The regulatory environment of the Trade and Storage segment is formed by a combination of national and EU laws. The most important Polish laws governing the PGNiG Group’s operations in the trade and storage area include:
The Polish Energy Law with secondary legislation defines the basic rules for trade in natural gas, grant of licences and determination of energy tariffs. Its content takes into account the legal acts included in the Third Energy Package, in particular Directive 2009/73/EC of July 13th 2009 concerning common rules for the internal market in natural gas, and Regulation No. 715/2009 on conditions for access to the natural gas transmission networks.
Pursuant to the provisions of the Polish Energy Law, a licence issued by the President of the Energy Regulatory Office is required for trading in gas fuels and electricity.
PGNiG conducts its trade activities under the following licences:
As for PGNiG Obrót Detaliczny, it holds the following licences:
Energy companies holding licences to trade in gas fuels have the obligation to submit gas trading tariffs for regulatory approval. Such obligation does not apply with respect to gas trading on the Polish Power Exchange.
On September 11th 2013, an Act Amending the Energy Law (referred to as the ‘Mini Three- Pack’) took effect; under the amendment, an energy company trading in gas fuels is obliged to sell a part of its high-methane gas volume introduced to the transmission network in a given year on the exchange market (the exchange sale requirement).
Consequently, PGNiG, being the only entity actually bound by the obligation, is required to sell on the exchange market at least 30% (in the period from the amendment’s effective date to the end of 2013), 40% (in 2014), and 55% (as of January 1st 2015) of the high-methane gas volume introduced to the transmission network in a given year.
In the period directly following the requirement’s effective date, the demand for gas offered by PGNiG on the power exchange was lower than the supply, which meant that the Company was not able to fulfil its statutory obligation. In those circumstances, on June 26th 2014, the Energy Law was amended again by introducing the rule of general succession of agreements. Following its entry into force, on August 1st 2014 subsidiary PGNiG Obrót Detaliczny commenced operations, taking over from PGNiG the customers who use less than 25 million cubic metres of gas fuel per year. PGNiG Obrót Detaliczny acquires gas at the Polish Power Exchange. Since the launch of PGNiG Obrót Detaliczny’s operations, a material increase in exchange gas sales has been observed.
A failure to meet the obligation to sell gas on the exchange market in the amounts specified by the Energy Law exposes the Company to the risk of financial penalty. Such penalty is imposed by the President of the Energy Regulatory Office in an amount of up to 15% of revenue from the licensed operations in gas fuel trading.
The initiatives taken by the Company allowed it to meet the exchange sale requirement in 2015, despite the increase of the proportionate volume required to be sold through the exchange from 40% to 55%.
Issues relating to the country’s fuel security are regulated under Regulation (EU) No. 994/2010 of October 20th 2010 concerning measures to safeguard security of gas supply, and under the Act on Stocks of Crude Oil, Petroleum Products and Natural Gas, and on Rules to be Followed in the Event of Threat to National Fuel Security or Disruptions on the Petroleum Market. The Act defines the rules for creating, maintaining and financing stocks of natural gas by energy companies.
From PGNiG’s perspective, another important document is the Energy Efficiency Act of April 15th 2011, enacted to implement Directive 2006/32/ EC on energy end-use efficiency and energy services. It establishes a national target for enduse energy savings and introduces a system of energy efficiency certificates (referred to as white certificates) as a means to achieve it. PGNiG and PGNiG Obrót Detaliczny, as trading companies, are obliged to purchase and redeem energy efficiency certificates or else pay the buy-out price.
The storage system operator Operator Systemu Magazynowania Sp. z o.o. (“OSM”) operates on the basis of relevant decisions by the President of Energy Regulatory Office, i.e. a decision dated May 16th 2012 (as amended) to grant OSM a licence for storing gas fuels in gas storage facilities for the period from June 1st 2012 until May 31st 2022, and a decision of May 22nd 2012 (as amended) to designate OSM as the gas fuel storage system operator for the period from June 1st 2012 to May 31st 2022. OSM has conducted the licensed operations since June 1st 2012.
