral and Energy Economy Research Institute
Krakow, Poland

2. Polish energy sector – energy production
97% of electricity produced from fossil fuels
Domestic sources of primary energy dominate the total supply
All consumed oil and half of natural gas are imported
Hard coal and lignite are the main primary energy sources
Renewables still have a small share in the energy balance
The accession to EU and adjustment to the directives creates new conditions and challenges that the Polish energy sector. These challenges are likely to be very hard to meet due to the fact that 97% of electricity in Poland is produced from fossil fuels. Despite the sharp downward shift of hard coal production over the past 8 years it is by no means a main primary energy source in Poland.

3. Polish energy sector – structure
Electricity generation sector consists of about 15 large public power plants and 30 public CHP plants
District heat sector is more decentralized and is characterized by companies owned by local authorities
Coal mining sector is organized in four hard coal companies (42 mines) and 5 lignite mines

4. Polish energy sector – emissions
The highest reduction of SO2 in the energy sector is due to FGD investments progress
The level of NOx emissions from the energy sector is stabilized owing to the technological constrains
Decrease of TSP emissions is caused by the relatively low cost of equipment applied within the industry
SO2
NOx
A transformation of the Polish economy had a positive effect on environment and air quality. Practically in case of all air pollutants we see a serious downward trend, also attributed to the energy sector. But it still generates 70% of SO2, 38% of NOx and 61% of PM. PM

5. Polish energy sector – CO2 emissions
Kyoto target = 94% of 1988 level
CO2 emissions stabilized in the mid nineties at the level of Mtons in total
The energy sector, which is the main consumer of solid fuels, is responsible for 56% of CO2 emissions
Fuels combustion remains the major source of CO2 emissions. Nearly 97% of CO2 came from these processes. Poland will probably meet the Kyoto emission target simply by continuing the current energy and environmental policy. Moreover, different studies demonstrate that by 2010 GHG emissions could be below the Kyoto limit by up to approximately 70 Mtons of CO2.

6. Plant characteristics

7. Location of selected power plants
Russia
Gdansk
Belarus
PP Dolna Odra
CHP Ostroleka
Germany
Lignite PP Patnow
Poznan
Warszawa
Lodz
CHP Siekierki
Lignite PP Adamow
Lignite PP Belchatow
Ukraine
PP Kozienice
PP Lagisza
Katowice
PP Polaniec
Total number:
hard coal - 65
lignite - 5
Czech Republic
Slovakia

8. Energy production, 2002, GWh Russia Belarus Germany Ukraine
Gdansk
4524
Belarus
PP Dolna Odra
1805
CHP Ostroleka
Germany
5982
Lignite PP Patnow
Poznan
Warszawa
3311
3999
Lodz
CHP Siekierki
25422
Lignite PP Adamow
Lignite PP Belchatow
8327
Ukraine
PP Kozienice
2810
6278
PP Lagisza
Katowice
Total energy production, TWh:
hard coal - 83
lignite - 50
PP Polaniec
Czech Republic
Slovakia

9. SO2 emissions, 2002, mg/Nm3 Russia Belarus Germany Ukraine
Gdansk
Belarus
1239
PP Dolna Odra
2130
CHP Ostroleka
Germany
3211
Lignite PP Patnow
Poznan
Warszawa
1425
916
Lodz
CHP Siekierki
Lignite PP Adamow
1777
Lignite PP Belchatow
Ukraine
1884
PP Kozienice
1245
PP Lagisza
Katowice
1551
Total emissions, 000 t: SO
NOX PM
PP Polaniec
Czech Republic
Slovakia

10. Stack height, m Russia Belarus Germany Ukraine
Gdansk
200
Belarus
PP Dolna Odra
120
150
CHP Ostroleka
Germany
Lignite PP Patnow
Poznan
Warszawa
150
300
200
Lodz
CHP Siekierki
Lignite PP Adamow
Lignite PP Belchatow
200
Ukraine
180
PP Kozienice
PP Lagisza
250
Katowice
PP Polaniec
Typical stack height, m:
hard coal - 120
lignite - 160
Czech Republic
Slovakia

11. Results (EcoSense 2.0)

12. Results (EcoSense 2.0) average lignite power plant (mid value) = 3,56
average hard coal power plant (mid value) = 2,48

13. Results (EcoSense 2.0) average NOx (mid value) = 1206
average SO2 (mid value) = 3942
average PM10 (mid value) = 5685

14. Results (EcoSense 2.0)
Total external costs of power plants

15. Results, external costs, Euro cents/kWh
3,58
6,19
9,43
4,68
Russia
2,68
Gdansk
3,00
3,41
3,48
Belarus
PP Dolna Odra
4,38
2,44
1.88
3,08
CHP Ostroleka
Germany
Poznan
Lignite PP Patnow
Warszawa
CHP Siekierki
Lodz
4,45
2,19
2,50
Lignite PP Adamow
Lignite PP Belchatow
Ukraine
2,70
3,19
4,52
PP Kozienice
PP Lagisza
Katowice
PP Polaniec
Czech Republic
v. 2.0
v. 4.0
Slovakia

