Our idea for heat

Global megatrends are a challenge but also an opportunity. District heating, and cogeneration especially, are aligned with the vision for development of a modern "energy industry of tomorrow" - an energy industry that efficiently uses energy and is closer to end customers, adapting to their needs.

Given the above, we developed the District Heating Strategy, which is naturally aligned with PGE Group's Strategy and involves the separation of a Cogeneration business line, intended to maximise the growth potential of the district heating market. We are certain that PGE's greater involvement in this segment will generate additional value for our shareholders.

District heating is the production of heat at district heating and CHP plants and its delivery, over district heating networks, to a wide range of customers, especially in urban areas. This way of providing a heating comfort has tremendous potential in Poland. Our country has one of the largest district heating markets in Europe, with extensive infrastructure ready for new customer connections. Providing heat supplies in the Polish climate is as important as providing electricity supplies.

Sale of heat to end customers

^{Source: Heat Roadmap Europe, 2015 data}
District heating may be produced in cogeneration, i.e. together with electricity. This improves fuel efficiency and therefore reduces harmful emissions and CO₂ emissions. Therefore it contributes to environmental protection and sustainable development and increases Poland's energy security, also through a greater diffusion of generation sources and diversification of technologies. We want to contribute to limiting the issue of small-scale emissions from individual sources of heat, which is responsible for the bad quality of air in many Polish cities. Providing security and stable development conditions is a manifest of our social responsibility.

However, from a business perspective, the fact that there is potential for stable demand for district heating in Poland is the most important aspect to us. Despite thermal modernisations of buildings and passive construction, long term demand for district heating in Poland is expected not to decrease and in urban areas to grow

The potential to maintain the demand emerges from:

• Subsequent economic development of Poland and respective regions.
• Necessity to curb the low emission from individual combustors.
• Increase in the average area of flats.
• Progressive suburbanisation (development of housing and service facilities in suburbia).
• Growing demand for new products and services (e.g. cooling).

We are aware of the fact that the supply side needs an adjustment to align it with modern trends, environmental requirements and the necessity for new investments. This creates opportunities for development through innovation:

Key benefits from the District Heating Strategy and from the focus on the district heating business for PGE:

• Formulating an effective response to new challenges and opportunities.
• Rising management focus on district heating business – carve-out of the new business unit - PGE Energia Ciepła.
• Maximisation of potential to build value in local markets.
• Increase in share of stable regulated EBITDA.
• Diversification of business, reduction in exposure to wholesale electricity prices.
• Lower exposure to CO₂ emission allowance prices due to effective use of fuel in cogeneration.
• Wide array of options to raise funds for investments.

PGE already owns attractive assets on the district heating market in Poland and after the acquisition of EDF's Polish assets became the undisputed leader in Poland in terms of district heating capacity installed as well as heat production and sales.

We are aware of the fact that being the national leader entails commitments and we will be shaping this sector taking into account its local character. In the social dimension, the Strategy is based on 4 pillars:

MISSION

We stimulate transformation and development of the domestic district heating contributing to improvement of the environment, competitiveness of the economy, social welfare and energy security on local and country level.

VISION

District heating company of first choice. Leader of the innovative district heating development, customer-, efficiency- and local government cooperation-oriented.

We have set ambitious goals for ourselves:Implementing these objectives is expected to translate into growth in PGE's value and in additional EBITDA, independent of the profit generated on the Group's district heating assets.

Additional annual EBIDATA resulting from the Strategy [PLN bn]

We will achieve this through an array of activities intended to develop district heating, its modernisation and transformation in accordance with the latest trends and changes occurring in technology. While we are aware of the need to supply heat at competitive prices, we also keep in mind the need to reduce unnecessary costs. Key initiatives:

• Reducing maintenance costs of generation assets by 10% by 2023 in relation to 2017.
• Managing district heating networks in at least 2/3 of PGE Energia Ciepła locations by 2023.
• Construction of 1,000 MWe of new cogeneration capacities by 2030.
• Increasing share of low-emission fuels in PGE Energia Ciepła generation mix to 50% by 2030.

Eventually the Group wants to create a specialised business line that will integrate district heating activities and manage the assets acquired from EDF as well as most of PGE GiEK's CHP plants and district heating networks.

The key to achieving the stated objectives will be an ambitious investment programme that takes into account both investments in transmission networks and new capacities as well as expenditures on reducing our impact on the natural environment.

Our expected investment expenditures in 2018-2023 will reach approx. PLN 6.9 billion, including approx. PLN 3.2 billion on the development of new initiatives and PLN 0.8 billion on the development of district heating networks and generation assets at the existing locations. Environmental and replacement expenditures will reach approx. PLN 2.9 billion.

Planned expenditures in 2024-2030 will reach about PLN 10.6 billion, including approx. PLN 8.1 billion on development and PLN 2.5 billion on the environment and replacements. 

The directions of investments and the scale of expenditures are of an indicative nature and will be constantly optimised in order to account for changes in the market and regulatory surroundings. Most of the planned investments will be financed in the corporate model. Selected development investments will be based on project financing. Investment financing will take into account, in as far as possible, EU financial instruments, domestic preferential funds and, after 2020, funding under the ETS directive (free CO₂ and the Modernisation Fund). We are treating the option of using these funds as an opportunity that may contribute to the development of Polish district heating at PGE Group.