Resilience of the Business Model to climate change

  • 201-2

The TAURON Group’s structure is organized in a long chain of operations covering virtually the entire business: from acquiring fuel to selling the product to the final customer. Each link (Line of Business) of this chain is based on large enterprises. Such organization permits the exertion of impact on the quality of the processes implemented at every stage of value creation, and thus optimizing, adapting or, if required, changing the way of doing business to respond to the current and future challenges. In accordance with the Strategic Directions Update, the line of business responsible for the production of electricity from renewable sources area is expanded. Thus, the TAURON Group is changing its generation mix, reducing greenhouse gas emissions.

Impact of climate related risk and opportunities on the business model, strategy and financial plans

For the power sector, the climate impact is a broad concept which includes weather-related phenomena, regulatory changes and changes in customer attitudes. We take all these factors into account when building our business model and Strategy, especially in terms of shifting the place where value generation takes place within the Group’s value chain. Our response to changes in the environment is the Strategic Directions Update and the resulting TAURON’s Green Turn, i.e. short and medium-term assumptions for transitioning the production mix towards low- and zero-emission sources as well as the TAURON Group Climate Policy.

We recognize the risk of significant changes in the regulatory area, both at the European and the national level, aimed at minimizing the negative impact on the climate by introducing further restrictions for coal-based power generation. The tightening of climate regulations and the withdrawal by financial institutions and insurers from the cooperation with entities operating coal assets will have a negative impact on the operational prospects for conventional coal units that are part of the Group’s production fleet. Accordingly, we see physical risks and so-called transition risks related to climate change.

The situation around climate change prompts us to develop RES assets in the Group and implement the principles of circular economy. However, one should be aware of Poland’s current energy mix, including that of the TAURON Group, which is based on fossil fuels and associated with large coal reserves. For this reason, in addition to the fast expansion of renewable energy sources, implemented within the framework of TAURON’s Green Turn, we are also taking steps to reduce the environmental impact of our existing coal-fired units.

[for more information about this risk, go to the tab Policies and Management Principles – Key risks and their impact on value levers]

Favorable and unfavorable impact of the Company’s business model on climate

Due to the technologies used, business operations in the energy industry can generate a number of negative impacts on climate, in particular emissions from combustion sources, fossil fuels, as well as land drainage and degradation caused by mining operations. Nevertheless, due to continuous upgrades of conventional generating units, an increase of capacity in renewable energy sources, capture and utilization of methane from coal deposits for business purposes and the withdrawal of inefficient coal-fired units, the Group is reducing its negative impact on the environment and climate. In accordance with the Strategic Directions Update adopted in May 2019, by 2030 the TAURON Group will reduce its emissions by more than 50%.

Figure: Planned CO2 emissions by the TAURON Group in 2018-2030

 

 

Resilience of the company’s business model and strategy, taking into account climate-related scenarios over various time frames (including a scenario assuming warming at the maximum rate of 2⁰C and a scenario assuming warming by more than 2⁰C)

The Group’s current Strategy responds to the current market, regulatory, technological and customer relationship challenges. The business model employed by the Group enables the implementation of strategic assumptions and thus supports the achievement of strategic objectives.

We take into account the potential effects of climate change and how they can affect planning processes, risks and potential consequences on our business. We take all these aspects into consideration in our business model and Strategy, paying particular attention to the adverse impact of climate change on the company and the possibility of the company’s negative impact on the climate, which is an important issue from both the business point of view and the social perspective. We take these aspects into account in our strategic and operational documents.

With respect to climate-related scenarios, we consider the following three main areas of changes in the external environment that may affect the Group’s business model and Strategy:

  • society and customer behaviors
  • regulations
  • power system and the electricity generation model

We assume that for both scenarios the developments described below will be taking place, but at different speeds and intensities. Based on the scenario assuming warming at a maximum level of 2⁰C, changes in the external environment will be rather evolutionary, as a result of the growing awareness of the society and businesses and the ever increasing availability of the new technologies. If the evolutionary activities cannot stop the temperature rise and the forecasts will be indicating that there is a high probability of exceeding the average temperature rise by more than 2°C above the value from the pre-industrial era, changes in the external environment, in particular with respect to the regulations, organization of the power (energy) system and the power (energy) production model, as well as the society and customer behaviors will be very deep and fast. The technological solutions for energy storage that are uneconomic today, in case of a significant increase in the energy production costs and environmental restrictions introduced by the new regulations, may become economically viable.

As of today, we can plan combating climate change taking into account the available technologies and the best knowledge as well as the availability of financial resources. The potential emergence of modern and ground-breaking technological solutions and their commercialization may lead to the fundamental changes of the entire energy sector’s functioning model.