16. Results

17. Results

18. Results

19. Results

20. Results

21. National, as% of total costs
Russia
45%
Belarus
PP Dolna Odra
50%
34%
CHP Ostroleka
Lignite PP Patnow
Poznan
49%
48%
Germany
CHP Siekierki
45%
Lignite PP Belchatow
Lignite PP Adamow
39%
Ukraine
47%
PP Kozienice
PP Lagisza
35%
PP Polaniec
Czech Republic
Total external costs, mln Euro:
All countries 5892
Poland (43%)
Slovakia

22. The model of power sector development
Key issues:
A mid-term planning of development of the Polish energy system based on the criterion of effective allocation of resources
External costs of emissions from energy technologies internalised
The tool presented here is the dynamic partial equilibrium model of a mid-term development of the Polish power sector.
The model focuses on detailed issues related to the energy production capabilities, the electricity and heat markets, without capturing other macroeconomic links.
It equilibrates prices and volumes of electricity and heat production taking into account external costs related to the emissions generated by energy technologies.

23. Criteria of resources allocation
Cost-effective allocation, which means a cost minimization for objective function to achieve a specific environmental objective – the desired emissions level
Maximization of social welfare defined as a sum of producers’ and consumers’ surplus minus external costs
The first criterion of the model uses simple least-cost approach. The second one uses the maximization of social welfare as an objective function that is defined as a sum of producers‘ and consumers’ surplus minus the environmental damages.

24. Main assumptions - 1
Supply side: public power plants, public CHP plants, industry CHP plants and municipal heat plants aggregated as energy generation technologies divided into three groups: existing, modernized and new plants
Demand side: industry and construction, transport, agriculture, trade and services, individual consumers and export
The supply side considers possibilities to deliver energy carriers from the domestic and import sources and their conversion through the energy processes.
The demand side is represented by the main electricity and heat consumers.

25. Main assumptions - 2
Demand curves estimated by price and income elasticity coefficients, both for electricity and heat markets
Damages related to energy technologies and derived from the ExternE estimations
Implementation – GAMS package, solvers – CPLEX and CONOPT
The supply side considers possibilities to deliver energy carriers from the domestic and import sources and their conversion through the energy processes.
The demand side is represented by the main electricity and heat consumers.

26. General structure of the model

27. Private costs Social welfare
Type of fuel.
Fuel costs
Investment costs of technol. prod.
Fixed and variable costs of technol. prod.
Investment costs of abatement technol.
Fixed and variable costs of abatement technol.
Balance of Import and export costs
External costs
Consumers and producers surplus
Source of supply
Technology efficiency
Fuel consump. rate
Demand sectors
Load periods
Domestic
Import
Capacity of supply
Existing technologies
Electricity/heat ratio
Transport losses
Demands ratio in load periods
Balance of fuels supplies
Fuels supplies
Energy balance of production
Energy production
Balance of production and demand for final energy
Consumers demand
Modernization of technologies
Import
Energy price
Production investments
Balance of production investments
Capacity
Balance of production capacity
New technologies
Availability factor
Technology efficiency
Export
Demand functions
Abatement technologies
Environ. investments
Balance of environ. investments
Capacity
Balance of abatement capacity
Emissions factor
Price elasticity
Income elasticity
The model framework presented in this figure indicates the main equations, variables, parameters and objective functions within the model.
The most important equations are: balance of fuels supplies, balance of energy production and balance of demand for final energy. The remaining relationships regard technological constrains (balances of production investments and capacity, balances of environmental investments and capacity) and emissions equations (balances of emissions and capacity reduction).
The major variables in the model refer to fuels supplies, electricity and heat production, consumers demand, energy prices, capacity of production and environmental investments and emissions level.
The cost components incorporated in the objective function are fuel cost, investments, fixed and variable cost of production and emissions abatement technologies, all create the private costs of energy production.
Emissions reduction
Balance of emissions
Balance of emissions reduction
Emissions
Unit external costs
Legend:
Balances
Variables
Parameters
Costs component
Efficiency of abatement technologies

28. Scenarios
Scenarios applied in the model reflect possible results in terms of type of the model used, the objective function, demand specification, emissions of main air pollutants and the volume of external costs estimates.
It must be stressed that the results of the reference scenario are more or less consistent with the official forecasts of the Polish energy policy.
Three scenarios included in variant 2 differ according to the range of externalities considered in the decision-making process.

