Macroeconomic environment

The TAURON Group’s core business operations are conducted on the Polish market, where the Group benefits from its positive trends and is affected by changes in such trends. The macroeconomic situation, both in the individual sectors of the economy and on the financial markets, is a significant factor impacting the earnings generated by the Group.

Economic environment

2019 was a positive year for the world economy, although the slowdown of some of the world economies was visible. The economic growth rate in the euro zone is stabilizing at a relatively low level. A slowdown in economic growth was recorded, among others, in the United States, mainly as a result of the weakened industry and uncertainty regarding the trade policy, and in China due to the trade tensions and the weak global demand as well as in Germany and Italy.

Poland reported strong economic growth, although signs of its weakening are intensifying. According to the data published by Statistics Poland (GUS), Poland’s Gross Domestic Product (GDP) growth rate stood at 4.1% in 2019, but a gradual weakening of the growth rate is expected in the following quarters due to the continuing decline in economic activity in the euro zone.

The main factors supporting Poland’s economic growth will be private consumption, favorable situation of employees on the labor market, including: strong wage growth (in the region of approx. 7% year on year), hike of the minimum wage or continued low unemployment rate (5.2% in 2019). The purchasing power of the households will be curtailed by the higher inflation. The consumer price index (CPI index) for 2019 came in at 2.3% (year on year).

Factors that have a negative impact on the GDP growth rate include the slowdown in the growth rate of the central and local government institution sector’s investments as well as that of the private sector’s investments, and also the expected slightly negative contribution of net exports.

According to the data of the National Bank of Poland (NBP), the energy commodity prices are assumed to remain flat. In December 2019 and January 2020, the President of the Energy Regulatory Office approved electricity tariffs for households. Increases in the total electricity supply and distribution prices stand at approx. 10%. It is forecast that this price hike will not affect the level of electricity consumption in this sector.

According to the data of Polskie Sieci Elektroenergetyczne S.A. (PSE – TSO) 2019 was the first year since 2012 when a decrease in gross domestic electricity consumption was recorded. In 2019, the electricity consumption came in at 169.39 TWh and it was 1.54 TWh lower than in 2018 (-0.9% year on year). The demand for electricity was covered by the production of the domestic power plants, which reached 158.77 TWh (-3.9% year on year), the record-breaking high imports from the neighboring countries coming in at 10.62 TWh (+85.7%), and the increased generation from RES. The wind farms alone, due to the good wind conditions, produced 2.23 TWh more electricity in 2019 than in 2018 (+19.1% year on year). In addition, the rapid growth of capacity in photovoltaic sources increases the self-consumption of electricity, reducing the demand for grid supplies. A 11.76 TWh (¬-8.9% year on year) decrease of electricity generation by the domestic hard coal and lignite fired power plants was reported in 2019.

Natural resources

Natural gas

2019 brought much lower gas prices as compared to 2018. The average price on the Day Ahead Market for gas on the Polish Power Exchange (TGE) stood at PLN 68.06 per MWh in 2019 and it was approx. PLN 37 per MWh lower than in 2018. A contract with the delivery on the next day was particularly low priced in June 2019, when its average volume-weighted monthly price came in at PLN 50 per MWh, while the highest price was recorded in January 2019, when the volume-weighted average monthly price of this contract exceeded PLN 100 per MWh. The reason for the low prices was primarily record-breaking levels of storage tanks, record-breaking LNG imports to Poland and Europe, and a relatively mild winter. The lowest price, i.e. PLN 38.73 per MWh, was recorded on 7 September 2019.

On the gas RDB market, the weighted average gas price was approx. PLN 37 per MWh lower than in 2018. The contract on the RDB market was cheapest in June 2019, when its volume-weighted average price stood at PLN 49.52 per MWh, while the highest price was recorded in January 2019, when the volume-weighted average price reached PLN 100.65 per MWh.

On the RTT market for gas, the month with the highest prices was January 2019, when the weighted average prices of some monthly, quarterly, seasonal, and annual contracts reached the highs above PLN 100 per MWh. The cheapest month was December 2019, when some of the contracts reached the minimum prices close to PLN 60 per MWh. The low prices were caused by the warm end of the year and the oversupply on the European gas markets, which was due to large and regular supplies of liquefied natural gas.

Looking at the total trading volume on the RTT market, the lowest total volume was recorded in February 2019 (below 5,000 thousand MWh), while the highest trading volume was reported in August 2019 (more than 13,600 thousand MWh).

