TAURON Group Strategy

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Strategy defines the Mission and Vision and defines the key values of TAURON Capital Group:

 

Mission and vision best describe the strategic intentions of TAURON Capital Group that sees a large growth potential in developing sales of products and services that are tailored to customer needs. TAURON Capital Group is adjusting its profile in order to ensure full focus on the customer, appreciating the potential of new products, compatible services, modern contact channels as a response to customer needs.

The key values that support the implementation of the Strategy include Partnership, Development, Boldness (Partnerstwo, Rozwój, Odwaga – PRO), and these are values that reflect the way in which TAURON Capital Group wants to accomplish its goals. What is important as part of the Partnership is customer orientation, development of sustainable relationships and engagement. Development means focus on innovations, developing competences, skills and knowledge as well as seeking ever better solutions, meeting customer needs and improving the quality of services. Boldness means courage and openness, determination as well as engagement and passion in achieving common goals.

The 2016-2025 Strategy adopted ensures financial stability and a prospect for growth, while at the same time providing support for ensuring the stability of the power system. It is assumed that the long term growth will be driven by solutions based on customer relationships. The Mission and the Vision reflect such management philosophy and are in line with the customer-oriented growth concept.

Strategy describes the approach to developing the individual Segments of TAURON Capital Group’s operations, dividing them into those segments that TAURON Capital Group is planning to strongly expand, the segments that will constitute the foundation of the financial stability and the segments where strong emphasis on cost efficiency is required.

In the Update of the Strategic Directions, TAURON Capital Group emphasized the focus on the development of the low- and zero-emission sources while making TAURON Capital Group’s portfolio of assets more flexible. The above reflects the need for the energy transition of TAURON Capital Group and for increasing the investment potential aimed at developing the renewable energy sources, which, combined with the changed management philosophy and the orientation towards the customer and his / her needs, allows for the development of an innovative, open to the new challenges TAURON Capital Group.

Foundations for the growth of TAURON Capital Group’s value

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Strategy sets three priorities that assume the transition of TAURON Capital Group into a growing energy company that is aligned to the market and customer needs, ultimately providing a return on invested capital for its shareholders:

The Update of the Strategic Directions confirmed the validity of TAURON Capital Group’s priorities, emphasizing the need to build a strong capital group through:

  • transformation of the energy mix, and a strategic pursuit of a more than 65% share of low- and zero-emission sources in the structure of TAURON Capital Group’s generation assets in 2030,
  • optimization of the coal assets and the capital expenditure (capex) portfolio.

Pursuit of priorities based on the pillars adopted in the TAURON Group Strategy

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When the Group adopted its current Strategy in September 2016, it was assumed that the successful implementation of the Strategy would result in an increase in EBITDA from PLN 3.5 billion in 2015 to above PLN 4 billion in 2020 and above PLN 5 billion in 2025.

The Strategy and the Update of the Strategic Directions indicate that the overarching goal with respect to the capital expenditures is to adapt the investment portfolio to the market needs. The update highlighted the need to increase the investment potential aimed at developing the renewable energy sources. It was assumed that the actions would be oriented towards:

  • optimization of the asset structure in all lines of business operations and adaptation to the environmental requirements,
  • investments in the development and modernization of the distribution grid as well as low and zero emission generation sources,
  • implementation of investment projects that guarantee the expected rate of return on capital and are not burdened with material market risks,
  • use of off-balance sheet financing, in particular by involving external partners,
  • investing in projects in energy related sectors (in particular in services) to supplement the value chain that TAURON is operating in and in the so-called new energy sector, among others the prosumer energy, Smart Home solutions, Smart City solutions, electromobility and energy related services.

Strategic goals and growth prospects in the individual operating Segments

Strategic goals

The main goal for the Mining Segment is to provide a stable supply of cost-competitive and adequate, in terms of quality, fuel and to align the output level to TAURON Capital Group’s planned demand for fuel.

The goals set in the Strategy are implemented through such actions as:

  • optimizing the costs and capital expenditures,
  • tri-product enrichment at Sobieski Coal Mine (ZG Sobieski) and Janina Coal Mine (ZG Janina),
  • expanding the line for packaging eco-pea coal, preparing dedicated fuel for the generating units.

As part of the Update of the Strategic Directions, a strategic option was adopted consisting in conducting a market verification of the sale of ZG Janina.

