Perspectives and surroundings
The PGE Group operates in a complex environment, with a decisive impact on operations. Therefore, monitoring changes in the environment is a priority for us. This has a bearing on the business outlook, which is assessed over three time horizons.
Persectives
Surroundings
Social expectations
The energy sector has undergone profound changes in recent years. Social expectations define the vision for the energy sector and are now directed towards energy produced in an environmentally friendly way and solutions tailored to customers’ needs and giving a sense of independence. The main trends defining the future of the sector are Decarbonisation, Decentralisation, Competition. Regulatory changes tightening the European Union’s environmental policy have emerged, with the aim of achieving climate neutrality in 2050 and, in February 2024, the European Commission issued a recommendation for an interim target for 2040 – a 90% reduction in net greenhouse gas emissions by 2040 compared to 1990 levels. This is in line with current scientific advice and the EU’s commitments under the Paris Agreement.
With social and regulatory changes, the policy of banks and investors to finance projects in the energy sector has also changed. These days, money flows to investments in zero-carbon generation sources and grid infrastructure.
Major trends defining the future of the sector
Energy transition as element of economic model
Fiscal and investment policy linked to environmental targets
- Targeting funds for investment in zero-carbon generating sources and grid infrastructure
- Reducing the availability of finance for fossil fuel-based power generation
- Companies and cities striving for sustainability
Economic development
Investment stimulus thanks to power grid modernisation
Just transition
Creating an opportunity for post-industrial regions to develop new specialisations
Independence
Use of renewable energy resources and energy storage assets
Challenges for energy companies
Adapting the organisation to competing in a new surrounding
Changes in the surroundings are not only a threat and a challenge for the sector, but also an opportunity to provide an investment boost to the economy through the construction of new generation sources and the modernisation of energy infrastructure. The transition of the energy sector should translate into economic development, sustainable growth for companies and cities, as well as a just transition of regions hitherto associated with coal mining. Energy transition is becoming part of the economic model. Part of this transformation in Poland is the project of separating coal assets of companies with State Treasury shareholding, including those belonging to the PGE Group. After completing this project PGE Group’s investments will focus on renewable energy, district heating transition and grid infrastructure. The total planned investment expenditures in 2021-2030 will amount to PLN 125 billion, of which approx. 50% will be allocated to the development of renewable energy sources (offshore and onshore wind farms, photovoltaics, zero-emission co-generation sources).
PGE the leader in sustainable transformation
PGE wants to play the role of a leader in the transition and modernisation of the energy sector in Poland and to support the building of a market environment conducive to energy transition. PGE Group is ready to carry out transition processes in the sector and prepare the conventional base of the power system to function under a new ownership structure.
PGE has already declared in its 2020 strategy that it will reduce its environmental impact by achieving climate neutrality in 2050. Sustainable reduction of emissions is planned by changing generation technologies, expanding its RES portfolio and enabling customers to participate in the energy transition through attractive product offerings. The company will pioneer the development and operation of offshore wind energy through the 2.5 GW Baltica offshore wind farm project.
Market environment
Prices of CO2 emission rights
EUA (European Union Allowances) prices are one of the key factors determining wholesale energy prices and PGE Group’s financial results. Installations emitting in the process of electricity or heat production bear the expenses for purchasing EUA allowances to cover the deficit (i.e. the difference between emissions at PGE Group’s generating units and the free-of-charge allowances received under derogation in accordance with the National Investment Plan). Wherein, last allocations granted free of charge were planned for realisation of investment tasks for 2019. It means that the free allocations for electricity generation, in accordance with the currently used method, ended when 2019 allowances were received.
In the fourth quarter of 2023 the weighted average price of EUA DEC 23 was EUR 76.07/t and was lower (by approx. 2%) than the average price of EUR 77.38/t in the similar period of the previous year. For the full year 2023, the weighted average quotation was EUR 83.16/t, 3% higher y/y than the average price of EUR 80.85/t in the previous year.
Prices of CO2 emission rights.
Source: own work based on ICE exchange quotations
CO2 emission rights granted free of charge
In accordance with Commission Implementing Regulation (EU) 2019/1842 of October 31, 2019 laying down rules for the application of Directive 2003/87/EC of the European Parliament and of the Council as regards further arrangements for adjustment of the allocation of free emission allowances due to changes in activity levels, the competent authority may suspend the issuance of free emission allowances to an installation until it is determined that there is no need to adjust the allocation to that installation or the Commission has adopted a decision concerning adjustments to the allocation to that installation.
In national legislation, the Act on the Greenhouse Gas Emission Trading Scheme introduced an additional condition for the issuance of emission allowances to installations. According to the general rules, allowances are issued by February 28 each year, however, in the case of installations, the issue of emission allowances takes place after the submission of an activity level report and the publication of information in the Public Information Bulletin on the website of the office serving the Minister of Climate and Environment. According to the European Commission Regulation, activity level reports are submitted by March 31 each year, thus on April 12, 2023 emission allowances were issued to the accounts of the operators of installations in the Union Registry in accordance with the publication in the Public Information Bulletin of the Ministry of Climate and Environment on April 7, 2023.
Emission of CO2 (in tonnes).
| 2023 | 2022 | % change | |
|---|---|---|---|
| Electricity and heat | 56 950 618 | 70 010 418 | -19% |
Allocation of CO2 emission allowances (in tonnes).
| 2023 | 2022 | % change | |
|---|---|---|---|
| Heat | 641 296 | 638 5461 | 0% |
Competitive environment
The electricity sector in Poland comprises four operating segments:
generation of electricity,
transmission, responsibility of the TSO – PSE S.A.,
distribution
retail sales.