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The climate changes (average temperature and the increasing number and intensity of the extreme weather conditions) that can be observed, as well as the resulting restrictions in access to water, lead to an increase of the climate awareness among the ever growing portion of the society. In combination with the care for the natural environment, forces (organizations, social and political movements) exerting the ever growing and more effective pressure on all levels of the government towards taking actions aimed at reducing the human impact on the climate will be expanding. Internationally, the activities of some countries (those where the public climate awareness is the highest) will continue to lead to the introduction of further regulations towards eliminating the use of fossil fuels for energy (power) production. These activities will be more and more socially accepted despite increasing the cost of the energy used.

The growing energy awareness combined with the rising energy cost will lead to increasing interest in energy efficiency, energy saving and in-house energy production from renewable energy sources. Economic incentives and better technologies will generate a rise in thermo-modernization, the purchasing of less and less energy consuming devices (including by the households). The falling costs of the photovoltaic installations, also due to state support systems, combined with an increase in electricity prices, will lead to a sharp increase in their quantity and capacity. This trend will be supported by the positive feedback resulting from the fact that the higher the RES electricity production, the more expensive the electricity in the power system will be (the costs of maintaining the capacity reserve, balancing, distribution). In addition, the mechanism will be reinforced by the growing interest in the trendy ecological behavior. More and more customers will expect and accept higher electricity costs as long as it is produced without the negative impact on the climate.

The widespread and ever cheaper access to the Internet will lead to the situation that an ever increasing proportion of the population will be using mobile communication and sales channels. The size of the digitally excluded group of people will be shrinking. This will be taking place despite the aging of the society. The decreasing personal sales contacts will be gradually replaced by robots (chat bots) and the online sales and customer service channels.

No particular increase in the consumer interest in taking advantage of small economic incentives and in electricity consumption during the night (at a reduced price) should be expected if this requires consumers to enforce their own self-discipline in watching it and making calculations. Instead, the offers of solutions based on automatic electricity consumption cost optimization systems will be growing thanks to the development of the automation systems and smart home technologies.

Business consumers, in particular large manufacturing industry, will be making greater efforts to reduce their energy costs, primarily because of the rising electricity prices, but also due to the cost competition forced by the market. The expectations of the customers, especially households, will be directed more towards safety (security), ease of use and contact, not just the price any more.

The young generation entering the period of professional and consumer activity is characterized by a much lower tendency to accumulate goods than the previous generations. Greater mobility, readiness for change, greater interest in maintaining the private life and work balance are combined with the desire to use all of the available goods without the need for their possession. This creates more space for all of the share-economy prospects. The market for the shared goods and services will expand.

Climate change will cause the biggest problems in the world’s poorest countries, which may lead to further migration crises and, consequently, growing political and security problems in the rich countries. Such developments may result in the need to intensify efforts to increase the security of the energy infrastructure.

Social pressure and the EU regulations are causing Poland to introduce increasingly more stringent environmental standards and a rising taxation of the CO2 emissions (charges for the CO2 emissions). The continuous increase in the CO2 emission allowances prices is also associated with the use of the regulatory mechanisms leading to the reduced supply of the emission allowances. The EU’s commitments to reduce the emissions by more than 40% in 2030 will be implemented through the supply controls. The next version of the BAT conclusions is expected to be released in the second half of the decade. The adaptation of the coal-fired units to the more stringent emission standards may prove to be impossible technologically or very expensive and economically unjustified to meet for the older generation sources.

This applies directly to the conventional electricity generation technologies, but an increase in the requirements for the installations producing the system and process heat can also be expected. This will affect the most the small coal-fired heating plants.

All energy processes using coal are accompanied by the production of the combustion and mining by-products. More stringent and therefore more costly requirements with respect to their storage and processing can be expected.

The increasing share of the intermittent (non-controllable) renewable energy sources in the EU countries’ production mix will force the introduction of the new regulations regarding electricity cross-border exchange and electricity trading on the international platforms. This is due to the doctrinal approach to the free movement of goods and services. The currently used argument of responsibility for the country’s energy security at the national level will be getting less and less important because of the need to ensure security in view of the deficit of the controllable generation sources. Countries will be increasingly interested in the ability to secure additional reserve capacity abroad. Greater interest should be expected in introducing the dual-commodity markets in the European countries that have not introduced such a solution yet.