29. Results, variant 1
Results of the model reveal that the type of criterion used in the calculations has a significant influence on the energy production in Poland.
It is not surprising that the structure of the energy production in the cost-effective allocation scenario should be dominated by relatively cheap energy conversion technologies that are generally based on domestic solid fuels – hard coal and lignite.
Existing coal fired power plants and their modernization options are economically competitive options to cover a slightly increasing demand for electricity.
As a result of diminishing of domestic coal reserves, stricter emissions standards, possible increase of gas use by industry and municipal heat plants and a promotion of renewable sources a slight decrease of hard coal use should be observed after But in fact hard coal and lignite seem to be still preferred as cheep energy sources for public power and CHP plants.
As demand for electricity grows, new natural gas-fired plants and renewables will come into operation after 2015.
It is characteristic that the level of external costs in this scenario is at the same order of magnitude as private costs of energy production.

30. Results, variant 2, scenario 3
A change of the objective function in the model forces serious technological and economic adjustments. Here is presented only one scenario with external cost fully included in the objective function. For this scenarios we can observe a significant drop of the energy production in amount of 20-30% comparing to variant 1.
A significant changes are also seen in the structure of the energy production. A dominant position of solid fuels is expected to decrease in favour of gas and renewables. Renewables are virtually used at the maximum of capacity. The use of hard coal, the primary energy fuel in the Polish energy balance, declines about 30-50% in comparison with variant 1. gas should be perceived as the main fuel source for electricity generation in 2020.
All abatement options are economically efficient with respect to the unit external costs estimates employed in the model.
The predicted increase of the energy prices is about twice higher comparing with their present level due to inclusion of externalities in decision-making process.

31. Results, private and social welfare
bln zl
Variants
Variant 1
Variant 2
scenario 1
scenario 2
scenario 3
Consumers’ surplus -
547
478
442
Producers’ surplus -
109
121
134
Private costs
358
311
318
325
External costs, including:
265
285
139
114 SO 97
115 44 37 2 NO 33 33 15 12 X CO 63 64 54 48 2
TSP 72 73 26 17
Private welfare -
656
599
576
Social welfare - 37 1 46
462 %
Consumers’ surplus - - 13 - 19
Producers’ surplus - 11 23
Theory suggest that from a social point of view a full internalisation of external costs by the energy prices increase makes that this scenario is the most desired among others.
The summary results of the model are illustrated here where the volumes of private and social welfare in discounted terms are shown. Private welfare is defined as a sum of consumers’ and producers’ surpluses. Social welfare is calculated as a difference between private welfare and external costs generated by the main air pollutants. Variant 1 with least-cost approach is also shown.
Social welfare increases significantly due to internalisation of external costs. Moreover, the greater range of externalities considered the greater is social welfare.
Private costs - 2 5
External costs, including: - - 51 - 60 SO - - 62 - 68 2 NO - - 55 - 64 X CO - - 16 - 25 2
TSP - - 64 - 77
Private welfa re - - 9 - 12
Social welfare - 24 25

32. Conclusions - 1
The structure of energy production in the cost-effective allocation scenario is dominated by the low-cost energy conversion technologies that are generally based on solid fuels – hard coal and lignite
In the partial equilibrium model with external costs internalised the dominant position of solid fuels decreases in favour of gas and renewables
This research seems to be one of the first such extensive attempt to examine the impact of external costs generated by air emissions on the whole energy sector in Poland.
Here are the most important conclusions that can be drawn.
But these conclusions should be carefully considered.
First, it would be better to use CGE model to include all inter-linkages existed between the energy sector and the rest of the economy. Low experience with this kind of simulations and – what is the most important – the lack of reliable data for model calibration are the crucial barriers to employ such approach for Poland as yet.
Second, technological and economical assumptions employed in the model might be crucial for the results. Discount rate, price and income elasticities, values of externalities caused by air pollutants, future fuel prices, the growth rate of economy etc. appear to be crucial for the analysis.

33. Conclusions - 2
Projected long-term increase of energy prices amounts to about 100% comparing with their present level. Decrease of energy production is predicted on 20-30% of the total
Existing abatement technologies are economically efficient strategies to lower emissions
From a social point of view a full internalisation of external costs by the energy price implies that this scenario is the most advantageous
This research seems to be one of the first such extensive attempt to examine the impact of external costs generated by air emissions on the whole energy sector in Poland.
Here are the most important conclusions that can be drawn.
But these conclusions should be carefully considered.
First, it would be better to use CGE model to include all inter-linkages existed between the energy sector and the rest of the economy. Low experience with this kind of simulations and – what is the most important – the lack of reliable data for model calibration are the crucial barriers to employ such approach for Poland as yet.
Second, technological and economical assumptions employed in the model might be crucial for the results. Discount rate, price and income elasticities, values of externalities caused by air pollutants, future fuel prices, the growth rate of economy etc. appear to be crucial for the analysis.