not only generation: about a quiet revolution in the polish ......not only generation: about a quiet...

Not Only Generation: about a Quiet Revolution in the Polish Electricity Sector 3rd edition of a report on financing energy investments prepared by ING Bank Âlàski and PwCMay 2013

Not Only Generation: about a Quiet Revolution in the Polish Electricity Sector

3

Dear Readers,

Once again, we are pleased to share with you our thoughts on the energy sector in Poland. Probably, what made the biggest impression on the readers of the first edition of the Report in 2011 were figures. The level of capital expenditure necessary in the energy sector was estimated at PLN 170 billion within a 10-year horizon. This amount stimulated the imagination andexpectations of potential beneficiaries of the investment process. The summary of that reportdiagnosed the main reason for waiting in the area of investments to be revolutionary changes in the regulatory and legal environment of the sector. According to our assessment at that time,the creation of a stable system of legal regulations as well as a transparent and sustainable system of support for renewable energy was one of the basic conditions for making decisionsto start the long-awaited investments in the energy industry – investments with a decades-longpayback period.

We still do not have such a system today, nor do we know when the announced new regulations,known as the Energy Three-Pack, will come into force. In this year’s edition of the report we analyze the impact of the lack of stable regulations on the suspension of some of the announcedinvestment projects in the past two years.

At the same time we look for answers to the questions of whether, how, and when our market maybe affected by such trends of the European market as a rapid increase in the number of photovoltaic installations or the development of microgeneration based on the concept of prosumer energy generation. We also wonder to what extent the European regulations and otherchanges occurring outside Poland may constitute an additional factor introducing uncertainty in the process of making investment decisions.

Recognizing the above-mentioned changes in Poland and globally, we decided to take them into account when looking at the Polish electricity sector in 2013. We show that, contrary to appearances, many things are happening: thus the slightly tricky title of the report.

We would like to express special thanks to the Management Board and Experts of Bank Gospo-darstwa Krajowego for their help in the preparation of the report.

Enjoy reading!

Piotr ŁubaManaging Partner at PwC Advisory Energy Group Leader PwC

Kazimierz RajczykManaging Director for the Power Industry SectorING Bank Âlàski

Introduction


5

Table of contents

1. Silent Energy Revolution – key report findings 4

2. Why and where? Causes and directions of investment transformations since 2008 7

2.1. Generation 7

2.1.1. Conventional energy sector 7

2.1.2. Nuclear energy sector 19

2.1.3. Renewable energy sector 20

2.1.4. Prosumer energy sector and energy storage 25

2.2. Sales and distribution 28

2.2.1. Sales 28

2.2.2. Distribution 30

3. Public Procurement Law. Flywheel or a drag for investments? 33

3.1. The influence of the Public Procurement Law on investments in the energy sector 33

3.2. “Technical dialogue” – a remedy to the limitations of PPL? 34

4. The formula of investment implementation: is EPC more expensive, but risk free? 35

4.2 EPC – more expensive but with no risks? 41

5. Polish Investments – new funding opportunities 43

5.2 Polish Investments 44

1. Silent Energy Revolution – key report findings


8

Observation of the current investment plans of market playersin the energy generation sector and of the changes that havetaken place in the sector, outlines a slightly different vision ofthe future in comparison to that of 2008 when the Polish EnergyPolicy until 2030 (PEP) was developed.

First of all, there was a reduction in the plans regarding gener-ation capacities. The plans of 2008 to build 21.5 GW of new capacities are currently reduced to 12.1 GW. Observing realchanges in demand year on year, market players revised theirforecasts regarding its future growth: the growth will take place,but not at the rate of 2.2%, as was originally assumed. The summary of the revised forecast of demand increase and theschedule of withdrawals of old units and addition of new unitslead to the conclusion that until 2020 there is room for 6-9 newunits of ~900 MW in the system. Taking into consideration thefact that only three projects to build new coal-fired units are atan advanced stage, there is still room for several new ones. Thequestions as to which player will build them and on the basis ofwhat fuel are still open.

For at least three years, in debates on the directions of invest-ment in the Polish energy sector, the question “gas or coal” hasbeen raised. Expectations of investors from 2008 assumed veryhigh CO2 prices, which – along with the forecast of stronggrowth in electricity prices – inclined them to prepare constru -ction projects for gas-fired units. Now, when the price of CO2

is low, many players have decided to abandon the plans to buildnew gas-fired units, which however, concerns power plants onlyand not CHP plants. Nonetheless, future transformations in thegas market may change this picture, contributing to a declinein gas prices, making a gas-fired power plant a profitable ven-ture. While the profitability of a gas-fired power plant requiresa decrease in the price of gas or a significant increase in CO2

prices in the future, the construction of a gas CHP plant is aprofitable investment even in the current conditions. This re-sults from the fact that CHP plants have the possibility of sellingheat and benefitting from the support instruments whose ex-tension is expected with the adoption of the new Energy Law.The potential for the construction of “large” gas units workingas CHP plants is slowly decreasing, but there is still muchspace for the development of smaller sources.

A strong increase in CO2 and electricity prices had been ex-pected since 2008. Meanwhile, in the previous years, whole-sale energy prices did not rise rapidly, and the forecasts for 2014 and 2015 also do not incline investors to be optimistic. This situation certainly should not be taken as an indication of

a long-term trend, as today’s price, in many cases, does notallow producers to cover even their operating expenses. This isparticularly important in the era of expiration of compensationfor early termination of long-term contracts and the need toservice investment debt.

In addition to the adjustment of expectations regarding an increase in energy prices, the last period was a disappointmentfor the once stable market of renewable energy sources (RES):on 16 April 2013 the price of the “green” certificates reachedthe level of 122.5 PLN /MWh. The real problem turned out tobe an oversupply of certificates. Regardless of the direction ofchanges in the law on renewable energy sources, the sectorhas reached a point where there is still room for new projects,though only selected ones. A wind farm with productivity of lessthan 2700 h per year (31% of time in a year) will not have a sat-isfactory rate of return, similarly investment in biomass sourceswith the fuel price higher than 29.6 PLN/GJ1. Of course, any in-vestment of average operating parameters may turn out to beprofitable if there is a market intervention in the direction of per-manent elimination of the oversupply of certificates. However,it seems that a further increase in energy prices for this reasonwould not be acceptable to the end user.

Thus, the generation segment is still an interesting investmentoption, however, only with regard to selected projects, whichcertainly include microgeneration, based mainly on the pro-sumer2. For market players, service of the prosumer is not onlythe very technical process of settlement but, most of all, thepoint of contact with the customer, whose needs are becomingincreasingly important.

In an age of limiting construction projects of new capacities,resulting from the uncertainty of gas and CO2 prices as well asRES regulations, the big winner in the field of capital expendi-ture is the distribution segment, which has not been treated asa priority before. In uncertain conditions, investments in thisarea are a perfect allocation of funds, whereas these are in-vestments not only in the networks themselves, but also in theimprovement of customer service quality.

For the first time, the customer appears at the centre of attentionof power companies. Investments in customer service qualitydo not require billions, and another fact giving rise to optimismis that investors see the necessity of allocating resources in this

1 Assuming the certificate price equals 40% of the replacement fee.2 Prosumer means a person who is an energy customer and producer at the same time.


9

sector. In the future, it is expected that competition for cus-tomers will not be based on price only, and power companieswill seek better solutions to improve the quality of their service.

Despite verification of investment plans in the electricity sector,in comparison to the year 2008, the resources required for theirimplementation still amount to tens of billions. However, onemust urgently find answers to the question of how to spend themoney. The need to apply Public Procurement Law (PPL) sig-nificantly limits the investor’s possibilities regarding the choiceof contractor and imposes on it the mode of preparing for thischoice. Practice also shows that investment without the PPL canbe significantly cheaper. Recently introduced into the Polishlegal system, the institution of “technical dialogue” gives the in-vestors obliged to use the PPL rights similar to the rights of thecompanies that may carry out the procedure using their inter-nal regulations. This institution is worth using.

Not only can the “technical dialogue” be a way to reduce capitalexpenditures, but also a proper construction of the contract witha contractor with regard to risk sharing. The taking over of the“safe” risks by the investor, even with the EPC formula (“turn -key”), may generate significant savings, without increasing therisk for the project.

Of course, in relation to the necessary investment there are always too little funds in the sector. However, in view of its importance to the national economy, the sector may count on anextra financial “boost”, as it is possible to obtain funding fromthe programme Inwestycje Polskie (Polish Investments).

2. Why and where? Causes and directions of investmenttransformations since 2008


12

2.1.1. Conventional energy sector

Demand forecast

Before the effects of the recent global financial crisis began to directly affect the economic situation in Poland, the nationaleconomy was growing rapidly. Economic development entaileda systematic increase in the annual national gross electricityconsumption (until 2008). Developed in 2008, and adopted by the Council of Ministers a year later, a document entitled“Polish Energy Policy until 2030” was based on assumptionsfrom a period of great economic prosperity and favourablelong-term forecasts for the development of Poland. The fore-cast concerning demand for electricity included in the PEP assumed its average annual growth at the level of 2.2% (in 2006-2030). As a result, the gross demand for electricity in 2030 wasto reach 217.4 TWh.

Since 2009, the Polish economy has been experiencing the effects of the economic slow-down, which have resulted in a decline in the dynamics of GDP growth. In consequence, al-ready in 2009 the economic downturn caused a transient redu -ction of energy consumption (by 4% year on year). The follo wingyear, the level of electricity consumption returned to the 2008level, and in the next years, national electricity consumption remained at a stable level.

In the face of changes in the market conditions, Agencja RynkuEnergii S.A. (the Energy Market Agency – ARE) prepared in2011 the “Updated Forecast of Fuel and Energy Demand until2030” (“Updated Forecast”). The document verified the forecastgross demand for electricity. According to the assumptions, by 2030, it is to achieve the level of 209.8 TWh (by 7.6 TWh less compared to the PEP forecast), and the growth rate of the

demand will be maintained at 1.8% rather than 2.2%, as origi-nally expected.

