The Market for Energy Efficiency in Poland

Table of Contents
Country Profile
Energy Sector Profile
Legislation, Policies and Programs for Energy Efficiency
Demand for Energy Efficiency – The Major Players
Product Markets
Strengths, Weaknesses, Opportunities, and Threats Analysis
Contacts

COUNTRY PROFILE
Poland’s transition from a centrally planned economy, which commenced in 1988, was among the most rapid of all the countries in the region. After a period of ‘shock therapy’ in the early 1990s, Poland’s was the first economy in Central and Eastern Europe to recover to pre-transition levels of economic output. Growth in GDP since 1993 has been very strong, averaging over 5% annually, and making the Polish economy among the fastest growing in Europe. A landmark was reached in 1996, when Poland was admitted into the OECD. Poland is also among the front-runners for early entry into the European Union. Having met virtually all of the membership criteria it is expected to join within the next five years.

The structure of Poland’s economy, measured in terms of the sectoral contribution to GDP, now appears almost indistinguishable from those of the longer-established OECD members. However, GDP per capita (measured in terms of purchasing power parity) remains very much lower than in Poland’s Western neighbours. As of 1998, it was little over half the level of the poorest European Union members. Even taking into account the rapid growth rate, it will take up to 20 years for Poland to reach the levels of GDP per capita seen in the EU.

ENERGY SECTOR PROFILE
The most notable features of Poland’s energy sector are its heavy dependence on coal, and the depth of power sector restructuring both to-date and planned for the future. Also significant from the point of view of energy efficiency is the increasing availability of natural gas.

Electricity
The total installed power generation capacity in Poland amounts to approximately 33 GW, while peak demand is currently about 24 GW. Electricity generation in Poland is dominated by coal, which accounts for 97% of all power produced (55% from hard coal, 42% from lignite). The remaining 3% of Poland’s electricity comes from hydro-plant. All of the lignite-fired generating capacity is located at mine-heads, and represents the sole use of Poland’s lignite production.

Annual electricity consumption stands at around 124 TWh, of which about 63% powers the industrial sector (including the energy industries), and 15% is consumed in households. In common with other countries in the region, the trend over recent years has been for residential consumption to increase as industrial consumption falls. Imports and exports of electric power almost balance, with a small net export in recent years amounting to less than 2% of total consumption.

Industrial auto-generation accounts for about 8 TWh annually, of which over 6 TWh is produced from cogeneration plant. Nearly 16 TWh is generated annually from district heating plants with CHP. Overall, therefore, over 15% of Poland’s electricity is generated in conjunction with heat.

The stock of electricity generating equipment in Poland is old, and there is therefore considerable need for investment in refurbishment and replacement. It is estimated that over 7 GW of capacity is older than 20 years, and 1.5 GW has now been in operation for more than 30 years. With transmission and distribution losses currently standing at about 13%, the transmission and distribution system is clearly also in need of substantial modernisation.

The Polish power sector is now in the midst of a process of radical reform, which is bringing both privatisation and de-monopolisation to generation and distribution. The transmission system is operated by the Polish Power Grid Company (PPGC), who will also be function for an interim period as intermediaries in the buying and selling of power. Poland’s 33 power distribution companies have formed into five consortia for the purpose of participating in the power market. The distribution companies also administer local power markets through which locally generated low-voltage power is traded.

Although supposedly freed as a result of the 1997 Energy Act, electricity prices in Poland remain regulated, in an attempt to prevent excessively rapid increases. Prices have been rebalanced so that the ratio of industrial to residential tariffs is now comparable with the rest of the OECD. However, absolute price levels remain below economic levels – it is estimated that prices are currently between 0.5 and 0.65 of the long-run marginal cost of production. The maximum permitted electricity price increase for 1999 has been set at 15%.

Natural Gas
Although the use of natural gas in Poland has not historically been very high, Poland’s natural gas network is currently undergoing a rapid expansion. The number of residential and commercial gas customers has increased from 2.3 million in 1970 to 6.8 million today and, over the same period, the total length of transmission and distribution network has increased more than five-fold, to 107,000 km.

