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Poland to halt nuclear electricity plan for shale gas - analysts

01 Nov 2012 14:10:35 | edem

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Analysts expect Poland's nuclear programme to be dropped in favour of shale gas as a less risky investment option, experts have told ICIS.

They claim that the parties involved in the nuclear programme could be progressing deliberately in slow motion, biding their time while the country receives clarity over the size of its shale gas reserves.

"If we have gas, there is no need for nuclear. The nuclear idea originated four to five years ago, before shale gas was on the agenda - we did not know that we had the potential for shale gas," Pawel Puchalski, head of equity research at BZ WBK Brokerage, told ICIS.

"At present, the only option for the nuclear programme is to progress in slow mode for the next two years until we know the amount of shale gas available. There's no point in giving up just now."

In September, state-controlled utilities PGE, Tauron, KGHM and Enea announced they were to join forces to build Poland's first nuclear electricity plant, with a capacity of 3GW (see EDEM 6 September 2012). If constructed, it is intended to commercially generate by 2023, and is expected to cost zlotych (Zl) 50bn (€12.1bn).

State support

Poland's economy ministry maintains that it is advancing the nuclear programme, and has finalised the first stages of the plan. "The whole legislation framework necessary to introduce a new sector of the economy related to nuclear power is already in place," a spokesperson told ICIS.

According to the ministry, Poland's nuclear programme aims to maintain electricity prices, as well as reduce greenhouse gas emissions. Analysts say that a shale gas programme could provide enough capacity to compensate for older lignite-fired plants coming off line and ensure the country's energy security.

However, the treasury ministry cast doubts over the keenness for nuclear power.

"The analysis costs, benefits and potential of technical options are essential to determine the optimal energy mix," a treasury ministry spokesperson told ICIS.

"The nuclear power plant presents a lot of questions - the costs of such investments will depend on the choice of technology, location, model of funding and participation of partners."

The choice

"We just need to evaluate the amount of shale gas available, which should take about two years. It will take another two years after that to construct a shale gas mine. These explorations are kicking off now - although there have been some delays," Puchalski said.

"Shale gas programmes are expensive to initiate, but then it is relatively easy to build numerous 1,000MW gas-fired plants. Gas plants are quick to build, and we know the technology well."

Analysts highlight that a nuclear programme would also require heavy government subsidies, as it is unlikely that it would give a return of investment because power prices are too weak.

The Polish Cal '13 Baseload fell to Zl176.30/MWh in October - the contract's lowest closing level since ICIS began to assess the contract, and the lowest level for a front year since 31 March 2010, according to ICIS data. Analysts have attributed at least some of the price declines to additional capacity recently added to the Polish grid. This includes PGE's new 858MW Bełchatów lignite-fuelled unit and increased generation from renewables (see EDEM 29 August 2012).

Shale gas

The exploratory work needed to give an accurate determination of the gas reserves is expected to be completed in 2014.

The Polish government estimates that investments in shale gas exploration will reach Zl5bn (€1.2bn) by 2016. However, the size of the country's reserves is not yet known. The Polish Geological Institute (PGI) calculates reserves reach 1.92 trillion cubic metres (Tm³), but with recoverable reserves of between 346 billion cubic metres (Gm³) and 768Gm³.

Meanwhile, the US Energy Information Administration's estimate stands at 5.3Tm³ for Poland, which would mean the country has enough gas to cover 35-65 years of its own demand, or 110-200 years if current production and import levels were to remain unchanged (see ESGM 21 March 2012).

"Shale gas is the lesser of two risks from PGE's perspective, investment-wise," said Patrick Hummel, executive director of European utilities and renewable energy at Switzerland-based financial firm UBS.

"However, the best thing for PGE would be if nothing was to happen for five years, from a shareholder's perspective. Cash flows would be better and power prices would go up on a tightening Polish power market."

Nuclear waning

One analyst said that the fact that the rest of the continent is moving away from nuclear energy also does not bode well for Poland's project.

"PGE's level of enthusiasm for a nuclear plant seems to have deteriorated," another analyst pointed out.

"The likelihood of new nuclear has declined over the last few months. The fact that PGE had to enter into a joint venture with three other companies demonstrates that they cannot do it alone.

"New nuclear is massively out of the money. If the government does not provide support for the project, it will not happen. And the government is realising what a huge [capital expenditure] risk it is.

"Power prices are too low - they would actually need to be 70-80% higher to get a return on investment."

"I've heard that there is no business plan for the project. There is absolutely no chance that the near future will bring a solution," one Polish trader commented.

"A location for the plant has not been selected yet. With no location, you can't think about the technology."

The treasury ministry told ICIS that the selection of the location will be preceded by conducting specific location and environment studies, which are scheduled for the end of next year.

ICIS contacted PGE to request an update on its nuclear strategy, including the next steps it intends to take to progress the programme. PGE declined to comment, and instead referred ICIS to its corporate website. KM

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