Taking into account macroeconomic forecasts for economicgrowth in the future, including in particular the rate of GDPgrowth, it is expected that the increase in the demand for electri -city will take place at a rate close to the figure presented in theUpdated Forecast. Thus, from today’s perspective, the 2.2% energy consumption growth rate assumed in the PEP shouldbe considered to be optimistic.

2.1. Generation

Year 2000 2005 2006 2007 2008 2009 2010 2011 2012

Consumption in Twh 138,0 144,8 149,9 154,2 154,9 148,7 155,0 157,9 157,0

Gross consumption of electricity in Poland in years 2000-2012

Source: PSE (Polish Transmission System), annual reports on the functioning of KSE (National Power System) in years 2005-2012

Forecast for the national gross demand fo relectricity [TWh]

Data according to the updated forecast by ARE (2011)Data according to PEP (2009)

National electricity consumption in 2012 amounted to 157.0 TWh

Source: PwC analysis based on “Polish Energy Policy until 2030”, ”Updated Forecast of Fuel and Energy Demand until 2030” by ARE and the data of PSE S.A. (regarding electricity consumption in 2012)

100

120

140

160

180

200

220

240

2010 2015 2020 2025 2030


13

Electricity price forecast

The optimism in assessing the rate of growth of energy demandwas followed by the expectations for a strong price growth in the future. With these assumptions, the construction projectsof new capacities were characterized by a high rate of return,regardless of the choice of fuel.

However, today’s prices deviate significantly from recent expe -cta tions: the current wholesale price of electricity is approximately50% below the level forecast in the Updated Forecast3. The cur-rent price level may prevent producers from achieving the revenue level which allows them to cover all operating costs.Therefore, it should be expected that producers will begin toshift a greater portion of fixed costs on to the price of electricity.Many market participants are asking themselves today whetherthe current market price results from supply and demand in-teractions, or whether it is the result of deficiencies of formalsolutions connected to the balancing market. The latter expla-nation is more probable.

Cumulative real GDP growth (1.0 = GDP of the year 2012)

0,4

0,8

1,2

1,6

2

0,2

0,6

1

1,4

1,8

+90%

2024 203020182012

Source: PwC analysis based on forecasts of the Independent Centre for Economic Studies (Niezależny Ośrodek Badań Ekonomicznych - NOBE).

0

Wholesale electricity prices, current prices (PLN/MWh)

Average price at competive marketannounced by the President of the Energy Regulatory Office

*) volumes of concluded contracts, stated as of 6.04.2013: for 2013 – 66.4 TWh. 2014 – 26.5 TWh. 2015 – 1.6 TWh

Source: PwC analysis based on publicly available information (“Updated Forecast of Fuel and Energy Demand until 2030”, exchange data of the Polish Power Exchange – TGE – obtained from its Internet page). The inflation rate used for the calculation of current prices in years 2013-2015 based on the forecast of the Independent Centre for Economic Studies (NOBE).

150

200

250

300

350

2010

Data according to Updated Forecast by ARE

2011 2012 2013* 2014* 2015*

Average weighted price of annual BASE contracts at the Commodity Forward Instruments Market with Physical Delivery (CFIM) at the Polish Power Exchange

3 With regard to BASE contracts on the Commodity Forward Instruments Market with Physical Delivery of the Polish Power Exchange concluded for 2013. Total volume of contracts – 66.4 TWh


14

The situation where a product’s price is lower than the cost ofits production should be regarded as temporary, especially inthe absence of over-supply of power. In such price circum-stances, none of the market participants will be able to survive,especially faced with the investment challenges that are await-ing. Since there are no grounds for concluding that the pricedrop is a result of a permanent collapse on the market, furtherprice increases are to be expected in the future. The drivingforce behind these increases will be the following factors:

• Increased demand – it is expected that the long-term up wardtrend in the development of the Polish economy will trans-late positively into demand for electricity and, consequently,also into price increases of this energy. Firstly, this will applyto prices during periods of peak demand, and only then toBASE prices.4

• A decrease in the volume of free CO2 emission allowances– together with the start of the 3rd Phase of the EU ETS5, thenumber of free allowances for Polish producers will besteadily decreasing until 2020, when the free allocation willbe finished. Even with the current low prices of allowances,it can be expected that their cost will have a positive effecton the market price of energy, strongly varying the marginsof producers.

• Decrease in the income from compensations for early termi-nation of long-term contracts – for producers, gradual redu -ction or total cancellation of compensations means adecrease in the revenue stream and the need to seek addi-tional sources for it.

• The need to finance investments in new generation capaci-ties – in the case of halt in the growth of electricity prices in the next years, energy groups will encounter difficulties in obtaining credit, or in the service of debt incurred for investments in new generation capacities. Lack of increasein electricity prices may prevent the realization of many investments. Since the expansion of the generation capaci-ties is necessary to avoid power deficits, it is expected thatthis factor will create significant upward pressure on elec-tricity prices.

Thus, in the future, it is expected that energy prices will incre -ase but, probably, not as fast as assumed in the Updated Fore-cast – the price of 392.3 PLN /MWh (real prices as of 2013)seems unrealistic in 2020. However, with the price of electricityslightly over 200 PLN /MWh (real prices as of 2013) in 2020 investment in new coal-fired plants become profitable.

Variable and fixed unit cost as well as the price necessaryto cover the fixed costs of a representative hard coal-fired unit (PLN /MWh)

Variable costs

Current energy price

Other fixed costs Depreciation

50

100

150

200

250

Producer’s costs

26.3 PLN/MWhAdditional unit income - without return on capital employed - is necessary

}

Producer’s revenue

0

Hard coal-fired power plant*

The indicated level of electricity price needed to ensure profitability at the operating level is based on several assumptions which do not have to be representative for each generation unit or company. Each generation unit has its own unique circumstances, and therefore the profitability analysis of the generation activity should be carried out for each case individually.

*) The analysis is based on publicly available data. It was carried out for a unit corresponding to the seventh decile of efficiency of system power plants operating in Poland and its level of fixed costs.

Source: PwC analysis based on publicly available information.

4 Prices for electricity supplies from 0:00 to 23:59.5 European Union Emission Trading Scheme – CO2 allowances trading system.

200 PLN/MWhElectricity price ensuring profitability of coal-fired powerplants with supercritical parameters taking into account

today’s level of coal and CO2 prices

Source: PwC analysis based on publicly available information. Break-even price required through-out the whole time of the investment, in real prices as of 2013.


15

Plans for reconstruction of capacities vs. place in thesystem

In anticipation of a significant increase in demand for and priceof electricity as well as power shortage, market players pre-pared in 2008 very ambitious plans for investment in new generation assets. They assumed the construction of over 21.5GW of new capacities in the conventional energy sector, as –according to the forecast – in 2020 the gap in the supply willreach 22 GW. The completion date for the vast majority of newinstallations was planned for the period 2015-2020.

In connection with the revision of the forecasts for growth inelectricity demand and the slowdown that the Polish economystarted to experience in 2009, energy companies have madeadjustments to their investment plans. As a result, the volume ofstated investment initiatives has been limited. The four largestPolish energy companies have reduced the planned invest-ments in new generation capacities by over 4.5 GW. At the sametime, some foreign companies have also abandoned their investment plans in new power units (about 4 GW of planned investments). Their decisions largely resulted from problemsin their domestic markets. Simultaneously, recognizing the attractiveness of the electricity sector, new players planning

to invest in new units (LOTOS Group, PKN ORLEN, Kulczyk Investment) emerged in the generation sector, and the currentmarket entities (such as Fortum, GdF, ZE PAK) expanded theirinvestment plans. In total, these investors initially planned to build more than 5 GW of capacities, but in 2013 some projectswere stopped or reassessed.

In 2012 we saw a decrease in the total volume of planned investments by about 3.5 GW, compared to the statements from2008. However, the current investment plans provide an evengreater reduction of projects in the area of generation.

There are at least three reasons for the abandonment of a number of investment projects in new generation capacitiesin recent years. The first reason is the already mentioned slow-down in the growth pace of electricity demand and, indirectly,also the revision of price growth forecasts. The second reasonis the lower-than-expected pace of moving from the system ofold power units, which slows down the growth of the potentialfuture gap between supply and demand. The third reason isthe uncertainty about the regulatory solutions and architectureof CO2 emission allowances market, which hinders the choiceof fuel for new units.

Capacity installedin KSE (2008)

Investmentplans 2008

Source: PwC analysis based on publicly available data

35.4GW

21.5GW

18.1GW

12.1GW

Planned investments in new capacities in the Polish market and the capacities installed in the National Power System (KSE)




16

The question most frequently asked by investors in the pastyears has been: “gas or coal?” Recently, the hot issue has beco -me for how many units is there in fact room in the system. Ob-servation of investment plans indicates that market playersregard building new coal-fired power plants to be a safer op-tion, and with regard to gas fuel they select CHP constructionprojects, whose economics is defended by support instrumentsand the possibility to sell heat.

To estimate for how many units there is room in the system, onemust assume future demand growth, including an increase inthe so-called “base load”. Work in the “base load” generallymeans operation on an ongoing basis. Currently, the units work-ing in the “base load” consist primarily of the – commissionedin recent years – units in the Bełchatów, Pàtnów and Łagiszapower plants, and selected lignite or hard coal-fired plants operating in Poland. In addition, the units meeting the demandof customers regardless of the demand for power in the systemmust include “must run” units, i.e. RES and combined heat andpower (producing both heat and electricity at the same time)installations. “Must run” means that the production of these unitshas the priority of entry into the system by virtue of technology.

Planned investments in new capacities by fuels in 2013

Gas fuel

Power plants CHP plants

Coal fuel

Total investment plans 2013

Source: PwC analysis based on publicly available data

12.1GW

6.7GW

5.4GW

4.3GW

2.4GW

Demand curve in KSE in 2012

Capacity (MW)

Hours

Demand growth according to the Updated Forecast

Source: PwC analysis based on data of PSE

10 000

15 000

20 000

25 000

30 000

35 000

0 1000 2000 3000 4000 5000 6000 7000 8000


17

Having regard to the future structure of the generation capacityon the market, it is estimated that by the year 2020 it will be pos-sible to install 6-9 units of 900 MW in the grid without causingmutual cannibalization. The final level of capacity, however, willdepend, among others, on the development dynamics of capa -cities classified as “must run”. Consequently, decisions of ener gycompanies on reducing the plans to build “large” units seem to be correct and have economic justification.