The gas fuel storage activities are conducted on the basis of EU and national laws, in particular the Energy Law of April 10th 1997 and Regulation (EC) No. 715/2009 of the European Parliament and of the Council of July 13th 2009 on conditions for access to the natural gas transmission networks and repealing Regulation (EC) No. 1775/2005.
Furthermore, Commission Implementing Regulation (EU) No 1348/2014 of December 17th 2014 on data reporting implementing Article 8(2) and Article 8(6) of Regulation (EU) No 1227/2011 of the European Parliament and of the Council on wholesale energy market integrity and transparency (respectively the “Implementing regulation” and the “REMIT“) took effect in the analysed period. As part of its disclosure obligations, in September the Company registered with the Centralised European Registry for Energy Market Participants (CEREMP) operated by the Agency for the Cooperation of Energy Regulators (ACER) and obtained ACER code A00037874.PL. The ACER code identifies the entity entering into transactions in the electricity and gas wholesale markets. Just like EIC codes, the ACER code is used to report data concerning OSM, in accordance with REMIT requirements. Furthermore, on September 3rd, the Rules for the performance of obligations resulting from Regulation (EU) No. 1227/2011 of the European Parliament and of the Council of October 25th 2011 on wholesale energy market integrity and transparency were implemented at OSM; The Rules relate, among other things, to:
Concurrently with the adoption of the Rules, a dedicated section was launched on OSM’s website, entitled “REMIT publications,” where inside information concerning any planned or unplanned unavailability of Gas Storage Facilities or Groups of Gas Storage Facilities in whole or in part is published.
The Energy Efficiency Act came into force on August 11th 2011, implementing Directive 2006/32/EC of the European Parliament and of the Council of April 5th 2006 on energy end-use efficiency and energy services. The Energy Efficiency Act establishes a national target for economical use of energy which stipulates that the minimum level of end-use energy savings by 2016 should be 9% of annual national energy consumption. Starting from January 1st 2013, PGNiG and PGNiG Obrót Detaliczny, as trading companies, are obliged to purchase energy efficiency certificates or else pay the buy-out price. This obligation drives up the cost of regulated activities.
Dependence of the PGNiG Group’s revenue on tariffs approved by the President of the Energy Regulatory Office is the key factor affecting the Group’s regulated business. Tariffs are crucial to the Company’s ability to generate revenue that would cover its reasonable costs and deliver a return on the capital employed. Currently, a significant portion of that revenue depends on the selling prices of gas fuel, which − except to the extent that the gas is sold through the Polish Power Exchange − are regulated prices. The tariff determination rules are defined in the regulations issued under the Energy Law, including primarily the Tariff Regulation. The methodology used to determine tariffs consists in defining prices and charges against forecast costs and planned gas sales volumes. Inaccurate estimates of customer demand for gas (affecting the accuracy of projected purchase and supply volumes) and changes in imported gas prices, which cannot be accurately projected, may have an adverse effect on the financial performance of the Group.
Prices of imported gas are denominated in USD or EUR and are based on indexation formulae reflecting the prices of petroleum products and/ or gas on the liquid market of Western Europe. Accordingly, changes in foreign exchange rates or prices of petroleum products and gas materially affect the cost of imported gas. Any precise forecast of changes in natural gas prices carries a high risk of error. With respect to a part of volumes sold at tariff prices, the approved prices can be legally adjusted during a tariff term. However, there is a risk that a change in the price of imported gas may not be fully passed on to customers or that changes in gas sale prices may lag behind changes in gas import prices.
In the case of exchange sales, which, given the statutory obligations under the Energy Law, concern a material part of imported volumes, and in the case of sales to end users at prices indexed to exchange prices, there is a risk of negative decorrelation between the Polish Power Exchange (TGE) and the prices calculated in accordance with the formulae stipulated in import contracts. If this risk materialises, it may lead to the need to sell gas at prices lower than the acquisition cost, which in turn will adversely affect the company’s financial performance.
