When it comes to similarities, Turkey and Poland’s ruling parties do not just share eerily sounding names. They also display a tendency to meddle in energy markets that could inflict long-lasting harm to the sector. And their tactics appear to have been lifted from the same rulebook favoured by political strong men with interventionist tastes.
Take the security of supply discourse.
Both Poland’s Law and Justice (PiS) and Turkey’s Justice and Development (AKP) parties have been actively driving home the need to improve their countries’ security of supply. But what does the concept even mean?
In the absence of a clear definition, it can mean anything.
It may mean blocking trading by passing controversial laws with damaging effects even though through trading the two countries could attract more investments and therefore sustain economic growth.
It may mean passing similarly questionable laws to encourage coal-fired generation even at a time when the fuel is the least competitive, to say nothing about its harmful effect on human health.
It may mean creating bloated and unwieldy incumbents, which lack the know-how and the vision to stay competitive globally.
Crushing the markets
This October, PiS will celebrate its second year in power. Two years might not be enough to build a new power plant, but it has proven a perfectly sufficient time to bring in several controversial reforms that have changed the dynamics of the country’s energy sector and look set to threaten the future of Poland’s wholesale electricity and gas markets.
For instance, increased liquidity and volatile price spreads between European gas hubs had attracted several foreign companies to gain licences to trade on Poland’s borders between 2015 and the first quarter of 2016. Poland was an emerging market for those ready to use its geographical position to make some money.
Fast forward to August 2017, most of those companies now face daunting business choices – give away their licence or pay lots of money for obligatory gas storage.
This is because a month earlier PiS passed a law banning gas shippers from using cross-border capacity linked to mandated storage outside of the country. The effect of the law is that it will cut all imports by independent companies and crush existing liquidity in the market.
In Turkey, the government’s intervention has been growing across the board. Although the share of privately-built capacity has been rising over the last decade, the impact of private generation on the market is now decreasing. This is because the government has been handing out large subsidies to lignite-plant operators and to renewable generators in addition to those it is already committed to support under long-term contracts.
Moreover, an insistence on price caps on end-consumer tariffs is simply snuffing out hopes for margins that small suppliers could ever eke out.
Coal, lots of coal
Another favourite tactic is to encourage coal-fired generation.
The fact that over half of major new power capacity set to come online in Poland before the end of decade will be coal-fired presents a set of complex issues that can prove detrimental to the future of energy sector in the country.
It shows that building new coal-fired capacity is somehow imposed on state-owned firms by the new government despite the fact that the profitability of such projects is being called into question
The financial burden the companies might face is likely to be reflected in rising wholesale electricity prices.
But if prices continue to rise, competition on the market will suffer if smaller companies with limited cash flow find themselves in short positions and are forced to buy back power at high prices.
The role of state-owned companies in shaping wholesale market prices is already unusual.
This is because they provide the majority of the supply and remain the most active on the demand side, shaping the market’s sentiment.
The government is planning to introduce a power capacity mechanism, rewarding producers who remain on stand-by as reserves. The producers who are most likely to qualify will be big coal plant operators, mostly state-owned. And while coal producers gain, green energy companies face losses.
PiS has passed several changes to the previous renewable law, most notably restricting the building of new wind farms and capping the replacement fee for Poland’s green energy producers, which will see the price of green certificates collapse and lead to many companies facing financial problems.
Poland’s insistence on retaining coal-fired capacity could also prevent the country from meeting the EU 2030 package, which states that member countries must reduce emissions 40% below 1990 levels by 2030.
Enjoying the benefits of not being bound by the EU’s emission targets, Turkey has also given the green light to lignite-fired generation, having already dug deep in its pockets to guarantee annual financial support for some 2GW of capacity.
Turkey’s lignite is poor quality. Its low calorific value means generators would have to burn significant quantities to produce energy, harming the environment in the process. But that does not seem to bother the Turkish government, keen to dish out investment projects and keep a steady stream of revenue.
And, then, of course, there is the governments’ unmistakable tendency to place a state champion at the heart of the sector to ensure that private initiative ticks along, but does not grow strong enough to challenge the status quo.
PiS and AKP have a track record in that respect, too.
Poland’s recent ban on shippers using cross-border capacity linked to mandated storage outside the country will, as already explained, cut imports by independent companies and crush existing liquidity on the market. The other effect is that it will allow the incumbent PGNiG to increase its control over gas market dynamics.
PGNiG’s Turkish counterpart, BOTAS has not enjoyed any de facto powers, nor are there any signs that it may do so in the near future, since the government deems it necessary that it be ruled by a pyramid of power reaching out well into the upper echelons of Turkey’s political class.
Even so, BOTAS remains a fixture of the Turkish gas sector, controlling some 80% of the market, despite rules that state that its share should have been drastically reduced. Under current circumstances it is hard to believe that share would ever drop.
Turkey and Poland may sit in different geographies, but when it comes to strongman tactics, they may just as well be next-door neighbours. email@example.com and firstname.lastname@example.org