The availability of natural gas is likely to continue to improve, as a result of a number of new pipelines either planned or under construction. An agreement has been reached with Norway for the supply of 0.5 billion cubic metres annually, to be supplied via Germany. A further pipeline under the Baltic is also under consideration. A major new pipeline connecting Russia with Western Europe via Poland is currently under construction but, although the Polish section is complete, other sections are behind schedule.

The proportion of households with a piped gas supply varies widely across the country, ranging from 29% in Podkarpacie voivodship up to 74% in Podlasie voivodship. Overall, about 43% of households are supplied with piped gas. The currently increasing popularity of piped gas for household use comes after a substantial decrease between 1990 and 1996. This earlier fall in residential gas usage can be attributed mainly to price increases during the early 1990s. The amount of gas that can be purchased with the average salary is now only about 22% of its 1990 level indicating that, relative to household spending power, piped gas is now considerably more expensive than at the start of the decade. However, despite this increase in relative price, the greater convenience of natural gas makes it very popular, particularly for providing hot water in households that receive only space heating from the local district heating system.

It is now expected that annual natural gas consumption in Poland will double over the next ten years, from 11 billion cubic metres in 1998 to 22 billion in 2008. This increase will be driven partly by increasing residential use but also by fuel switching in CHP plants, which is likely to prove a more cost-effective way of combating SO₂ and particulate emissions than end-of-pipe pollution control technologies.

Heat and hot water
The district heating sector in Poland comprises almost 400 individual networks, including the world’s largest district heating network in Warsaw. Of Poland’s urban population, 70% receive space-heat and 50% receive hot water from district heating systems. The sector is powered by a total of over 8,000 boilers, and delivers about 488 PJ (petajoules) of heat each year, at a peak rate of 45 GW. Out of this total heat production, approximately 170 PJ is produced within, and used by industrial enterprises.

Poland’s heat networks account for about 40% of total primary energy demand. This figure is very high compared with Western European countries, where the provision of heat and hot water for residential and commercial premises generally accounts for only 15-20% of total primary energy demand. The difference can be attributed to a combination of thermally inefficient buildings and high distribution losses found in Poland.

Heat prices remain subsidised, due to the political sensitivity of increasing the financial burden on households long-accustomed to very cheap energy. Successive governments have balked at freeing heat prices completely, despite the fact that the 1997 Energy Act their freeing before 1 January 1998. There have been a number of regulated increases in recent years, resulting in real heat prices rising by about 15% since the beginning of 1998. However, these increases fall far short of those needed to put heating companies on a sound financial footing. The average net profit of heating companies in 1997 was 4.1%, but this disguises wide regional variations (regulated prices take no account of local differences in production costs). In the Lodz area, heating companies made net losses of almost 30%, and there are many others registering losses of 3-5%. As a consequence, most heating companies do not have the resources necessary even for routine maintenance.

The resulting under-investment in Poland’s heat networks leads to poor levels of performance. It is estimated that distribution energy losses in some systems amount to 45% (compared with a typical figure of 10% in a well-maintained system). There is therefore considerable latent demand for the replacement and refurbishment of heat distribution networks, a demand that will only be realised when heating companies are permitted to charge prices that reflect true economic costs.

In addition to gross inefficiencies in the distribution network, further inefficiencies occur at the point of use. This is partly due to the poor thermal performance of much of the building stock, but also to the lack of sophisticated controls and the absence of metering. Heat supply is often regulated using so-called ‘qualitative’ methods – i.e. with a constant flow rate, the output of boiler system is manually adjusted according to outside temperature. Building users in turn have no control over the amount of heat they receive, and no incentive to use heat rationally.

LEGISLATION, POLICIES AND PROGRAMS FOR ENERGY EFFICIENCY
The 1997 Energy Law
The most significant piece of energy-related legislation is the 1997 Energy Act which, although primarily concerned with supply-side issues, contained a number of Articles relevant to energy efficiency. Article 45 explicitly creates the framework for DSM activities, by stating that energy tariffs "… may include costs of co-financing by energy enterprises of projects and services the purpose of which is to reduce energy and fuel consumption by customers…".

The Energy Act also provides the basis for energy efficiency labelling of equipment. Article 52 requires that manufacturers and importers of equipment specify energy efficiency in technical documentation, and that energy efficiency be displayed on a label. The detailed requirements regarding energy efficiency labelling will be determined through future secondary legislation, but given Poland’s imminent accession to the European Union, labelling laws will certainly be based closely on European Directive 92/75/EEC and its subsidiaries. These Directives apply to refrigerators, freezers, clothes washers, electric tumble dryers, dishwashers and lamps.

