Company’s dependence on customers, plans to build a competitive heat and power plant
In respect of heat sales, the Company’s business operations rely primarily on Fortum Power and Heat Polska Sp. z o.o. (a district heating operator).
An important risk factor and threat for KOGENERACJA S.A. was the planned Fortum’s project to build a new combined heat and power plant in Wrocław at 195 Obornicka Street. In 2018, the project was discontinued and Fortum resigned from the location in Obornicka Street.
In response to the growing demand for network heat in Wrocław and Siechnice, KOGENERACJA S.A. is planning to build a Gas and Power Unit. The investment will be located on the grounds owned by KOGENERACJA S.A. in the north-west part of Siechnice. The construction of new generation units on the investment site adjacent to the existing heat and power plant will not affect its operating conditions so the continuity of heat supplies will be maintained. New generation units fired by natural gas will ultimately replace the currently operated coal and biomass fired heat sources of EC Czechnica heat.
The planned project will involve building of a new cogeneration unit including a gas and steam turbine with a thermal capacity of 160 MWt and electrical power capacity ranging from 160 to 180 MWe depending on the number of gas turbines. The total thermal power of the new CHP including the peak load unit will approximate 330 MWt. The commissioning is scheduled to take place in 2023.
Changes in the Energy Law
The Energy Law and its implementing regulations govern the national energy policy, set out the rules and conditions for the supply and use of fuels and energy and identify the authorities responsible for fuel and energy management.
In 2018, the Energy Law was amended several times:
- amendments of 30 April 2018 arising from the Act of 6 March 2018 implementing the Entrepreneurs Law and other legal acts on business activity,
- amendments of 25 May 2018 arising from the Act of 10 May 2018 on the protection of personal data,
- amendments of 28 July 2018 arising from the Act of 6 June 2018 on the amendments to the Act on biocomponents and liquid biofuels and certain other acts,
- amendments of 4 September 2018 arising from the Act of 5 July 2018 on the amendments to the Act on combating unfair competition and certain other acts,
- amendments of 25 November 2018 arising from the Act of 5 July 2018 on the management of succession in businesses owned by natural persons,
- amendments of 18 December 2018 arising from the Act of 9 November 2018 on the amendments to the Energy Law and certain other acts.
Carbon dioxide emissions
The risk associated with CO2 emissions and the need to use up a certain amount of emission allowances is increasing, as the actual CO2 emissions were lower than the limits allocated to the Company under the National Plan of Distribution of Allowances (KPRU). The low amount of emission allowances granted under KPRU III for 2013-2020 means:
- changes in the method of distribution of allowances into an auction system according to the new Directive on emission allowances
- only a certain part of the allowances will be received by the Company free-of-charge - under the National Implementing Measures and the National Investment Plan, the allocations for heat and electricity, respectively, will need to be evidenced with completed investment projects
- starting from 2020, all the allowances will be acquired through auctions.
In 2018, revision of the CO2 European emissions trading system (EU ETS) was completed. The factors having impact on the price of CO2 emission allowances include:
- increase in the Linear Reduction Factor from 1.74% to 2.2% as of 2021,
- doubling the number of allowances allocated to the Market Stability Reserve (MSR) between 2019 and 2023 from 1.2% to 2.4% of allowances in circulation and the announcement of regular cancelling of surplus allowances as of 2023,
- adjustments to the derogation rules and establishment of the Modernization Fund which will not finance any investments based on fossil fuels,
- continuation of free allocation of emission allowances to suppliers of network heat and operators of high-efficiency cogeneration plants.
All this means a need to implement additional investments in the improvement of the generation efficiency and a temporary increase in the generation cost as a result of spending on the purchase of emissions allowances.
Factors affecting the demand for heat
Urban construction developers are very active in the area Wrocław. New buildings connected to the district heating network drive up the demand for heat and thermal power of the heat supply system.
In 2018, the estimated growth of the heat market approximated 48 MWt, of which 18 MWt was attributed to new buyers connected by KOGENERACJA S.A. and almost 30 MWt to the heat distributor Fortum.
On the market of new buildings (primary market) the total volume of new contracted heat demand was 44 MWt while the demand coming from existing buildings (secondary market) totaled 4 MWt. The development of the secondary market was triggered by the launch of the program aimed at elimination of low-stack emissions implemented in partnership with Wrocław Municipality and the heat distributor.
Another important factor contributing to the development of the heat supply network is the construction of new heat mains by KOGENERACJA S.A. in the area of Zawidawie and Siechnice. The total budget of the investment project approximates PLN 13m and includes a subsidy from the National Fund for Environmental Protection and Water Management (NFOŚiGW) granted from the financing allocated to Integrated Territorial Investments.
The gradual decrease in demand for heat, which was caused, among other things, by improved thermal insulation of houses and apartments, reduction of heat losses during transmission and installation of weather sensors in the district heat substations, has finally stopped recently.
The proactive efforts undertaken by KOGENERACJA S.A. to acquire new buyers, especially through cooperation with the Wrocław Municipality in connecting new and existing buildings to the network, compensate for the reduced demand and help stabilize the sales of heat.
Last year, the sales of contracted heat power increased by 13.76 MWt, i.e. by 1.35%.
Factors responsible for the variation in heat and power sales
The main factors determining the demand for electricity and heat include the weather conditions, such as the air temperature, wind and precipitation, socioeconomic factors, such as the number of energy users, prices of energy resources, economic development and GDP growth and technological factors, such as the generation technology. Each of those factors has a bearing on the technical and economic conditions of energy generation and, consequently, on the Company’s performance results.
The volume of energy sales varies throughout the year depending mainly on the weather conditions (air temperature and length of the day). Higher demand for electricity is observed mainly in the winter months and is considerably lower in the summer. Moreover, seasonal variations are observed for certain groups of consumers. The seasonality effect is much more prominent in the case of households than in the case of industrial customers.
The sale of the Company’s products is subject to significant seasonal fluctuations. In the period from October to April the demand for heat is much higher than in other months. This means that the possibility to generate electricity in the combined system is also seasonal. The Company does have the technological capacity to generate electricity also in the period of a lower demand for heat (through the so called "pseudo-condensation") but this has been significantly limited since 1 July 2007, i.e. following the entry into force of another revision of the Energy Law, due to the requirement to keep the minimum gross efficiency of transformation of chemical energy into electricity and heat in the cogenerated system at 75%. In 2018, EC Wrocław achieved the efficiency of 79.8%, (vs. 84.9% in 2017), while EC Czechnica 76.9% (76.2% in 2017).