District heating sector may be also distinguished, within which PGE Group is active in heat generation, distribution and sales.
The key participants of the electricity market in Poland are four nationwide, vertically integrated energy concerns: PGE, TAURON Polska Energia S.A., ENEA S.A. and ENERGA S.A., which is part of the Orlen Group.
PGE Group is the undisputed leader in electricity generation.
The Group produces more electricity than all of the competitors on the consolidated market combined, whilst having the largest achievable capacities, both conventional and renewable.
Aside from integrated energy groups, significant producers on the market include Orlen Group (comprising major energy producers, i.e. ENERGA S.A. iand PGNiG Termika S.A.) and ZE PAK S.A.
In 2023 46% of the electricity produced in the country was hard coal-based. Approximately 21% of the electricity produced in Poland was lignite-based. Aside from PGE Group, ZE PAK also bases its electricity production on lignite. The market share of renewable energy sources increased. Wind farms as well as photovoltaic installations have respectively approx. 13% and 8% share in electricity generation.
Estimated share of largest Polish electricity generators in installed capacity and net generation after three quarters of 2023.
Net generation
Installed capacity
Source: own work based on information published by the companies and Agencja Rynku Energii (ARE).
Energy production from renewable sources is much more dispersed than the conventional generation market. In the previous year wind photovoltaics was the most dynamically developing sector. As of the end of November 2023, this technology had the largest share in total installed RES capacities – 16.5 GW, although the vast majority of installations (10.5 GW) belonged to approx. 1.4 million prosumers. The development of photovoltaics is an element of PGE Group’s investment plan, which sees the construction of approx. 3 GW in capacity by 2030. So far, PGE Energia Odnawialna S.A. has secured approx. 3.5 thousand hectares of land for the purpose of building farms with a capacity of almost 2 GW. At the end of 2023, the capacity of farms in operation was 126 and the PGE Group was one of the largest investors in terms of installed capacity. In addition, projects with a total capacity of 357 were under development. PGE Group remains the entity with the highest installed wind capacity – 797 and has over 9% share in total wind capacity installed in Poland. Other notable wind farm operators include EDP Renewables Polska sp. z o.o., RWE Renewables Poland sp. z o.o., Polenergia S.A., TAURON Ekoenergia sp. z o.o. and Grupa Orlen.
Offshore wind farms are an emerging RES segment in Poland.
In the system’s first phase, support is awarded by way of an administrative decision issued by the President of the Energy Regulatory Office, and from 2025 offshore wind farms projects will be able to participate in the auction system. In December 2022, the President of the Energy Regulatory Office issued decision in case of individual prices in contracts for difference for two offshore projects Baltica 2 and Baltica 3 with a total capacity of 2.5 GW which are being implemented jointly by PGE and Ørsted (JO).
Growth in the market prices of energy allows for the development of RES investments also outside the support system, based on PPAs.
In the distribution area, the country is divided into regions, with four large distribution system operators (the “DSO”) on the market, who are required to carve out distribution activities from their other business: PGE Dystrybucja S.A., TAURON Dystrybucja S.A., Enea Operator sp. z o.o. and Energa-Operator S.A.
Aside from the above-mentioned energy groups, another significant entities include Stoen Operator sp. z o.o. (company from E.ON Group), responsible for electricity distribution in Warsaw, as well as PGE Energetyka Kolejowa S.A. (previously PKP Energetyka S.A.) managing the railway electric network throughout the country (as of April 2023, the company is part of the PGE Group).
A historical division of the distribution areas has substantial impact on the operating conditions of the business, and this specific situation is reflected in the distribution tariffs approved by the URE president. PGE Group operates in an area that is less urbanised and industrialised, meaning that it has approx. 5.7 million clients throughout an area of approx. 130 ths km2 in the Distribution segment. For comparison, TAURON has a similar number of clients in an area nearly twice smaller and distributes a larger amount of energy.
Areas of operation of Polish distribution system operators.
Source: own work.
Share of particular energy groups in volume of energy distributed and sales of electricity to final off-takers after three quarters of 2023.
Volume of distributed energy
Sales to final off-takers
Source: own work based on information published by the companies, ARE and ERO.
In the retail segment, which covers sales to end customers – individual, small and medium enterprises as well as large industrial customers – most of the sales are conducted by the four largest energy groups and E.ON Polska S.A. (formerly innogy Polska S.A.). PGE Group (including PGE Energetyka Kolejowa), TAURON, Orlen Group and ENEA remain the leaders, collectively concentrating around 85% of the market. Other significant player is E.ON Polska S.A., based on sales connected with serving as distributor for the Warsaw area.
The district heat production market in Poland is highly dispersed, with the four leading producers accounting for less than 40% of production countrywide. PGE Group is the undisputed leader of this market, too with a share at a level of approx. 20%. This market is of a local nature and bears the traits of a natural monopoly, with heating prices being set in an administrative procedure – tariffs approved by the President of the Energy Regulatory Office. The dominant producers focus their production activities in different urban areas therefore sector competition is limited and is local in nature. Besides PGE Group, the key producers of heat are:
- PGNiG Termika S.A. from Orlen Group – Warsaw agglomeration,
- Grupa Veolia – Poznań agglomeration, Łódź.
Regulatory environment
PGE Group operates in an environment with a significant impact of domestic and foreign regulations. Presented below is a summary of the most significant decisions, which could have an impact on PGE Group’s operations in the coming years.
