The European Commission published a Communication document on the European Green Deal (“EGD”) in December 2019. The key long-term objective of the EGD is to make the EU carbon neutral by 2050. In addition, the Commission aims to protect, conserve and enhance EU’s natural capital and to protect human health and well-being against threats and adverse environmental effects. These objectives are to be achieved through a number of initiatives covered by the EGD. From PGNiG’s perspective, the most important initiatives include: The European Climate Law, The reform of the ETS, energy efficiency challenges and Green Finance.
Regulatory risks
One of the important factors with a significant impact on the operations of PGNiG as an entity operating mainly in the European Economic Area (EEA) is the European Union’s climate and environmental policy.
It provides a framework for PGNiG ’s future business decisions and may affect the profitability of investment projects initiated or completed in the past. This is why PGNiG closely monitors the activities of the European Commission and other EU institutions by taking part in public consultations and engaging in decision-making processes through industry organisations, or by presenting its recommendations to the Polish government. The European Green Deal for 2019-2024 is the most important climate programme of the European Commission, with potentially the largest impact on PGNiG’s operations.
In March 2020, the European Commission presented a draft Regulation of the European Parliament and of the Council establishing the framework for achieving climate neutrality and amending Regulation (EU) 2018/1999, referred to as the “European Climate Law”. After more than a year of negotiations, which primarily concerned ambitions for intermediate targets, in June 2021 the European Parliament and the Council adopted the Regulation. It introduces the goal of making the entire EU climate-neutral by 2050. In addition, in accordance with Article 4 of the Regulation, a binding EU climate target is a reduction of net greenhouse gas emissions (emissions after deduction of removals) in the EU by at least 55% by 2030 compared to 1990. This means an increase of the previous 2030 reduction target of 40% by 15 percentage points. These ambitious goals are to be achieved by adopting new and revising existing laws. The laws of key importance for PGNiG are discussed below.
The EU Emissions Trading System (ETS) is the core of the European Union’s climate and energy policy. By imposing the obligation to cover greenhouse gas emissions with an appropriate amount of allowances, the ETS leads to internalisation by industrial and energy companies, of external costs related to adverse impacts on the climate. The system has been criticised in recent years for failing to incentivise sufficient low-carbon investment, which was due to the continuing low prices of CO₂ allowances (EUA). However, the fourth stage of the ETS (2021-2030) is marked by a sharp increase in the EUA prices. This is largely the result of the decision to increase the reduction ambition for 2030. The currently applicable EU ETS rules were designed with a view to reducing by 2030 carbon emissions in the sectors covered by the ETS by 43% compared to 2005. However, in line with the European Commission’s impact assessment, the increase by the European Climate Law of the overall 2030 reduction target will entail a need to reduce emissions in the sectors covered by the ETS by 54% relative to 2005 in the baseline scenario* (by 11 pp above the current target). The achievement of this higher target will mainly entail an accelerated removal of emission allowances available on the market, leading to a faster increase in their prices.
While increases in the prices of CO₂ emission allowances were initially beneficial for natural gas, leading to the replacement of electricity generated from coal with that generated from natural gas (e.g., in Germany in 2020 68% more electricity was produced from natural gas than from coal while as recently as in 2018 gas-fired power generation was 71% lower than coal-fired power generation ), a further price increase may accelerate the rate of energy transition by providing incentives for the development of zero-emission technologies which will also replace gas-fired units. Additional pressure on natural gas may emerge if the ETS covers sectors hitherto excluded from it, namely transport and construction, which will result, among other things, in greater competition for domestic gas furnaces from solutions such as heat pumps.
* Commission Staff Working Document Impact Assessment, Stepping up Europe’s 2030 climate ambition – Investing n acclimate-neutral future for the benefit of our people, s. 98-99.
In March 2018, the European Commission released an action plan on sustainable finance.* Its objective is to reorient capital flows on financial markets towards sustainable investment in order to allow the EU to further the 2015 Paris Agreement goals. With that objective in mind, in May 2018 the Commission put forward a draft legislation package that included the interest rate benchmark reform; the taxonomy regulation and a regulation on the disclosure of non financial information by financial market participants. Since sustainable finance is a crucial element of the European Green Deal,** in 2020 the Commission conducted a consultation on the renewed sustainable finance strategy, which was summarised in a report published in February 2021. In response to the views and opinions submitted by consultation participants, a new package of regulations and draft legislation aimed at making the financial sector greener was published by the Commission in April 2021. Of key importance to PGNiG is Commission Delegated Regulation***,
supplementing Regulation (EU) 2020/852 on taxonomy.**** The delegated regulation establishes technical screening criteria for determining whether an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation. Its importance is determined by the fact that an economic activity will be considered ‘green’ only if it meets the above criteria, and this in turn will be fundamental to future decisions of investors seeking to green their portfolios. The decision regarding the classification of the natural gas business was postponed until 2022. PGNiG predicts the natural gas business will be classified as a ‘transitional activity’. The risk of a decision to exclude natural gas from the taxonomy framework entirely will force PGNiG to take steps to change its financing strategy.
* Communication from the Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions: Action Plan: Financing Sustainable Growth https://eurlex.europa.eu/legalcontent/PL/TXT/PDF/uri=CELEX:52018DC0097&from=PL
** European Commission, Communication on the European Green Deal, p. 18.
*** (EU) C/2021/4987 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by specifying the content and presentation of information to be disclosed by undertakings subject to Articles 19a or 29a of Directive 2013/34/EU concerning environmentally sustainable economic activities, and specifying the methodology to comply with that disclosure obligation https://eur-lex.europa.eu/legal content/PL/TXT/?uri=PI_COM:C(2021)4987
**** Regulation (EU) 2020/852 of the European Parliament and of the Council of June 18th 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 https://eur-lex.europa.eu/legal content/PL/TXT/PDF/uri=CELEX:32020R0852&from=PL
The Communication on the European Green Deal stated that the plan for the EU’s transition to climate neutrality will also include actions to decarbonise the natural gas sector, particularly by reducing methane emissions. In line with this plan, in October 2020 the European Commission published a Communication on an EU strategy to reduce methane emissions. The first step taken under the strategy will be to tighten the reporting requirements to ensure the methane emission measurement and reporting methods applied by companies are much more accurate than today. This should contribute to a better understanding of the problem and improve the quality of information used for the purposes of further mitigation measures*. In the energy sector, the Commission is to draw up legislative proposals on compulsory monitoring, reporting and verification of all energy-related methane emissions and on an obligation to improve leak detection and repair (LDAR) of leaks on all fossil gas infrastructure. The Commission is also to consider
legislation on eliminating routine venting and flaring.
The proposed regulations will entail additional investment to accurately measure methane emissions from natural gas production facilities and distribution infrastructure owned by the PGNiG Group.
*European Commission, Communication on an EU strategy to reduce methane emissions, p. 4.
