Mar 27

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“Free market: yes, but only if it’s good for us…“

The European Emission Trading Scheme doesn’t work. The low prices of the carbon allowances make investment in the modernization of the existing power plants unprofitable. At the same time the uncertainty concerning the development of the carbon market and the possible increase in the price of carbon due to possible intervention of the European Commission stops investors from investing in new capacities altogether. Such situation is not good for anybody. And yet Polish government and the incumbent energy companies in Poland are strongly opposing any changes to the ETS until 2020:  it is a free market mechanism and the price of the CO2 certificates simply reflects the situation on the market. So the defense of the “free market” character of emission trading scheme seems to be more important than its effectiveness.

Change of scenery: market of “Green Certificates” in Poland. Green Certificates are the part of the support mechanism for the development of renewable sources of energy in Poland. The major issue with them is that you get green certificates not only for electricity generated from wind or PV, but also for the biomass co-firing in the old and inefficient coal-fired power plants.  The fact that an increasing share of the biomass is imported from the other side of the globe and then burned with 26-27% efficiency makes it difficult to call this source of energy “green”. But over the last few years large energy companies became specialized in burning trees and imported biomass in their power plants. That led to a significant fall in the price of the green certificates. As a result a representative of Tauron, the second largest power producer in Poland, called the government to take action and increase the price of the certificate by purchasing some of the certificates: not really in accordance with the free market ideology that Polish government and representatives of the Polish energy companies are defending so strongly at the European level.

Here two points must be stressed: first of all, the price of the green certificates in Poland needs to increase to make investment in renewable sources of energy profitable. Secondly, no, I’m definitely not a socialist (this is to some American readers if there are any). I’m old enough to remember the tragic consequences of introducing a system in which the government gave itself the right to decide what’s best for its citizens. But the limitations of the free market should also be kept in mind. As it is now free market doesn’t force companies and individuals to use limited resources sparingly. Free market leads to the most effective utilization of resources at a given point in time, but often fails to take into consideration long-term developments.

Free market is like chocolate: it should be indulged in with caution. That concerns especially emission trading scheme and support for renewable energies. In both cases long-term perspective is necessary. If the proceeds from the investment are hard to predict, the investment will not be made or the financing will be granted at a very high price. As a result in the power sector free market may lead to the development of the cheapest sources of energy but at a much higher prices.

Poland has experienced the tragic consequences of a central planned economy. Possibly this is the reason for the fascination with the free market. Another reason is the inefficiency of the government which after 14 years of talking about it still wasn’t able to adopt a law dealing exclusively with renewable energy. Free market in the power sector is fine as long as it includes the full external costs of a source of energy and allows for a long-term planning to investors. Both elements are missing in the case of the European ETS and the quota mechanism aimed at supporting the development of renewable sources of energy in Poland. Defending a flawed instrument only because it has some traits of a free market has more to do with ideology than common sense.

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