Adapting to Europes Rapidly Changing Electricity Market Polish

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Adapting to Europe’s Rapidly Changing Electricity Market - Polish Perspective 16 September 2014 Kazimierz

Adapting to Europe’s Rapidly Changing Electricity Market - Polish Perspective 16 September 2014 Kazimierz Szynol European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

Content: 1. Overview of the power sector in Poland 2. Impact of the EU

Content: 1. Overview of the power sector in Poland 2. Impact of the EU climate and energy policy on the power sector activity 3. TAURON Group as representative power utility in Poland CEE 4. Conclusions European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

1. 1 Polish Energy Sector Integrated energy groups (State controlled) ENERGA Installed capacity 1

1. 1 Polish Energy Sector Integrated energy groups (State controlled) ENERGA Installed capacity 1 300 MW, Electricity generation 5 TWh/y Distribution network 191 000 km, Customers 2 900 000 Transmition System Total: - 242 high voltage lines, 13 396 km, - 1 750 k. V line, 114 km, - 74 400 k. V lines, 5 340 km, - 167 220 k. V lines, 7 942 km, - 100 high voltage stations (NN) - sub-sea cable connection 450 k. V DC Poland – Sweden, 254 km. ENEA Installed capacity 3 168 MW, Electricity generation 13, 6 TWh/y Distribution network 112 000 km, Customers 2 420 000 PGE Installed capacity 12 860 MW, Electricity generation 57, 04 TWh/y Distribution network 279 704 km, Customers – 5 200 000 Fortum Installed capacity: 198, 3 MWe, 1516, 5 MWth Others Tauron Installed capacity 4 700 MW, Electricity generation 17, 6 TWh/y Distribution network 224 000 km, Customers 5 300 000 Ed. F Installed capacity: 3 000 MWe, 3500 MWth Annual electricity generation 1, 32 TWh/y Gd. F Suez Installed capacity 1 800 MW, Annual electricity generation 7 TWh/y Dalkia Installed capacity: 4 290 MWth, 820 MWe CEZ Polska European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

1. 2 Basic production data Electricity generation in Poland 2013 Total – 162. 5

1. 2 Basic production data Electricity generation in Poland 2013 Total – 162. 5 TWh (1. 6% higher compared to 2012) Polish Energy Policy assumptions 5. 64 5. 33 1. 94 2030 Total – 217. 4 TWh 35. 05 52. 04 Lignite Industrial power plant RES Natural gas Hard coal 9, 12 5, 78 6, 67 Installed capacity in Poland Total – 38. 7 GW 78, 43 European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

1. 3 Macroeconomic and market situation in Poland’s GDP growth rate and manufaturing PMI

1. 3 Macroeconomic and market situation in Poland’s GDP growth rate and manufaturing PMI (quarterly average) Increase of manufacturing production sold and electricity consumption (change yoy) GDP growth rate Manufacturing PMI increase of production sold change of domestic electricity consumption Yearly BASE contract prices on the Polish Power Exchange (TGE) Average price (€/MWh) Volume [GWh] Y-13 43. 9 184 615 Y-14 39. 29 214 584 Y-15 40. 39 102 524 Y-16 41. 56 13 005 Average electricity sales prices on the competitive market: § 2011: € 47. 65/MWh] § 2012: € 48. 36/MWh] § 2013: € 43. 67/MWh] European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol Q 3 2014 Q 2 2014 Q 1 2014 Q 4 2013 Q 3 2013 Q 2 2013 Q 1 2013 Q 4 2012 Q 3 2012 Q 2 2012 Q 1 2012 Q 4 2011 Q 3 2011 Q 2 2011 0% Q 1 2011 1% Q 4 2011 2% +2. 2 p. p. Q 3 2011 3% 12% 10% 8% 6% 4% 2% 0% -2% -4% Q 2 2011 +0. 1 p. p. 4% 56 55 54 53 52 51 50 49 48 47 46 Q 1 2011 5%

1. 4 Electricity market price trends Electricity Platforms: TGE, TFS, GFI, GPWPOEE 2013 2014

