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What to expect in the CEE energy industry – interview with Christian Schnell, energy partner at Dentons Warsaw

While we move forward with the energy transition, new regulations about renewables and Power Purchase Agreements (PPAs) will become the new normal to meet changing demand in Central and Eastern Europe.

CEENERGYNEWS spoke with Christian Schnell, who joined Dentons Warsaw at the beginning of the year as an energy partner, about the most important energy trends we can expect in the CEE region and the advantages (and/or disadvantages) of RES auctions versus corporate PPAs.

“The Fit for 55 package will be the main trigger for new investments in the energy industry from 2022. Although it is not just a job for Europe alone to work toward a net-zero world,” he begins.

Mr Schnell reminds us that there are two major ways to get to net-zero by 2050: electrification (especially in the heat and transport sectors) and increasing energy efficiency so that the whole transition won’t be too expensive for end consumers.

“Direct electrification is cheaper than indirect electrification,” he underlines. “It is cheaper to use heat pumps or e-mobility than green or blended hydrogen, for instance, as heat pumps are a cheaper heat source than hydrogen.”

“In Europe in particular we also have to take into account the role played by politicians, lobbies, unions (for example coal unions) and the pressure coming from suppliers like Russia,” he continues. “If we want to switch to renewables, we have to decentralise the system; Transmission System Operators will have a more passive role and Distribution System Operators a more active role in securing grid stability.”

According to him, what we will see as an add-on to RES in the power sector (whether wind or solar) can be a demand-side response, battery storage, hydrogen and syngas, supported by digitalisation and artificial intelligence.

“Utility companies have understood the story, now it is up to the politicians to join the game and leave the old-fashioned centralised top-down energy system behind,” Mr Schnell highlights.

In Poland, in particular, coal still represents 75 per cent of the energy mix in both power and heat generation. Therefore, without a mix of gas and nuclear, countries like Poland are extremely exposed.

“Everybody is looking at Poland and the truth is that we see it as the end of coal, so the Polish energy system has to jump from power generation from base-load coal to another world, completely new: a decentralised and digitalised world of wind farms and PV,” Mr Schnell points out.

“In our opinion, Poland is very well equipped when it comes to the IT background, it is an excellent IT hub,” he continues. However, many people in Upper Silesia are dependent on the coal industry and this may still have an impact in the next elections in autumn 2023.”

Indeed, we have to think in the short and mid-term.

“We know what the future looks like in the 20-year horizon, but how to organise a proper transition is not yet entirely clear,” he adds.

With the volatility of the electricity system growing, due to renewables, a keyword for 2022 will be sector coupling.

“Heat pumps add flexibility to the system, they require night-time electricity when it is cheaper due to lower demand,” Christian Schnell explains. “Generally, the demand for heat pumps is compatible with wind generation. The colder it gets, the more wind you get. However, heat pumps will also increase electricity demand.”

When it comes to district heating, which is a huge topic in many CEE countries because of historical investments, Mr Schnell believes we need to replace large high-temperature pipe systems, causing substantial energy losses.

“New EU funding will support micro heat systems, which will surely help enable a proper transition,” he notes. “However, peak technologies are still required for both district heating and balancing wind and PV generation.”

“For the time being, wood biomass power and heat are warmly welcomed in the EU, but this too is changing because of sector coupling and short-term emissions. We will see large investments in wood and agricultural biomass gasification very soon, to replace natural gas. Natural gas is a large CO2 and methane emitter and leads to energy dependency.”

As for what is the best way to move forward, when it comes to the fight between auctions and corporate PPAs, Mr Schnell quotes the example of Hungary, where the first METAR tender rounds were very successful. However, now we are more realistic as the prices and volume decrease.

“Also, the prospects in the Balkan region are looking promising.,” he says. “But, the small currency markets and bribery are risk factors which make investments in these countries less attractive.”

On the contrary, most RES investments in the region take place in Poland, as it is the largest consumer market.

“The contract for difference support system was the most attractive investment case, but since the second half of 2021 corporate PPAs have become more attractive,” he underlines. “The corporate PPA market is becoming more sophisticated and besides sleeved pay-as-produced PPAs, we see an increasing amount of financial PPAs. Industrial off-takers ask for base-load PPAs, which is risky with one technology but more feasible when you have a mix of PV combined with wind and battery storage. In this context, cable pooling becomes an attractive way to optimise available grid connection capacity, but this still requires regulatory changes.”

With the Fit for 55 legislation package, Mr Schnell also sees a strong recommendation for EU Member States to support small and medium corporate off-takers with guarantee schemes to enable multi offtake PPAs, which should further boost the corporate PPA market.

Finally, another major trend in 2022, going forward, will be hydrogen, a source that Christian Schnell expects will play a role where direct electrification combined with energy efficiency measures is not available at a reasonable cost.

“This includes heavy-duty transport and the shipping sector, but very cheap power is required for green hydrogen to become competitive,” he says, referring to offshore generation in the Baltic Sea as the best fit for electrolysis to produce hydrogen.

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