Thermo-modernisation programme
The thermo-modernisation programme has been introduced in order to protect households against the worst impacts of freeing heat prices. State funds have been made available to provide credits to owners of housing who wish to improve the thermal properties of dwellings, or to owners of local heating networks of up to 5.8 MW wishing to modernise their systems. The fund will cover the final 25% of loan repayments on qualifying investments. The programme also provides guarantees of up to 50% for loans taken out to finance energy efficiency investments.

Other funds
The National Fund for Environmental Protection is made up of fines and fees paid by firms exceeding various pollution emission limits. It offers grants and soft loans for environmental investments, including energy efficiency.

The ECOFund was created by converting 10% of Poland’s debt, and is designed to fund projects with positive international environmental impacts. Certain energy efficiency projects are eligible for support, with grants of up to 30% of the investment cost available.

International obligations
Poland is in the process of ratifying the Energy Charter Treaty, which it signed in 1994. Poland is also a signatory to the Kyoto Protocol, and has ratified the UN Framework Convention of Climate Change. Under the terms of the Kyoto Protocol (yet to be ratified), Poland commits to reduce its greenhouse gas emissions by 5% in the period 2008-12 relative to a 1988 baseline.

Other legislation and instruments
The "Act Supporting Energy Efficiency" is currently in the early stages of passing through Parliament, so it is too early to assess its likely final form, and its impact of the markets for energy efficiency goods and services.

The "National Programme of Reduction of Sulphur Dioxide Emissions" will have an impact on the economics of investments in energy efficiency, particularly where retrofitting of coal-fired plant with pollution abatement equipment proves prohibitively expensive. Agreements on the implementation of this programme have recently been signed by the Ministries for Environmental Protection and for Industry and Trade.

DEMAND FOR ENERGY EFFICIENCY – THE MAJOR PLAYERS
Local government
As in many countries with economies in transition, the local authorities are significant users of energy both directly, in their own buildings and in providing street-lighting, and indirectly, through the various public buildings and district heating systems they manage. From the beginning of 1999, the local government structure has been comprehensively revised into a three-tier structure. The top tier is formed by the 16 new voivodships (regions), which are divided into a total of 308 powiats (counties) and then, at the most local level, 2,483 gminas (communes). The principle of subsidiarity underpins the whole structure, requiring that decisions are made and policies are defined at the lowest possible level.

Gminas are responsible for, among other things, health services, schools and pre-schools. Powiats take responsibility for matters connected with public services of a local character, but which are too large to be implemented by the gminas. These include universities and colleges of higher and further education, some aspects of health services and nursing homes. Voivods are responsible for implementing law and for securing the unitary character of the state.

Articles 17-20 of the 1997 Energy Law spelt out the responsibilities of voivods and gminas with regard to energy service provision. Consistent with the principle of subsidiarity, most of the day-to-day responsibility falls on the gminas. They are responsible for detailed heat supply planning and organisation within their own territories, and for the provision of street-lighting except for highways. Voivods are responsible for the overall co-ordination of heat supply planning across the whole voivodship, and for ensuring that state energy policy guidelines are observed. At the time the Energy Law was framed, the middle tier of local government, the powiats, did not exist. Their role with regard to the provision of energy services is therefore less clearly defined, but is expected to take the form of co-ordinating the activities of the gminas at a local level.

The ‘Polish Energy Cities’ network is probably the most important in-country body concerned with municipal energy efficiency projects. Based in Krakow, the network has a mission to encourage greater use of energy efficient technologies and services in small and medium sized municipalities. Contact FEWE, the Polish Foundation for Energy Efficiency for further details of the network.

Housing associations
Housing associations are emerging, from a position of relative obscurity, as the most significant players in Poland’s residential sector. A recent study by the UN Economic Commission for Europe noted that "Housing co-operatives could be considered as the main private-sector operator in Poland's housing sector with considerable tasks ahead, both in the existing housing stock and in new construction." The study revealed that housing co-operatives were responsible for 77% of all new housing construction in Warsaw and held 2.8% of the national housing market.