Fluctuations in gas fuel prices on the wholesale market are an important factor affecting the financial performance of PGNiG Obrót Detaliczny.
Gas fuel is acquired by the company mostly at the Polish Power Exchange (TGE). Throughout 2015, gas prices at the TGE followed a steady downward trend.
In 2015, PGNiG was a party to three long-term take-or-pay contracts for gas fuel deliveries to Poland. The most important of these are the contracts with OOO Gazprom Export and Qatar Liquefied Gas Company Limited (3).
On December 9th 2014, PGNiG and Qatargas executed a supplementary agreement to the long-term contract for sale of liquefied natural gas (LNG) of June 29th 2009. Under the supplementary agreement, the parties altered the terms on which the contract was to be performed throughout 2015. On October 21st 2015, PGNiG and Qatar Liquefied Gas Company Limited (3) executed another supplementary agreement which extended the effective term of the amended (in 2015) terms of the contract until June 30th 2016.
The gas volumes originally intended for PGNiG SA in 2015 and H1 2016 were sold by Qatar Liquefied Gas Company Limited (3) on other markets. PGNiG covers the potential difference between the LNG price specified in the contract and the obtained market price. Should the price be lower than PGNiG finds satisfactory, any unsold LNG supplies may be shifted to subsequent years of the contract.
The Council of Ministers’ Regulation of October 24th 2000 on the minimum level of diversification of foreign sources of gas supplies prescribes the maximum share of gas imported from a single country in total gas imports in a given year. In 2015–2018, the share may not exceed 59%.
For failing to comply with the obligation to diversify supplies of imported gas in 2007−2008, the President of the Energy Regulatory Office imposed on PGNiG a fine of PLN 2m, which − as a result of legal steps taken by the Company − was reduced to PLN 0.5m. In May 2015, PGNiG filed a cassation complaint against a decision of the Warsaw Court of Appeals, which is still being examined.
By virtue of his decisions of December 30th 2015 and December 31st 2015, the President of the Energy Regulatory Office imposed on PGNiG fines, respectively of PLN 2m and PLN 4m, for failing to comply with the obligation to diversify supplies of imported gas in 2009 and 2010. The Company filed appeals against these decisions with the Competition and Consumer Protection Court at the Regional Court of Warsaw.
If the Regulation is not amended, the President of the Energy Regulatory Office may in continue to impose fines on the Company for failing to comply with the diversification requirement until gas starts to be supplied from other sources (e.g. through the LNG terminal).
The advancing deregulation of the natural gas market in Poland has brought about changes in the competitive, regulatory and legal environments, and a strong intensification of activity of other market operators. Currently, gas trading licences in Poland are held by 175 companies not belonging to the PGNiG Group. In 2011–2012, 22 new licences were awarded. In 2013–2014, another 63 licences (excluding PGNiG Obrót Detaliczny), and in 2015–26 licences were issued. Additionally, 60 companies (excluding PGNiG) hold licences to trade in natural gas with foreign partners, allowing them to import gas for resale to customers in Poland. 17 and 14 such licences were awarded respectively in 2014 and 2015. According to information published on the website of gas pipeline operator OGP Gaz-System SA, at least 102 entities have entered into a transmission agreement with the operator.
In 2012, trading in natural gas commenced on the Polish Power Exchange (TGE). According to information published on the exchange’s website, the number of registered participants of the TGE gas trading market is 23.
An important development promoting competition on the gas market was the launch, as of April 1st 2014, of the physical reverse flow to Poland from sources west of our country through the Mallnow entry point. Under the reverse flow service provided on a continuous basis, it is possible to import 2.3 billion cubic metres of natural gas. On January 1st 2015, the technical capacity for continuous gas imports through the Mallnow entry point was further increased to 5.5 billion cubic metres.
Despite dynamic changes that have followed as a result of the market deregulation process, PGNiG continues to be the largest supplier of natural gas in Poland.