1. 4 Electricity market price trends Electricity Platforms: TGE, TFS, GFI, GPWPOEE 2013 2014 (until 1. 08. 2014) 2014/2013 Price [€/MWh] Volume GWh Price % Volume % Forward BASE (Y+Q+M) 44. 44 140 488 38. 64 182 816 -13. 0% 30. 1% Forward PEAK (Y+Q+M) 49. 11 14 855 44. 03 18 461 -10. 3% 24. 3% Forward (weighted average) 44. 89 155 343 39. 14 201 276 -12. 8% 29. 6% SPOT (TGE) 36. 99 19 930 42. 30 (forecast) 20 500 (forecast) +14. 4% 2. 9% Weighted average total 44. 00 175 273 39. 43 221 776 -10. 4% 26. 5% CO 2 emission allowances (EUA/t) Property rights [€/MWh] Price (€/t) Certificate type Market prices (2014 average) (until 1. 08. 2014) Substitution fee and obligation for 2014 2013 average € 4. 47/t RES (green) 46. 50 72. 11 (13. 0%) 2014 average € 6. 00 – 8. 00/t Hard coal-fired cogeneration (red) No transactions 2. 64 (23. 2%) 2015 average € 8. 00 – 10. 00/t Gas-fired cogeneration (yellow) 24. 31 26. 43 (3. 9%) € 6. 5 – 8. 00/t Methane (violet) 14. 20 15. 20 (1. 1%) CO 2 market analysts’ survey* Average 2014 EUA price forecast by TAURON European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

Content: 1. Overview of the power sector in Poland 2. Impact of the EU

Content: 1. Overview of the power sector in Poland 2. Impact of the EU climate and energy policy on the power sector activity 3. TAURON Group as representative power utility in Poland CEE 4. Conclusions European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

2. 1 Perception of the European energy and climate policy in Poland • As

2. 1 Perception of the European energy and climate policy in Poland • As EU member Poland will participate in the decarbonization process up to 2030, and probably later • The EU strategy to lead by example need to be revised, we are not able to stop global climate change alone • The current global circumstances are different compared to 1997 (Kyoto Protocol) • The climate targets have to be aligned with the availability of key technologies and financial sources • Focus more on security of energy supply and affordability • The climate policy has to reflect European/national fuel and economic circumstances • The real impact of the EU energy and climate policy on jobs and growth in Europe has to be assessed • Refrain from political intervention on the carbon market European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

2. 2 External impact on the power sector operations in Poland IED and LCP

2. 2 External impact on the power sector operations in Poland IED and LCP BREF RES 2030 Package, ETS, MSR Morernizations and replacement of old units, new capacities CCS Energy Efficiency Power Sector Decreased acceptance for coal in the EU Security of supply Decreased electricity market prices Gas imports, no own resources Limited acceptance for the nuclear energy European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

2. 3 Trends expected in Polish power sector as result of the EU climate

2. 3 Trends expected in Polish power sector as result of the EU climate and energy policy • Timeframe up to 2020 • Closures of existing installations due to low energy prices and IED implementation • RES development if subsidies in place (mainly wind) • New builds if capacity remuneration market occurs • Modernization of existing units with the aim to operate them up to 2030 -2035 • Timeframe 2020 -2030+ • The demand for coal and lignite base load power plants will decrease further • Reduction of the installed conventional capacity due to higher carbon price and unavailability of CCS/CCU technology, modernization towards LCP BREF and CO 2 reduction • Further RES development resulting from high CO 2 price and subsidies, but market integration is needed • Development of CCGT and CHP • Nuclear power • Distributed small generation and smart grids • Strong regional transborder electricity exchange • Flexible conventional and RES (biomass) power plants together with demand side response will support the security of supply European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

2. 4 EU 2030 Package impact on conventional generation The October EU summit results

2. 4 EU 2030 Package impact on conventional generation The October EU summit results will influence the operators and investors’ behaviour and decisions • 40% CO 2 emissions reduction, 43% in ETS, 30% in non-ETS • will result in partial fuel switch towards RES, gas and nuclear • coal and lignite plants closures in longer term • ETS revision with the MSR implementation and CO 2 cap to decline by 2, 2% from 2021 onwards means undermining the industry competitiveness • 27% RES in the EU energy consumption • > 40 % of electricity from RES • 60 % of electricity still generated in conventional maner • Enough conventional capacity needed for security of supply reasons • Low fuel cost and flexible conventional power plants will be needed • 27% energy savings – influence on the industry, transport and households, will promote innovation in the non-ETS sectors • Energy savings are crucial to improve EU competitiveness European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