Industrial sector
The energy intensity of Poland’s industrial sector is 3 times higher than the European Union average. The structure of the industrial sector is now not significantly different from that of most EU countries, and the prices of industrial outputs are close to market levels. The high energy intensity must therefore be attributed to technical inefficiencies in the use of energy. According to the several recent studies, significant savings can be achieved by no-cost/low-cost measures such as correct energy management practices. However, there is undoubtedly considerable scope for further savings to be achieved through investments in energy-efficient technologies such as efficient motors, variable speed drives, heat exchangers, boilers etc. The mining, metallurgy and machine-building sectors show the greatest potential for cost-effective energy efficiency improvements.

PRODUCT MARKETS
Cogeneration / CHP
The market for cogeneration in Poland appears very healthy. It has been estimated by the Polish CHP Association that 40% of Poland’s electricity could ultimately be derived from cogeneration. The new regulatory structure of Poland’s electricity sector appears favourable for cogeneration, with full access to power markets possible for small, independent generators. Furthermore, the increasing availability of natural gas bodes well for cogeneration.

The most promising immediate market for cogeneration must be existing district heat systems that are in need of refurbishment. About 25 - 30% of Poland’s district heat is derived from heat-only plant, much of which it would be economically favourable to upgrade to CHP. In the longer-term, it is expected that the wider availability of natural gas will lead to the appearance of more localised CHP plant based around gas-turbines, with consequent reductions in heat distribution losses.

The increasing availability of natural gas provides a good opportunity for fuel switching in industrial cogeneration plant, with consequent gains in energy efficiency as well as reductions in pollution. Cogeneration modernisation got under way in July 1999 with the commissioning of a gas-turbine plant at the Wiszow Chemical Works in Boleslawiec. This system produces 25 MWt and 4.1 MWe, and replaces an old lignite-fired cogeneration plant. Not only does the new system deliver heat at a lower cost, but it also results in massive environmental improvements. Particulate and SO₂ emissions will both be reduced by 99%, while NOx and CO₂ emissions will fall by 73% and 49% respectively.

As well as fuel switching in existing cogeneration plant, an increase can be expected in the number of enterprises using cogeneration. A firm of Polish consultants recently estimated that, between now and 2020, the annual market for industrial cogeneration plant would be approximately 175 MWe.

Buildings insulation
The heating season in Poland averages 210 ± 10 days, from mid-October to mid-May. The number of heating degree-days ranges from 3,450 on the Baltic coast to 4,000 in the mountainous regions. The number of cooling degree-days is not sufficient for air-conditioning to be a major market – about 1.5% of Poland’s building currently have air conditioning, although it is becoming more popular in hotels, restaurants and larger shops. Improvements in the thermal properties of new and existing buildings will help to minimise the need for space-cooling, as well as for space-heating, and are likely to prove more cost-effective than air conditioning in most cases.

Although the minimum insulation standards specified in Poland’s building regulations have been tightened significantly in recent years, they still fall short of the levels required in many Western European countries.

These numbers apply only to new and substantially modified buildings. The impact they will have on the market for insulation materials is therefore strongly dependent on the rate at which new building are constructed. The construction sector in Poland is expected to undergo something of a recovery in the next few years. The number of new homes constructed annually in Poland fell consecutively for nineteen years from 1978, and has only just begun to show an increase. However, at 1.9 homes per 1,000 population, the annual rate of home construction is still well below the levels seen in most Western European countries. The result is a shortage of housing, estimated at about 1.5 million units, combined with a rapidly ageing stock of buildings.

Approximately 1 million homes are in a sufficiently poor condition as to be virtually uninhabitable, and the majority of homes are poorly insulated and draughty. Heat losses from residential buildings in Poland have been estimated at about twice those found in European Union countries. Polish households spend about 12% of their budgets on energy, compared with an average of 4% in the European Union. Bearing in mind that heat prices remain subsidised, it is likely that the next few years will see a series of increases in the real price of heat. The financial burden on households of purchasing energy is therefore likely to increase still further. Ensuring the thermal integrity of dwellings, both existing and new-build, is therefore likely to prove beneficial not only on the macro-level, but also in helping to improve the financial standing of individual households.

