The Generation segment’s revenue was PLN 1,943m, down ca. 6% on the previous year. Operating expenses were down 7%, which, despite lower revenue, translated into a PLN 18m (13%) increase in the segment’s operating profit relative to 2013. The revenue decline was attributable to higher average air temperatures (up by 0.9oC), which resulted in lower volumes of heat sold (down 9%) than in the year before. The decline in revenue from heat sales was offset by a higher heat tariff (up by ca. 6%), effective as of 1 August 2014. As a result, revenue from heat sales remained relatively flat year on year. Lower volumes of heat sold translated into lower volumes of cogenerated electricity (down by 6%, i.e. 217 GWh, year on year), which drove down revenue from electricity sales by 13%.

The legal framework for the generation business is defined mainly by:

• the Energy Law,
• the Regulation of the Minister of the Economy of 17 September 2010 on the detailed rules for determining and calculating tariffs and on settlements in heat supply.

Licences

The business of electricity and heat generation requires a licence. PGNiG TERMIKA SA holds an electricity trading licence valid until 31 December 2030, as well as the following licences, each valid until 31 December 2025:

• for the production of heat,
• for the transmission and distribution of heat,
• for the production of electricity.

Tariffs

A tariff applicable to PGNiG TERMIKA SA’s sales of heat generated at the Żerań CHP, Siekierki CHP, Pruszków CHP, Wola heating plant and Kawęczyn heating plant and to the transmission and distribution of heat via the heating network supplied from the Pruszków CHP plant was effective until 31 July 2014. On 8 July 2014, the President of the Energy Regulatory Office approved a new tariff, effective since 1 August 2014.

Until 31 December 2014 the company was required to apply the following tariffs for the transmission of heat through the heating network in the areas of Marsa Park, Annopol, Marynarska, Chełmżyńska, Jana Kazimierza. On 18 November 2014 the President of the Energy Regulatory Office approved new heat transmission tariffs for the following areas: Marsa Park, Annopol, Marynarska, Chełmżyńska and Jana Kazimierza. The new tariffs will be in effect from 1 January 2015 to 31 July 2016.

Until 30 April 2015, the company is also required to apply the tariff for the production of heat at the Regaty heating plant and the transmission of heat through the heating network in the Regaty residential estate.

Support for cogeneration

The amended Energy Law, effective as of 30 April 2014, has reintroduced the support system for electricity cogeneration until the end of 2018. The obligation to purchase and redeem cogeneration certificates for a given calendar year may be settled only with certificates obtained for the cogeneration of electricity in the same year. The above limitation, as well as the sufficiently high obligation thresholds, should solve the problem of certificates oversupply, ensuring that certificate prices are kept at a level similar to the buy-out price. Proceeds from the sale of certificates of origin will add to the revenue of PGNiG TERMIKA SA, which will be able to use the extra funds to continue the upgrade of its existing assets.

EU regulations

The conclusions from the European Council meeting, adopted on 23-24 October 2014, set out the objectives of the energy and climate policy for 2020−2030. The new targets provide for a 40% reduction in greenhouse gas emissions by 2030 (relative to 1990), a 27% increase in the share of energy from RES (EU binding target), as well as a 27% improvement in energy efficiency (indicative target).

The European Commission began to work on a new Energy and Climate Package, which also includes the EU ETS Market Stability Reserve. The purpose of the Market Stability Reserve is to regulate the supply of emission allowances on the market, and help maintain their prices at a level supporting decisions to invest in low-carbon technologies and renewable energy sources. Work is also in progress on the IAS and its early implementation in 2017, so as to ensure that emission allowances withdrawn through backloading are not reintroduced on the market, but are transferred to the Market Stability Reserve. The framework of the new climate and energy policy should be conducive to the development of gas-fired cogeneration units.

Allocation of free-of-charge emission allowances

Despite delays in the work on amendments to the Act on Trading in Greenhouse Gas Emission Allowances, in 2014 the Company received free-of-charge emission allowances for heat generation in 2013 pursuant to the existing Act on Trading in Greenhouse Gas Emission Allowances of 28 April 2011 (J.L. of 2011, No 122, item 695), and for power generation pursuant to the report on the scope and cost of its new build and upgrade projects implemented in 2009−2013, as submitted for the National Investment Plan. The report was developed based on information published by the Ministry of the Environment.

Environmental protection

The implementation into Polish law of the Industrial Emissions Directive (IED) as well as the BAT conclusions, which are currently being developed, require the Company to reduce its industrial emissions. These challenges are being met by the Company’s long-term capex plan, which addresses the identified requirements of the tightened environmental laws.

Cogeneration support mechanism

The cogeneration support mechanism currently in place has been as submitted for notification to the European Commission. The Commission has not yet ruled on the compatibility of the state aid with the EU internal market.

