The situation in the market environment is vitally important for the Group’s market performance. With this respect, one should mention the prices of:
electricity
property rights,
CO2 emission allowances
hard coal (which is the basic fuel for production).
Additionally, the Group’s results were affected by regulatory drivers, such as the operating reserve, and non-regulatory drivers, e.g. weather conditions, especially hydrometeorological conditions and windiness.
According to data published by PSE, in 2017 demand for electricity in Poland increased by 3.5 TWh compared to 2016, reaching a record high in the last 10 years of 168.1 TWh. The increase in demand was not satisfied by production in 2017, even though it was higher than last year, increasing by +3.3 TWh up to 165.9 TWh. Therefore, the significant increase in demand was not matched by production growth, as a result of which energy imports increased.
2017 was another consecutive year of growth in wind energy generation. The share of wind sources in the production structure was approx. 8.4%, and the generation of electricity by these utilities increased by approx. 19% as compared to 2016.
In the past year, the greatest share in the electricity production structure was held by hard coal-fired public-grid power plants. Their share in total production was 48.2% and the share of lignite-fired com-mercial power plants was 31.4%. In 2017, the increase in wind farm production output was surpassed by gas-fired commercial power plants, which boosted their electricity production output by 24%, up to 7.2 TWh.
In 2017, imports declined compared to the previous year by 0.7 TWh. Also exports were lower by 1.0 TWh compared to 2016, which may be explained by the rapidly increasing demand for electricity, which in 2017 reached its highest level in the last 10 years at 168.1 TWh. The opening of the new interconnection LitPol Link in December 2015 between Poland and Lithuania and the Nordbalt inter-connection between Lithuania and Sweden facilitated the flow of electricity not only between Poland and Lithuania but also increased the volume of electricity exchange with Sweden, treating Lithuania as a transit country. The volumes of energy flow from Ukraine also increased, which contributed to im-ports being just slightly lower than in 2016.
In order to compare energy prices in Poland to those in the neighboring countries, spot market prices were used as reference levels. The price level in Poland, as compared with previous years, was significantly higher than in the neighboring countries. The highest price differences existed in relation to the Scandinavian market (+26.2%, or 32.78 PLN/MWh) and smaller differences in relation to the prices in the German market (+8.8%, i.e. 12.81 PLN/MWh). In January of the previous year and in the second half of the 4th quarter in particular, strong price hikes occurred in peak hours on the Polish market and in the neighboring countries. The second half of the 4th quarter is particularly noteworthy, as significant price drops and hikes could be observed along with higher price volatility related to the high level of wind farm energy production and the shutdowns in conventional, including nuclear, power generation in Germany and France.
In recent years, the prices of hard coal have been systematically decreasing driven by global factors, that is the global reduction of prices of this raw material and its oversupply in Poland. The downward trend on global market was reversed in 2016 and very high prices of this commodity were maintained in main transshipment ports (ARA, Newcastle, Richards Bay) in 2017. The sales prices of coal for the commercial and industrial power sector on the Polish market increased only slightly as compared to the global trends. Accordingly, the negative effect of this factor on Energa SA Group’s performance was limited.
The average price of electricity in the DAM in 2017 was slightly lower than the average price in 2016 (-1.35 PLN/MWh). There is no doubt that the slight yoy decrease in energy prices in 2017 was caused by higher domestic production and the lack of extremely high temperatures in the summer.
To assess the forward market in Poland, the annual forward contract for delivery of base energy in the whole 2018 was used as a reference product (BASE 2018). In 2017, the contract’s price was highly volatile, reaching its minimum in February just below 160 PLN/MWh. From that moment, there is a clear upward trend on the BASE 2018 market, which pushed the December price up to slightly below 180 PLN/MWh. The trend on the forward market is particularly important from the perspective of the Group contracting process for the next year.
In the beginning of 2017, there was a crash on the market for CO2 emission allowances, which led to a decline in prices from more than 6 EUR/ton to 4.36 EUR/ton in mid-May. From that time onward, the market made an effective attempt to increase the prices, ending the quotation of the DEC 2017 con-tract at 7.39 EUR/t. The upward trend, which started in May, may be explained by the acceleration of work on the reform of EU ETS (on 22 November, the EU Council supported the agreement) and an upward movement of prices of energy products (oil, coal, gas).
From the standpoint of the Group’s generation structure (high RES production) the quotations of so-called green property rights were the most important. In the first half of 2017 a systematic decrease of prices for this index was observed, which recorded the minimum level at the end of June at 22.46 PLN/MWh. This can be attributable to, among other factors, a surplus of certificates in the market. From that moment onward, the prices of RES property rights in session transactions continued to in-crease and ended the year at the level of 45.29 PLN/MWh.
The figure below presents the average daily electricity prices on the balancing market and on the spot market.
The first 7 months of 2017 were peaceful on the balancing market and in terms of prices of instruments listed on the spot market; it was distorted mainly by severe fluctuations in wind power production, increasing demand for capacity and shutdowns in Poland and in the Western Europe. The aver-age price level in 2017 on the balancing market was 167.27 PLN/MWh, compared to 164.16 PLN/MWh in 2016.
Operating reserve
As of the beginning of 2014, the catalogue of system services provided to PSE was expanded to include an operating reserve. The operating reserve is made up by generation units which have free capacity not covered by energy sales contracts.
In 2017, the operating reserve service was continued, while its level changed slightly compared to the previous year. The reference price was raised to 41.79 PLN/MWh and the budget rose by 11% compared to 2016.