Currently in the conventional energy sector several large proj-ects, at various stages of implementation, must be pointed out.The company ENEA Wytwarzanie has already started the con-struction of unit 11 with a capacity of 1075 MW in Kozienice.Commencement of the investment is scheduled for 2017, whilethe company Tauron Wytwarzanie intends to sign a contractsoon with the general contractor for the construction of a powerunit of 843 MW in Jaworzno (at the moment, an appeal process

Summary of investment plans regarding big coal-based generation units

Investor InvestmentPlanned

commissioning

Advancement of works

ENEA WytwarzanieUnit 11 Elektrownia

Kozienice (1075 MW)

2017 Under construction

Tauron WytwarzanieElektrownia Jaworzno III (843 MW)

2018The general contractor has been selected. The appeal process (initiated by rejected tenderers) regarding the decision on the

choice of the offer for the construction of a unit is pending

PGE GiEK Turów (450 MW) 2017

Tender procedure.In the first tender, 2 offers were submitted whose value

considerably exceeded the budget planned by the investor

Kulczyk InvestmentsElektrownia Północ

(2 units of 1000 MW each)

2017 In preparation.Administrative and legal procedures

Kompania Węglowa Coal unit (1000 MW) 2020

In preparation.Looking for a business partner.

Asian companies are interested in the project.

Source: PwC analysis

Estimated space in KSE for investments in new power plants until 2020

Source: PwC Analysis

6-9 units of ~900 MW

Development of the RES and combined heatand power generation sector

Withdrawal of the existing capacities

Demand growth

Estimate investment space for units workingin the “base load” until 2020


18

6 Source: PwC analysis. Data necessary to make the calculations: efficiency of units based on ARE’s“Updated Forecast of Fuel and Energy Demand until 2030”, hard coal prices based on ARE – Energy Carriers’ Prices, gas price based on the tariff price for industrial gas customers for 2013,fuel emissivity based on other publicly available sources.

– regarding the decision on the selection of an offer to constructthe unit, initiated by the rejected bidders – is pending). Comple -tion of the construction is scheduled for 2018. According toplans, in 2017 a unit of 450 MW, built by PGE GiEK in Turów,will be commissioned. Currently, another tender for a generalcontractor is to be announced (the first one did not allow theselection of a contractor, because the submitted offers signifi-cantly exceeded the budget set by the investor).

These investments are very likely to be carried out in accor-dance with the adopted schedules. It seems, however, that evenafter they have been put into operation in the system, there willstill be room for a few large units in the system. An open ques-tion is who will build them, and based on what fuel.

Currently, also two other major projects in conventional energyare being planned. The first is the construction of the powerplant Elektrownia Północ (fired by hard coal) in the municipalityof Rajkowy, consisting of two units with total capacity of appro -ximately 2000 MW. Kulczyk Investments is working on the for-mal and legal aspects of the project, and the commissioningdate included in the schedule is the year 2017. The second investment is a project analyzed by Kompania W´glowa re-garding the construction by 2020 of a unit with a capacity of1000 MW, also based on hard coal. Until recently, an investmentprocess under the project Opole II was being carried out (2 units of 900 MW each), but PGE withdrew from it

Although the actions of investors indicate that they believe morein the economics of the construction of coal-fired than gas-firedpower plants, the decline in gas prices may reverse the com-petitiveness of these sources.

Today's belief in the coal-based energy industry is grounded onthree foundations. Firstly, in the current situation, cost per unitof energy from gas is significantly above the cost of hard coalor lignite-fired units; the difference is not compensated byhigher efficiency and lower emissions of gas units. Secondly,the observation of the CO2 market does not give rise to the be-lief in a radical increase in the price of allowances in the future,which would guarantee gas-fired power plants an advantage at the level of variable costs. Thirdly, owing to the quantity ofcoal-fired units in the system, only those producers will have a real opportunity to transfer the increase in variable costs ofproduction to electricity prices.

As far as the price of CO2 is concerned, the forecasts prese ntedin the PEP assumed that by 2012 the prices of emiss ion allowances will reach the level of 25 EUR /t, but after 2012 they

were expected to rise significantly – up to 60 EUR /t. Mean-while, the real prices of allowances are considerably below ex-pectations. Since the beginning of 2013 the level of prices ofallowances on the primary market on the EEX has ranged from3.15 to 6.57 EUR/t. The current low level of allo wances pricescould change, if the European Commission moved 900 milliontonnes of allowances from 2013-2015 to the years 2019 to 2020(the so-called backloading). Effectively, this would postponethe problem of oversupply in the EU ETS. However, on 16 April2013, the European Parliament rejected the proposal of the Eu-ropean Commission in this case, postponing a potential inter-vention to a later date. Nonetheless, even if it was carried out,it would be unlikely to have a lasting impact on the market, asinvestors – having regard to the increa sed supply of the CO2

emission allowances in the future – may decide not to imple-ment investments in low-emission solutions.

Looking at the price level of CO2 emission allowances necessaryto ensure competitiveness of new gas-fired power plants in re-lation to new coal-fired units – 67.3 EUR /t6(at today’s fuelprices) – it should be noted that it appears to be unattainable,even with the intervention of the European Commission.

Thus, a necessary condition for the profitability of a new gas-fired power plant is a significant reduction in gas prices.

The current level of CO2 emission allowances on the primary market

Source: PwC analysis based on EEX quotations of the following period 1.01.2013 – 16.04.2013

6,57 EUR/t

Current range of pricesof CO2 allowances

3,15 EUR/t


19

Those investors who are currently planning to build gas unitsworking in condensation (as a power plant – not as a CHPplant) believe that gas prices will fall in the coming years. Thepotential for reductions in gas prices may be supported by theprogressive market liberalization in Poland, which not onlyhelps reduce the prices of the fuel itself, but also increases thepossibility of building the supply portfolio on the basis of morethan one supplier, the diversification of the length of contractsand greater flexibility of the take-or-pay7 formula. The US exa -m ple shows that the decline in gas prices may not only increasethe quantity of gas units, but also move the units working cur-rently in peak demand to the “base load”.

While the decision to build a gas-fired power plant is accom-panied by uncertainty about the future price of gas and CO2,the construction of a gas-fired CHP plant has two tools secur-ing the economics of the investment. Gas units producing bothelectricity and heat (cogeneration) may count on support meas-ures in the form of certificates8. In addition, the heat producedis sold at tariff prices. Moreover, the development of cogenera-tion units is also the direction promoted by the European Union.

The highest rate of return is characteristic for investment in theconstruction of CHP plants working for industrial entities. Thisresults from stable reception of process steam (heat) for the en-tire year, not only seasonally, as is the case with CHP plantsworking for municipal heating systems. Moreover, the volumeof heat consumption by industrial facilities is usually significan.

An example of such an investment for industry is the project ofPKN ORLEN currently carried out in Włocławek, while thebiggest project of this type is planned by PGE and ZA Puławyand concerns the construction of a CCGT unit of 840 MW inPuławy. The project’s goal is the sale of heat to Zakłady Azo-towe and to the city of Puławy. Currently, the investment processis at the stage of tender procedure, to which five bidders will-ing to carry out the order according to the EPC formula havebeen invited.

It seems that the potential of investing in new large gas CHPplants operating in the cogeneration mode for the industrialpower sector is disappearing. However, there are still severallocations in Poland available for investments. Apart from the con-struction of large industrial CHP plants, in Poland there is broadspace for the development of small cogeneration sources. Heatmarkets of small industrial customers and small towns are anattractive investment option. One of the possibilities of develop-ment of such sources is replacing heating plants with cogene -ration units.

7 The take-or-pay formula means an obligation to pay for ordered fuel even if it is impossible to collect it.

8 It was assumed that the support system would be maintained according to the statements of gover nment representatives.

Emission rates of currently built generation units (kg CO2/MWh) and break-even price of CO2 allowances

200

400

600

800

Natural gas Hard coal

0

752

341

67.3 EUR/t EUA price leveling the variable cost of new gas and coal-fired

power plants at the current fuel prices

Source: PwC analysis. Data necessary to make the calculations: efficiency of units based on ARE’s “Updated Forecast of Fuel and Energy Demand until 2030”, hard coal prices based on ARE – Energy Carriers’ Prices, gas price based on tariff price for industrial gas customers for 2013, fuel emission rates based on other publicly available sources

Changes in market conditions, including a decline in theexpected growth dynamics of electricity demand, havenecessitated a revision of the ambitious investment plansof market players. Market analysis indicates that there is space for 6-9 new units with a capacity of ~ 900 MW in the perspective of the year 2020. In this context, a re-duction of investment plans is right. Moreover, investors’optimism dropped because of the current low levels ofelectricity prices: this situation, however, should be trea -ted as a temporary one. In times of low prices of CO2 al-lowances, investors believe that a coal-fired power plantcan ensure a higher rate of return than a gas-fired gener-ation unit. The players who plan to build a gas-fired powerplant believe in a decline in gas prices in the future, whichmay result from ongoing liberalization of the gas sector. A great success today is gas-fired power genera tion basedon CHP plants. Its cost-effectiveness is guarded by sup-port instruments (assuming their validity in the future) andthe possibility of selling heat.


20

2.1.2. Nuclear energy sector

When analyzing the generation sector in the long term per-spective, one cannot overlook the construction project of the firstnuclear power plant in the National Power System. Currently,the pace of work on the construction project of the power planthas lost its dynamism. If this direction of development of the energy sector is maintained, then, according to a realistic sce-nario, the nuclear power plant will be commissioned after 2025.

The inclusion of a nuclear power plant in the National PowerSystem may have an impact on the business legitimacy andeconomic efficiency of other conventional large-scale projects,but should not affect other energy investments.

