Environmental conditions determining the choice of strategy in the short, medium and long term

Short term outlook

TAURON Capital Group’s strategy responds to changes in the regulatory and macroeconomic environment as well as market challenges in both short as well as long term. In the time frame covered by the current Strategy, until 2025, TAURON Group is focusing on ensuring financial stability by increasing operational efficiency and optimizing its processes. As part of its development, TAURON is continuously improving its offering in response to the customer needs. We do not want to remain only a market participant, but we see ourselves as the leader in the transition of the energy sector in Poland.

At the stage of developing the Strategy, it was assumed that there would be no significant changes in the market and competitive environment until 2020, however, as a result of acquisitions carried out by PGE and ENEA in 2017, the generators’ market landscape changed. Thanks to the acquisition of EDF assets, PGE is strongly developing its heating business, while ENEA, in connection with the acquisition of ENGIE assets and commissioning of the 1075 MW unit in Kozienice, has climbed to the runner-up spot in terms of installed capacity. At the same time, the share of industrial electricity generation increased, as, among others, ORLEN Group commissioned two gas fired units – in Płock with a capacity of 600 MW, in Włocławek with a capacity of 463 MW.

It is assumed that up to 2025 the highest growth rate will be observed in the renewable energy sources. On one hand, this will be the result of an increase in prices on the wholesale electricity market, associated with the charges related to the costs of CO2 emission allowances, on the other hand, it will also the consequence of the strong support for the development of renewable energy sources and the cost competitiveness of such technology.

The fast growth of photovoltaics in Poland is primarily associated with the cost competitiveness of the technology and the launch of extensive support programs that significantly reduce investment costs.

Binding national RES targets for 2020 prompted Poland to introduce a system of incentives, among others for prosumers that result in increased interest in this technology. The development of prosumer photovoltaics installations (which accounts for more than 60% of the photovoltaics’ installed capacity) is possible thanks to the funding from such programs as Energia Plus. According to SolarPower Europe, Poland was in the fifth place in the European Union in 2019 in terms of the growth of new photovoltaic capacity. In 2020, another record amount of photovoltaics’ installed capacity is expected due to the implementation of installations as a result of the RES auctions held in 2018 and 2019 and the fast growth of the prosumer sector.

It is assumed that by 2025 the installed capacity in wind based technology will also increase – the total capacity of new installations planned for construction is approx. 1000 MW, as a result of the RES auctions held in 2018 and approx. 2200 MW as a result of the RES auctions held in 2019. An impulse stimulating further growth of wind energy may be an amendment to the distance act, which may increase the supply of projects in the subsequent years.

It is forecast that after the introduction of the regulations regarding investments in off-shore wind farms (principles of settling investments in grid connections, the support system) and adopting the final version of the Spatial Development Plan for Polish Maritime Areas, the construction of the first wind energy installations on the Baltic Sea will begin, so that in 2025 the first off-shore farms will be put into operation. The most advanced works are carried out by PGE, PKN Orlen and Polenerga, and the grid connection conditions were issued for more than 7 GW of capacity.

The share of individual sources in the country’s generation structure will change, but despite the growing number of renewable energy installations, coal will remain the primary fuel in the domestic energy sector by 2025.

The final decision is also expected on the commencement of the investment in the nuclear power plant.

Based on the changes observed on the European energy market and the situation of the domestic energy groups, it can be concluded that the energy business model will be modified. The mergers underway and planned – both the domestic as well as the European deals – indicate that fuel companies (e.g. Equinor-Statoil, PKN ORLEN, PGNiG) are making investments in the energy sector. On the other hand, specialization is also taking place, exemplified by the merger of two vertically integrated groups on the German market: RWE and E.ON. and a significant reduction of conventional energy, a gradual withdrawal of the Western conglomerates from nuclear energy and focusing mainly on the renewable energy sources.

In terms of the macroeconomics, according to the NBP, in the years 2019-2021 the domestic GDP growth rate will gradually slow down. The forecast for 2019 assumes a growth rate of 4.3%; 3.6% in 2020 and 3.3% in 2021. Despite the deceleration of the global economic growth, the Polish economy is still growing rapidly – it is assumed that GDP growth will be continued until 2025.

In the coming years, it is assumed that the growth in demand for electricity will be continued. Despite the expected decline in the energy intensity of the Polish economy, stabilization of the economic growth rate and the improvement of energy efficiency, there will be an increase in electricity consumption per capita – in terms of consumption Poland is below the EU average, so there is still a large growth potential. The increase in energy demand will also be sustained by the development of electromobility, expected after 2020, and the wider spreading of the use of electricity, for example, for heating purposes – in connection with counteracting low emissions. The electrification of heating (combined with an increase of the importance of district heating) will be rising along with a growth of environmental awareness and the intensification of activities related to smog reduction.