Growth prospects

The introduction of further restrictions with respect to environment protection, quality of solid fuels placed on the market, taxes and local government regulations (including the anti-smog ones) pose a challenge for the sector. The energy and climate regulations lead to a successive decline of the competitiveness of the coal fired electricity generation. The directions of the mining industry’s development will also be strongly correlated with the guidelines outlined in the government documents: Poland’s Energy Policy until 2040 (draft) and the National Plan for Energy and Climate for 2021-2030. The above-mentioned documents show the growing importance of the renewable energy sources, including off-shore wind energy, new technologies and a gradual change in the country’s generation mix at the expense of conventional energy.

Strategic goals

The main goals for the Generation Segment include:

  • for TAURON Wytwarzanie: to develop an optimal, from the point of view of profitability and risk, generation assets portfolio and its effective operation,
  • for TAURON EKOENERGIA: to improve the profitability of its generation assets and prepare options for the profitable growth of this line of business,
  • for TAURON Ciepło: to achieve return on invested capital as a result of market growth and rising customer satisfaction.

The goals set in the Strategy are to be accomplished by:

  • optimizing the costs and capital expenditures as well as streamlining employment,,
  • optimizing production assets,
  • selling redundant non-production assets,
  • investment projects that lead to upgrading of the generation fleet.

The Update of the Strategic Directions indicated that the priority is to decommission all obsolete coal fired units (120 MW units – by the end of 2020 and 200 MW units – after 2025) and to maintain assets that receive the regulatory support. Ultimately, modern conventional units will remain a part of the production portfolio: Łagisza 460 MW and Jaworzno 910 MW

In the RES line of business options for developing RES installations are being prepared by building own sources, acquiring existing installations and ready-made projects. The update of the strategic directions has strengthened the importance of clean energy development, which will be the basis for building the value of TAURON Capital Group. The involvement in the low and zero emission energy is implemented through:

  • investments in on-shore wind farms: additional 900 MW by 2025,
  • investments in solar farms: additional 300 MW by 2025,
  • readiness to participate in off-shore wind farm projects.

In the heat generation, distribution and trading line of business significant actions include eliminating low emissions, looking for solutions in the co-generation area as well as improving the rate of utilizing the existing infrastructure.

As part of the Update of the Strategic Directions, a market verification of TAURON Ciepło disposal (divestment) option was assumed.

In addition, the sale of shares in EC Stalowa Wola and PGE EJ1 is planned.

Growth prospects

The tightening energy and climate policy of the European Union (EU) combined with the increase in prices of CO2 emission allowances set the direction of the development of the energy sector. The reduction of the support systems for conventional energy and the prospect of not being able to benefit from the ETS derogation means a permanent loss of profitability for these units. The reduction of the financing for both coal fired installations as well as the capital groups with coal assets and the narrowing base of coal property insurers reduces the financial sense of maintaining conventional assets. In December 2019, the European Commission presented the European Green Deal – an action plan to implement a strategy to achieve climate neutrality at the EU level by 2050.

An increase of the domestic electricity production, including RESgeneration, is assumed. A strong growth of photovoltaics is observed, associated primarily with the launch of the support programs, including programs for the prosumers. According to SolarPower Europe, Poland was ranked fifth in the EU in 2019 in terms of new solar capacity growth. In 2020, another record increase in new PV capacity is estimated. An additional factor supporting such growth is the possibility of obtaining funds for investments from the dedicated funds planned for 2021-2030.

The growth of investments in the renewable energy sources will also apply to on-shore wind farms and, in the long term, off-shore wind farms. The technological changes related to wind farms and the favorable regulations will translate into the repowering of the installations, thus increasing the capacity and improving the efficiency of their use.

The key issue in the coming years will continue to be ensuring the security of the operation of the National Power System (Krajowy System Elektroenergetyczny – KSE). The capacity market has been introduced in Poland for that purpose, which is one of the elements supporting the transition of the Polish power sector. Obtaining derogations from the requirements to adapt the generating units to the BAT Conclusions represents an opportunity for the conventional power generation.

On the heat market Poland’s policy, aimed at providing support for the co-generation and improving air quality, may lead to an increase of investments and the growth of this area. An important factor is rising social awareness, the actively conducted battle against smog waged by the local governments and the national aid programs. On the other hand, the growth opportunities for the heating market are limited due to the improvement in the energy efficiency of buildings and the rising competition from the increasingly efficient individual heating devices. The reduction in the financing and insurance of coal investments should also be taken into account.