With subsidised heat prices, it is often difficult to present a compelling case on purely financial grounds for insulating and draught-proofing existing homes. But if thermal improvements are deferred until heat prices have reached economic levels, there is a risk that households will be trapped in a position of energy poverty – unable to afford energy efficiency investments because of the burden of high energy bills. The thermo-modernisation (see above) was introduced specifically to address this problem, and should provide a significant stimulus to the market for insulation materials, double and triple glazing and draught-stripping.

Efficient lighting
Lighting accounts for about half of the residential peak demand for electricity in Poland. The contribution of the residential sector to total electricity consumption is increasing, with the result that the overall load curve is becoming more peaky. Given that Poland’s generating capacity is dominated by large-scale coal plant, best-suited to base load operation, there is a considerable benefit to be gained from reducing the magnitude of the residential peak.

Considerable attention has been paid to stimulating the market for efficient lighting products in Poland, with the result that Poland probably ranks among the most efficiently lit countries in Central and Eastern Europe. The Poland Efficient Lighting Project (PELP) has undoubtedly been among the most influential programmes. PELP was financed by Global Environment Facility (GEF), and commenced in 1995. It used a combination of producer subsidies and targeted marketing to stimulate the market for compact fluorescent lamps (CFLs). Between 1994 and 1997, annual sales of CFLs increased from 0.6 million to 1.6 million units, and new manufacturers had entered the Polish market. By end 1997, the number of households owning one or more CFLs had increased from 11% to 19%

The overall market for lighting equipment has recently been developing quickly, driven partly by the recent upturn in building construction. Total sales of lighting equipment in 1997 amounted to US$375 million, an increase of 32% on the previous year. The recovery of the construction sector should provide a boost to the market for dedicated CFL-only luminaires, which are the target of the current phase of PELP.

Particularly significant for the lighting upgrade market is a new law on waste management, obliging firms to take responsibility for the waste they produce. This has prompted a major lamp manufacturer to set up a company for the collection and safe disposal of used fluorescent lamps. Although the law probably does not require this level of care, the fact that one firm has set this precedent places a degree of pressure on others to follow suit.

Efficient household appliances
The ownership levels of many types of household appliance are quite high in Poland. Virtually every household owns a refrigerator, 63% of which have internal freezers. Another 27% of households own separate freezers, so overall ownership of freezers stands at about 90%. Table X below lists the ownership levels of a range of appliances as of January 1999.

Demand for household appliances is strongly correlated with household income and hence with per-capita GDP. With the recent strong performance of the Polish economy, the spending power of many households is at the highest levels seen for a considerable period. At the same time, high quality appliances are widely available for the first time and, as a result, the household appliance market is growing at 8-9% per annum, with demand for higher quality products being particularly strong. The total market in 1999 is expected to amount to about US$1 billion.

However, domestic production of household appliances, particularly the higher quality energy-efficient products, is currently not able to keep pace with increases in demand. Over 50% of total demand for household appliances is met from imports, and it is estimated that 70% of imports consist of the more advanced and energy efficient models of refrigerators, freezers and washing machines. Recent trends suggest that domestic manufacturers are beginning to move into the premium end of the market, including energy efficient models.

As Poland moves towards full EU membership, energy labelling of a range of household appliances will become mandatory, and minimum energy efficiency standards will also apply. The experience of some Western European countries indicates that, even with energy labelling, energy efficiency does not figure very highly in the criteria used by purchasers in selecting appliances. However, energy expenditure represents a much greater burden in Polish households than in Western Europe, so the impact of labelling on the demand for the most energy efficient appliances can be expected to be significant.

Heating controls and metering
In the past, heat delivery from district heating systems was either manually regulated or not regulated at all. Since 1991, it has been mandatory for heat meters and warm water flow meters to be installed in all new and modernised buildings. More importantly, there has been considerable effort to fit existing households with meters and controls. Already, 15% of apartments have been fitted with thermostatic radiator valves, and 40% with heat meters, under a system of grants and subsidies from central government. However, with 70% of Poland’s urban population connected to district heating systems, there remain well in excess of 4 million apartments without thermostatic valves, and over 3 million without meters.

