New disclosure requirements and being launched across the EU, such as the upcoming EU Taxonomy and SFDR obligations. Investors are now scrutinizing their investments more than ever, and we have seen substantial interest amongst real estate fund managers to maximise renewable energy opportunities across their assets.
As we worked with funds across Europe, we identified Poland as a critical country in many portfolios. We believe Polish assets should be prioritised due to the country’s heavy reliance on coal (and thereby outsized CO2 impact compared to similar projects in other countries) and business norms where landlords charge tenants for electricity under a service contract.
Why Poland – High Reliance on Coal and Favourable Business Norms
The polish electricity grid is heavily reliant on coal, with almost 70% of its power generation supported by domestically produced coal. While there are growing efforts to phase out coal power, this is difficult due to the country’s historical reliance on coal and dependence on coal mining for local jobs. So far, Poland is the only EU country that has not committed to carbon neutrality by 2050. Most recently, in April 2021 it extended the operating license of the Turów coal mine from 2026 to 2044. The mine supplies the nearby 1.3 GW Turów coal-fired power plant, which is currently also being expanded to 1.8 GW.
Figure 1: Grid Emission Factors (2021-2042)
The country’s reliance on coal magnifies the CO2 savings effect of a Polish PV system vs. other European countries. If we compared a 500-kW self-consumption rooftop PV system (roughly 6,000 m2 of roof space) in Poland vs. Germany or Spain, the Polish system provides a 25-60% increased CO2e savings, even after accounting for the increased solar potential in Spain.
Figure 2: CO2e Savings over 25-Years for a 500-kW self-consumption PV system
In Poland, landlords typically procure electricity on behalf of the tenants, and recharge it under a service charge. As a result, landlords already have a precedent to procure electricity on behalf of the tenant, and there is no need to convince the tenants to buy solar power from the landlord, compared to other countries where tenants have their own existing electricity supply contracts. As all the electricity prices are rolled into the service charge, the landlord can also charge retail rates for the solar power, improving overall project economics. In other countries it is common to offer a 15-20% discount to the retail rate to convince the tenant to sign up. This provides Polish PV systems with more economies of scale, and the scope 3 emissions reductions from tenants will have a large impact on the asset portfolio’s net-zero strategy. It also opens up more assets for rooftop PV deployment, as explicit tenant buy-in is not required.
Polish Commercial & Industrial Rooftop PV Projects Likely To Rely on Unsubsidised Market Prices
While there is a subsidy auction scheme for solar projects in Poland, projects under these schemes are not allowed to self-consume power. As real estate investors and tenants alike are principally concerned with reducing on-site consumption in a bid to reduce Scope 2 and 3 CO2 emissions, this effectively rules out the prospect of subsidies.
Instead, landlords will have to sell their PV generated power to a third party offtaker (normally a utility or distribution network operator), at prices in line with wholesale market prices. The offtake contract is negotiated, and prices may be fixed or floating (pegged to the wholesale market). The treatment of Guarantee of Origins (GOs) is also negotiated in these offtake arrangements, as some utilities may want to buy the GOs to sell together with their electricity. Negotiated offtake prices in March 2021 were around €40-50 /MWh, while commercial electricity prices were estimated at €13 cents/kWh (inclusive of all taxes and levies). Polish commercial electricity prices are relatively close to the EU average of €15 cents/kWh (inclusive of all taxes and levies).
Figure 3: Electricity Price vs. Grid Emission Intensity in Europe
Increased Support for Commercial & Industrial Scale Solar
While the market remains reliant on coal, we are seeing increased support for rooftop solar systems. In April 2021, the government adopted a new law to simplify licensing requirements, removing the need for a generation license for systems <1 MW (which previously took around two-four months to obtain).
The Polish market poses an opportunity to generate out-sized carbon returns, but landlords will need to carefully negotiate the commercial aspect of the deal to manage the pricing risks involved and treatment of GOs. Longevity Power is a multi-disciplinary energy and sustainability consultancy which can support you in this field. We have worked with asset managers in their net-zero carbon strategies and have delivered solar PV feasibility studies and installations across Europe. For more information on our energy practice, please contact Anthony Maguire at [email protected].