2. 5 How will the 2030 Package influence Polish Energy Market • Free CO

2. 5 How will the 2030 Package influence Polish Energy Market • Free CO 2 allocations limit electricity cost increase • Additional ear-market funds are welcome for CAPEX of new projects, with high efficient coal-fired units included • The devil is in the detail – lessons learned from ETS derogation solutions are dark • Polish Power sector is committed to high environmental standards • We need appropriate time and sources for the transition to diversified new fuel mix • The classical triangle of competitiveness, profitability and environmental compatibility is deformed • Poland needs to avoid high costs of the carbon transition • High level of energy independence is crucial for Poland • Up to 600 000 jobs exposed to a significant risk related to carbon leakage and massive unemployment in the mining, power and energy intensive sectors • Energy poverty can occur, targeted social policy needed • Polish contribution in the EU decarbonization will be extremely high, resulting in costs, jobs loses and deindustrialization European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

2. 6 IED and LCP BREF • The power sector in Poland executes modernizations

2. 6 IED and LCP BREF • The power sector in Poland executes modernizations of existing fleet to the IED standards • LCP BREF conclusions change the game rules • Consistency between IED Directive and BREF LCP has to be ensured • BAT conclusions have to be consistent with the scope, definitions and transitional derogation options (Art. 31 -35) within the IED Directive • BAT-AELs covering new pollutions and environmental performance levels should be applied primarily to new power plants • Derogations from emission limit values, realigned on the BAT-AELs have to be applied by the competent authorities in accordance with Art. 15. 4 of the IED European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

2. 7 The CCS issue • No sense to modernize old existing capacities fitting

2. 7 The CCS issue • No sense to modernize old existing capacities fitting them with CCS • CCS no commercially available, expensive, huge efficiency loss • The public in Poland rejects CCS considering the technology risky causing loss of efficiency, additional investment and operational costs • Ready to capture, but no prospects for transport and storage • We understand that CCS technology doesn’t exist as a chain and will not be available commercially for a long time • CCU is needed instead of CCS, examples from the US (Capitol Sky Mine) to transform CO 2 into other common industrial products • Revision of the CCS Directive not needed - lack of operating experience with the technology European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

2. 8 How to secure needed capacities and electricity supply • The transition period

2. 8 How to secure needed capacities and electricity supply • The transition period in the electricity market will take decades, the use of coal will decline, RES will expand, EU electricity markets will grow together • Electricity market for maintaining of reserve capacity will start by 2018 • Decreasing level of reserve margins, maintaining of sufficient capacity is crucial in medium and longer term • Life extension up to 2030 -2035 • Currently 4. 2 GW new coal plants under construction. They need reliable and reasonable CO 2 access up to 2050. Next stranded assets ? • New CCGT plants, lack of own gas resources, import dependence 70% • New RES: wind, biomass, solar - marginal • Dream of own shale gas • Nuclear (? ) • Transborder interconnectors, expansion of distribution network in the country • Demand side management • The regional and European cooperation has to be intensified European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

2. 9 Future electricity generation structure (Power Choices Reloaded, Prof. Capros) 100% 90% 80%

2. 9 Future electricity generation structure (Power Choices Reloaded, Prof. Capros) 100% 90% 80% 70% 60% 50% Nuclear Coal-CCS Coal w/o CCS Oil Gas-CCS 40% Gas w/o CCS 30% Biomass 20% Variable RES 10% Hydro 0% 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 - Fuel mix vision for 2030/2040/2050 needed in future Polish Energy Policy - Reduced CO 2 emission cap will result in high carbon prices - After 2040 coal fired power plants without CCS/CCU will disappear European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

Content: 1. Overview of the power sector in Poland 2. Impact of the EU

Content: 1. Overview of the power sector in Poland 2. Impact of the EU climate and energy policy on the power sector activity 3. TAURON Group as representative power utility in Poland CEE 4. Conclusions European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

3. 1 TAURON - one of the key players in CEE region TAURON Group

3. 1 TAURON - one of the key players in CEE region TAURON Group is the 2 nd biggest utility in Poland in terms of revenues and profits Poland is the biggest country in the CEE region § Population: 38 m § GDP 2013: USD 496 bn § 2014 -2017 GDP growth rate forecast: 3. 6% p. a. (average) Selected utilities listed on WSE: • PGE TAURON Group is the 8 th biggest company in Poland in terms of revenues TAURON Group is placed on 24 th position in CEE region in terms of revenues • P/E: 9. 3 • EV/EBITDA*: 5. 1 • P/BV: 0. 94 • TAURON • P/E: 7. 5 • EV/EBITDA*: 4. 3 • P/BV: 0. 5 • ENEA • P/E: 7. 6 • EV/EBITDA*: 3. 9 • P/BV: 0. 56 • ENERGA • P/E: 10. 7 • EV/EBITDA*: 7. 3 • P/BV: 1. 08 *EV/EBITDA ratio according to Thomson Reuters European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

