[REPORT] HDV electrification in Poland. Challenges and opportunities.

The purpose of this report is to present available tools to support the development of the zero-emission truck market, taking into account the specificity of the sector in Poland. The transport sector in the European Union (EU) is facing major changes related to climate policy. This means the transformation of the transport system ? including truck transport
? towards zero-emission solutions, which also makes more and more economic sense.

These changes are inevitable, but their effective support can make the transformation faster and would give transport companies that will efficiently carry it out a competitive advantage. This is particularly important for the Polish transport sector, as it is an important part of our economy. Support for its development is needed so that it can maintain its competitiveness and strong position on EU markets. Delaying electrification could result in a loss of position
in key markets to competitors and a crisis in the sector.

Effective support to the transformation of the truck transport industry is important for Polish economy and labour market. Truck transport is a significant emitter of greenhouse gases. However, unlike passenger transport, before the COVID-19 pandemic, the level of emissions of the industry was growing even in the most developed countries. In order to achieve the
goals of the Paris Agreement, reducing emissions from this sector is crucial. Actions in this direction are taken by not only the European Union through further legislative initiatives, but also other economies, e.g. yhe United States under the Inflation Reduction Act. The electrification of the industry also makes more and more economic sense: technological progress has resulted in availability of zero-emission trucks capable to replace combustion vehicles on most routes, and the total cost of ownership zero-emission trucks over the next 10 years should become significantly lower than for diesel trucks. Transformation of this industry is important for Poland, because transport and storage are one of the main sectors of the Polish economy. Road freight transport is responsible for the largest parts of the value generated and the employment.
At the same time, it seems that this should not change in the coming decades, despite competition from i.a. railways and intermodal transport.

Although uncertainty about the exact direction of market development remains high, we can identify main technological trends determining future changes. In particular, primarily because of the needs of the passenger vehicle market, electric batteries technology is rapidly developing, resulting in a gradual decrease of difference of the prices between
battery trucks and internal combustion ones. Therefore, it seems that battery powertrain should be the basis for the development of the zero-emission vehicle market in the coming years. In the longer term hydrogen fuel cell vehicles are a technology potentially complementing the zero-emission truck market in niches where battery technology cannot be
used. Currently, the main barrier to market development is no longer the availability of technologies and vehicles but increasingly the lack of infrastructure. The issue of the development of public charging infrastructure is to be addressed by the EU AFIR regulation, imposing significant obligations on Poland to expand the battery charging network and hydrogen refuelling stations on roads within the TEN-T network but according to vehicle manufacturers, it is insufficient. Poland should consider the possibility of taking more ambitious actions aimed at the development of infrastructure. At the same time, however, due to the structure of the energy mix based on coal, electric vehicles in Poland will not be realistically zero-emission in the coming years unless HDVs are charged from dedicated RES installations. To truly ensure zero-emission transport, it is necessary to increase investments in the production of electricity from renewable or non-emission sources in
Poland. However, an increase in the share of zero-emission vehicles would significantly reduce other harmful emissions of i.a. nitrogen oxides.

Transformation of Polish road transport industry is important not only from the perspective of Poland, but also of the whole European Union. Polish carriers have specialized in international transport. This is mainly due to the handling of Polands international trade, but they also have a significant share in other main routes within the European Union, e.g. they are responsible for over 1/3 of tonne-kilometres in transport between France and Germany. This translates into high demand for their services by foreign entities, which results in their leading role in the cabotage market in the EU. At the same time, however, more than 30% of the mileage and almost 80% of the tonnage handled by the industry falls on intra-Polish transport. This means that although foreign trends should support the electrification of our industry, Poland itself should care about supporting the process. At the same time, from the perspective of other EU countries, support for Polish road transport in this process would be beneficial for their climate goals. However, this also means that the delay in the implementation of
the electrification of the industry by Poland may result in the loss of position on key markets to competition and the crisis of the industry.

Although the industry currently has high investment needs, investment level is limited i.a. because of the market structure. Road transport is based on micro-enterprises and is highly labour-intensive. This results in a relatively low level of investment compared to the value of the industry. At the same time the investment needs of the market are high. Polish
carriers on average use significantly older vehicles. Moreover, the pace of fleet replacement for new vehicles after the COVID-19 pandemic is relatively slow compared to the EU. This is partly offset by the import of used vehicles from abroad. Poland is characterized by a high potential for electrification of the fleet. Although the market is dominated by the heaviest vehicles (over 30 t of permissible weight), vehicles of 3.5-10 t still play an important role in Poland. This should encourage the electrification of transport, as due to shorter routes and the lack of need to charge along the routes covered daily, they are the easiest to replace technologically. In addition, the high proportion of older vehicles is not necessarily a negative feature: they are easier for retrofitting, i.e. the conversion of diesel vehicles into battery vehicles. At the same time, despite a series of strong negative shocks on the market, the forecasts for the development of the road freight transport market are positive for the coming years. However, inflation and potential costs of market consolidation in relatively high interest rates environment may result in companies lacking the resources to purchase zero-emission vehicles in the coming years.