2.1.3. Renewable energy sector

Since the introduction of the support system in the form of“green” certificates in 2005, the dynamic growth of the renew-able energy sector began, resulting in more than 4 GW of rene -wable capacity at the end of 2012. The year 2012 also saw are cord – 34 percent – increase in the achievable capacity of RES

The level of energy produced from renewable sources did notexceed the volume of energy subject to the obligation of re-demption. However, the situation changed in 2012, when thequantity of energy from renewable sources (eligible for the“green” certificates) exceeded the volume of energy subject tothe obligation of redemption by 4.1 TWh. As of 31.03.2013, i.e.the last day allowing energy sellers to make settlements withregard to the obligation of redemption, the number of issuedand not redeemed certificates of origin of energy amounted to4.97 TWh. The level of oversupply of certificates on the marketis close to the overproduction of energy from renewable sour cesfrom 2012, which seems to indicate that the potential speculationmight have had a slight impact on the market of property rights.The cause of the decline in certificate prices is their oversupply.

Given the current investment portfolio of the power gene -ration sector, a high degree of uncertainty about theprospects of investing in a nuclear power plant, and thelong time horizon of the possible start of its operation, itmust be assumed that the investment should not deter-mine the current investment decisions – besides the de-cisions of the entities involved in the project.

Energy production from RES and the energy volumesubject to the obligation of redemption (TWh)

Energy produced from RES

Volume of energy subject to the redemption obligation (RES)

0

2

4

6

8

10

12

14

16

18

4.1 TWh

2007 2008 2009 2010 2011 2012*

*) Quantity of energy subject to the obligation of “green” certificates redemption based on the estimates of the Energy Regulatory Office of 6.02.2013

Source: PwC analysis based on the data of the Energy Regulatory Office and ARE


21

Oversupply in the market of “green” certificates has led to a col-lapse of the stock market prices of these property rights, sig-nificantly reducing the main stream of revenue from RESinstallation. Falling prices of certificates may lead to the followinglong-term changes in the RES market:

• Higher selectivity of RES investments

The current price of certificates decreases the revenue streamfrom the support system. This does not mean a definitive halt ofthe growth of investments in renewable energy generation. A consequence of this situation will, however, be the need for a higher selectivity of investment projects from the RES portfolio.In the case of the wind energy production, which is the sectorwith the highest growth in installed capacity in Poland, with the

right wind conditions, it is possible to obtain a suitable return oninvestment. Assuming that the current price ratio of “green” cer-tificates to the replacement fee remains stable (i.e. at the levelof 40%), the wind farm productivity necessary to ensure profita -bility is 2700 MWh /MW (31% of capacity utilization)9.

In the case of co-firing of biomass, which dominates in thestructure of renewable energy production, maintaining profita -bility, given the current prices of certificates, depends on theprice of biomass. When selling “green” certificates at the levelof 40% of the replacement fee, the price of biomass, includingtransport, necessary to ensure viability of production in units ofaverage efficiency amounts to 29.6 PLN /GJ10.

• Change in the price formulas in contracts for the sale of“green” certificates

One popular pricing formula used in long-term contracts forthe sale of certificates of origin, concluded between the com-panies which operate renewable energy installations and tradingcompanies, is making the price of “green” certificates de pend-ent on the level of the replacement fee. However, a collapse

50

100

150

200

250

300

350

2011-01-0

4

2011-03-0

4

2011-05-0

4

2011-07-0

4

2011-09-0

4

2011-11-0

4

2012-01-0

4

2012-03-0

4

2012-05-0

4

2012-07-0

4

2012-09-0

4

2012-11-0

4

2013-01-0

4

2013-03-0

4

PMOZE_A index Substitition fee plus excise duty*

* In view of the exemption of renewable energy from the excise duty, which is levied on electricity sold to end-users (20 PLN /MWh), until recently (in the period of demand excess) the price of "green" certificates at the exchange reached a level slightly higher than the replacement fee. Redemption of a "green" certificate entitles to a refund of the excise duty.

Source: PwC analysis based on the data of the Energy Regulatory Office and the Polish Power Exchange

0

Exchange prices of ”green” certificates and the maximum border price of a ”green” certificate (PLN/MWh)

9 Source: PwC analysis for a sample wind farm. The specified level of productivity of a wind farm is based on a number of assumptions which may not be representative for all investors. Each investment project has its own unique circumstances, and therefore, the cost-effectiveness analy-sis of investment projects should be carried out for each case individually.

10 Source: PwC analysis for a sample biomass co-firing installation. The indicated biomass price is based on a number of assumptions which may not be representative for all investors. Each investment project has its own unique circumstances, and therefore, the cost-effectiveness analy-sis of investment projects should be carried out for each case individually.


22

of the price of certificates will lead to a situation where the priceformulas of “green” certificates will depend on the market priceof property rights. This situation leads to a change in the per-ception of the risk of RES investments, which until recently, usedto be considered investments with a predictable and stablelevel of realized revenue.

• Collapse of the biomass market

As a rule, the only generation technology based on RES thatgives the full ability to manage the level of energy production isthe burning of biomass in dedicated boilers and in biomass co-firing systems. Multi-fuel systems allow the owners to choosebetween biomass fuel and coal. The current price relationshipof biomass and “green”certificates do not provide sufficientprofitability of production, prompting the producers to abandonthe supplies of biomass. This situation has a significant impacton the companies which provide biomass for energy purposes.Protests of biomass producers at the Ministry of Economy on12.03.2013 and pickets that took place on 04.04.2013 in five Polishvoivodships may be only the beginning of a wave of protests ofbiomass production companies that have lost the opportunity ofselling their products.

The current situation leads to escalating demands of interventionin the market of the certificates of origin initiated by inve stors,financing institutions and biomass producers. One should notexpect, however, that an intervention – involving, for example,the purchase of “green” certificates from the market – will result

in long-term recovery of this segment. Stabilization of the situ-ation on the market of “green” certificates requires a mecha-nism that would regulate the relationship of the supply anddemand of the certificates of origin. This could be done by:

• Demand regulation – increased obligation of redemption

The level of the redemption obligation necessary to absorb thetotal volume of “green” certificates produced in 2012 amountsto 13.8%, while the redemption obligation for the year 2012 was10.4% and for the year 2013 it has been set at 12.0%. The po-tential increase of the redemption obligation by 1.8% in 2013would, however, result in an increase in electricity prices forend users. Estimated price increases for households owing to the increased redemption obligation would be around PLN20 gross per annum11. It is doubtful that the additional burdenon end-users would meet with the approval of the authorities orelectricity consumers. As a result, one should not expect thatthe solution consisting in increased redemption obligationcould be applied.

• Regulation of supply – reduction of the number of “green”certificates flowing into the market

Reduction of the supply of “green” certificates is provided for inthe draft law on RES of 9 October 2012. The way to introducethe supply-side regulation is both a shorter period of supportfor renewable energy installations and introduction of a mecha -nism of correction factors. Correction factors described in thedraft law introduce a diverse number of “green” certificates forRES installations, depending on the technology used and theyear of the installation start-up. In particular, they reduce thenumber of certificates received by the most widespread re-newable energy technologies, such as onshore wind powergeneration and biomass co-firing.

The productivity of a wind farm and the price of biomass necessary to ensure profitability of investment, assuming the price of the "green" certificate at the level of 40% of the replacement fee.


The productivity of a wind farm necessary to ensure profitability of the investment min. 2 700 MWh/MW

(capacity utilization rate 31%)

Real price of biomass necessary to ensure profitability of biomass co-firing

max. 29.6 PLN/GJ

Break even redemption obligation for 2012:


13.8%The level of the redemption obligation in 2012 necessary to absorb the whole supply of the

“green” certificates from that year.

11 PwC analysis; for the calculation, an annual electricity consumption for a household at the level of 3 MWh was taken, charging according to the level of the replacement fee. The calculation wasmade for 2013.


23

Failure to regulate the relationship of supply and demand of"green" certificates on the market may mean a continuous fluc-tuation of prices of the certificates of origin as a result of the ad-justment mechanism presented below.

The consequence of the above will be an increased risk of in-vestments in innovative RES technologies such as the offshorewind energy sector.

Notwithstanding the introduction of long-term solutions that sta-bilize the market of “green” certificates, a reduction in the num-ber of viable renewable energy projects may be expected. Thesituation may force investors to seek alternative investment options such as microgeneration, considered one of the futuredevelopment directions of the global energy sector.

Development of microgeneration sources is usually describedin terms of prosumer energy sector. According to this concept,the energy recipient is simultaneously its producer. The idea ofactive involvement of mass consumers (households, small busi-nesses) in the energy value chain has been implemented in many EU countries. The rapid development of this sector hastaken place mainly in Germany, the UK, Italy, the Czech Re-public and Spain.

The factor most strongly stimulating the development of mi-crogeneration in these countries was a significant simplifica-tion of the formalities related to the installation of the source andsettlement of the energy produced. With regard to the latterissue, widespread appreciation has been achieved by a tariffmechanism known as the feed-in-tariff, which is to ensure thecollection and prices of the energy fed into the grid. An analy-sis of the development of microgeneration in the countrieswhich have implemented financially attractive feed-in tariffs indicates a rapid increase in installed capacities in the sup-ported sources: for example, in the UK between 2010 and 2011,the installed PV capacity increased from approximately 90 MWto over 600 MW, while in the Czech Republic in the same periodan increase from values close to zero to 120 MW was recorded.

In the long term perspective, the development of the prosumerenergy sector has many benefits for the energy system:

• it promotes awareness of energy efficiency;

• it relieves the distribution network through production andconsumption of energy without feeding it to the distributionnetwork;

• it ensures continuity of supply, even in times of power failure.

From the point of view of the investment process, microgener-ation has beneficial features. In the case of the feed-in tariff, it ispossible to make a long-term projection of energy prices. In ad-dition, the relatively low cost of financing a single installationmakes it easy to scale the participation of financial institutionsin these projects. When choosing the supported technologies,the financing party is able to diversify the risk and manage it more easily than in the case of large-scale investment in theutility energy sector.

Diagram of the RES market adjustments

Decrease in RESproduction and investment

Increase in the pricesof green certificates

Decrease in the prices of green certificates

Increase in RES production and investment

*) Decrease of production applies only to sources which enable the changes of its level – e.g. combustion of biomass in dedicated boilers or co-firing of biomass with coal.