Strategic goals

The main goal for the Distribution Segment is to maintain its leadership position on the Polish market in terms of the security and efficiency of the grid operation.

The level of annual capital expenditures in the Distribution Segment stands at PLN 2 billion. Mainly tasks related to connecting new customers as well as upgrading and expanding of the grid are carried out.

Activities aimed at ensuring the flexibility of the grid and simplifying the procedures related to connecting new customers are carried out. The investment projects underway are aimed at adapting the distribution assets to the growing volume of electricity generated by the renewable sources, and also at preparing the grids to interoperate with the infrastructure for charging electric vehicles.

The Single Distribution Program, that was made up of projects aimed at optimizing the company’s operational processes, including; actions leading to raising customer satisfaction and improving the company’s image, was completed.

Growth prospects

The activities aimed at ensuring the reliability of electricity supply and simplifying the procedures related to connecting the new consumers and micro-installations will be continued. The investment projects carried out will allow for adapting TAURON Capital Group’s distribution assets to the growing volume of electricity generated by the distributed renewable sources, and also for preparing the grid to interoperate with the infrastructure to be used for charging electricity vehicles. The expansion of TAURON Capital Group with respect to implementingsmart grid and smart meter solutions will allow for introducing additional functionalities, both on the distributor’s side, as well as on the customer’s side. The Distribution Segment’s growth will be significantly affected by the ability to obtain aid funds, both with respect to improving the grid security, as well as the research and development (R&D) activities.

The Distribution Segment’s operations are dependent on the new elements of the regulatory policy introduced by the President of ERO. Significant changes to the functioning of the segment may be a consequence of changes to the energy law.

Strategic goals

The main goal for the Generation Segment is to achieve the leadership position in the relationships with the customers based on the high quality customer service as well as product leadership.

A number of initiatives are implemented, i.e, among others: increasing the sales potential by transforming the customer service channels into integrated customer contact channels, increasing the value of the products and services sales to mass customers by developing the product offering and sales techniques, developing products and developing contact channels with respect to specialty products as well the partnership offering addressed to the mass customer segment.

The update of the strategic directions confirmed the continuation of the development of new energy-related products and services, including:

  • for business customers: consulting and management of energy assets and infrastructure, energy audit and efficiency improvement services,
  • for institutional customers: products and services with respect to Smart City, electromobility, low emission reduction, multiutility.

Growth prospects

The actions taken by the competition and growing customer expectations have an impact on developing the product offering and maintaining the highest customer service standards. Growing customer awareness has an impact on the rising requirements, both with respect to the products offered, as well as the speed and quality of the customer service. TAURON Capital Group is systematically expanding its product offering, tailoring it to the expectations of the individual and business customers, and developing the communications channels, both on the digital platforms level, as well as direct contacts.

Competing companies are offering products on the market that are often very similar to the products offered by the Supply Segment. With similar price offerings the competition for a customer will take place on the level of innovative product and service proposals, in particular on the level of customer communications platforms and customer service quality.

At the stage of preparing the Strategy it was assumed that the activities outlined therein would allow for accomplishing the set key goals for TAURON Capital Group:

  1. EBITDA above PLN 4 billion in 2020
  2. Maintaining the net debt/EBITDA covenant below 3.5x
  3. Maintaining a high Customer Satisfaction Index (CSI)
  4. Power plants generating positive cash flows by 2020
  5. Maintaining the customer base
  6. Unit margin leadership among Poland’s 4 largest electricity suppliers
  7. New businesses are to represent at least 25% of the revenue/margin in 2025.

Actions planned for the coming years will allow for arresting the profitability decline. This will be achieved by optimizing the operations in the Mining and Generation Segments, while at the same time maintaining stability in the Distribution Segment.

Forecasts for changes in the TAURON Group’s mix

Investments in new RES installations and lower number of coal units.

2018

2025

2030

A natural consequence of the change in the structure of TAURON Capital Group’s capacity will be a significant reduction in CO2 emissions, which will allow the Company to be ranked among the most environmentally responsible energy companies. Ultimately it is assumed to achieve CO2 emissions well below 550 kg / MWh.

 

 

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