The EU regulatory environment provides for a number of solutions supporting the decar- bonisation of transport. Its impact on the development of zero-emission truck transport can be seen in two dimensions. Firstly, the energy and climate objectives applicable to Member States are an incentive for them to introduce national instruments aimed at reducing greenhouse gas emissions and increasing the share of RES in the energy mix. This is achieved i.a. through the objectives of reduction of CO2 emissions for non-ETS sectors, sectoral objectives for transport, and air quality standards. Secondly, EU regulations directly improve the competitiveness of zero-emission drives compared to combustion engines. This is achieved both through an increase in the costs of operating internal combustion vehicles, e.g. the introduction of EU Emissions Trading System (CO2) for the road transport sector and by improving the competitiveness of zero-emission vehicles, e.g. the requirement to develop charging infrastructure or the mandatory share of zero-emission vehicles in public procurement; or by acting simultaneously in both directions, e.g. Eurovignette differentiating infrastructure charges depending on emissivity. Polish strategic documents currently lack provisions directly related to the development of zero-emission trucks. Nevertheless, stricter emission standards and support for the development of zero-emission trucks are part of a broader framework of national strategic documents such as the Strategy for Responsible Development until 2020 (with a perspective until 2030) or the Electromobility Development Plan in Poland.

The EU?s decarbonisation policy should be complemented by a instruments implemented at national level. Although the development of zero-emission heavy transport is a relatively new regulatory area, several European countries have already implemented policies in this area. Among the European countries with highest number of registered electric trucksby February 2023, all have implemented comprehensive support policies using instruments from at least two of the five categories: subsidies for the purchase of a vehicle, tax reductions, subsidies for investments in charging stations, infrastructure development strategies, facilitation of use. In addition, the support instrument may also be green public procurement and the introduction of restrictions on movement in urban areas and/or clean transport zones/low emission zones. Experience of other countries shows that comprehensive development and support policy of zero-emission transport can be effective.

Considering the above factors instruments that can be used to support the development of the zero-emission vehicle market can be identified. The tool with the greatest potential impact on the competitiveness of zero-emission vehicles is direct financing of their purchase, but the cost of this instrument is high and its use should be limited to the first period of
transition of the sector. In particular, this applies to medium-sized electric vehicles, as their cost is already approaching the cost of using internal combustion vehicles. Therefore, other tools of public support should also be used, and their selection should take into account a number of factors i.a. existing market barriers, the impact of the tool on the total cost of
ownership of a vehicle, the impact on public finances, as well as the diversity of needs of specific recipients, in particular the needs of micro-entrepreneurs. Instruments aimed at taxing CO2 emissions will be of great importance, i.e. differentiation of taxes and charges related to the use of a vehicle according to CO2 emissions. It will be extremely important to take into account the needs of micro-enterprises and prepare dedicated solutions for them, as they represent the majority of market players and have limited financial resources, low availability of tools from financial markets and are vulnerable to market shocks. The availability of infrastructure is also important. It can be addressed in a short time by surcharge
for the purchase of private charging infrastructure, but in the longer term development of a public vehicle charging and hydrogen refuelling network is needed. Financing the green transport transition can benefit from many sources. In addition to
state founds, financial instruments for implementation of EU Green Deal strategy should be used, especially as Poland has strong negotiating arguments in this regard. It is also worth using trends in the financial sector ? redirection of financing towards sustainable and green investments, in line with the EU Taxonomy.

Due to the dynamic changes on the market, constant monitoring of the effectiveness of instruments is necessary. It is also recommended to repeat the TCO analysis and review instruments and program parameters every 2-3 years.

The following report is divided into five chapters.

1. The first Chapter (Context) presents the environmental, economic and technological context of changes in the truck transport market. It shows why the promotion of zero-emission road transport is necessary to achieve climate goals, why changes in the transport sector are particularly important from the perspective of the Polish economy and what technologies
play a key role in the transformation of the market. This chapter also points to the existence of barriers limiting the pace of achieving zero emissions in truck transport, in particular related to the energy sector.

2. Chapter Two (Analysis of the market and fleet structures of heavy goods vehicles) contains an analysis of the truck transport market in the European Union and Poland: the role it plays in the transport of goods, the structure of transport companies, the structure of demand for truck transport services with particular emphasis on demand in international transport and the structure of the truck fleet. The analysis is supplemented by an indication of the main barriers to market development and prospects for its development in the coming years.

3. Chapter Three (Regulatory environment and support instruments) presents in detail the legal aspects of the promotion of zero-emission truck transport. It reviews the regulatory environment at the level of the European Union and the support instruments used by countries within the European Economic Area, with particular emphasis on Germany, France, and the Netherlands, as the countries that support development of zero-emission trucks to the greatest extent.

4. In Chapter Four (Analysis of the Total Cost of Ownership (TCO) by Powertrain Technology) a calculation of the total cost of ownership of the truck (TCO) depending on the drive technology is presented. In particular, the elements affecting TCO for battery and hydrogen vehicles compared to diesel vehicles today and in the perspective of 2030 and 2040 for
medium and heavy-duty vehicles are analyzed.

5. Chapter Five (Recommendations), based on the analyses presented in the previous chapters, presents recommended support tools. It indicates the context of the selection of instruments, presents a set of available market support tools, assesses their usefulness, and informs about the impact of selected instruments on TCO. The chapter also contains
information on the possibilities of financing the transformation.