Climate regulation will also affect the power sector indirectly. The new requirements imposed on the financial institutions practically cut off the coal technologies from the European funding sources. This raises the financial costs and provides an additional disincentive for their development. At the same time, the investors and financial institutions are eager to participate in the renewable energy projects. No European aid funds will be available for the development of the coal-based electricity generation sector, and for the gas fired generation sources this access will be limited. With respect to the power and heat generation sector, aid funds may be allocated solely to the restructuring and mitigation of the social effects as well as the transition towards electricity generation from RES.

Due to the fact that ensuring the social, economic and also personal security of citizens will be one of the biggest challenges, increasingly stringent regulations regarding the security of the infrastructure, competition and consumer protection and personal data protection should be expected. These will be further factors making the business operations more difficult to conduct and raising the costs.

The increasing number of the intermittent (non-controllable) renewable energy sources, as well as the growing number of prosumer installations are ever increasingly affecting the power system from the technical and commercial point of view. Rising energy efficiency of the customers and growing production from the prosumer installations lead to a drop of the demand for the electricity generated by the system (utility scale) sources. This trend, combined with the rising prices of the fossil fuels and / or the uncertainty of their supply, the increase in the environmental and climate costs (CO2 emission and the costs of other emissions), causes a shift in the role of the system (utility scale) power plants (in particular, the coal-fired ones) from the position of primary sources to that of complementary ones. This means reducing the production time and volume, and thus increasing the share of the fixed costs in the total costs. This mechanism will cause the need to decommission power generating units that will not receive the support from the capacity market, because they will not generate a sufficient margin with the declining production. As a consequence, there may be capacity deficits during the periods of the low production from the renewable energy sources. In addition, the declining production from the coal-fired units will lead to the decreasing demand for the thermal coal. The use of coal for the heating purposes will also drop as a result of the anti-smog regulations, as well as the increasing competitiveness of the use of the natural gas and heat pumps by the households.

It is assumed that the importance of the cross-border connections and the facilities making the cross-border trading easier will be growing. This will result in a greater system integration among countries and the greater competition, as well as a price link. This is an additional factor preventing the economically justified operation of the least efficient generation sources (obsolete coal-fired units).

The rising share of the wind farms in the production mix will lead to the higher price volatility, which, combined with the tightening of the climate regulations and the increase in the price volatility of the CO2 emission allowances, will create a situation where the investments in the new coal-fired sources as well as the expenditures on the refurbishments and overhauls of these sources will be unacceptably risky.

The nature of the transmission networks and distribution grids is changing from handling the traditional direction of the electricity flow from the power plants to the transmission network, and then to the distribution grid and the consumers, to supporting the growing flows in the opposite direction, i.e. from the low voltage grids to the higher voltage networks. This requires undertaking investment activities aimed at equipping the networks with the metering devices, including data transmission and IT systems supporting the network management in order to maintain stability by controlling the flows (the load carrying capability of the network elements), controlling the voltages and the short-circuit powers. The low and medium voltage grids require large capital expenditures for their modernization so that they can absorb the avalanche of the emerging distributed generation installations. The distribution grids, in particular in the areas with the low density of the consumers, are becoming a guarantee of stability and security, as well as a kind of „energy storage” for the prosumer sources and the other renewable energy sources.

In the coming years, no development of new energy storage technologies reaching the capabilities that would enable their economic implementation on the system wide scale should be expected. An impulse for the dissemination and widespread use of the energy storage facilities for the systemic purposes may be significant regulatory restrictions on the use of the fossil fuels for electricity production and the volatility of the electricity prices caused by the large share of the intermittent (non-controllable) sources.

The technical solutions and network topologies are also significantly affected by the extreme weather conditions. Their increasing number and intensity makes it necessary to use the solutions resilient against, in particular, strong winds. This leads to the need to build cable and insulated networks (for the medium and low voltage grids) and upgrade the overhead networks, especially in the built-up and forest areas.

Poland’s system heat (district heating) is one of the best-developed district heating systems in Europe, and the climate change, resulting in mild winters, reduces the demand for heat. In addition, the relatively high cost of the system heat increases interest in thermomodernizations and the automation systems that reduce heat consumption. All these factors combined cause increasingly limited growth opportunities for the district heating systems. The reduced heat consumption, growing competition of the local (individual) heat sources based on the natural gas or electricity, and the need to expand the district heating network outside the city centers will deteriorate the economics of such business operations.

The following table presents our understanding of the current situation and activities regarding the resilience of our business model to climate change.