Because of the short-term perspective of the cogeneration support mechanism adopted in April last year, work is currently under way to develop a support system for high-efficiency cogeneration units to be applied in the long term, i.e. after 2018. The newly developed system should be compliant with the European Union’s new state aid rules.

More stringent gas and dust emission standards

Furthermore, in order to meet more stringent gas and dust emission standards to be implemented as of 2016, producers have to thoroughly modernise their power and CHP plants and may be forced to shut down a number of generating units (a total of some 4-6 thousand MWe by 2020) where it is not economically viable to install expensive flue gas treatment systems. In order to meet the more stringent emission requirements, PGNiG TERMIKA SA has gradually been modernising its generating assets under its Long-Term Capex Plan.

Maintaining share in the municipal heat market

Marketing efforts conducted jointly with Dalkia Warszawa SA, and the connection of further western districts of Warsaw to the municipal heating network, should significantly reduce a potential future decline in the volume of energy produced at PGNiG TERMIKA SA’s generating plants. To maintain its share in the municipal heat market, the company will also offer ‘green’ heat generated at biomass-fired units, and will continue to sell energy at competitive prices.

Activity in the energy sector

PGNiG TERMIKA SA has entered into contracts for coal supplies and electricity sales, closing its portfolios for 2015. Other fuels as well as heat sales are contracted on an ongoing basis. The situation in the Polish coal mining sector may pose a threat to PGNiG TERMIKA.

In an extreme scenario of supplies being discontinued (due to bankruptcy or strikes), PGNiG TERMIKA will be forced to purchase coal from other sources, which could adversely affect its bottom line.

Production

PGNiG TERMIKA’s key products are heat and electricity. In 2014 100% of total electricity output was cogenerated with heat.

The company also provided Network Constrained Generation services under an agreement with PSE Operator SA, pursuant to which the company maintains a long-term plant margin and keeps a specific number of generating units available, so as to overcome limitations in the operation of power sources in the national power system and to ensure Warsaw’s energy security. PGNiG TERMIKA SA is required to generate electricity whenever instructed to do so by the Transmission System Operator. In performance of the agreement, by 31 December 2014 the company had generated 199.4 GWh of electricity.

The fluctuations in heat output from year to year are caused by fluctuations in outdoor temperatures: in 2009 the average outdoor temperature for the months of the heating season was 3.2oC and was equal to the 10-year average. In 2014, the average outdoor temperature was 4.6oC and was higher by 1.4oC compared with the long-term average, which resulted in a 6% lower heat output compared with the figure for 2009. In fact, 2014 was the warmest year on record. The percentage of heat output produced in cogeneration in 2014 was 89.8% and was equal to the average for the years 2009−2014. Electricity output in 2014 was down by only 1.1% on the 2009 figure, despite the unavailability of installations undergoing upgrades in 2014, such as boiler No 1 at the Siekierki CHP plant – the conversion to biomass combustion, and the fluidised bed boiler B at the Żerań CHP plant – the replacement of electrostatic precipitators with bag filters. The upgrades were designed to adapt the installations to the requirements of the Industrial Emissions Directive coming into force after 2016 (new emission standards).

Sales

In 2014 PGNiG TERMIKA SA sold 36,617 TJ of heat, mainly to Dalkia Warszawa SA, which purchased 94.6% of the heat generated by the company. In 2014 Dalkia Warszawa SA contracted 3.6 GW of PGNiG TERMIKA’s heat generation capacity. The balance of the produced heat was sold to local customers, mainly in Pruszków and the surrounding areas.

The key customer for electricity generated at PGNiG TERMIKA’s plants was PGNiG, with an aggregate share in the company’s electricity sales volume reaching 99% in 2014. The company also sold electricity to smaller customers.

Construction of a CCGT unit in Stalowa Wola

The project for the construction and future operation of a 449.16 MW gas-fired CHP plant is being carried out jointly by the PGNiG Group and the TAURON Group, each holding a 50% interest. The CHP plant will produce heat in the form of hot water for the city’s residents and process steam for nearby industrial facilities. It will be the largest unit of its kind in Poland. According to the agreement between the project partners, revenue from sale of electricity will be shared pro rata to their interests in the Stalowa Wola CHP plant. It is estimated that the Stalowa Wola unit will generate approximately 3,500 GWh of electricity per year, while burning approximately 600 m m³ of gas. At the same time, it will produce low carbon dioxide, SOx and NOx emissions, in line with the EU’s energy and climate policy.

In 2014 key components were delivered and the installation of the steam and gas turbines began on site of the ‘Construction of a CCGT Unit in Stalowa Wola’ project. Some of the auxiliary equipment was installed, including pumps, exchangers, ejectors, and turbine lubrication systems. In the period under review, the acceptance of stage I work on the San River weir took place, and work on stage II of the project commenced.

