Macroeconomic situation
Enea Capital Group’s operations are focused basically on the territory of Poland. The same core macroeconomic factor affecting both achieved results and financial situation is the development pace and the general condition of the Polish economy.
According to the preliminary data of the Gdańsk Institute for Market Economics (IBnGR) in 2016 the economic growth pace was 2.8%. It has been the lowest pace of economic growth for three years.
The key factor of the economic growth in 2016 was the domestic demand. The element of the domestic demand with the lowest dynamics in 2016 was gross fixed capital formation, i.e. investments. The total consumption grew much faster than the economic growth rate. In 2016 it grew by 3.6%. The same pace was reported for individual consumption.
As regards sectors the fastest growing area of economy in 2016 was market services. In 2016 the added value in the industry grew by 3.5%, and production sold of the industry grew by 3.2%. The deepest crisis observed for the last ten-odd years has been reported in the construction industry. In the whole year, the added value in the construction industry dropped by 11.9%, and production sold of the industry dropped by 14.1%.
Pursuant to the forecast of IBnGR the rate of growth of the gross domestic product in 2017 will amount to 3.0%, which means it will be slightly higher than in the preceding year. Pursuant to the forecast by IBnGR, the economic growth will accelerate during the next quarters, and its quarterly structure will not be very differentiated - in Q1 GDP will grow by 2.8%, and in Q4 by 3.2%. In 2018 it is expected that GDP will still be slightly increasing and should total to 3.2%.
In 2017 the added value in the industry will grow, pursuant to the forecasts of IBnGR, by 4.3%, thus the growth will be slightly faster than in the previous year. On the other hand, the situation in the construction industry will improve considerably. The pace of growth of the domestic demand in 2017 will amount to 3.1%, i.e. slightly more than in 2016.
During 2017-2018 prices in Poland will grow moderately - inflation will not exceed the level set by the inflation target of the National Bank of Poland. According to the Institute's forecast, in 2017 the average inflation level will be 1.3%. On the other hand, in 2018 the inflation should amount to 2.2% as the annual average. The main factor impacting the pace of growth in consumer prices will be higher prices of fuel and food.
The summary of the key macroeconomic ratios characteristic for the Polish economy in 2016-2018 is presented below.
| Description | unit | 2016 | 2017 | 2018 |
|---|---|---|---|---|
| GDP | change % | 2.8 | 3.0 | 3.2 |
| Added value in industry | change % | 3.5 | 4.3 | 4.5 |
| Added value in construction sector | change % | -11.9 | 6.8 | 7.7 |
| Added value in market services | change % | 4.7 | 3.2 | 3.4 |
| Domestic demand | change % | 2.8 | 3.1 | 3.3 |
| Gross expenditures on fixed assets | change % | -5.5 | 3.6 | 7.1 |
| Industrial production sold | change % | 3.2 | 3.9 | 4.2 |
| Construction production sold | change % | -14.1 | 5.0 | 7.0 |
| Inflation | in % | -0.6 | 1.3 | 2.2 |
Legal frames of energy market functioning
Regulatory surrounding
The legal basis for energy market functioning in Poland is the act of 10 April 1997 Energy Law and related secondary legislation (regulations.
At the same time, along with Poland accessing the European Union, the Polish legal regulations relating to the energy market were reconciled with the European laws, including in particular EU Directives regarding the principles of the common electricity market.
The central public administration body nominated pursuant to the Energy Law to realise the duties relating to the fuel and energy management and promote the competition is the President of the Energy Regulatory Office. The objective of the President of the Energy Regulatory Office is regulation of the operations of generators, distributors and companies trading in energy compliant with the Energy Law and Polish energy policy strategies with a concurrent pursuing of balancing the interests of particular participants of the energy market.
Enea SA's operations are conducted in the environment subject to detailed legal regulations, both in Poland and in the European Union. Legal regulations relating to the energy sector are often derivatives of political decisions, therefore there is a risk of frequent changes within this area which the Company is not able to foresee, and which may, as a consequence, result in a lack of unity and uniformity of regulations, based on which Enea SA conducts its operations.
Amendments within regulatory surrounding
Act of 20 February 2015 on renewable energy sources
In H1 2015, the President of the Republic of Poland signed an act on renewable energy sources. The goal of the act is increasing the energy security and environment protection, e.g. as a result of an efficient use of renewable energy sources. The act provides for, e.g., achievement of at least 15% share of energy from renewable sources in the final gross consumption of energy in 2020. Enea SA will be the so called obliged vendor, i.e. an entity obliged to purchase electricity generated in RES installations connected to the network of Enea Operator sp. z o.o.
On 29 December 2015 the Sejm adopted, after consideration of the Senate's amendments, the content of the act amending the act on renewable energy sources and the Energy Law (J. L. of 2015 No. 2365).