Changes to the TAURON Group’s business model in the short, medium and long term

Changes to the TAURON Group’s business model in the short, medium and long term
temperature rise scenario Short term
(until 2025)
Medium term (until 2035)
Check point 2030
Long term (until 2050)
Up to the check point Past the check point
< 2⁰C We have prepared solutions in place – we are implementing the TAURON Group’s Strategy:

  • Shutdown of obsolete 120 MW coal-fired units (approx. 1 GW).
  • Prepared plan to change the fuel mix, including a plan to invest in low- and zero-emission sources (approx. 900 MW in wind power plants + 300 MW in solar power plants)
  • Commissioning of a high efficiency and lower emission new 910 MW unit in Jaworzno
  • Plan to sell the Heat Line of Business – including the coal-fired generating units
  • Option to sell a coal mine / mining company – at the stage of looking for a buyer
  • The growing role of the distribution and increasing expenditures on adapting the grid to the rapid growth of the RES mini- and micro-installations]
  • Shutdown of 200 MW coal-fired units
  • Participation in the offshore wind farm construction project
  • Service and product offering for the prosumers
  • Construction of successive large RES installations
  • Maintaining profitable coal-fired units as regulating and intervention sources
  • Significant role of the distribution in the local balancing
*Preparation of the development assumptions for 2030+
> 2⁰C Adapting the mining operations to the demand of the Group’s coal-fired generating units Limiting the mining operations to the level based on the Group’s generating units regulating and intervention operation.

  • Maintaining the leading role of the distribution, including the need to build energy storage facilities for the local balancing
*Preparation of the development assumptions for 2030+
* The main determining factors (drivers) for formulating the applicable provisions are: 1) Passing of Poland’s Energy Policy; 2) Poland joining the agreement on climate neutrality in 2050.

Changes to the company’s business model and its business strategy that have been introduced to reduce the risk associated with the transition and the physical risk in order to take advantage of climate-related market opportunities

We are constantly monitoring the external environment, including announcements of regulations aimed at counteracting climate change, as well as agreements and declarations of countries related to long-term strategies for reducing emissions and achieving climate neutrality. Accordingly, we adopted the Strategic Directions Update complementing the TAURON Group Strategy for 2016-2025. In accordance with the Strategy and the Strategic Directions Update, the increase in the Group’s value will be based primarily on:

  • regulated and stable Distribution segment,
  • development of low- and zero-emission sources in terms of greenhouse gases emissions,
  • conventional generation assets eligible for support,
  • sales of energy and energy related products and services tailored to customer need.

We assume the pursuit of the following strategic options:

  • Development of low emission and zero emission power generation, primarily through investments in renewable energy sources.

By 2025, we plan to invest in onshore wind farms (additional 900 MW), photovoltaic farms (additional 300 MW) and commence the process of involvement in the construction of offshore wind farms.

  • Flexibility of TAURON’s asset portfolio will be enhanced by aligning the mining assets with the Group’s planned demand for fuel, reorganizing the Generation segment and the equity investments portfolio.

Within the framework of this option, we verify the possibility of divestment of the Janina Mine and TAURON Ciepło. With respect to conventional power generation, we assume permanent decommissioning of 120 MW units and, after 2025, 200 MW units.

Thanks to the implementation of the planned activities, it will be possible to increase the share of low- and zero-emission sources in the generation structure of the TAURON Group from 10%. in 2018 to nearly 30 percent in 2025 and more than 65% in 2030.

The company's dependence on natural capital, including due to the risks associated with climate change

One of the key levers of the TAURON Group’s value is access to natural resources. Water, land (including its resources: hard coal and limestone) and air are resources that we have an impact upon in the course of our operations. Thus, we make every effort to reduce our impact and increase the rationality and efficiency of their use.

Mining assets play an important role in the Group’s value chain. They are its first link, and thanks to the investment projects underway they are to guarantee the supply of suitable quality coal to the Group’s generating units. In addition to conventional coal-fired generating units, water and wind energy are used to produce electricity. 34 hydroelectric power plants located in the south of Poland and 9 wind farms located mainly in the northern part of the country. We have also started the implementation of photovoltaic power plant construction projects, so another natural resource that will be used by the TAURON Group is solar radiation.

Climate changes observed in recent years do not significantly affect the way we use our natural capital. Temperature rise associated with climate change has a negative impact on the production from hydroelectric power plants (due to hydrological drought), but thanks to the development of photovoltaic and wind generation, including offshore, the Group will be able to use such renewable generation sources. Therefore, we are planning to build solar (photovoltaic) installations.

In the long run, the TAURON Group’s impact on natural resources will decrease, both due to the need to meet the expected tightening of environmental requirements and climate policy, as a result of investments into new, low- and zero-emission energy sources, but also thanks to the permanent shutdown of obsolete conventional units. Climate change, in particular the rise in temperature, mainly in the winter months, reduces the need for heat and electricity for the heating purposes. When planning the consumption of natural resources, the Group will have to take into account such changes.

