Developments in the market environment are of key importance for the financial performance of the Group. In this context, particular attention should be paid to quotations for;
the Group’s results were determined by the regulatory mechanisms of the market, such as the Oper-ating Reserve, as well as non-regulatory factors, e.g. weather conditions, in particular hydromete-orological and wind conditions.
According to data published by the PSE, the demand for electricity in Poland in 2018 increased by 2.8 TWh in relation to 2017, reaching a 10-year high at 170.9 TWh. Production failed to match the increased demand and fell by almost 0.7 TWh in relation to 2017 to 165.2 TWh. Therefore, the visibly growing demand was not offset by production, and energy imports increased as a result.
In 2018, the upward trend in wind farm generation was interrupted. The share of wind energy in the generation mix was approx. 7.1%, and the production of electricity by wind farms declined by approx. 16% in relation to 2017. The lower wind power generation was due to inferior wind conditions.
Coal-fired main activity producer electricity plants had the highest share in the power generation mix last year. They accounted for 49.9% of the total production, while the share of lignite-fired main activity producer electricity plants was 29.8%. The highest increase in production in percentage terms in 2018 was recorded by gas-fired main activity producer electricity plants, where generation increased by 34% yoy to 9.6 TWh.
Import increased in 2018 by more than 0.5 TWh relative to last year, while export declined by almost 2.9 TWh in relation to 2017, which can be explained by the visibly growing demand for electricity, which reached its 10-year high at 170.9 TWh in 2018. The launch of the new LitPol Link interconnection in December 2015 between Poland and Lithuania and of the Nordbalt interconnection between Lithuania and Sweden not only facilitated power flows between Poland and Lithuania, but also contributed to a higher power exchange with Sweden, treating Lithuania as a transit country. Import growth relative to 2017 was driven by increased power flow volumes from Ukraine.
In order to compare electricity prices in Poland against prices in neighbouring countries, SPOT market prices were used as a reference product. The price level in Poland was substantially higher than in the neighbouring countries compared to previous years. The highest price differences were found in com-parison to the Scandinavian market (+18.83%, or 35.37 PLN/MWh), and only slightly lower differences were identified in comparison to the German market (+17.43%, or 33.13 PLN/MWh). Very high system losses, high demand for power during high temperatures in the summer and low production from wind sources, as well as increasing CO2 emission allowance (EUA) prices and persistently high prices of coal resulted in increasing prices on the Polish market.Especially in late Q4, in peak hours, we faced strong price increases on the Polish and neighbouring markets, where substantial price drops and spikes could be observed along with an increased volatility, which was attributable to high energy outputs from wind farms.
Over the recent years, a consistent decline in coal prices has been observed in Poland, driven by a global factor – the global decline in the price of this commodity and the oversupply of coal in Poland. The downward trend reversed on the global markets in 2016, when the prices skyrocketed. In 2018, coal prices were still very high at main transhipment ports (ARA, Newcastle, Richards Bay). On the Polish market, the selling price for coal for main activity producer and autoproducer power plants signif-icantly increased, partially catching up with the global trends. The negative impact of this factor on the performance of the Energa Group was limited.
The average electricity price level on the day-ahead market in 2018 was 223.23 PLN/MWh, 65.39 PLN/MWh more than in 2017 (157.84 PLN/MWh). Record levels of system losses and domestic demand for power were coupled with very low wind power generation, which consequently resulted in a consid-erable pick-up in prices relative to 2017.
In order to assess the futures market in Poland, a one-year base-load future contract for 2019 (BASE 2019) has been selected as a reference product. In 2018, the price level for this contract was highly volatile, with above-average spikes that had not been seen in the recent years and brought the price to a peak level of 311.56 PLN/MWh in September. The trend on the futures market is particularly important from the perspective of the Group’s contracting process for the next year.
EUA prices rising to levels unseen since 2008 were mainly driven by efforts taken by the European Commission with the overarching goal to reduce the supply. On 15 May 2018, the European Commis-sion published the number of allowances in circulation as at the end of 2017 (just over 1.654 billion), which is the basis for defining the Market Stability Reserve (MSR) of the EU Emissions Trading System (ETS), a mechanism which has been in operation since January 2019. Therefore, the volume of auctions in the first 8 months of 2019 will be reduced by 265 million allowances which will be transferred to the ‘Reserve’ (MSR), accounting for 16% of all allowances in circulation. During the first five years, the MSR is to be reduced by 24% of allowances from the auction pool every year. The next publication of the total number of allowances in circulation will be made by the European Commission on 15 May 2019. If the number of allowances in circulation does not change, in consequence 397 million allowances offered in auctions in 2019 will be transferred to the MSR. The implementation of this effective system to curb the supply of emission allowances on the market, backed up with suggestions that the floor for trading in emission allowances may be at the level of EUR 25 to 30 per tonne and the price in 2018 could reach EUR 30 to 35 per tonne this year, resulted in increasing market prices for allowances. On 10 September 2018, these factors boosted the EUA price to EUR 25.24/t, while since the end of 2017, the price had increased by 228%.
From the perspective of the Group’s generation mix (its high share of RES), the prices of green property rights were of key importance. PM RES prices in EOB trades continued the growth path initiated in the second half of 2017, closing 2018 at 135.20 PLN/MWh, with a very strong volatility. The property rights market picked up, with a continually high volume of available property rights.
The figure below shows the average daily prices for electricity on the balancing market and SPOT mar-ket.
In 2018, differences in prices on the balancing market and prices for instruments traded on the SPOT market were mostly attributable to strong variations in the wind generation output, increasing domestic demand for power and decommissioning in Poland and Western Europe. The average price level in 2018 on the balancing market was 227.94 PLN/MWh vs. 167.27 PLN/MWh in 2017.
In 2014, the operating reserve was included in the catalogue of system services provided to PSE. The operating reserve is composed of generating units which have spare capacities not covered by contracts for electricity.
The operating reserve (OR) service was continued in 2018, although its volume changed slightly in relation to the previous year. The reference price was raised to 42.58 PLN/MWh, and the budget was extended by approx. 5% relative to 2017.