The CCGT plant is scheduled to come online in late 2015/early 2016.

CCGT unit at the Żerań CHP plant

Following its completion, the CCGT project will modernise the generation profile of the Żerań CHP plant in Warsaw. The worn out coal-fired boilers will be retired, and the new unit with an installed capacity of ca. 450 MWe will allow the plant to increase power output by 50%. The technical parameters of the unit will meet the requirements of the Industrial Emissions Directive (IED) and BAT (Best Available Techniques). The project will also contribute to power security in the Warsaw metropolitan area and to further air quality improvement.

Work on the tender documentation had been completed, and on 25 November 2014 a public tender for the construction of a CCGT unit at the Żerań CHP plant was announced, which is to be conducted by way of competitive negotiations involving a contract notice. The company obtained a building permit for the unit’s construction, as well as a final building permit for the construction of a water discharge pipeline and upgrade of the cooling water system. Preparatory work is under way for the construction of a gas pipeline from the Rembelszczyzna Gas Compressor Station to the Żerań CHP plant. Amendments to the grid connection agreement with Polskie Sieci Energetyczne were drafted whereby the commencement of work by PSE is to depend on PGNiG TERMIKA executing a construction contract for the CCGT unit. The tender documentation is being drafted for switching over the equipment at the Żerań CHP plant to the new switchgear station.

The unit is expected to come online in 2018.

Conversion of the K1 boiler and construction of a biomass storage unit

On 11 October 2013, an agreement was signed with Andritz Energy & Environment GmbH (consortium leader) for the conversion of boiler No 1 into a biomass-fuelled one, along with the construction of biomass unloading, storage and feeder systems at the Siekierki CHP plant. Following the completion of the project, the unit’s capacity will be raised to 185 t/h, with a thermal input of 146.6 MWt. In this way, PGNiG TERMIKA will diversify its fuel mix and ensure that the unit’s operation accommodates the heat demand in the Warsaw metropolitan area. The conversion of a coal-fired boiler into a biomass-fuelled one will eliminate the need to install an FGD and deNox unit to comply with the Industrial Emissions Directive. In 2014, the planning permission documentation was prepared and a final building permit was obtained. Work related to dismantling the boiler’s auxiliary equipment was completed. The installation of the pressurised section was also completed and a superheater was replaced. Work is in progress on the installation of the boiler’s auxiliary equipment. The foundations were laid for the wet biomass unloading stations, separation buildings and wet biomass storage facility, as well as for the fly ash, bottom ash and sand containers and dry biomass silos. Assembly work is in progress on the biomass facilities.

The company plans to complete the project in the third quarter of 2015.

Reconstruction of the Pruszków CHP Plant

In 2013 a decision was made to modify the Pruszków CHP plant to increase its cogeneration capacity based on gas engines, and to reduce its coal consumption by reconstructing the water boilers and modifying them to meet future, more stringent environmental requirements. In the same year a gas network connection agreement with Polska Spółka Gazownictwa was signed to secure gas supplies and a request was submitted to PGE Dystrybucja to specify the grid connection conditions for reception of the plant’s electricity output. In 2014 an agreement was signed and work related to the construction of a water treatment station commenced.

The whole project is scheduled for completion in 2016.

Carbon emissions trading scheme

In 2014 PGNiG TERMIKA SA’s Siekierki, Żerań and Pruszków CHP plants, along with Kawęczyn and Wola heating plants, were covered by the carbon dioxide emission trading scheme (ETS). In 2014 emissions from these installations were 5.6 m Mg CO₂. In 2014 the PGNiG Group reviewed annual reports on its carbon dioxide emissions for 2013. Carbon emissions from the installations covered by the EU ETS scheme in 2013 totalled 6.0 m Mg. After reconciling its CO₂ emissions with emission rights held, and after redeeming the allowances allocated for 2013, a deficit of 2,054.8 m Mg CO₂ free emission units was identified. The deficit was covered with reserve allowances accumulated in the accounts of the Group’s installations (unused free allocations from previous years) and with allowances purchased on the Intercontinental Exchange Futures Europe.

In the current trading period (2013-2020), the free allocation of CO₂ emission allowances covers only part of the actual emissions. The free allocations will be phased out, reaching zero in 2027.

In 2014 PGNiG TERMIKA plants emitted:

• 13.4 thousand tonnes of SO2
• 6.8 thousand tonnes of NOX
• 0.8 thousand tonnes of dust.

In 2014 the level of biomass co-combustion at the Siekierki and Żerań CHP plants reached 41.7 thousand tonnes, reducing CO₂ emissions by 59.9 thousand tonnes.