Being aware of the non-renewable nature of the hard coal sources consumed, we use them in a responsible and efficient manner.

Changes to the company's business model and business strategy that are aimed at mitigating climate change or adapting thereto, and will lead to changes of the company’s needs in terms of human capital

The Group’s transition towards low- and zero-emission energy will impact the business model, shifting revenue generation place within the value chain. In turn, the implementation of this scenario will have an impact on human capital, causing the need to change the qualifications of some employees and hire people with new skills. Accordingly, we are already taking actions today to ensure that the best staff for the TAURON Group subsidiaries will be available in the medium and long term, taking into account changes to the technologies used.

In 2019, we updated the TAURON Group’s Corporate Social Responsibility Code of Conduct [for more information on this, go to the tab Corporate Social Responsibility Code of Conduct] by adding issues related to climate protection. This document is a set of values and principles, and at the same time it is a commitment to act in an ethical and transparent manner. It also obliges the Group to balance its impact on the environment through environmental and climate protection measures. On the other hand, employees should identify potential threats in this respect, taking actions to prevent irregularities or accidents that could pose a threat to the environment.

Thanks to the transition being implemented, there is also a chance that dedicated and qualified persons might become interested in working in the TAURON Group, as they would be offered an opportunity to build career paths in the new renewable technology fields. The challenges associated with this and the opportunity to work in a stable industry will become one of the factors changing the perception of the energy sector by young generations and enable them to view the industry as modern and climate neutral.

Adaptation to climate change

The TAURON Group’s Climate Policy defines the basic priorities with respect to the adaptation to the climate change. The gradual adaptation of the production assets to the consequences of extreme weather occurrences and volatility of weather conditions, in particular in case of the Lines of Business sensitive to the volatility of temperature, rainfall and wind strength, will be implemented, among others, as part of the system approach to Asset Management. [for more information, go to the Climate Policy tab].

Striving for resource efficiency

In 2019, the TAURON Group established a specialized entity called Bioeko Grupa TAURON (formerly, Biomasa Grupa TAURON), the operations of which, in addition to the supply of biomass, which is a fuel considered neutral in terms of climate impact, focuses on the implementation of the principles of Circular Economy with respect to the byproducts of combustion and mining, thus contributing directly to resource efficiency. As such materials of anthropogenic origin successfully replace the natural materials, reducing the consumption of the minerals such as sand, gravel, gypsum etc. The activities related to the development of new products and services in this field and gaining access to the new markets related thereto began in 2019, also carrying out scientific cooperation with the AGH University of Science and Technology in Cracow.

As part of the steps taken to improve resource efficiency, the activities related to the development of new products and services for local governments, for which TAURON Dystrybucja Serwis is managing the lighting systems, were also started in 2019. The goal for 2020 is to replace at least 28 000 LED fixtures as part of the lighting replacement efforts and install more electric vehicle charging stations so that their total number could reach 100 units in 2020.

TAURON Ciepło took an inventory of its metering network in 2019 in order to prepare the model that would enable quick identification of the district heating network water leaks. The ultimate implementation of the model in the future is contingent on the availability of water at the current price and potential possible savings in operating expenses.

The Group’s operations contribute little to the deforestation, forest degradation or land use change. Only the operations of KW Czatkowice directly entail a change in the use of forest land, but this adverse impact is compensated by newly planted trees.

Method applied to select scenarios

Action scenarios are based on the assumption that measures aiming to reduce negative environmental effects, in particular the greenhouse effect, will be effective and stop the global average temperature rise rate below 2⁰C or, alternatively, that this increase will be greater than 2⁰C. We are aware that a further increase in temperature will result in further-reaching measures being taken to limit the negative impact of industrial human activities on the climate. Such actions may have a significant impact on the Group’s conventional assets, thus the reaction will involve deeper changes to the business model. We have already begun work on a new Strategy of the Group for the next period, which may translate into changes to the business model in the long run.

For the above reasons, no new investment projects will be undertaken in the coal mining and coal-fired electricity generation lines of business. The TAURON Group will be operating in accordance with the assumptions of Poland’s Energy Policy, and will also be implementing all decisions taken by Poland as part of initiatives and projects functioning based on the provisions and agreements reached during the next World Climate Summits (COPs), aiming at achieving climate neutrality over the next several decades. As a reference point, TAURON will use the climate scenario methodologies that are available and applied. [for more information, go to the Climate Policy tab].

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