3. 2 TAURON Group’s assets TAURON Group’s key operating data* Production of commercial hard

3. 2 TAURON Group’s assets TAURON Group’s key operating data* Production of commercial hard coal 5. 45 t Hard coal reserves 56. 1 m t Hard coal resources 2 480 m t Installed capacity 5. 4 GW Net electricity generation 19. 4 TWh including from renewable sources 1. 38 TWh Electricity distribution 47. 9 TWh Distribution lines 260. 9 thou. km Electricity supplied to end customers 41. 3 TWh Customers 5. 3 m Employees approx. 26 thou. 50 40 Distribution (TWh) 48 6 4 20 17 2 10 0 5. 3 Sales 40 5. 2 30. 1 32 30 20 PLNbn [USDbn] End Customers (m) 0 30 2. 9 2. 4 20 19. 1 11. 4 10 9. 1 0 European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

3. 3 Integrated value chain in TAURON Group TAURON POLSKA ENERGIA S. A. Holding

3. 3 Integrated value chain in TAURON Group TAURON POLSKA ENERGIA S. A. Holding company in the TAURON Capital Group. It is in charge of corporate functions: Group management, strategic projects, corporate regulations, HR, finance, controlling, internal audit, procurement, PR, IR MINING 20% of Polish recoverable thermal hard coal resources • 2 hard coal mines • 5. 45 m tons of hard coal extracted, of which 67% was used internally and 33% was sold to thirdparty customers • 2013 Mining Segment EBITDA: PLN 166 m [USD 51 m] GENERATION RENEWABLES HEAT No. 2 electricity generator in Poland gradual increase in RES capacity one of the biggest players on the heat market in Poland • 6 hard coal PPs • • 4. 7 GW of capacity in conventional PPs 183 MW of capacity from 4 wind farms • • • 133 MW of capacity from 35 hydro power plants • • 0. 61 TWh of net generation from wind and hydro • 2013 Renewables Segment EBITDA: PLN 136 m [USD 41. 8 m] • • • 17. 6 TWh of net generation, including 0. 55 TWh from biomass 7. 24 PJ of heat generation 2013 Generation Segment EBITDA: PLN 32 m [USD 9. 8 m] • • • 4 hard coal CHPs 1, 050 km of heat distribution grid 2, 049 MW of thermal capacity and 462 MW of electric capacity 8. 38 PJ of heat generation 1. 2 TWh of net generation 2013 Heat Segment EBITDA: PLN 232 m [USD 71. 4 m] DISTRIBUTION AND SUPPLY No. 1 electricity distributor and supplier in Poland • • • 5. 3 m customers distribution area of 57. 1 km 2, i. e. approx. 18. 3% of Poland’s territory 47. 9 TWh of electricity distributed 41. 3 TWh of electricity sold to end customers 2013 Distribution/Supply Segment EBITDA: PLN 2 208/899 m [USD 679/277 m] CUSTOMER SERVICE • Customer Service segment provides customer service, accounting and IT services for TAURON Group’s companies European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

3. 4 TAURON’s CAPEX – key projects’ work progress Investment project Capacity (MWe) Capacity