According to TAURON Group, the most important issues that will affect the energy sector until 2025 include:

  • European and national regulations: further reduction of CO2 emissions resulting in increased prices of emission allowances, increased obligation with respect to the share of electricity from renewable energy sources and increased energy efficiency; adoption and implementation of Poland’s Energy Policy until 2040,
  • limitation of financing possibilities for investments in coal assets by the financial sector,
  • decommissioning of some conventional generating units associated with the high costs of adaptation to the more stringent environmental requirements and their deteriorating competitive position versus other energy sources,
  • integration of the European energy market and the associated reduction of the importance of the local markets in favor of the regional markets, rising capabilities for physical cross-border flows,
  • ability to separate self-balancing areas, e.g. energy clusters, and the ability to provide additional services for them, not offered today (balancing, aggregation, DSM, capacity reservation, etc.),
  • development of technology related to energy storage,
  • broadly understood digitization.

TAURON Group’s Strategy, along with the Update of Strategic Directions, is in line with the market and regulatory trends identified in the time frame up to 2025. The Update of Strategic Directions, in turn, outlines TAURON’s Green Turn, i.e. a sustainable transition towards a leading low-emission energy group in Poland. The main outcome will be a change in the Group’s energy mix, approximately 28% of the installed capacity will be low- and zero-emission sources, with the simultaneous decommissioning of 120 MW units and maintaining of profitable and eligible for support 200 MW units, as well as modern, low-emission and high-efficiency coal fired units. At the same time, TAURON Group is preparing a portfolio of investment projects with respect to the renewable energy sources and is developing competences required for their implementation. In 2019, TAURON Group purchased five wind farms with the capacity of 180 MW, thus doubling the installed capacity in wind. In the coming years, the Group will be looking for other similar market opportunities.

TAURON Group’s Strategy, along with the Update, is in line with the European activities related to reducing the impact of the business operations on climate change. Given the significant importance of issues related to the protection of the environment and climate, TAURON Group is working on the assumptions for developing a new strategy with the minimum time frame of up to 2030, with a long-term outlook. The main guideline will be to prepare development scenarios that will ensure long-term profitable business operations immune to climate change and at the same time minimizing the impact of the Group’s operations on the environment by reducing the emissions of the generation sources. The scenarios taken into account will depend on the intensity of changes taking place in the environment, in particular on the assumptions of Poland’s Energy Policy, the decisions taken by the Government as part of the climate initiatives and regulatory directions shaped during the global climate summits. TAURON will be defining climate scenarios based on the available and applied methodologies, in particular TAURON Group’s long-term strategic directions will be considered based on two temperature change scenarios: < 2 degrees and > 2 degrees.

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Medium term outlook

In the medium term, a slight decrease of the electricity demand growth rate is assumed. The most important factors affecting the level of electricity demand include a further improvement of energy efficiency and, at the same time, still large potential for electricity consumption growth.

Consumers are expected to further increase consumer awareness in connection with the digitization processes, access to prosumer installations and smart grid solutions. An ever broader range of services based on the smart grid infrastructure, in particular smart meters, is assumed. The role of the demand side management services (DSR / DSM) will also increase, which will largely result from the development of smart technologies and market mechanisms.

Due to the avalanche growth of prosumer installations, there will be a need to further develop transmission systems and distribution grids in order to adapt them to greater load variability, as well as to support bi-directional flows.

In terms of ​​electricity generation, the fast development of renewable energy sources is forecast to continue.

A further decrease in the costs of installing renewable energy sources (primarily the photovoltaic ones) and electricity storage facilities will be of significant importance, along with the continuous technology development. Technological changes for wind farms, with favorable regulations, will translate into the repowering of installations, thus increasing the capacity and improving the efficiency of their utilization. The development of energy storage will have a positive effect on the stability of electricity supply. The EU level regulations will further support the development of renewable energy sources and at the same time impose higher and higher costs and restrictions on conventional energy, making it, gradually, permanently unprofitable.

Further intensive development of photovoltaic installations in Poland is estimated to continue. According to the projections related to the National Plan for Energy and Climate the capacity available in PVinstallations is expected to rise to more than 7 GW in 2030. At the same time, the first off-shore wind farms should be commissioned in 2025. The National Plan for Energy and Climate also envisages an increase in the capacity achievable in off‑shore wind installations to almost 4 GW in 2030. The level of on-shore wind farms’ installed capacity should be less than 10 GW in 2030.

By 2030, further unprofitable coal fired units will be shut down. The end of the support from the capacity market for many generating units after 2025 is significant. However, there is an opportunity for large, modern conventional power generation units, whose main role will be to stabilize the national power system. However, it is assumed that their operation will be directly dependent on the state of the climate and the environment at the end of the third decade of the century. The expansion of flexible gas-fired units is also taken into account. As a result, it is forecast that the share of coal in the national energy mix will decline, which will be a natural consequence of the rise in the capacity of low and zero-emission sources, including the gas fired sources.

