“We welcome the announcement that the Modernisation Fund will continue beyond 2030. However, the EU ETS reform proposal announced last week might be better tailored to address the challenges facing the district heating sector. This applies to both the gradual inclusion of waste-to-energy plants in the emissions trading system and the European Commission’s approach to the allocation of free emission allowances for district heating. The Commission’s proposal does not provide for the continuation of the additional allocation of free allowances in exchange for investment. The district heating sector, currently receiving relatively few allowances compared with its actually reported emissions, warrants consideration of the existing benchmark-setting methodology. The funds derived from the free allocation of allowances are used to meet current investment needs in our sector; therefore, the introduction of the so-called 80/20 rule may limit the scope for further decarbonisation and emissions reductions. Our priority is an EU ETS framework that allows the district heating sector to maintain its current pace of transformation while mitigating the impact of transition costs,” said Marcin Laskowski, President of the Polish Association of Heat Energy (PTEC).
The latest 2025 Heating Energy Market In Numbers Report prepared by the Polish Energy Regulatory Office confirms a significant improvement in the sector’s current economic condition. Enhancing profitability is important because it helps restore project bankability and the sector’s financial capacity to provide its own contribution. However, it cannot substitute for stable, long-term support mechanisms. In 2025, district heating companies spent a record PLN 5.59 billion on modernisation, development and environmental protection. At the same time, the fixed asset depreciation rate remained at 50.61 per cent. Analysis by the Polish Association of Heat Energy, however, shows that the total investment required to transform the Polish district heating sector by 2050 will range from PLN 299 to 466 billion, covering generation sources, networks and consumer-side infrastructure. Therefore, the annual investment scale needs to increase significantly.
From this perspective, the European Commission’s proposal to phase out free allowances for district heating to zero by 2040 as part of the EU ETS reform does not take into account the specific circumstances of countries such as Poland, where the transition began with a high share of coal. At present, free allocation covers only a small share of the sector’s emissions – for example, at PGE Energia Ciepła S.A., this amounts to an average of around 7 per cent of its compliance requirements. Further reductions in this area will not automatically accelerate decarbonisation, but may reduce the funds available for investment and put further pressure on heat prices.
The transformation must take into account the availability of technology and fuels at an appropriate scale. In many Polish systems, natural gas will remain a transitional fuel, enabling a shift away from coal until sufficient supplies of biomethane or other decarbonised gases are secured. It should not be assumed that every large cogeneration unit – such as a 50 MW CHP facility – can be currently replaced by a heat pump of equal capacity without considering factors like the district heating network, power supply availability, location, access to low-temperature heat sources, storage options, and most importantly, security of supply requirements. A steep rise in the cost of transitional technologies might hinder the coal phase-out process instead of accelerating it.
The benchmark methodology also needs to be revised. The Commission itself acknowledged the challenge by proposing a temporary easing of the heat and fuel benchmark reductions for 2026–2030. This is significant because the heat benchmark was previously lowered from 47.3 to 31.2 allowances per TJ, a 34.1% reduction, and compared to Phase III of the EU ETS, by about half overall. A methodology based on the top 10 per cent of the most efficient installations should not compare large, seasonally operated district heating systems with zero-emission units whose technology cannot be applied at a comparable scale. Therefore, after 2030, a distinct benchmark is needed for district heating, taking into account the scalability of the technology, seasonality, peak capacity and security of supply.
The Polish Association of Heat Energy calls for the continuation of free allocation beyond 2030 at a level linked to the actual pace of the transition, the continuation of additional allowances for investment in lower-income countries, and the provision of adequate funding for the Modernisation Fund. The 80/20 rule also requires adjustment: retaining 20 per cent of the free allowance allocation until the end of the five-year investment period effectively turns part of the support into a deferred reimbursement, rather than providing capital at the time of project implementation. The social dimension of the transition cannot be treated as incidental – its costs will be borne directly by residents, local authorities and businesses. Therefore, the pace of change must be ambitious, yet technically feasible and economically acceptable.
From the sector’s perspective, it also seems reasonable to reconsider the proposal to include waste-to-energy plants in the EU ETS, with the obligation to surrender allowances phased in gradually: from 25 per cent of verified emissions in 2031, through 50 per cent in 2032, and 75 per cent in 2033, up to 100 per cent from 2034 onwards. Given this sector’s relatively small share of total emissions, this approach may yield only a limited impact on emissions reduction, whilst at the same time increasing the costs of heating and waste management borne by residents and local authorities. The sequence of measures may also seem contentious: incineration plants, which recover energy and reduce landfilling, will be subject to EU ETS costs from 2031. Meanwhile, the decision on whether to include landfill sites – sources of methane with a much higher global warming potential – is to be preceded by further monitoring and assessment, scheduled only for the end of 2034.