BMI View: Investors in Poland's power sector will have to be wary of populist policies that are unveiled ahead of the October 2015 general election, which could lead to greater government intervention in the utilities sector. As a tight electoral race forces the incumbent PO and the opposition PiS into a bidding war for votes, there will be reduced visibility on policy formation , deterring private investors.
The biggest risks to investors in the Polish power sector ahead of the October 2015 parliamentary election are political. There is a non-negligible risk of a change of government in October, which poses risks to investors through reduced visibility surrounding policy formation and continuity, and also through populist policies targeting specific sectors - particularly the power sector.
At the time of writing, incumbent Prime Minister Ewa Kopacz and her Civic Platform (PO) government are trailing in the polls to the opposition Law and Justice (PiS) party. We highlight the PiS is not currently likely to achieve an overall majority and has no obvious coalition partner - but investors should be wary of the increased probability of populist policies unveiled even before the election as tight electoral race forces PiS and PO into a bidding war for votes. This will deter private investment as regulatory uncertainty over issues such as electricity prices, the future of state-owned utilities, and the role of coal and emissions targets weighs on the outlook for the power market.
Key Trends And Developments
A victory for the PiS in the October elections would pose a threat to investors in the power sector and heighten the risk of confrontation with the EU over energy policy. Although the incumbent PO government has had a turbulent relationship with the European Commission (EC) as it has sought to sustain Poland's reliance on coal and support the domestic coal mining industry in the face of more stringent EU green energy policies, the election of more populist PiS would strain relations on such issues even further. PiS has already said, for example, it wants to negotiate Polish exemptions from EU rules aimed at reducing carbon emissions.
In the event PiS forms a government, the party's raft of populist policies is likely to extend to the power and renewables sector. According to our forecasts, coal will account for 80% of all electricity generation in Poland in 2015, and we would expect PiS to intervene heavily in the power sector to support employment through support for the domestic coal sector and also to ensure cheap coal can be utilised in power generation to keep electricity prices low. It would also raise the likelihood that Polish utilities will be forced to bailout struggling state-owned coal miner Kompania Weglowa, which is a victim of low coal prices amid global oversupply.
Competition for voters has already forced the incumbent Prime Minister Ewa Kopacz (Civic Platform) to adopt her own populist policies in the power sector. Pertinent examples include reports (in August 2014) that capping regulated prices is under consideration and also an announcement in January 2015 stating the government will consolidate its largely state-backed utilities sector to create a more highly capitalised entity, that will be able to access credit more cheaply. The emergence of more highly capitalised Polish utilities - possibly comprising some combination of Polska Grupa Energetyczna (PGE), Tauron, Energa, ENEA - will make it easier to raise capital needed to support flagship coal projects.
Poland's Supreme Audit Office (NIK), which monitors public spending, announced on April 2014 that the government's failure to produce the long-term energy strategy was making companies reluctant to invest in the sector (according to Reuters). In the short term, Poland will be able to balance plant closures and new capacity, but more replacement capacity will be needed as plants are closed down between 2020 and 2035.
We highlight that our Oil & Gas team downgraded its forecasts for shale gas production in Poland in mid-2015 and does not now factor in any gas production from shale within our 10-year forecast period. This was on the back of the slow pace of exploration and disappointing drilling results, and means upside risks to gas-fired power generation are limited.