Tim Gosling in Prague -

Poland is set to boost the role of coal in its energy mix, the prime minister said on June 27, as he officially pushed the country's top utility back into a flagship project to add coal-fired capacity. The move raises further questions over Warsaw's confused energy strategy, its relations with Brussels, and the share prices of state-controlled companies.

Shares in PGE slumped as the energy utility signed off on the PLN11.6bn project to expand the capacity of Opole. Although it was joined in the project by coal miner Kompania Weglowa and state fund Polskie Inwestycje Rozwojowe, concern remains that the plan to add 1.8 gigawatts (GW) will be loss-making due to the current slump in power prices.

On top of that, the worry is that Poland's state-controlled companies are now at the mercy of a government struggling with an unrealistic energy strategy. PGE's share price rose as it pulled out of the plan to expand Opole in April. However, with Prime Minister Donald Tusk having long identified it as a flagship project, the company was bounced back into it earlier this month, accompanied with vague promises of help with financing.

The agreement that PGE has signed with its state-controlled peers will limit the risk of the project being unprofitable, Treasury Minister Wlodzimierz Karpinski said, according to Bloomberg. Prime Minister Donald Tusk added that the project is now set to start this summer.

The idea depressed investors, who are wary of the pressure on Polish state-controlled companies to implement a confused strategy to increase energy security. PGE has already told Warsaw that its hopes of building the country's first nuclear power plants, and developing a significant shale gas industry are unrealistic. "We have to build a model for Opole that will make the project profitable or at least safe for PGE," Tusk said at the signing. "It's not about business for the company but the national interest of all Poles."

On top of that, the government has been pushing for higher dividends to help with its fiscal consolidation efforts in recent years. However, the struggle of the state-controlled companies to keep up with investment demands has seen that drive fading this year. The state treasury added to the pressure by approving a payout well below expectations, which saw PGE shares drop as much as 7% to a session low of PLN14.87, reports Reuters.

The revival of Opole encapsulates the mess that Poland's energy strategy now finds itself. In the face of the difficulties - nuclear power is extremely expensive; shale gas test results have been disappointing thus far - the PM surprised by saying the project will lead a push to increase the role of coal in Poland's energy mix. "Coal will again find its place in the Polish energy mix," Tusk said.

However, thanks to its abundant domestic supplies, Poland already relies on coal for over 90% of its power, but it's rapidly running out of alternatives. Grid operator PSE said recently that the country faces a potential crisis as early as 2016 due to its ageing power plants. The analysis said the country needs to retire up to 6.6GW, or 40%, of its capacity by 2020.

Yet with power prices through the floor - low demand has seen them drop over 30% in the last 12 months - companies are understandably unwilling to invest. A host of projects have been pulled this year. At the same time, much of the blame can be laid at the government's door. It's failure to lay out clear and attractive regulation and tax regimes for both shale gas and renewables such as wind have held back investment.

All of which has Warsaw in hot water with the EU's environmental policymakers. Brussels views Poland as the black sheep when it comes to renewable energy targets: its high use of black coal - let alone expanding it - is already considered an obstacle in global climate talks, and Warsaw runs a constant battle against supra-national environmental legislation.