3. 4 TAURON’s CAPEX – key projects’ work progress Investment project Capacity (MWe) Capacity (MWt) Project status Work progress Planned completion date - Works underway on the unit’s basic design. Services with respect to the construction of the unit’s auxiliary systems and installations are being contracted. Contract’s engineer selected - Energopomiar Gliwice 6% 2019 450 240 Construction and installation works as well as deliveries of components for technological systems within the basic unit, power take off points, fuel installations, the unit’s auxiliary systems continued 59% 2015 Construction of the hard coal-fired cogeneration unit at ZW Tychy 50 86 Boiler’s steel structure’s installation completed, boiler drum’s water tests conducted. General contractor is carrying out successive stages of the works 16% 2016 Construction of the TG 50 ZW Nowa turbogenerator 50 - Turbine’s delivery completed. Turbine set’s foundation accepted. Construction works underway. Project carried out in line with the schedule 45% 2015 Jaworzno III Power Plant – installing of the flue gas denitrification systems and upgrading of the 200 MW units - - Project carried out in line with the schedule. Upgrade works completed on four of the six units. Works on the other two units (units no. 1, 5) will be carried out in 2014 -15 55% 2016 Łaziska Power Plant – – installing of the flue gas denitrification systems and upgrading of the 200 MW units - - Upgrade of the last one (no. 9) of the four units commenced. Units will comply with the requirements with respect to the values of permitted NOx emissions past 2018 (200 mg/Nm 3) 81% 2015 Construction of the CCGT unit at Łagisza Power Plant 413 266 Project’s investment advisor selected. Procedures required to obtain the construction permit and select the contract’s engineer commenced 1% 2018 Following the cancellation of the proceeding on selecting the contractor to construct new RES capacity due to the value of the submitted bids the evaluation and analyses of the project’s business case are underway 3% 2015 Construction of the hard coal-fired unit at 910 Jaworzno III Power Plant Construction of the CCGT unit at Stalowa Wola Combined Heat and Power Plant Construction of new RES capacity at Stalowa Wola Power Plant (biomass) 55 Construction of the 800 m level at Janina coal mine - - Janina VI shaft deepening underway, Hard Coal Mechanical Processing Unit’s upgrade accepted 9% 2019 Construction of Grzegorz shaft at Sobieski coal mine - - Basic design accepted, construction site access road completed, drilling of the test exploration borehole continued 12% 2022 European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

3. 5 TAURON’s Capacity balance New capacity +2 222 MW in total 6 130

3. 5 TAURON’s Capacity balance New capacity +2 222 MW in total 6 130 5 393 6 130 Decommissionings - 1 485 MW in total Łagisza unit 5, Siersza unit 5, ESW unit 7, Nowa 50 Blachownia ESW T 5, K 8, K 9, K 11 hard coal (current) Łaziska units 1 and 2, Siersza units 3, 6, Łagisza units 6 and ESW unit 8 7 hard coal (new) biomass gas hydro wind European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 22 Kazimierz Szynol

3. 6 Future strategy • Assuming that after 2030 free CO 2 allowances will

3. 6 Future strategy • Assuming that after 2030 free CO 2 allowances will disappear and the CO 2 prices will grow, the strategy requires changes in the fuel mix • RES • Natural gas (shale gas ? ) • CHP • Nuclear • The coal will dominate but its share will be decreased • Coal fired units have to be highly flexible and efficient • The role of RES will grow • TAURON has to fight for consumers, mainly small and medium enterprises European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

3. 7 Research and development activities within TAURON Group • Legal and environmental requirements

3. 7 Research and development activities within TAURON Group • Legal and environmental requirements influence the R&D • New innovative technologies and concepts for electricity generation • High efficiency coal gasification • Energy storage • Low emission, high efficiency power generation concepts • Pilot and demo scale research • CO 2 capture • Hg reduction and monitoring European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

Content: 1. Overview of the power sector in Poland 2. Impact of the EU

Content: 1. Overview of the power sector in Poland 2. Impact of the EU climate and energy policy on the power sector activity 3. TAURON Group as representative power utility in Poland CEE 4. Conclusions European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

4. Conclusions • Poland regards the atmosphere protection as a global not a local

4. Conclusions • Poland regards the atmosphere protection as a global not a local issue. EU cannot pursue the climate objectives alone undermining its competitiveness • Accepting the summit conclusions Poland will participate in next EU decarbonization steps 2030/2050 • Today the triangle of security of supply, environment and economy is deformed • The energy costs are growing, impacting in negative way our economy and competitiveness • EU climate policy cannot lead to deindustrialization and degradation of economy and to never ending increase of electricity price and poverty • Reduced share of coal means higher gas penetration and higher import dependence • Economic issues should prevail over climate objectives, so that EU can keep up with the world and not lose work places • Reasonable allocation of efforts and loads related to CO 2 reduction for particular EU countries is needed, inclusive of the CEE European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol

Thank you for your attention Kazimierz Szynol Power Plant Director TAURON Wytwarzanie S. A.

Thank you for your attention Kazimierz Szynol Power Plant Director TAURON Wytwarzanie S. A. Tel. +48 32 715 3301 E-mail: kazimierz. szynol@tauron-wytwarzanie. pl European Power Generation Strategy Summit Amsterdam, 26 -28. 11. 2014 Kazimierz Szynol