Efficient electric motors
Estimating the market for energy efficient motors is a very difficult task, involving not only a comprehensive survey of the population of motors currently in use, but also a detailed picture of their duty cycles. This is because selecting an energy efficient motor in preference to a conventional one may only be cost-effective if the motor is in use frequently or continuously. The cost-effectiveness also depends on the nature of the load that the motor is driving. However, it is important to consider two further observations. Firstly, the price differential between ‘efficient’ and ‘conventional’ motors is steadily being eroded, so premium efficiency motors are more likely to prove economic. Secondly, in Poland’s case, many of the motors currently in use are likely to be so inefficient that replacing them with any modern motor would prove cost-effective.

A full survey of the current population of motors is clearly beyond the scope of this report, and detailed data is generally not available in the literature. A 1993 report by Hagler Bailly probably represents the most recent body of data on Poland’s industrial motors. That report estimated the total motor population (greater than 1 kW) at 1.3 million, with a size breakdown as shown in Table X below. The report also estimated that it would be financially and technically feasible to replace 90% of motors in the high-usage categories and in the small low-usage category, and 70% of motors in the low-usage categories in other size ranges. This corresponds to a total potential market of just over 1 million motors, although the true market size depends also on the awareness of plant managers of the possible gains to be had from energy efficiency improvements.

Since 1993, the output of Poland’s industrial sector (measured in physical units) has increased considerably. Among the most energy-intensive sub-sectors, physical output has increased by between 9% (copper) and 36% (paper). However, it is likely that the productivity of the capital stock has improved over this period, so the total capacity of motors in operation is probably not significantly different from its 1993 level. However, there has been a tendency in recent years for the average size of industrial enterprises to decrease, so the size distribution of motors in use has probably also shifted towards the smaller end of the spectrum.

Over the last three years, efforts have been made to promote energy efficient electric motors in Poland. The Polish Foundation for Energy Efficiency (FEWE) in conjunction with the Polish Copper Promotion Centre have produced a software package ‘Efemotor’, aimed at introducing the principles of motor selection according to full ownership cost. The software has formed part of an ‘Energy Bus’ display and mobile laboratory, which has been touring key industrial enterprises since 1996.

A full assessment of the impact of Efemotor on motor purchases has not been carried out. However, allowing for a moderate success in promoting the purchase of energy efficient models, taking into account the natural rate of turnover of motors and assuming that the size distribution has shifted as described above, the total potential market for energy efficient motors in Poland probably remains at somewhere between 0.5 – 1 million units.

Efficient Transformers
Much of the Polish power system is old and in serious need of refurbishment, including the transmission and distribution networks. The Polish Power Grid Company has estimated that the level of investment needed to modernise the transmission and distribution system will amount to almost US$0.5 billion annually until 2010. An important component of this modernisation will be the replacement of distribution transformers, many of which could cost-effectively be replaced by premium efficiency models.

SWOT ANALYSIS

 CONTACTS

Polish National Energy Conservation Agency (KAPE)
Krajowa Agencja Poszanowania Energii
Nowogrodzka 35/41, XII p.
00-691 Warszawa
Tel.: +48 22 622 27 97
Fax: +48 22 622 27 96

Foundation for Energy Efficiency (FEWE)
Fundacja Efektywnego Wykorzystania Energii
ul. Florianska 55
31-019 Krakow
Tel.: +48 12 21

Baltic Energy Conservation Agency
Baltycka Ajecja Poszanowania Energii
ul. Podwale Przedmiejskie 30
80-824 Gdansk
Tel./Fax: +48 58 305 84 36

Polish Association of Home Builders
Polskie Stowarzyszenie Budowniczych Domów
ul. Foksal 2
00-366 Warszawa
Tel./Fax: +48 22 827 77 50 / 828 30 44

Polish CHP Association
Polskie Towarzystwo Elektrocieplowni Zawodowych
ul. Krucza 6/14
00-950 Warszawa
Tel.: +48 22 693 23 68
Fax +48 22 628 69 93

SOURCES
Source: The 1998 study (ref. ECE/HBP/107) is available from the UN

"Economic reform of the electricity industries of Central and Eastern Europe"; Jon Stern and Junior R Davis, Economics of Transition 6(2) pp427-460 (1998)

Prepared by the International Institute for Energy Conservation (IIEC)
September 1999

Support for this document was provided by the Export Council for Energy Efficiency (ECEE) and the US Department of Energy (award DE-FC41-94R110679). This support does not constitute an endorsement by the US Department of Energy of the views expressed in the article.

Updated: 12/05/02