2.1.4. Prosumer energy sector and energy storage

The lack of new regulatory solutions regarding the marketof certificates of origin for renewable energy may result inthe destabilization of the market. As a consequence of thissituation, constant price fluctuations of the certificates oforigin, due to the necessary adjustments of the producersto the market, are to be expected. However, even in suchcircumstances, selected RES projects may achieve ade-quate profitability.


24

Despite its many benefits, in the short term – in particular, takinginto account the current economic situation – the developmentof this electricity generation sector will be limited by high costs.Owing to the high price of the installation in relation to its effi-ciency, the average cost of producing one MWh of electricityin these is 300-1000% higher than in utility energy sector (de-pending on the installed capacity and technology). There arealso significant differences between the individual technolo-gies: for connection load below 10 kW the cost of generating 1 MWh in a photovoltaic system is more than twice as high asfor micro wind turbines.

Stimulating the development of this segment of energy sector(e.g. by the feed-in tariff) means that it is necessary to create a mechanism for transferring additional funds to the micropro-ducers. Mechanisms of this type observed in other countriesusually introduce an additional element in the price of electric-ity (included in the price or covered by a special fee), less oftenin exceptional taxes and tax reliefs. Regardless of the optionused, one must be aware that such support means an increasein energy prices.

A positive factor in the development of microgeneration may bethe effect of scale and experience: for example, for photovoltaicpanels, the period in which the price of equipment is reducedby 50% is five years. The price decrease and the constant simpli -fication of construction and connection procedures (for small installations it is the second highest category of costs) will reducethe support necessary for a return on the installation in a periodof 8-12 years (the period of return in countries where micro en-ergy generation has had rapid development).

A framework for the development of microgeneration in Polandwill be defined in the laws of the energy three-pack. The firstproposals assumed a guaranteed purchase price of electricityin 2013 and 2014 at the level of PLN 650 per 1 MWh for smallwind installations, and up to 1100 PLN /MWh for photovoltaic installations. In addition, connecting microinstallations to thenetwork is to be released from the connection fee, while the

production and sale of electricity from such a system is not to be treated as conducting an economic activity.

Regardless of support for specific technologies, an elementstimulating the development of the prosumer energy sector willalso be the (co-)funding provided under support programmes.Currently, the NFOÂiGW (National Fund for Environmental Pro-tec tion and Water Management), among others, is preparing a programme to assist the construction of microinstallations.Com pa nies trading in energy, and consulting firms, may become the agents in facilitating the acquisition of such funds for future prosumers. In consequence, one may expect the appearance of innovative products. Another factor contributingto the development of the prosumer energy sector may be thesituation in the wholesale market: any increase in electricityprices in the market will shorten the return period on mi-croinstallations.

In the EU countries which have supported the development of the micro energy sector through a guaranteed tariff (the so-called feed-in-tariff), there was a rapid increase in this typeof production. In Poland there are currently plans to implementa similar tariff mechanism, which – in combination with the elim-ination of a number of administrative barriers and with subsidyprogrammes – will provide an opportunity for the developmentof the micro energy sector in Poland. In the period of 3-4 yearsseveral hundred megawatts of power in this area are to be expected. Moreover, the sellers who can create a platform forcollaboration with customers based on micro energy genera-tion will be the market makers.

Features of microgeneration investments


Microgeneration

Predictability of revenue

Easy risk management for the financing institutions

In the EU countries which have supported the develop-ment of the micro energy sector through a guaranteed tar-iff (the so-called feed-in-tariff), there was a rapid increasein this type of production. In Poland there are currentlyplans to implement a similar tariff mechanism, which –in combination with the elimination of a number of admini -strative barriers and with subsidy programmes – will provide an opportunity for the development of the microenergy sector in Poland. In the period of 3-4 years severalhundred megawatts of power in this area are to be ex pec -ted. Moreover, the sellers who can create a platform forcollaboration with customers based on micro energy gen-eration will be the market makers.


25

2.2.1. Sales

In the sales strategies of Polish energy companies, maximizingthe mass of the margin generated in co-operation with custo -mers and creating an effective system of contact with the custo -mers’ base are expressly recorded targets or derivative targets.Many of the initiatives taken in the sales area by the Polish energy companies in 2009-2012 resulted in an improved averagelevel of commercial practices. The three areas with the biggestprogress are:

• the area of sales structures - the first step of the modern mana -gement of sales organization was to divide customers into“key” and “mass” customers and to create a differentiatedlevel of business advisory and scope of after-sales servicefor the two groups. Each of the companies distinguishedgroups of several hundred strategic customers, to which keyaccount managers were assigned. Services and sales formass customers have become the responsibility of separatecompanies within the energy groups (e.g. Tauron ObsługaKlienta, Energa Obsługa i Sprzeda˝);

• product area – following the introduction of a simple productof “fixed price”, the offer was extended to include a “green”proposal, and in the last year also non-energy components,e.g. insurance;

• the area of marketing – brand-building activities werestrengthened, while budgets for marketing communicationsincreased. The results of consumer research indicate an increasing brand awareness of energy companies.

Evaluation of the effectiveness of activity of particular energygroups is different in different areas, but one common conclu-sion follows from it: the transformation of the area of sales andcustomer service that has taken place in the past few years is just the beginning of a long journey. Taking the next step inthis process will require investment.

The area requiring the highest capital expenditure will includebilling systems and CRM systems – the Polish energy companies

continue to use many billing systems. Introduction of the optionof advanced products settlements, creating customer profilesand enabling access to them in various channels of contact, aswell as using this information to create a customer-tailored offerrequires integration of systems and further development of nextgeneration tools. The results of tenders announced by energycompanies in the sales segment show that each of them willprobably spend tens of millions of zlotys on the new billing/CRM systems. Adding to this the additional tools that are used,for example, in telecommunications or banking, necessary,among other things, for the management of the sales channel,customer experience management, or effective marketing activities, the amount of investment in the sector in the next fewyears could reach PLN 300-400 million.

The actual impact of the introduction of advanced tools and better customer base management on the margin achieved re-mains an open question. The above-mentioned investmentsshould rather be regarded as necessary to meet the demandsof the modern customer than as a guarantee of success.

On the one hand, energy suppliers are exposed to increasedmargin risks, such as the growing number of customers tied upwith loyalty contracts whose annual renewal may put pressureon prices. Growing awareness of the various opportunities in the energy market enhances the activity of brokers in sectorswhere high margins were generated traditionally (small busi-nesses). On the other hand, price regulation in the tariff groupfor households still leads to a situation where the currently gen-erated margins cannot justify high capital expenditures.

In addition, the “traditional” energy sellers are not the only own-ers of their customer base: companies from other industries(e.g. telecommunications) are capable of offering energy prod-ucts as well, using their tools and advanced forms of contactwith customers. For example, T-Mobile in Hungary, where thecombined telecommunication and energy offer gained tens ofthousands of customers, demonstrates the real potential of suchsolutions. Looking at the business logic, one might expect thatthis type of product solutions will be another threat to the margin generated by traditional energy suppliers. Seeking the opportunities provided by the advancing integration of sectors,it is worth noting the possibility of using advanced tools andsystems owned by, for example, telecommunications compa-nies to open faster and cheaper ways of collaboration betweenenergy companies and the customers.

2.2. Sales and distribution


26

In this light, the partnerships of Orange with PGE and Tauronwith T-Mobile – announ ced in recent months – seem to be a pathtowards impro ving sales solutions without incurring the full costof implementing advanced systems.

In times of uncertainty about fuel prices, the prices of CO2

emission allowances and electricity, as well as having to facefundamental changes that may occur in the sector (potential im-pact of the shale gas boom, possible construction of a nuclearpower plant), investment projects in the electricity sector areburdened with risks. In this environment, investment in the dis-tribution assets of energy companies is considered to be relatively stable and secure. An expression of a positive evalu-ation of this direction of investment is the rapidly growing cap-ital spending of Polish energy companies, which in 2012amounted to over PLN 4.5 billion compared to PLN 3.5 billionin 2010 (upward trend observed in all energy groups).

Analyzing investment plans in the distribution network until 2015– agreed by the Polish Distribution System Operators (DSOs) withthe Energy Regulatory Office – it is possible to see a continuationof the upward trend, with the growth rate slower than in 2010-2012.

In recent years, Polish energy companies have increasedthe level of advancement in the areas of sales and servi -ces. Taking the next step requires investment in billingsystems and custo mer database management tools: theestimated needs of the sector in this area reach up to PLN300-400 million. Investments are made in increasinglycompetitive market conditions and should be treatedmore as a requirement of modern sales mana gement thanas a source of competitive advantage.

2.2.1. Distribution

2009 2010 2011 2012

* In October 2012, the assets of the Vattenfall DSO joined the Tauron GroupSource: Companies’ financial statements

1750

250

750

1250

1500

1000

500

ENEA Energa PGE Tauron*

0

Investments of Polish companies in the distribution network in 2009-2012 (in millions PLN)

2000


27

An element which might increase the level of investment in the area of distribution will be the determination of the manner and scope of implementing smart metering (AMI – advanced metering infrastructure) in Poland. Directive2009/72/EC obliges Member States to prepare a cost-benefitanalysis of AMI implementation. If this solution proves to be vi-able, the country has the obligation to provide 80% of con-sumers with AMI by 2020. If the solution proves to beunprofi table, there is no such obligation. Poland has not per-formed the analysis, and the Directive does not specify the con-sequences in this case, although the guidelines to the Directive(which are not a source of law) point to the necessity of theirimplementation. Regardless of the results of the cost-benefitanalyses, EU Member States may individually determine thetimetable for implementation of AMI. It is expected that the newEnergy Law will determine the rules for the implementation ofAMI in Poland.

If a decision to implement AMI is taken, in a period of 6-8 years,investment of PLN 6-10 billion will be necessary on the part ofthe Polish DSOs. With regard to the present levels of investmentthis would mean an increase in capital expenditures by addi-tional 20-30% per year until full AMI implementation. A strongsupporter of this direction of investment is the Energy Regula-tory Office (ERO), which created mechanisms for the additionalrewarding of the investment in AMI (higher return on the capi-tal employed in AMI investments) and has taken on the role ofthe entity designating the minimum functionality to provide theso-called interoperability of the solutions implemented by vari-ous DSOs.