The goal of the amendment which came into force on 31 December 2015 is adjournment by 6 months of entry into force of the provisions of chapter 4 of the Act of 20 February on renewable energy sources (J. L. of 2015, item 478; further on as: RES act), and in particular the issues relating to the lunching of the auction system for the purchase of electricity from renewable energy sources installations and mechanism supporting the generation of electricity in microinstallations of the total installed electrical capacity not greater than 10 kW. Changes were proposed to be made to the provisions of the RES act, enabling the application of the existing provisions until 30 June 2016, and new regulations - from 1 July 2016.
The act amendment finally settles two issues:
- certificates of origin do not apply to energy generated from 1 January 2016 in installations with the capacity greater than 5 MW using hydropower to generate this energy
- certificates of origin adjusted with 0.5 coefficient apply to electricity generated from 1 January 2016 in multi-fuel firing installations excluding electricity generated in the dedicated multi-fuel firing installation
On 1 July 2016 the act of 22 June 2016 entered into force amending the act on renewable energy sources and some other acts (J. L. of 2016 item 925). The goal of the act is removal of interpretative doubts of legal and editorial regulations which entered into force in the act of 20 February 2015 on renewable energy sources (J. L. of 2015 item 478 and 2365), in particular Article 41 of the RES act.
Additionally, auctions will be performed in each group for the below mentioned buckets:
- with the level of utilisation of installed electrical power, total, notwithstanding the origin source, greater than 3,504 MWh/MW/year
- using for electricity generation some biodegradable fraction of industrial and municipal waste of plant or animal origin, including waste from waste processing installations and waste from water and sewage treatment, in particular sewage sludge, pursuant to the regulations on waste within the qualification of fractions of energy recovered from thermal recycling of waste
- in which CO2 emission is lower than 100 kg/MWh, with the rate of utilisation of installed electrical power not greater than 3,504 MWh/MW/year
- by members of energy cluster
- by members of energy cooperative
- utilising exclusively agricultural gas for electricity generation
- other than that mentioned in item 1-6
On 16 July 2016, the act of 20 May 2016 on investments in wind power plants entered into force (J. L. of 2016 item 961). Among the key regulations implemented based on the above mentioned act the following must be distinguished:
- Locating of a wind power plant is exclusively based on the local zoning plan mentioned in Article 4 of the act of 27 March 2003 on spatial planning and development (J. L. of 2016 item 778 and 904).
- Establishment of the location requirement (Article 4 item 1 and 2 of the above mentioned act) being the prohibition to construct a wind power plant in the distance smaller than 10x its height measured from the ground level to the object’s highest point, including technical elements, in particular rotor with blades (the total height of the wind power plant) from the following elements of the surroundings:
- residential building or any building with a residential function, which includes residential function,
- forms of nature conservation mentioned in Article 6 item 1(1-3) and 5 in the act of 16 April 2004 on environmental protection (J. L. of 2015, item 1651, 1688 and 1936),
- forest promotional complexes mentioned in Article 13b item 1 of the act of 28 September 1991 on forests (J. L. of 2015 item 2100),
however, the establishment of these forms of nature conservation and forest promotional complexes does not require observation of the distance mentioned above.
3. Amending the qualification of all the elements of a wind power plant as a building taxed with a fixed tax on buildings.
Licences
Energy groups operate on the Polish energy market based on granted licences. The table below presents the licences held by Enea CG Companies:
| Company | Licence for: |
|---|---|
| Enea SA |
|
| Enea Operator sp. z o.o. |
|
| Enea Wytwarzanie sp. z o.o. |
|
| Enea Trading sp. z o.o. |
|
| MPEC Białystok sp. z o.o. |
|
| MEC Piła sp. z o.o. |
|
| PEC Oborniki sp. z o.o. |
|
| LW Bogdanka SA |
|
REMIT
Since 7 October 2015 there has been a duty to report basic transactions and data (for standard contracts for electricity and gas supplies) to the European Agency for the Cooperation of Energy Regulators (Agency or ACER). Pursuant to the REMIT regulation, i.e. the regulation of the European Parliament and the Council (EU) No. 1227/2011 dated 25 October 2011 on wholesale energy market integrity and transparency (REMIT), until the above mentioned date the participants of the wholesale energy and natural gas market mentioned in Article 9 item 1 of REMIT are obliged to register with the national regulatory authority.
With the Act of 11 September 2015 on amendment of the Energy Law and some other acts (J. L. of 2015, item 1618), which entered into force on 30 October 2015, the principles were introduced guaranteeing REMIT application, including the penal provisions (Chapter 7A) for breaching the duties resulting from REMIT.