Competitors of PGNiG Obrót Detaliczny offer, besides traditional network supplies, modern solutions to supply natural gas in the liquefied form (LNG).
They offer gas fuel at competitive prices, and also sell bundled gas and electricity. The largest sellers of electricity in Poland are diversifying their business into natural gas sales, becoming active players in this market.
The company’s main competitors whose offerings are targeted at large business customers include DUON Marketing & Trading SA, RWE Polska SA, PKP Energetyka SA, Hermes Energy Group SA, Enea SA, Energa SA and Tauron SA. On the other hand, the main competitors targeting households and small businesses include DUON Marketing & Trading SA, Energetyczne Centrum SA, ENERGA-OBRÓT SA, Energia dla firm SA and Tauron SA.
In response to growing competition, the PGNiG Group companies selling gas fuel in Poland launched discount schemes to make their offering more attractive to customers.
The obligation to maintain mandatory stocks of natural gas is stipulated in Art. 24 of the Act on Mandatory Stocks. Pursuant to the Act, an energy company engaged in the business of importing natural gas for its resale to customers is required to maintain mandatory stocks of gas in an amount equal to at least 30-day average daily gas imports into the territory of Poland. Companies which import less than 100 million cubic metres of gas per year and supply the gas to not more than 100 thousand customers are exempt from the obligation to maintain mandatory stocks. Meeting the statutory requirement as to mandatory stocks exposes PGNiG to financial and technological risks, and endangers the fulfilment of its contractual obligations.
The balancing risk is mainly connected with the inability to cover peak demand for natural gas in autumn and winter if low air temperatures persist. The presence of mandatory stocks limits the commercial use of the storage capacity and deliverability.
As mandatory gas stocks may be withdrawn only with the consent of the Minister of Economy and only after gas supply limits have been introduced, the Company is exposed to the risk of a temporary significant imbalance in its gas portfolio. Notwithstanding that, withdrawal of gas from mandatory stocks may lead to a situation where users face gas supply limits (the introduction of such limits being a formal requirement) despite relatively high volumes of gas held in storage.
The technology risk follows from the fact that the need to maintain mandatory stocks has a negative impact on the operating parameters of underground storage facilities. A situation where gas is not drawn from storage for a longer period of time may result in gas migrating to the reservoir section with poorer porosity and permeability, leading to a decrease in gas withdrawal capacity. It may take several years to restore the original operating parameters of the facility (entailing additional costs) and in extreme cases such restoration may even prove impossible.
The deregulation of the Polish gas market is bound to trigger major changes, in the market itself and in the related legal framework. In 2012, gas sales were launched at the Polish Power Exchange (TGE). Under a decision of the President of the Energy Regulatory Office, gas trading on the exchange is exempt from the tariff obligation. It is also expected that prices of gas for end users will be gradually liberalised as the deregulation process advances. In the first place, the tariff requirement is to be disapplied with respect to wholesale customers and the largest industrial customers.
Despite earlier announcements by the President of the Energy Regulatory Office, 2015 saw no significant developments related to the planned deregulation of gas prices for customers.
In response to the changes in the natural gas market, the PGNiG Group introduced a number of discount schemes, enabling its customers to purchase gas at prices lower than the tariff prices.
In the period from September 2014 to March 2015, the quantities of natural gas supplied by OOO Gazprom Export were lower than those ordered by PGNiG. The reductions ranged from 6% to 46% per day and affected gas supplies passing through the entry points in Drozdovitse, Vysokoye, Kondratki and Teterovka (since December 2014). To meet customer demand for gas, the Company imported the missing volumes from the west (through Mallnow, Lasów) and the south (Cieszyn). Moreover, between October 2014 and April 2015 the Company withdrew gas from underground storage as part of the commercially available capacities. Throughout the period when gas supplies were reduced, the stability of gas supplies to PGNiG customers was not affected and the Company did not default under its contractual obligations towards customers. Given the continuing political instability in Ukraine, there is a risk of further limitations in gas supplies.
Probability that the risk will materialise:
Risk materiality level