A vital issue for determining future investments in the distribu-tion sector is also their impact on tariffs. The natural limitationis the level of the tariff increase year on year and over longerperiods. Analyzing the growing investment plans of the PolishDSOs (the graph below also includes PSE – the TransmissionSystem Operator), which will amount to PLN 6-7 billion per yearin 2013-2015, it may be concluded that the transfer of additionalitems in the tariff may be blocked both by ERO, and by the customers.

0

1

2

3

4

5

6

7

8

2012 2013 2014 2015

7.427.466.25

5.74

Source: PwC analysis based on publicly available information

The level of DSO and PSE (Polish Transmission System Operator) investments agreed with the Energy Regulatory Office in development plans (in billions PLN)

Capital expenditures in the distribution sector were in-creasing rapidly in recent years, reaching approximatelyPLN 4.5 billion in 2012. In comparison with other sectorsof the energy industry, distribution has relatively stableregulatory solutions, which makes it possible to forecastinvestment parameters. Therefore, it is expected that in thefollowing years the high level of expenditure in this sectorwill be maintained. The development of smart metering(AMI) may increase the level of investments needed inthe area of distribution. If a decision to implement AMI inPoland is taken, the investment needs during the imple-mentation period will reach the level of PLN 6-10 billion.One should expect that the consumers and ERO will putpressure to limit tariff increases, which will inhibit the in-crease in capital expenditures over the current, historicallyrecord, plans of DSOs.

3. Public Procurement Law. Flywheel or a drag for investments?


30

An important factor that determines the pace of preparationworks on the investment processes in the electricity sector, affects the efficiency of the funds being spent, and sets schedu -les for investment implementation is the Public ProcurementLaw (PPL).

PPL contains a limited range of conditions that allow the con-tracting party to cancel the procedure, withdraw from an agree-ment, or change the obligations of the parties. Therefore, forthe investment process to be successful, it is necessary to prop-erly construct the order and, in particular, to determine the tech-nical parameters and technological solutions of the orderedequipment and installations. However, proper preparation ofthe specifications requires from the specialist in energy com-panies extensive knowledge on the specificity of the recenttechnological solutions of potential bidders and on the stan-dards applied by equipment suppliers.

Limited access to information on specific technical solutionsused by contractors and the lack of a simple, efficient and quickpossibility of dialogue before the start of the procedure maylead to a situation where the tender specifications – concerning,for example, the construction of new units – prepared by thecontracting party, may contain assumptions that do not meetthe standards applied by the contractors. As a result, eventhough the technical specifications prepared by the investor fallwithin certain market standards and practices, some of its ele-ments may require the contractor to develop dedicated solu - tions for the purpose of participation in the given tender andimplementation of a specific project. Some of the requirementsmay be difficult to fulfill.

Recently in Europe, in the area of generation, two tenders forthe construction of units with the same installed capacity havebeen resolved. The first investment was carried out accordingto the Public Procurement Law, while the other – outside of it.The price difference was 31% compared to the value of the firstinvestment. The above statement forces one to think whether – despite the specific character of each investment and the impact of market conditions at the given time on the behaviourof the bidders – the difference in capital expenditure does not

result from a more efficient determination of contract parame-ters and more efficiently conducted price negotiations in a situ-a tion when the contracting party is not bound by the provisionsof PPL. PPL restricts the freedom of the investor. Therefore, to achieve cost-effectiveness in a project, the investor has to putmuch more effort into its preparation in comparison with the investor who applies the internal regulations of a company.

The provisions of the Public Procurement Law lay down a legalprocedure for appeals against the decision of the contractingparty on the choice of the bidder. Appeals are submitted by unsuccessful bidders to the KIO (National Chamber of Appeal).They suspend the investment process, as the contracting partymay not enter into an agreement with a contractor until the National Chamber of Appeal gives its judgment or decision terminating the appeal proceedings (i.e. the decision to rejectthe appeal or to discontinue it).

In the case of an unfavorable outcome of the appeal proceedingsat the KIO, the contractor has the right to appeal to a regionalcourt against the decision of the National Chamber of Appeal.However, this action no longer limits the possibility of conclud-ing a contract between the contracting party and a contractor.Nonetheless, in this case, the contracting party may stop theprocess of signing a contract until the case is resolved beforethe court. Consequently, the appeal procedure under the PPLmay result in delays in the implementation of investment projectsalready at the stage of the tender procedure.

3.1. The influence of thePublic Procurement Law oninvestments in the energysector

The binding provisions of PPL may make it difficult for thecontracting party to select the best technological solu-tions, and they may also cause a significant increase in theprice of the bids submitted by contractors. In addition, thecomplexity of the procedure and the deciding on appealsmay cause delays in the implementation of the investmentin relation to the originally adopted schedule.


31

Recent amendments to the provisions of PPL set up the institu-tion of a “technical dialogue”, which significantly facilitates theprocess of preparing specifications of the subject-matter by the contracting party.

The “technical dialogue” is a process of consultations with potential contractors before the commencement of the publicprocurement procedure. During the “technical dialogue” thecontracting party has the opportunity to review its own needs,compare them with the offer of the potential contractors, and to discuss with the bidders the possibility of using more techno -logically advanced and more cost-effective solutions.

As part of the “technical dialogue”, the contracting party mayask the prospective contractors for advice or for information onthe description of the subject-matter of the order, the Terms ofReference (TOR), and the conditions of the contract.

It should be noted that the “technical dialogue” is not the modeof selection of the bidder and may be used as a tool to learn themarket offer and the available technical and technological solutions. The “technical dialogue” may take place at differentstages of the preparation of the procedure, even before the for-mal approval of the budget for the given investment. In addi-tion, after completion of the “technical dialogue”, there is noobligation to carry out the procurement procedure.

The “technical dialogue” may bring significant benefits for thecontracting party, as the ordering party may get information aboutthe best technical solutions available on the market, as well asabout their limitations and conditions of use. On this basis, thecontracting party should be able to compare its expectations withthe possibilities of the market and contractors. Such preparationmay translate into better technical specifications of the subject-matter of an order, and thus reduce the risk of getting bids whichdo not meet this part of the Terms of Reference.

In addition, the process of “technical dialogue” may provide thecontracting party with information that will allow it to correct the calculation of the investment costs and the time required for implementation as well as to explore investment risks and pos-sible ways to reduce them. Thus, the contracting party will beable to better determine the economic rationality of the invest-ment and spend funds more efficiently.

The “technical dialogue” may also allow the contractor to de-termine the optimal evaluation criteria of offers, determiningtheir technical and economic value, and thus – to reduce the importance of the price criterion.

3.2. “Technical dialogue” – a remedy to the limitationsof PPL?

The “technical dialogue” allows for greater flexibility inthe process of preparing tenders and drafting Terms ofReference. As a result, the introduction of the institution of “technical dialogue” into the legal order may have apositive impact on the pace of preparation of tenders forinvestment in the electricity sector and on the quality ofthe technical specification of the expectations of the con-tracting party specified in TOR. Thus, the “technical dia-logue” may significantly shorten the duration of the con tractawarding procedure, facilitate its implementation for contractors and increase the efficiency of allocation of investment funds.

4. The formula of investment implementation: is EPC more expensive, but risk free?


34

Capital expenditures on investment projects in the electricitysector, and thus the efficiency of spending them, depend on theadopted form of investment implementation.

It is generally believed that the EPC formula (Engineering, Pro-cu rement and Construction, “turn-key”) is more expensive, but itremoves the risk from the investor. In fact, however, neither ofthese statements has to be true.

4.1. Characteristics of the in-vest ment formulas

The EPC

An EPC type contract is suitable for large investments (e.g. con-struction of power units, upgrading of transmission and distribu-tion lines), where the investor is not involved in the deve lopmentof design documentation and provides funding only.

Under the EPC contract a single contractor who enters into an agreement with the investor is fully responsible for the investment, including the design, manufacturing, supply, andinstallation of electrical or mechanical equipment, as well asthe design and performance of construction and engineeringworks. The contractor shall provide the contracting party witha fully equipped facility, ready for operational use. Within theEPC formula, the contractor guarantees the investor the finalprice of the contract and agrees to keep to the schedule of workand to meet technical conditions. The consequence of theseagreements is, however, a higher remuneration of the contractor,who takes over the vast majority of project risks, and thereforehigher overall capital expenditures.

Within the EPC formula, the investor is involved in the processof implementation of the investment project to a very limited extent since it is the contractor who runs the selection processof equipment, materials, and technology to finally provide thesubject of the contract which fully meets the functional and ope -rational requirements of the investor. As a consequence, the in-vestor’s requirements contained in the tender documentationdescribe the investment project in a general way and place thegreatest emphasis on the important functional and operationalrequirements to be fulfilled by the facility.

Structure of investment project formula: EPC contract

ContractorsSupplier of materials

and equipment

Sub-suppliers of materialsand equipment

Subcontractors

EPC Contractor

Investor



35

The principal benefits of the EPC formula investment include:

• responsibility for the investment in the hands of a single entity;

• synergies from the consolidation of project planning and investment development, including minimisation of the riskof incorrect or incomplete project documentation;

• risk reduction for the investor thanks to a lump sum contractprice.

However, the EPC formula also has its limitations:

• the investor has a smaller impact on the technology of investment realization and on the choice of specific tech-nologies;

• limited ability to control and make changes during the invest -ment implementation;

• responsibility of the contractor is reduced to the works pre-cisely formulated in the contract;

• higher contract price due to contractual price stability andensured adherence to work schedule by the contractor.

The EPCM Formula

The EPCM Formula (Engineering, Procurement and Constru -ction Management) is quite an innovative approach to the im-plementation of investment projects, especially in the Polishmarket. An EPCM contract is a contract for services.

The Contract Manager provides the investor with a range ofconsulting services in the fields of design, conclusion of con-tracts with suppliers and contractors, and supervision of the investment process.

Contracts with the actual performers of design and constructionworks, as well as suppliers of materials and equipment, areconcluded by the Contract Manager on behalf of the investor.This means that the direct parties to the contract are: the investorand each of the individual partners.