On 7 April 2016, as per Article 12 item 2 sentence 3 and 4 of the Commission (EU) implementing regulation No. 1348/2014 of 17 December 2014 on data reporting implementing Article 8 items 2 and 6 of Regulation (EU) No. 1227/2011 of the European Parliament and of the Council on wholesale energy market integrity and transparency, an obligation entered into force of reporting to ACER the other transactions in wholesale trade (standard and non-standard contracts for supply of electricity or natural gas concluded on OTC market, transmission contracts) and data on the operation of systems published by operators of transmission systems, LNG operators and operators of warehousing systems.
Directive of the European Parliament and of the Council No. 2015/2193 of 25 November 2015 on the limitation of emissions of certain pollutants into the air from medium combustion plants
On 28 November 2015 the Directive of the European Parliament and of the Council No. 2015/2193 of 25 November 2015 on the limitation of emissions of certain pollutants into the air from medium combustion plants (MCP Directive) was published in the Official Journal of the European Union. MCP Directive applies to combustion plants with the nominal heating capacity not lower than 1 MW and lower than 50 MW (the so-called "medium combustion plants"), notwithstanding the type of fuel they use (Article 2 item 1). Additionally, MCP directive applies to the connections of new medium energy combustion plants, specified in Article 4, including connections for which the total nominal heating power amounts to not less than 50 MW, unless the connection is the object of energy combustion plant included in the application scope of chapter III of directive 2010/75/EU. Article 4 of MCP directive provides that the connection of at least two new medium combustion plants is deemed one medium combustion plant, and their nominal heating power is summed in order to calculate the total nominal heating power of the plant, if vent gases of such medium combustion plants are removed via a common chimney, or in the assessment of the relevant authority, taking into account technical and economic factors, vent gases of such medium combustion plants could be removed via a common chimney.
The key scope of the MCP Directive regulation is specification of: the emission norms for three types of air pollutants - sulphur dioxide (SO2), nitric oxides (NOx) and dusts for medium combustion plants, and also dates until which it is necessary to satisfy the duty of observing relevant volumes of air pollution in the existing and new medium combustion plants. As per Article 17 item 1 sentence 1 of the MCP Directive, member states are obliged to bring into force the laws, regulations and administrative provisions necessary to comply with the Directive by 19 December 2017.
The provisions of the MCP Directive are significant as regards the companies in which Enea Wytwarzanie sp. z o.o. holds shares and in which the so-called medium combustion plants directly defined in the MCP Directive are located. These companies include: Przedsiębiorstwo Energetyki Cieplnej sp. z o.o. in Oborniki (PEC Oborniki), Miejska Energetyka Cieplna Piła sp. z o.o. in Piła (MEC Piła) and Miejskie Przedsiębiorstwo Energetyki Cieplnej sp. z o.o. in Białystok (MPEC Białystok).
Allowances for emissions of CO2
Poland, until the selection of the target trading platform, performed sales of its allowances for emissions of CO2 via EEX exchange seated in Germany. Last year, 17,125 mln allowances for emissions of CO2 were sold. The schedule of the Polish auctions in 2016 foresaw a significant growth in the volumes offered for sale, to almost 40.55 mln allowances for emissions of CO2. Last year, 63% of the volume was sold in 8 offers. One of the offers, dated 25 May, closed unsuccessfully in the light of insufficient number of purchasers. As of September 2016 Poland stopped selling on the German EEX exchange, intensifying at the same time
the operations aiming at the establishment of the national auction platform, whose legal frames are specified in the act on greenhouse gas emission allowance trading of 17 July 2015. In Q1 2017 it is expected that a tender will be announced for the conduct of auction sales. One of the candidates to manage the platform will be the Polish Power Exchange which in December 2016 obtained the permit for trading in EUA emission allowances. The act on greenhouse gas emission allowance trading scheme foresees two exceptions from the auction system - derogations for energy sector and national execution measures. At least 50% of inflows from the auctions is to be allocated to purposes strictly defined in the act and related to the climate policy.
