District Heating

* managerial perspective

As in the case of Conventional Generation, this segment’s revenues are primarily revenues from electricity sales, however, they are usually directly related to generation of heat which in turn depends on demand that is highly seasonal and depends on external temperatures.

This is why, in contrast to system power plants in Conventional Generation, as a rule, CHP plants do not have any considerable impact on the development of prices for electricity on the wholesale market.

Revenues from the sale and distribution of heat are regulated revenues. Energy companies independently set tariffs and present them to the President of the Energy Regulatory Office (the “ERO President”) for approval. Heat production at PGE Group takes place in cogeneration units, which tariffs for heat are calculated using a simplified approach (compared to tariffs based on a full cost structure), based on reference prices, which are based on average sales prices for heat generated in units with specific fuel other than cogeneration units. They are published each year by the ERO President. Tariffs for heat production for cogeneration units in a given tariff year thus reflect changes in the costs of heat-generation units (not co-generation units) in the previous calendar year. The cost approach is applied in the case of tariffs for heat distribution, which allows to cover justified costs (mainly the costs of heat losses and property tax) and a return on invested capital, in line with guidelines from the ERO President. Distribution tariffs for heat are in place at branches in Gorzów and Zgierz, as well as by Kogeneracja S.A., PGE Toruń and Zielona Góra CHP.

Generation of heat and electricity is directly related to key variable costs of the segment, i.e. the cost of production fuel used (in particular, hard coal and gas) and the cost of fees for CO₂ emissions.

Electricity production in high-efficiency cogeneration is additionally remunerated. Until 2018, CHPs generated revenue from the sale of energy origin certificates, i.e. cogeneration certificates (yellow and red). From 2019, due to a change in support model, they receive support at a level covering increased operating costs related to production. For large units, this are set on an individual basis. The support mechanism in the form of certificates is in place also for biomass-fired generating assets. This type of production is additionally remunerated by awarding origin certificates, i.e. green certificates, the sale of which generates additional revenue, within the segment obtained in biomass unit in Kielce CHP.

District Heating within PGE Capital Group combines CHP plants separated from the EDF Polska assets acquired on November 14, 2017 and CHP plants separated from PGE GiEK. Since January 2, 2019 the segment’s composition has been as follows: PGE EC, Kogeneracja S.A., Elektrociepłownia Zielona Góra S.A. and  PGE Toruń S.A.

District Heating segment is the largest heat producer in Poland with market share of over 20%. Generation is based mainly on hard coal and gas.

Installed capacity and production in District Heating segment

• Lower volume of heat production in 2020 y/y is a result of higher outside temperatures – as compared to 2019 the average temperatures were by 1.3^o C higher, what translated into lower production (by 0.1 PJ)
• Increase of heat sale price is a result of price increase following the publication by the ERO of new reference prices for heat production.

• Higher electricity production volume in the segment by 0.3 TWh as a result of higher generation at Lublin Wrotków CHP and Rzeszów CHP caused by high margins due to low natural gas prices.
• Increase in electricity sale prices
• Lower fuel consumption costs are caused by price drop on wholesale market of natural gas.

• Higher CO₂ costs are mainly a result of higher price of allowances and lower allocation of allowances granted free of charge.
• Lower personnel expenses result mainly from decreased employment y/y.
• Lower level of other item are caused mainly by lower revenues from sale of services and higher real estate tax.

Capital expenditures incurred in District Heating segment in 2020 and 2019