The weighted average price of the reference one year GAS_BASE_Y-20 contract in 2019 was PLN 89.96 per MWh. The maximum price was reached at the beginning of April 2019, coming in at PLN 103.43 per MWh, while the minimum price was reached at the end of 2019, coming in at PLN 67.63 per MWh. The total trading volume on the Polish Power Exchange (TGE) in 2019 was more than 146.1 TWh, as compared to 143.3 TWh in 2018, which meant an increase by almost 2% year on year.

The futures market had the largest share in gas trading in 2019, with a volume of more than 123 TWh. On the SPOT market, the total trade in the day ahead contracts came in at almost 17.0 TWh (a decline by 3.7% year on year). The decrease also took place on the RDB market, where the turnover stood at less than 5.7 TWh, as compared to 6.1 TWh in 2018 (a drop by 6.3% year on year).

LNG imports (from Qatar, Norway, and the USA) went up by more than 0.7 billion m3 in 2019 (an increase by 32% year on year) and reached the volume of approx. 3.3 billion m3 (after regasification), as compared to 2018, when approx. 2.5 billion m3 of LNG was imported (after regasification). It was the highest LNG import in the history of Poland.

The key events on the gas market included: the decision of the Dutch government to completely shut down the largest inland gas field in Europe, in Groningen, the Netherlands, by the end of the 2022 gas year, as well as the deadline for the commissioning of the second line of the Nord Stream 2 off-shore gas pipeline by the end of 2019 having not been met and an extension of the contract on the Russian gas transit through the territory of Ukraine.

The figure below presents average monthly SPOT and Y-20 contract prices on TGE in 2019.

Oil and coal

2019 was characterized by relatively low oil prices on the global markets. The volume-weighted average price of Brent crude on the ICE stock exchange stood at USD 64.06 per bbl in 2019 and it was USD 7.8 per bbl lower as compared to 2018, which meant a drop in the price of Brent crude oil by 10.9% year on year. Brent crude oil was cheapest in the fourth quarter of 2019, when its volume-weighted average price was only USD 62.01 per bbl. The maximum price (USD 68.22 per bbl) was reached in the second quarter of 2019.

The total trading volume was more than 62,800 thousand barrels in 2019, while it reached more than 66,100 thousand barrels in 2018, which meant a 5% decline.

The global events were the main factors that had an impact on the demand and supply on the oil markets.

The trade negotiations between the USA and China, conducted in 2019, intensified at the end of the fourth quarter of 2019. At the beginning of August 2019, the USA imposed additional tariffs on China and, in response, China imposed its tariffs on selected US goods. Fears of a global recession caused by the economic weakness in China and the exacerbation of the trade conflicts around the world caused the price of oil to fall to just over USD 52 per bbl at the beginning of 2019.

The oil production in the USA reached a record-breaking level of 12,900 thousand barrels a day in the fourth quarter of 2019. In December 2019, as a result of the OPEC meeting, the cut in oil production was increased from 1,200 thousand to 1,700 thousand barrels per day, which should take effect in the first half of 2020. At the same time, Saudi Arabia decided to make further cuts by 400 thousand barrels per day, thanks to which the effective reduction increased to 2,100 thousand barrels a day in total.

Another significant event affecting oil prices was the attack on the oil refineries in Saudi Arabia, as a result of which the oil price rose to almost USD 72 per bbl in September 2019. However, after the full production had been restored, the price again fell below USD 65 per bbl after a dozen or so days.

ARA coal prices dropped from USD 86.60 per ton to USD 71.5 per ton in Q1 2019. The price drops were mainly caused by China’s activities involving an increase in the domestic production combined with the launch of the new nuclear power plant capacity, as well as the trade conflict between the USA and China, which had an impact on the valuation of energy commodities.

An increase in coal production in China, a decrease in demand for coal in Germany, France, Spain, and the United Kingdom, caused by a decrease in hard coal based electricity production to 4.7 TWh (14.4 TWh in April 2018), led to a surge in the coal inventory at the ARA ports to record-breaking levels. This accelerated the fall in the ARA coal prices, which stood at approx. USD 62 per ton in May 2019, while the prices of the coal imported from Russia reached their lowest level since the beginning of 2019, falling to USD 48.08 per ton.