In the medium term, i.e. in the years 2025-2030, TAURON Group is planning to gradually shut down 200 MW coal fired units. Pursuant to the Group’s Strategy, the main direction of the expansion of the electricity generation line of business will be investments in low- and zero-emission sources, including an engagement in the development of off-shore wind energy. Thanks to the investments in new generation installations and a reduction in the number of coal fired units, the Group’s generation mix will change in 2030, where more than 65% of assets will be low- and zero-emission installations, which is in line with the climate policy aimed at reducing the emissions. Being aware of the prosumer market development, TAURON Group is also planning activities related to offering products and services in line with this market trend.

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Long term outlook

It is assumed that the years 2030-2035 will be a period during which a deep review of development scenarios with respect to the climate will be required, depending on the intensity of climate change. If the ultimate temperature increase estimated for that time frame exceeds 20C, then we are forecasting a further tightening of environmental standards towards a substantial reduction of the CO2 emissions and extremely stringent emission standards for nitrogen and sulfur oxides as well as mercury and dust. Tightening climate policy will result in a reduction in the supply of CO2 emission allowances under the ETS, which will lead to a significant increase of the prices of these allowances.

In the event that global temperature forecasts indicate an increase below 20 C, a scenario where high-efficiency profitable coal assets will be maintained is possible, with a simultaneous reduction of emissions through the development of low and zero-emission generation sources and limited development of coal fired assets, conditioned on the demand for coal fuel and the possibility of obtaining it at competitive costs.

In the time frame up to 2050, it is forecast that the biggest challenge will be to ensure stable electricity supply to support the country’s economic growth and growing prosperity, while at the same time having to accelerate energy transition through capital expenditures in low-emission technologies. The energy sector is currently the largest single source of carbon dioxide emissions and, irrespective of climate change scenarios and temperature rise, it is extremely important to reduce emissions in this sector.

According to available forecasts, the role of the renewable sources will be consistently growing at the expense of conventional ones in the long term. Renewable energy sources are gaining their share in the global energy system faster than any other fuel in history. The British conglomerate BP, in its Annual Energy Outlook 2019, estimates that by 2040 renewable energy sources will be the main source of energy in the world, and RES and natural gas combined will be responsible for the overwhelming majority of the increase in primary energy supply. Renewable energy will be pushing out coal-based energy over the next two decades and will replace coal as the main source of electricity generation in 2040.

In the long term, there will also be a significant transition of the national energy mix by increasing the share of renewable energy sources, as well as potentially nuclear energy, and, at the same time, a further drop of the share of coal sources. Taking into account the rising costs of coal energy as a result of climate policy, its role will be marginalized.

Strategic decisions with respect to environment and climate protection taken at the European Union level will determine the development of the domestic energy sector in the long term, including in particular the European Union 2050 climate strategy. The European Green Deal proposes an action plan enabling the transition to a zero-emission economy through a more efficient use of resources by moving to a clean circular economy, halting climate change, preventing the loss of biodiversity and reducing the pollution level.

The future of the energy sector will depend not only on its environmental impact, but also on the adaptation to climate change required to be implemented. Changes in climate conditions will not be without an impact on the conditions of electricity distribution or changes in demand for electricity and heat. The infrastructure may require preparation for the effects of extreme weather and climate developments that may cause direct damage (e.g. hurricanes, intense storms, hailstorms, rainstorms and snowfall may damage transmission and distribution lines), as well as indirect losses, which are the long-term consequences of extreme weather and climate conditions (e.g. droughts or floods).

A great opportunity for the energy and district heating sector is the growing awareness of threats to air quality resulting from low emissions and transportation. The manufacturing sector, with the introduction of relevant regulations, may become the largest beneficiary of changes in the way electricity is used for heating and transportation purposes. At the same time, it will be a challenge for the distribution grids and heating networks, which will have to take accommodate the load increases.

The implementation of the European strategy aimed at reaching climate neutrality by 2050 will determine the shape of the Polish energy sector in the long term, which will also be reflected in strategic decisions made by TAURON Group, whose overall goals and actions should constitute a coherent response to the European and national guidelines regarding the sector’s shape and model of functioning. TAURON Group will be steadfastly seeking a further diversification of the generation sources in terms of fuel used and a modernization of the generation capacity. In the long term, the possibility of an emergence of breakthrough technologies on the market that can significantly affect the energy business, e.g. fuel cells, should be taken into account. It is assumed that there will be a significant development of energy storage technologies and the development of new transmission technologies. In the scenario where there is a lack of breakthrough technologies, the energy sector will be most likely develop in an evolutionary manner, based on the already known and commercialized technologies.

In the long term, TAURON Group’s stable operations will be determined by the approach to the issues related to sustainable development – in addition to the key issue regarding optimized resource management (raw materials, materials, energy, etc.), it will also be important to develop relationships with the stakeholders.

As a summary, Figure 22 illustrates the response of TAURON Capital Group to the changes in the external environment.

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