| Auction date | Volume | Auction price [EUR] | Volume, cumulatively | % volume, cumulatively |
|---|---|---|---|---|
| 3 February 2016 | 3 526 000 | 5.70 | 3 526 000 | 9% |
| 2 March 2016 | 3 526 000 | 4.80 | 7 052 000 | 17% |
| 30 March 2016 | 3 526 000 | 4.77 | 10 578 000 | 26% |
| 27 April 2016 | 3 526 000 | 6.94 | 14 104 000 | 35% |
| 25 May 2016 | 3 526 000 | The auction was not settled | ||
| 22 June 2016 | 4 407 500 | 5.55 | 18 511 500 | 46% |
| 20 July 2016 | 4 407 500 | 4.65 | 22 919 000 | 57% |
| 17 August 2016 | 2 644 500 | 4.65 | 25 503 500 | 63% |
| 14 September 2016 | 3 526 000 | Auction cancelled - no new agreement with EEX | ||
| 12 October 2016 | 3 526 000 | Auction cancelled - no new agreement with EEX | ||
| 9 November 2016 | 3 526 000 | Auction cancelled - no new agreement with EEX | ||
| 7 December 2016 | 3 526 000 | Auction cancelled - no new agreement with EEX | ||
Reduction of emission of pollutants
Pursuant to the EU regulations, in particular the Directive of the European Parliament and the Council No. 2010/75/EU of 24 November 2010 on industrial emissions - IED (integrated pollution prevention and control), new, stricter standards of environmental protection have been in force since 1 January 2016. In relation to the above, all producers of electricity in Poland who use mainly high-emission coal technologies, are obliged to adjust the units to new environment requirements. The law, meeting the problems of entrepreneurs, provides for a possibility of using derogatory mechanisms. Mitigation of the requirements of the IED directive in the form of derogations, allows to achieve additional time for adaptation of generating units to stricter standards of pollutant emissions into the air.
Introduction of the quality tariff
From 2016 the President of the Energy Regulatory Office introduced elements of the quality regulation to the process of determining tariffs for ODSs - operators of the distribution systems (in Enea CG the function of ODS is held by Enea Operator). They were described in detail in "QUALITY REGULATION IN 2016-2020 FOR OPERATORS OF THE DISTRIBUTION SYSTEMS (who separated their operations as of 1 July 2007)". It means that the President of ERO set, for each ODS, goals for 2016-2020 whose non-performance (subject to the existence of mechanisms allowing to exceed the goal within certain limits) will result in financial consequences for these enterprises.
Annual settlements of each of the ratios of the quality regulation, starting from 2016, affect the tariff calculation, and thus ODSs’ income.
The President of ERO indicated that the ratios which have a direct impact on the regulated income of ODSs are the following efficiency ratios:
- SAIDI - system average interruption duration index
- SAIFI - system average interruption frequency index
- Connection Realisation Time (CRT)
Additionally, DST ratio - Settlement and Measuring Data Submission Time will be introduced to the quality regulation as of 2018.
2016 Tariff - distribution of electricity
Detailed rules of tariff calculation are governed by the Energy Law and relevant regulations relating to tariffs. Pursuant to the Energy Law, tariffs for a incensed energy company are approved by the President of ERO.
The tariff for Enea Operator for 2017 was approved by the President of ERO on 15 December 2016. It was prepared in accordance with the strategy developed and published by the President of ERO in the document titled "ODS tariffs for 2017". The rates of fees for the distribution services approved for 2017 resulted in changes in average payments for Customers in particular tariff groups in relation to 2016:
- A tariff group set - growth by 0.96%
- B tariff group set - growth by 5.73%
- C tariff group set - growth by 4.91%
- G tariff group set - growth by 5.61%
Operating Capacity Reserve (OCR)
- OCR mechanism is conducted by Polskie Sieci Elektroenergetyczne - Operator of the Transmission System (OTS) within the system services catalogue
- For producers of energy it is an economic incentive to offer generating capacities to OTSs in the peak hours of demand for power
- OCR includes the available generating capacity, being the surplus of the power available to OTSs over the contracts concluded to satisfy demand for electricity
- A unit price for OCR depends on the volume of generating capacity available to OTSs over the demand for electricity covered:
- within energy sale agreements
- on the Balancing Market as part of the free exchange
- A unit price for OCR depends on the volume of generating capacity available to OTSs over the demand and may not be higher than the reference price which for 2015 amounts to PLN 37.28 PLN/MWh, for 2016 41.20 PLN/MWh and for 2017 the level is PLN 41.79 PLN/MWh
Parameters of the OCR settlement model for 2016-2017:
| Parameter | 2016 | 2017 |
|---|---|---|
| Hourly budget [PLN] | 128 758.72 | 144 070.61 |
| Reference price [PLN/MWh] | 41.20 | 41.79 |
| Hourly volume of required OCR [MWh] | 3 451.09 | 3 447.49 |
| Number of demand peak hours | 3 780 | 3 765 |
| OCR annual budget [PLN mln] | 486.7 | 542.4 |
In 2016 the rules were changed for settling OCR, which in previous periods resulted in the fact that in the hours during which the OCR unit price reached the maximum level OTS did not fully use the budget designated for that service. Since 2016 new adjustment settlements were introduced (monthly and annual), which re-verify settlements and any unused funds from OCR are distributed among the units participating in the reserve.
Since 2017, consumption units with the possibility of reducing the demand are included within OCR (POR).