Structure of investment project formula: EPCM contract

ContractorsSuppliers of materials

and equipment


Subcontractors

Contract menagerSupervision and coordination

Investment project

Investor



36

The Contract Manager’s responsibility focuses primarily on:

• supporting the investor in the selection of technical solutions;

• supporting the investor in the procurement process and ordering of equipment and services (the Contract Manageris responsible for the preparation of complete tender docu-mentation, for holding a tender, for collecting bids and theiraccurate technical and professional analysis as well as forproviding the investor, who preliminarily accepts the bid-ders, with advice);

• monitoring the quality of project works (including the initialbasic project and its further elaboration);

• preparation of the budget and its continuous monitoring (although it rarely happens that the Contract Manager givesany assurance that the investment works will be carried outwithin the planned budget);

• estimation of the duration of the project and monitoring thecompliance of works progress with the schedule;

• coordination of design and construction works among thesubcontractors.

The main advantages of the EPCM formula are:

• possibility for the investor to intervene in the technology usedand in the contractual provisions of contracts with contractorsand suppliers of materials and equipment;

• possibility of costs reduction by eliminating the margin of theGeneral Contractor.

The choice of this form of investment implementation also entails a number of associated risks:

• delays or errors in documentation because this formula pre-supposes that the investor needs to sign all the contracts withall the contractors directly;

• limited liability of the Contract Manager who provides the investor only with support services;

• difficulty with potential litigations since the investor is a partyto contracts with contractors.

Packet formula

The packet formula is based on a separate ordering of the individual components of the investment.

Within the framework of the packet formula, the investor mayindependently supervise the construction process or outsourceinvestment supervision to an external entity – a Contract Engi-neer. In this option, the investor performs all the design worksand bears the responsibility for the quality of the project andthe associated risk, whereas the contractor is responsible forthe execution of works in accordance with project and techni-cal specifications agreed with the investor.

In the case of appointing the Contract Engineer, their job is tomonitor the construction works and to approve payments forthe contractor.

The advantages of this investment formula include:

• the investor’s ability to affect the specification of technicalsolutions (optimal from the economic and technical point ofview);

• lack of General Contractor’s margin.

Significant risks of this formula result from:

• potential failure to achieve the design parameters;

• potential failures to meet the schedule and to overspend thebudget.

The investment in the packet formula requires the investor to develop strong competences in order to monitor and controlthe investment process.

Currently, most of the Polish electricity sector investmentsare carried out in the EPC formula. This is due to the factthat under such a contract all the risks associated with theinvestment process are transferred to the General Con-tractor. In addition, the formula ensures for the investorstability of prices. However, it results in increased costsof the investment.


37

In the case of external financing of an investment project, espe -cially when it is implemented in the Project Finance formula, financial institutions usually require the EPC formula contractsfrom the investor, as the financing parties strive to limit the in-vestment risks related to the applied technological and technicalsolutions of the project. Thus, investors who finance projectswith support from the financial market must take into accountthe potentially higher costs of the investment.

The EPC formula, however, allows some optimisation and mana -ge ment of the actual investment process. Although it is com-monly believed that the realization of an investment in thisformula is more expensive than in the packet formula, yet withproper construction of the EPC contract with the contractor, andprovided the investor takes over some of the “safe” risks, it ismore effective – not just in terms of capital expenditures, but

also because of potential delays in generating revenue from theinvestment in operation.

In the EPC formula, prices depend on various factors such asrisk distribution between the investor and the contractor, or therequirements related to technical solutions. It is evident that anyrisks and the probability of their occurrence are estimated by individual bidders and, consequently, must be included in theirprices. The investor can take some risks, especially those thatonly purely theoretically are the risks of the contractor. In thiscase, the EPC does not necessarily mean “more expensive”.

It should be emphasized that even in the EPC formula, the inves -tor is encumbered with the effective economic risk associatedwith the investment. In case of delays in the implementation of the investment or problems arising from default of the con-tractor to fulfil the technical parameters, the investor will not beable to reap economic benefits from the investment either infull or in part. The investor will have the right to seek damages(contractual penalties) from the contractor, but the process canbe long and will not necessarily end with the desired results.

Structure of investment project formula: the packet formula

ContractorsSuppliers of materialsand equipment


Subcontractors

ContractEngineer

ProjectDesigner

Supervision

Investor


4.2 EPC – more expensivebut with no risks?


38

It is therefore important that the contractual arrangements be-tween the investor and the contractor protect the interests of theinvestor on the one hand, and – on the other – motivate the con-tractor to timely completion of the investment in accordancewith the agreement. Then, the EPC may actually mean imple-menting a “no risk” project. When, for example, a default tocomply with the technical specifications of an installation auto-matically imposes a contractual penalty on the contractors, theywill primarily focus their efforts on its avoidance, rather than onthe removal of any defects. In this situation, the contractual pe -na lties could therefore be suspended for a fixed period, duringwhich the contractor would make modifications to the insta -llation to achieve the intended technical parameters.

Another important factor in limiting the risks of implementinginvestments in the EPC formula can be the selection of the con-tractor and the consortium leader. The contractor or the con-sortium leader should be a company that will guarantee timelyimplementation of the investment, not only in the framework ofcontractual arrangements, but also owing to non-contractualfactors. Such factors include, for example, reputation. The con-sortium leader or the contractor should be a company of a verygood reputation. Such a contractor will make every effort to fulfilthe terms of the contract (schedule, budget, technical speci -fications). Otherwise, the contractor’s reputation may be tar ni -shed, which will usually affect the outcome of other competitions/tenders in which the contractor will participate in the future (e.g.in other European countries). This is particularly importantwhen the contractors implement a project on the basis of theirinnovative solutions. In such a situation, the success of the in-vestment would provide the first positive refere nces to the giventechnology. Certainly, a contractor’s “strong brand” does not always guarantee the success of the project.

It positively affects the cost of the project when the bidders usestandard technological solutions. If the investor requires a cus-tom-made solution, it generates at least two negative conse-quences for the contractor. Firstly, the contractor must designthis solution or order it from a subcontractor – doing so for thefirst time – therefore, it will usually turn out to be more expen-sive. Secondly, the contractor is not aware of how the solutionwill work with the rest of the components – it will consequentlygenerate additional risks for the contractor and will certainly affect the price offered. That is why an early dialogue betweenthe investor and the bidders is so valuable. The dialogue conducted at the preparation stage of the project has a positive effect on its profitability.

In the case of external financing of an investment project,it must be – as a rule – implemented in the EPC formula.In this formula, a proper construction of the contract withthe contractor, especially in the context of risk-sharing,and the use of bidders’ standard solutions, may result in price reduction. An effective dialogue between the in-vestor and the contractors – so called “technical dialogue”conducted under the new legal solution of the Public Pro-curement Law – helps to achieve this objective.

5. Polish Investments – new funding opportunities


42

In the two previous editions of the report, all possible forms offinancing investment needs were widely discussed. We do notsee the need to cover this area so deeply. Experience showsthat investors who have recently decided to start investing useall commercially available forms of financing. The fact is thatcorporate financing is still preferable, based on the balance of the investor. But we also have the example of Project Finance(a joint project of PGNiG and Tauron), we have examples ofsome European bond issues (i.a. PKN Orlen, PGNiG, Energa)or bonds issued on the domestic market (example – PGNiG).Also EU funds subsidies are widely used, but usually withsmaller projects.

One regulation of the Energy Regulatory Office (ERO), appli-cable since 2011, provides new funding opportunities in thearea of distribution by organizing the rules of granting tariffsbased on a predetermined return rate on assets recognised by the Regulator (the so-called Regulatory Asset Base, RAB).The ERO verifies the assets of distribution network operatorsand decides to recognise them (or not) in the process of deter-mining the tariff. The rate of return is determined by the Regula -tor taking into account the alternative opportunities to invest thecapital over a long term (long-term treasury bonds). The cur-rent return on RAB is 8.95% per year. This mechanism allows a different approach to financing by banks. Across the EU,where similar regulations within transmission and distributionhave already been implemented, a model of funding dedicatedto distribution network operators was adopted, where the mainparameter determining the debt-raising capacity is the debt-to-RAB ratio. It is assumed that the level of debt-to-RAB ratio shouldnot exceed 70/30. Long-term regulations, ensuring an attractiverate of return, very little susceptible to changes in the marketsituation, allow financing with a very long repayment horizon,matched to the depreciation cycle. In Polish conditions, thedominant model is corporate financing at holding level, withdistribution down to the operating companies. In this way, EneaGroup has secured funding for the construction of a new powerunit in Kozienice. However, it seems that over time the entitiesoperating in the transmission and distribution area will begin toseek, at the level of the operating companies, a financing modelwhich takes into account the specific nature of their business.

The ability to raise debt for investments in electricity transmis-sion infrastructure should be significantly improved by movingaway from the standard of measuring capacity to incur debtsby EBITDA in favour of models that better reflect the essence of regulated business.

One should mention the active role in promoting investmentplayed by multilateral banks: EBRD, EIB and NIB. Undoubtedly,the large benefits of financing with the participation of thesebanks are the possibilities of obtaining long-term repayment, a relatively attractive price of financing, and a chance to avoidtedious tender procedures under the Public Procurement Law(PPL). However, it should be noted that these banks have theirpolicy that does not provide for co-financing in all investmentareas. For example, in the area of production, the developmentof technologies different from the currently dominant coal-based generation is promoted. Therefore, the following maycount on support: gas-based condensation and cogenerationsystems may count on support (for example, the gas-fired unitin Stalowa Wola built jointly by PGNiG and Tauron), biomassunits and other renewable energy sources (so far wind farmshave been the main beneficiaries). Supporting the developmentof the transmission infrastructure for electricity and gas as wellas gas storage facilities is also consistent with the above-men-tioned policy. Such an approach means, among other things,that the business model of these banks does not include, for ex-ample, funding the construction of new coal- or lignite-firedpower units or supporting the construction of new mines. It ispossible, however, to obtain co-financing for investments relatedto environmental protection, such as SOx, NOx capture or evenfor still controversial CCS installations. This is consistent with theregulations and directions of development promoted in the EU.