Reclamation of the fuel ash landfill site

PGNiG TERMIKA is carrying out the reclamation of the Myśliborska fuel ash landfill site for the Żerań CHP plant. The project will involve the reclamation of the land as green areas (Cells No 1 and 2) and for residential and commercial development (Cell No 3). In 2014 the company completed the technical reclamation of Cell No 2 and the transport of soil to fill Cell No 3. Work was carried out on dismantling the technical infrastructure between the Żerań CHP plant and the landfill site, and macrolevelling and soil compaction commenced in Cell No 3. The full scope of the reclamation work is scheduled for completion in 2016.

Fulfilment of the requirements of the Industrial Emissions Directive

In 2014, in an effort to meet the environmental standards provided for in Directive 2010/75/EU of the European Parliament and of the Council on industrial emissions (IED), PGNiG TERMIKA accounted for the project it completed in 2013 involving the construction of NOX selective catalytic reduction (SCR) units for four unit boilers at the Siekierki CHP Plant. Capital expenditure on the project amounted to PLN 180m, of which PLN 52m came from the Infrastructure and Environment Operational Programme of the National Environmental Protection and Water Management Fund. Thanks to this project, annual NOX emissions from the boilers’ SCR units will be reduced by 70%, i.e. 2 thousand tonnes of NOX per year.

Moreover, the company embarked on new projects aimed at reducing the emissions of gases and particulate matter into the atmosphere, i.e.:

• The conversion of coal-fired boiler No 1 at the Siekierki CHP plant into a biomass-fired unit; the converted boiler is to be placed in service late in 2015; the expected annual reduction of pollutants into the atmosphere comprises: reduction of CO₂ emissions by 227 thousand tonnes, SO2 emissions − by 780 tonnes, NOX emissions − by 260 tonnes and particulate matter emissions −by 20 tonnes,
• The provision of the fluidised bed boilers at the Żerań CHP plant with high efficiency dust collectors (bag filters) and thus enhancing the desulphurisation process; the project is scheduled for completion late in 2015,
• The conversion of mazout-fired water boilers at the Siekierki CHP plant and the Wola heating plant into light oil units, including the modernisation of their burners; the project is scheduled for completion by the end of 2015.

Noise reduction project at the Siekierki CHP plant

In 2014, noise barrier walls were built along the plant’s eastern boundary and around the coal unloading points located at the hump tracks on the plant’s premises. The purpose of the project was to reduce the risk of exceeding the permitted noise levels during the execution of future projects at the Siekierki CHP plant. The total cost was PLN 3.8m.

Biomass supplies

In order to fulfil the requirements of Directive 2009/28/EC on the promotion of the use of energy from renewable sources and use of biomass other than forest biomass, i.e. biomass from plantations and energy plant crops at commercial power plants (Regulation of the Minister of the Economy dated 18 October 2012), PGNiG TERMIKA procures fuel under long-term contracts for the supply of biomass from energy willow plantations. Currently, the company procures biomass from plantations with a total area of ca. 386 ha. Thanks to the use of biomass as a fuel, CO₂ emissions were reduced by 59.9 thousand Mg in 2014.

The objectives PGNiG TERMIKA wants to pursue on its existing markets in 2015 is to expand its heat distribution network and increase heat sales volumes.

In 2015 the electricity portfolio and commercial balancing for PGNiG TERMIKA will be managed through PGNiG Energia, which enters into dated power purchase contracts on the Commodity Derivatives Market. In addition, PGNiG will be the key customer for electricity generated at PGNiG TERMIKA’s plants.

In the following years, PGNiG TERMIKA plans to scale up its power and heat generation operations in the Warsaw area and beyond. Projects will be implemented independently or with business partners. The company intends to focus on projects based on gas-fired or biomass-fired generation sources, to gradually reduce its coal consumption and increase the share of low- and zero-emission fuels in its energy mix.

On 30 April 2014 the amended Energy Law came into force, reintroducing the support system for electricity cogeneration by reinstating the obligation to hold and redeem red certificates (23.2% of the portfolio of electricity supplied to end users) and yellow certificates until the end of 2018. Certificates are issued for the generation of electricity using high-efficiency cogeneration technology. Proceeds from the sale of certificates of origin will add to the revenue of PGNiG TERMIKA, which will be able to use the extra funds to continue the upgrade of its existing assets. This will increase the efficiency of cogeneration, which in turn will improve the company’s competitive position.

On 5 September 2014 a new Act Amending the Environmental Protection Law and Certain Other Acts came into force. PGNiG TERMIKA is at an advanced stage of work on adjusting its existing assets to the tighter environmental standards. At the Siekierki CHP plant desulphurisation and nitrogen rejection systems were installed, and at the Żerań CHP plant a CCGT unit and a new gas- and oil-fired boiler house are to be built. In addition, the Wola heating plant will be converted to light oil combustion, generating lower quantities of noxious substances, while the Kawęczyn heating plant will begin to use a high-quality grade of coal with a sulphur content of less than 0.4%.