The core area covered by TAURON Group’s operations is the Polish market. The macroeconomic context, in individual sectors of the economy and the financial markets alike, has a major influence on the Group’s results.
The condition of the Polish economy is, to a large extent, correlated with the situation in the European Union and on global markets. Ongoing analysis of the changes to the macroenvironment makes it possible to identify opportunities and threats. The main areas of the macroenvironment affecting the Group and shaping its development are as follows:
2016 saw many changes on the oil market. During the year, this commodity’s significant surplus drove the selloff and price declines to 2000-2003 levels. This was the effect of the policy pursued by oil producers to defend their market share leading to a price war. The shale revolution in the US also affected the market situation – over a 5 year period, this country’s oil production shot up 65%. Additionally, by lifting international sanctions, the market saw significant quantities of oil from Iran, which successively increased its export volume in 2016.
In February 2016, Brent oil cost only 27 USD/bbl. Such a low price of this commodity halted a number of investments in new extraction infrastructure; banks financing these projects also had problems. Concerns emerged that this situation would lead to very high oil prices in the future. In Q2 and Q3, prices started to recover, among others thanks to the better than expected condition of the Chinese economy and higher global demand for oil associated with the high holiday season. Higher oil prices were also driven by extraordinary circumstances, e.g. the enormous fire in Canada in the vicinity of the biggest oil fields, warlike activities and destruction of the oil infrastructure in the Middle East and Nigeria.
2016 was a year of historically low prices in the gas market. In the very first month of the year the average price on the spot market was nearly 30 PLN/MWh lower than the year before, descending to 72.54 PLN/MWh. The culmination of the downward trend was seen in March, when the average next day delivery market price on TGE was a mere 60.11 PLN/MWh. After a slight upturn in Q2, the gas price in Q3 turned out to be very low, in particular in its last two months. In September 2016, it stood at 49.61 PLN/MWh. Throughout the summer, next day delivery contract prices remained in the range of 60 PLN/MWh, compared to 85-90 PLN/MWh in the year before. At the start of the gas winter season, a significant increase in prices took place. In December spot prices averaged 84.95 PLN/MWh.
On the forward market, following low Q1 prices, prices started to go up just like on the spot market. History repeated itself in H2 2016, when following declines in Q3, the end of the year was marked by strong price growth. Ultimately, the reference annual contract gained slightly over 15 PLN/MWh in 2016.
As for development and liquidity on Poland’s TGE market in 2016, one should primarily note the doubling of the trading volume on the next day delivery market. Most of the 16 TWh was traded in the winter season, i.e. when gas demand is at its highest. In 2015, it was a mere 8.7 TWh, while the year before it was half of that. Such a rapid increase in trading volumes on the spot market was not reflected by the forward market, where the volume dropped by over 3% compared to the year before. In terms of quantity, trading on forward contracts was still significantly higher than trading on the spot market. In 2016, it was nearly 90 TWh, i.e. nearly 5 times more than the volume of next day delivery contracts.
2016 was unique, not only in terms of historically low prices. In mid-2016 the LNG terminal in Świnoujście greeted the first ships with commercial deliveries of gas. Thanks to the launch of this regasification port Poland has gained access to the international market enabling it to buy gas practically from anywhere in the world, thus strengthening its negotiation position vs. traditional suppliers.
In addition, the November amendment of the energy law approved gradual waiver of the obligation to set tariffs for gas prices by trading companies and submit them for approval. These actions entailed the necessity of implementing the judgment of the European Court of Justice of September 2015, stating that the Polish natural gas price regulation system is incompliant with the requirements of community law. Another key change in the market involved lifting the privileges for small-scale sellers, releasing them from the obligation to keep natural gas stocks. From amendment’s effective date, each seller importing gas, regardless of volume, is obligated to secure sales by maintaining a specific volume in storage units.
In Q1 2016, the coal prices in global markets dipped to their lowest level in over a decade. In February 2016, coal in ARA ports cost a mere 36 USD/Mg. The price decline was driven by the economic crisis in China and the shale revolution in the US (cheap shale gas squeezed out coal). Both China and Europe are focused on altering their energy mix towards increasing energy generation from renewable sources.
