Donald Tusk, Poland’s prime minister, said on Thursday his government would go ahead after all with a plan to create the country’s second biggest power station despite the fact that it was scrapped in April by the state-controlled utility responsible, Polska Grupa Energetyczna (PGE), due to sagging energy prices and weak demand.

“We confirm the readiness of the government to build the power plant in Opole… The government will find the funds and a way for this investment to be carried out,” Tusk said at an IPO conference in Warsaw.

PGE’s plan was to build two 900 MW units at its hard coal-fired plant at Opole, southwestern Poland, more than doubling its capacity to 3.3 GW and making it the second largest in the country. PGE, which generates 71 per cent of its electricity at cheaper but more polluting lignite-fired power plants, said the project was no longer profitable after the economy slowed in recent quarters, reducing demand for power and causing energy prices to fall.

That was not the case in February 2012, when PGE signed a 9.4bn zloty ($2.9bn) contract with a consortium led by Rafeko, a Polish boiler maker to built the two units.

Concerns about CO2 emissions were not a factor. Poland has the largest coal reserves in the European Union and has built almost two decades of uninterrupted economic growth on power fuelled by coal-fired plants. More than 90 per cent of the country’s energy comes from coal or lignite. Tusk’s government does want to reduce that dependence by bumping up wind energy and starting shale gas production. But its energy policy is based on coal for decades to come. Anyway, building new and more efficient coal-fired plants while shutting down old, polluting ones reduces overall emissions.

PGE is Poland’s biggest power company. It is controlled by the state Treasury and its chief executive is Krzysztof Kilian, an old friend of Tusk’s. However Kilian’s decision to scrap the Opole project purely on business grounds seems to have met with Tusk’s disapproval.

Wlodzimierz Karpinski, treasury minister, said on Thursday, “we are looking for a formula to carry out this investment because it is necessary from the point of view of energy security”.

Poland is required by the European Commission to shut down or upgrade up to 5 GW of old polluting coal-fired plants by 2016 because of tighter rules on emissions. If that capacity is not replaced, the government and the grid operator argue, there could be power shortages.

Karpinski said the government was still talking to PGE about building the project but a “path to obtaining financing and the possibility of lowering costs is being discussed”.

Investors seem to assume the job will still go to PGE. Its shares fell 4.7 per cent on Thursday following Tusk’s announcement. Pawel Puchalski of BZ WBK said that, assuming the project could be made positive for shareholders – perhaps through support from the EC for its reduced emissions – PGE “either has to spend 11bn zlotys or give it to the shareholders, and that’s the reason for the 5 per cent fall in PGE’s share price. PGE’s share price has been based on an expected higher dividend payout. If the project goes ahead the dividend will be smaller.”

If it does go ahead, the project can expect to meet renewed legal challenges from environmental groups. ClientEarth, a UK-based group, successfully stalled the project throughout 2012 when a Polish court agreed to rescind Opole’s environmental permit because PGE failed prepare an adequate environmental impact assessment. PGE successfully appealed against that decision in February this year.

Related reading:
Polish renewables: Investors await legislation details to see which way the wind blows, FT
Renewable energy in Poland: endlessly renewable squabble, beyondbrics
Poland: squeezing out the dividends, beyondbrics
Poland’s shale: enter the state, beyondbrics

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