In Europe, as a result of June weather forecasts for the summer period, there was an increase in the prices of the ARA contracts, based on the fear of the risk of a low water level that could, like in 2018, prevent the transportation of coal to the power plant by rivers. The above increase was negated by the market participants and, as a consequence, as early as in August 2019, the price of coal approached USD 62 per ton again.

In September 2019, an increase in the ARA coal valuation was recorded, which was caused by the market participants preparing for the winter season; however, as time passed and new weather forecasts appeared, the prices were more volatile. Gas prices, which, in combination with the climate and energy policy, led to a reduced interest in coal in the industry and energy sectors, brought about a drop in coal prices below USD 60 per ton (the 2019 minimum price reached USD 56.15 per ton), i.e. levels not seen on the market since 2016.

Social environment

A gradual annual population drop has been noticeable in Poland in recent years. It results from an unfavorable trend as regards the rate of natural increase. The population of Poland was 38,396 thousand at the end of June 2019, i.e. approx. 15 thousand fewer than at the end of 2018. The present demography is influenced, among others, by the falling birth rate, large scale of emigration, acceleration of the population ageing process.

However, a population decline arising from relatively low birth rates has been noticeable since 2013 (despite the growth recorded in the period 2016-2017), with the simultaneous insignificant yet gradual increase in deaths. This results from the growth in the number and percentage of the elderly. The observable demographic changes clearly indicate the continuing process of ageing of the Polish population, which is an effect of a positive phenomenon of gains in life expectancy on the one hand and a negative outcome of low fertility rates.

Technological environment

Power plants using Renewable Energy Sources

Wind and photovoltaic farms:

Due to its location, Poland does not have the best possible conditions for developing the wind and solar energy sector. In 2019, the production of electricity by wind and other renewable power plants in Poland was approx. 14 TWh, which constitutes approx. 9% of the total national production. The installed capacity in wind power plants was 5,917 MW and the installed PV capacity exceeded 477 MW at the end of December 2019 (a growth by over three times compared to 2018).

Biogas plants:

Biogas technologies are based on the production of methane from waste, waste water, and agricultural raw materials. Their use in Poland is limited: the overall capacity of such plants was 245 MW at the end of 2019. The available capacities of such plants are between a few dozen kW and over 2 MW. It is expected that biogas plants will develop towards optimization of substrate use, high efficiency cogeneration, and production of fertilizers.

Gas fired power plants

Due to the availability and prices of fuel, gas energy has not played a major role in Poland to date; in 2019, gas was used for the production of almost 8% of the electricity consumed in Poland, yet a growth in the application of this technology is noticeable (in comparison to 2018, an increase in the production of energy from gas by nearly 2 percentage points was recorded in 2019). In the period 2017–2018, the PKN ORLEN Group commissioned two combined cycle gas turbine units: an CCGT unit with a capacity of 463 MW in Włocławek in 2017, and an CCGT unit with a capacity of 600 MW in Płock in 2018. The TAURON Group, in cooperation with GK PGNiG, continued its investment in a 450 MWe CCGT unit in Stalowa Wola in 2019. The first synchronization of the gas turbine set of the new CCGT unit with the National Power System was carried out on 4 March 2020. The unit is to be commissioned in the second quarter of 2020.

High efficiency combined cycles reach efficiency of 60%, and due to the used fuel, it is unnecessary to apply additional environmental protection systems. The advantages such as flexibility of gas / combined cycle units and low capital expenditures are accompanied by the conditioning of their operation profitability on the gas price.

Hard coal fired power plants

Currently, conventional energy in Poland is based on hard coal and lignite fired power plants. In 2019, these fuels were used for the production of over 75% of the electricity consumed in Poland (49.25% and 26.14%, respectively). These are mainly obsolete units with relatively low efficiencies, yet satisfying the environmental standards or being in the modernization phase. The new conventional units are characterized by efficiency of up to 46% and capacity of approx. 1,000 MW. Currently, new supercritical power generating units with the capacity of approx. 2.4 GW (a 460 MW unit at the Łagisza Power Plant since 2009, an 858 MW unit at the Bełchatów Power Plant since 2011, and a 1,075 MW unit at the Kozienice Power Plant since 2017) operate in the National Power System. More supercritical power generating units will be commissioned: 2 x 900 MW at the Opole Power Plant in 2019 and a 910 MW unit at the Jaworzno Power Plant in mid-2020.

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