Starting from Q2 2016, the situation in the global coal market started to improve due to supply side disruptions. As a result of low prices, there were several spectacular bankruptcies of coal giants, e.g. Peabody Energy domiciled in the US and one of the biggest producers of this commodity in the world and Czech OKD a.s. The Polish mining industry also experienced serious financial problems. In Columbia, the world’s fifth largest coal producer, mining industry employees went on strike and in Australia most mines were disabled by floods. China introduced regulations limiting home production (decommissioning of unprofitable mines and then decreasing the number of mine working days).
In Europe, starting in October, as a result of putting aside significant nuclear energy generation capacities in France, the demand for coal increased, thereby strengthening the demand side. Coal prices in the spot market with delivery in winter months rose to over 85 USD/Mg. The contract price for delivery in 2017 closed at 70 USD/bbl, i.e. nearly 100% more than in February 2016.
Improving conditions on the global coal market will certainly have a positive impact on the Polish mining sector. However, this commodity’s price increase will not materialize on the domestic market until 2017.
In 2016, the Polish steam coal price index PSCMI 1 was in the range of 188-201 PLN/Mg (8.52-8.93 PLN/GJ).
The local economy was to a large extent driven by household consumption, supported by the situation in the labor market and price stability. The unemployment rate at the end of 2016 was 8.3%, compared to 9.8% at the end of 2015, and the average salary in the national economy exceeded PLN 4,000 (compared to PLN 3,900 in 2015). In 2016, the inflation rate was -0.6% (in 2015 deflation was -0.9%).
GDP growth in 2016 was lower than in 2015, which resulted from the significant decrease in investments.
Over 2016, the average exchange rates increased – the EUR/PLN exchange rate was on average PLN 4.40 (compared to 4.26 in 2015), and the USD/PLN rate – PLN 4.20 (vs. PLN 3.90 in 2015).
Historically, there is a strong correlation between economic growth and higher electricity demand. However, in the past few years the correlation has been weakening in connection with the decreasing energy consumption by the economy. Over the past 10 years Poland’s real GDP increased around five times more than the domestic demand for electricity. Because the TAURON Group is Poland’s second generator, leading distributor and major seller of electricity, changes in electricity demand have a significant impact on the Group’s results. Poland’s estimated GDP growth in 2016 is 2.8% (compared to 3.9% in 2015), and in the next years it is likely to remain in the range of 2.5-3.5%. 2016 saw an increase in gross electricity consumption by 2% vs. the previous year.
Purchasing power is defined as annual income per capita after taxes, social security contributions, including all benefits received from the state. According to research, Poland’s purchasing power per capita in 2016 was EUR 6,366 (PLN 27,397). This result puts Poland in 29th position in Europe. Warsaw has the highest purchasing power. Its inhabitants have EUR 11,651 (PLN 50,142) at their disposal on average, 83% more than the national average. However, even the purchasing power of the Warsaw population is 15% lower than the European average.
The Central Statistical Office (GUS) in its study entitled “Population forecasts for 2014-2050” shows that by 2050 Poland’s population will diminish to 33.950 million (today it is nearly 38.5 million). Other important forecasts pertain to the aging society. This study shows that old-age pensioners will account for nearly 40% of the population. The median age will climb to 50.2 from today’s 38.6. This means that in 2050 people aged over 50 will account for more than half of the society.
As a result, the size of the working population will shrink from over 70% today to slightly more than 55%. The old-age index, i.e. the proportion of people aged 65+ to people aged 0-14 will significantly increase. Currently, it stands at 983, i.e. out of 1000 people aged 0-14 there are 983 people aged 65+. In 2050, there will be some 2,693 senior citizens per 1000 young people. These changes will also shape the offerings and products of utility groups. At the same time, customer awareness is on the rise from year to year (illustrated particularly well by the extent of use of the TPA principle). Customer requirements regarding the quality and reliability of supply are rising. Aligning service to customer diversity, coping with demographic trends (aging society) and universal digitization are serious challenges for the traditional power sector. The role of modern and comprehensive customer service is becoming significantly more important. Intuitive and easy electronic customer service will have increasing significance for achieving competitive advantage and customer loyalty. The importance of tailoring products to customer needs is also growing. Consumers expect quick and convenient access to products and services.