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Warsaw — * Expects 3.5 million mt fewer free carbon allowances
* Forecasts blended hard coal prices to fall 5% this year

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Poland's largest power company Polska Grupa Energetyczna said late Tuesday it faces a challenging 2016 due to lower electricity prices and volumes and fewer free CO2 emission allowances.

PGE expects the wholesale full-year average blended price in the range of Zloty 168-170/MWh ($42.55-$43.06/MWh) in 2016, down from Zloty 173/MWh in 2015, the company said in a fourth-quarter earnings presentation. PGE expects blended hard coal prices this year will fall by about 5% year on year.

The company expects lower generation volumes as two units at its hard coal-fired Dolna Odra plant and one unit at its lignite-fired 5.3 GW Belchatow plant are shifted to reserve. PGE said it will receive fewer free CO2 emission allowances this year, equivalent to emissions of about 3.5 million mt.



For a company such as PGE, which generated 91% of its electricity from lignite and hard coal in 2015, the market trends are creating a challenging environment this year, CEO Marek Woszczyk said.

"European climate policy and new regulations on renewables support in Poland...were the most important topics for the sector last year. We have witnessed declining wholesale electricity prices in forward contracts for 2016, which follow global trends related to falling hard coal prices and changes in installed capacity in Poland," he said in a video.

"In 2016, I think we can expect pressure on earnings due to the situation on the commodity markets, both fossil fuels and energy, despite our optimization initiatives and unfortunately we will not be able to offset them fully," he added.

POLISH PRICES SEEN STAYING HIGH

On Wednesday, Woszczyk told a Q4 results' news conference, the company will release its revised strategy in Q2 of this year to reflect the environment of lower prices and volumes and the need to buy carbon emission allowances. As PGE can do little to effect the macro environment, the revisions will focus mainly on increasing efficiencies inside the company, he said.

Although PGE sees lower electricity prices in 2016 as the main threat to its performance, Woszczyk said he believes that Polish wholesale prices will continue to be substantially higher than in neighboring markets for the short-to-medium term due to limited volumes available via interconnectors. Year-ahead baseload prices in Poland are currently around Eur34/MWh, compared with Eur21/MWh in Germany and Eur22/MWh in the Czech Republic.

However he said increasing wind generation in Poland -- in December last year it accounted for 11% of the country's total generation compared to just 7% a year earlier -- and increased interconnector capacity will likely reduce Polish prices. On the other hand, he said that increased interconnector capacity will allow PGE to export more electricity.

Another factor that may keep Polish prices high is the introduction of a full capacity market Woszczyk said, noting that the government's economic development strategy announced on Tuesday stated the need for one.

Poland currently has two capacity market mechanisms, which Woszczyk described as "transitional." One is an operational reserve capacity which has a 20% higher budget in 2016 and another is interventional cold reserve. In the latter PGE is being paid by the TSO from January this year to have 454 MW of old hard coal-fired capacity in its Dolna Odra plant in reserve.

CARBON PRICE CONCERN

Carbon allowance prices remain a "major concern" for PGE, but Woszczyk said he saw two reasons to expect EUA prices to remain low in 2016. The first is the two-year gap between the end of the backloading scheme at the end of this year and the introduction of the Market Stability Reserve in 2019, which should create a surplus of allowances on the market and drive prices down. Another factor that may drive down EUA prices, he said, is the economic slowdown in many European countries coupled to an expectation of cheaper gas prices.

Poland has launched a legal challenge against MSR because it may minimize the compensatory effect of receiving free EUAs post 2020, Woszczyk said. In the period after 2020 Woszczyk said he was trying to be "very positive that we will (continue to) get these free allowances otherwise it would be an obvious breach of the European Council summit assumptions in 2014." Despite the challenging environment, Woszczyk said the company's flagship investment, a Zloty 11 billion project to build two 900-MW units at the hard coal-fired Opole plant was proceeding on schedule and was now 35% complete.

A Zloty 4 billion investment to build a 450-MW unit at the lignite-fired Turow plant has required substantial redesign to meet the requirements of the BAT conclusions for new units, Woszczyk said, but excavation work at the site is continuing. PGE expects to start a trial run of its 138 MW combined cycle gas turbine cogeneration unit in Gorzow in Q1 of this year, Woszczyk said.

PGE added 218 MW of new wind capacity in four wind farms to increase the company's installed wind capacity to 529 MW at the end of last year.

However, the government's decision to postpone the introduction of a new support system based on auctioning until the middle of this year added uncertainty to the renewables market in Poland, especially about the final auction price and volumes to be purchased at auction, Woszczyk said.

Woszczyk said PGE is still interested in constructing offshore wind projects, adding however the projects were in the "very initial stages." The company has plans to construct three offshore wind farms in the Baltic Sea with a combined capacity of 3.45 GW.

Q4 OUTPUT FALLS

In Q4, PGE generated 13.84 TWh of electricity, down 4% year on year due to a 7% drop in lignite generation caused by a heavier maintenance workload in Belchatow. Lignite-fired output reached 9.25 MWh and accounted for 67% of PGE's total generation. Hard coal-fired production was flat at 3.01 and it accounted for 22% of generation.

Gas-fired generation fell 1% year on year to 750 GWh and it accounted for 5% of PGE's output in the quarter. Biomass-fired generation fell 3% to 300 GWh, but wind output rose 65% to 280 GWh due to better weather conditions and additional capacity. Pumped storage generation rose 54% to 200 GWh due to greater utilization by the TSO, but hydro generation fell 38% to 50 GWh.

In the whole of 2015, PGE generated 55.58 TWh of electricity, up 1% year on year thanks to 77% higher gas-fired output as a result of reinstated subsidies, PGE said. Gas-fired generation was 2.05 TWh.

Lignite generation was flat at 38.64 TWh and accounted for 70% of total output. Hard coal-fired generation fell 1% year on year to 11.91 TWh and accounted for 21% of combined output. Biomass generation fell 2% to 1.23 TWh but wind generation increased 28% to 0.82 TWh. Pumped storage was up 10% to 0.57 TWh but hydro fell 14% to 0.36 TWh.

The availability of PGE's generation assets in 2015 rose year on year, with lignite reaching 84.9% from 83.4% and hard coal attaining 88.1% from 81.8%. Their load factor fell with lignite dropping to 84.4% from 86.5% and hard coal down to 66.6% from 69.7% due to lower demand from the TSO.

PGE supplied 9.97 TWh of electricity in Q4, down 3% year on year, due to to a 3.5% fall in supply to business customers.

--Adam Easton, newsdesk@platts.com