The project known as “Inwestycje Polskie” (Polish Investments),launched in 2012, is a very interesting element complementingthe existing range of financing options available in the market.It is a programme designed to support investments in infra-structure, strategic to the interests of the Treasury. More infor-mation about the new arising opportunities is given in the nextsection of this report, created with the assistance of expertsfrom Bank Gospodarstwa Krajowego.

5.1 An overview of existingmethods of financing


43

On the 12th October 2012, Prime Minister Donald Tusk pre-sented in Parliament an action plan to stimulate economicgrowth. One of its components is the “Polish Investments” pro-gramme, which aims at providing the means to finance majorinfrastructure investments which would stimulate economicgrowth under projects carried out in collaboration with privatepartners. “Polish Investments” is also a method of acceleratingprivatisation, and the funds obtained will be used for infra-structure investments. The expected result of the programme is to mobilise private entities to increase expenditures on infra-structure projects by initiating or closing project financing (theso-called “first or last zloty”).

The programme is based on two pillars: Bank GospodarstwaKrajowego (BGK) in the area of debt financing and guaranteeoperations, and the newly formed company Polskie InwestycjeRozwojowe S.A. (PIR) in equity financing.

BGK

BGK, as a complementary bank to commercial banks and otherfinancial institutions, provides debt financing. Thanks to capitalinjection in January 2013, it may significantly increase the scaleof investment financing. An advantage of BGK is the possibilityof obtaining long-term financing cheaper than domestic com-mercial banks. BGK has a long-term rating of A – on an inter-national scale in foreign currency by Fitch – and the long-termrating of AAA (pol) on the national scale.

BGK conducts regulated economic activity and operates on thebasis of the Banking Act, the Act on BGK, regulations of KomisjaNadzoru Finansowego (KNF – Polish Financial Supervision Authority), BGK statutes and internal regulations. It is a statebank, which means that the State is the economic owner of thebank. BGK carries out activities commissioned by the State, aswell as its own activities on a commercial basis. In the area of commissioned activities, it supports public sector entitiesand government programmes. The subcontracted activities arecarried out under agreements signed between the state organcommissioning such tasks and BGK. As a part of its own busi-ness activities, BGK provides financing and transaction bankingservices to – among others - local authorities, municipal utilitycompanies and health care institutions. It finances investmentprojects and sectors of strategic importance. The financial re-sources for activities commissioned by the State and for its ownactivities are clearly separated – for BGK it is not possible tocombine them or exchange at any time of conducting business.

Under the “Polish Investments” programme, BGK grants SPV(Special Purpose Vehicle) loans on regular market conditions.If the terms of credit rating and financing conditions deviatefrom them, funding cannot be granted because it could be takento be public aid.

PIR

Polskie Inwestycje Rozwojowe S.A. (PIR) is an entity that makescapital investments under the “Polish Investments” programme.From a practical point of view, the company is a combination ofan investment fund and an entity managing this fund.

The main task of PIR is to conduct capital investments, which inthe case of financing an investment under Project Financemeans that PIR is involved in a single purpose company as aninvestor, which makes it easier for the initiators of projects to raise the capital needed to get bank financing for their in-vestments. The capital investment is – by definition – more riskythan debt financing, therefore, the profitability of PIR involve-ment must be assessed as higher than the cost of obtainingfunds in the form of debt financing. After a certain time, PIRwithdraws from the investment in order to be able to effectivelyuse the capital to finance new projects.

The evaluation of investment projects by PIR resembles theprocesses used by other investment funds. Evaluation of theproject is carried out simultaneously by PIR and by BGK. However, it does not mean that the involvement of PIR impliesthe involvement of BGK or vice versa.

The strategy of “Polish Investments”

The main directions of the investments under the “Polish Invest -ments” programme concern energy infrastructure (distribu tionand generation), gas infrastructure (transmission network, ex-tracting, and storage), development of hydrocarbon deposits(including shale gas), harbours, maritime, rail, road and indus-trial infrastructure along with telecommunications, as well aslocal government infrastructure (such as waste incinerationplants, and communication).

The primary assumption of the programme is to increase theefficiency of the assets of the Treasury. The programme chan -ges the way of using those assets: the shares held by the Treas-ury, after being contributed to PIR and BGK, will be sold andthe resources from selling them will directly co-fund the develop -ment of commercially viable infrastructure projects in Po land.After withdrawal from a project, the capital will be investedagain in another project implemented under the programme.

5.2 Polish Investments


44

The second assumption of the programmes is the market char-a cteristics of spending funds. Investments should provide BGKand PIR with a market return rate. The third assumption is profi -tability of PIR and BGK activities. Under the programme, busi-ness activities of both entities should generate profits.

Programme Instruments

Programme objectives are pursued through three main instru-ments: debt financing by BGK (loans, or taking over by BGKbonds issued by companies implementing investment projectsor by commercial banks that finance long-term projects), BGKguarantees, and PIR capital investments.

PIR takes up the shares of special purpose companies (each of which will be dedicated to a specific investment project) together with strategic investors (private parties, companieswith direct or indirect participation by the Treasury, public agen- cies, local governments – project sponsors). This makes it pos-sible to increase the scale of possible funding and is an essentialelement of investment risk management.

Specific aspects of BGK investment financing

For its own activities, BGK uses the same tools as commercialbanks interested in financing infrastructure projects. However,the task of BGK is not to compete with commercial banks, butto supplement their offers. What constitutes BGK’s special posi -tion in the banking market is the possibility of obtaining long-term financing by the bank at a price only slightly higher thanthe cost of financing the public debt.

The simplest example of such financing structure is the situa-tion where, for example, commercial banks finance the initialphase of the project, and BGK its next steps. In this situationBGK finances the project longer than the commercial banks.This solution makes it possible to diversify the structure of riskfor the participants of the consortium financing the project. Thecommercial banks are at greater risk associated with the con-struction period, whereas BGK bears long-term risks associ-ated with the project. Thanks to this solution each entity can useits strengths.

CAPITAL

Cap

ital Debts:

loan and bonds

CAPITAL

SupervisionThe Ministry of Treasury contributesshares of companiesto be privatizedto PIR and BGK

guarantees

Financing from the market or international financial institutions

gua

rant

ees

Polskie InwestycjeRozwojowe S.A. (PIR)

The treasury Projectinitiators

BGK Banks

Project 2

Inwestors

Project N

Source: Bank Gospodarstwa Krajowego

Project 1


45

This solution makes it possible to extend the repayment period,which is particularly important for projects within a public-pri-vate partnership formula. A longer repayment period meansthat the project has a chance to succeed at lower charges in each period, and the private partner in such a structure of finan cing may submit an offer which is more attractive to thepublic partner.

It should be noted that with such a structure of financing investment projects, BGK has the longest relationship with theinvestor and, therefore, it is natural for it to play the role of theconsortium leader.


47

Our report has been developed during a time of ongoing de-bate on the strategic directions of investments in the energy industry. This is the time when business should work togetherwith government, parliament and the administration responsi-ble for regulations to create an energy policy and a stable legalsystem to support it.

The issue of ensuring energy security and stable functioning of the economy in the long-term perspective remains open. We would venture a thesis that the electricity sector is a step

away from the moment when – from the economic rationalitypoint of view, and considering the uncertainty associated withthe investment projects – it will be appropriate to implementstrategies for electricity imports.

We have started with the idea that we are witnessing a quiet energy revolution today. At the end, we would like to expressour hope that this revolution does not lead to anarchy. Next yearwe will see where in this dynamic process we have landed.

6. Instead of a summary, or where is the energy industry heading?

This publication was prepared by PwC Polska Sp. z o.o. with its registered office in Warsaw, Al. Armii Ludowej 14, and ING Bank Âlàski S.A. with its registe -red office in Katowice, Ul. Sokolska 34, established by the resolution of the Council of the Ministers on 11th April 1988 on the establishment of Bank Âlàski in Katowice (Journal of Laws 1998, no. 21, position: 141). PwC Polska Sp. z o.o. and ING Bank Âlàski S.A. assured the due diligence in order to guarantee that the published information was not mistaken or untrue on the day of publication, but PwC Polska Sp. z o.o. and ING Bank Âlàski S.A. and their employees are not responsible for the truthfulness and completeness of this information, as well as for any damage caused by the usage of this publication or the information it includes. This publicationhas been prepared only in the informative purposes and is not any kind of investment recommendation or offer concerning the purchase or sale of any financial instrument, as it is understood in the Act on Public Offer and the Conditions of introducing the financial instruments to the organised trading system and Public companies from 29th July 2005 (Journal of Laws 2005, no. 184, position: 1539) or an Act on the financial instruments trading from 29th July 2005 (Journal of Laws 2005, no. 183, position 1538). ING Bank Âlàski S.A. and PwC Polska Sp. z o.o. do not, particularly through the information included in this report, advise on any transactions concludedby the recipient of the report and do not give any kind of investment advice or recommendations concerning such transactions. The recipient of the report, concluding any transaction, acts on their own account and at their own risk, making the independent and autonomous decisions on concludingtransactions and being fully aware of the given transaction’s relevance or appropriateness for them, basing on their own judgment or an independent professional advice.


48

Piotr ŁubaPartner, Advisory, Energy Group LeaderPwCTel.: +48 22 523 4662e-mail: [email protected]

Dorota D´biƒska-PokorskaDirector, AdvisoryPwCTel.: +48 22 746 7150e-mail: [email protected]

Sebastian JandaDeputy Director, AdvisoryPwCTel.: +48 22 746 7283e-mail: [email protected]

Michał GawrysiakManager, AdvisoryPwCTel.: +48 22 523 4796e-mail: [email protected]

Joanna ErdmanDeputy ChairmanING Bank ÂlàskiTel.: +48 22 820 4232e-mail: [email protected]

Paweł SerockiHead of the Strategic Clients Department ING Bank ÂlàskiTel.: +48 22 820 4514e-mail: [email protected]

Kazimierz RajczykManaging DirectorING Bank ÂlàskiTel.: +48 22 820 4229e-mail: [email protected]

Przemysław StaranowiczManaging DirectorING Bank ÂlàskiTel.: +48 22 820 4295e-mail: [email protected]

Contact

Translation: Barbara Maliszewska

not only generation: about a quiet revolution in the polish ......not only generation: about a quiet...

Documents