Energy Regulatory Office Heat generation: latest report by the Energy Regulatory Office - News

The latest report Heat generation in numbers presents the picture of the market based on data collected by the Polish Energy Regulatory Office (URE) from over 400 licensed heat generating companies. The results of the survey allow to assess the condition of the sector, indicate the most important directions of changes taking place in the Polish heat generation industry as well as the actions that need to be taken.

Transformation of the energy sector is one of the main and currently most widely discussed issues concerning the national and European climate and energy policy. A similar process and challenges are also faced by the Polish heat generation sector. Although heat generation, being local in nature, has lesser impact on the economy than other energy sectors, it still needs to change in order to meet the upcoming challenges and at the same time not lose the chance to receive financial support from the European Union in the process.

Recognizing the changes taking place and the necessity to continue and even intensify them, the regulator pays special attention to the heating sector.

‘We are all aware that the Polish heating industry faces a huge challenge connected with the transformation process, forced mainly by the climate policy, including stricter environmental requirements and increasing costs of purchasing the CO₂ emission allowances.’ notes Rafał Gawin, URE President. ‘Being aware of the needs of the sector, for many months we have been working in the Office to align the regulatory model with the dynamic changes in the market environment.’

How is the transformation in the heat generation sector progressing?

URE has been closely following heat generation companies for 19 years. During that time, generation efficiency has increased significantly, while transmission efficiency has remained almost unchanged. The level of harmful substances emitted to the atmosphere has significantly decreased: mainly dust, sulphur dioxide and nitrogen oxides. CO₂ emissions have decreased by about 20%.

Heat generation companies prepared for IED

In order to diagnose the progress of the process of adjusting heating sources to the regulations of the[1] Industrial Emissions Directive and the related investment needs of heating companies, the Office conducted market monitoring in 2020. The survey shows that 97% of the companies obliged to adapt their sources to the EU regulations have already started investments. The amount of expenditures planned to be incurred by the end of 2029 for the implementation of this objective was estimated by the heating companies at nearly PLN 5.4 billion.

Cheaper fuels for heat generation but more expensive CO₂

The cost of producing heat, and thus the level of its prices, is closely correlated with the type of fuel used. In 2020, compared to 2019, the unit cost decreased for all fuels used in the heat generation industry, except for lignite. The prices of heating oil and high-methane gas decreased the most.

Fig.1. Unit cost of fuels used for heat sources in 2018-2020

Source: URE in-house materials

Despite the fact that 2020 was a period of stabilization and even slight decreases in the costs of fuels used to produce heat, there was an increase in the average heat price (by 8.2%) for its recipients. This was due to the growing share of the costs of purchasing CO₂ emission allowances in the total generation costs. The growth dynamics of the average heat generation price in 2020 was also significantly impacted by the price increase resulting from the simplified method of calculating heat prices from cogeneration.

Fig.2. Average price of CO₂ emission allowances in 2020 calculated from 60 quotations

Source: URE in-house materials

Fig.3.. Prices for heat generated from different types of fuel in 2018-2020

Source: URE in-house materials

What about profitability?

In 2020, for the second time since 2013, revenues generated by licensed heating companies did not make it possible for them to cover the costs of running their operations related to supplying heat to consumers. The gross financial result was at the level of (-) PLN 473 million. Thus, the profitability ratio of heat companies was also negative and amounted to approximately (-) 2.4%  (in 2019 it was (-) 2.9%).

‘High CO₂ prices and forecasts of further increases raise justified concerns of all market participants due to their practically direct impact on both electricity and heat prices. At the same time, failure to undertake necessary investments in emission reduction, modernisation and change of production methods in individual sources may result in a long-term and permanent increase of heat prices and, consequently, in reduction of the use of district heating for heat supply’ URE President summarises the survey results.

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• URE conducted its first survey of the heating sector in 2002. Since then, the structure of the surveyed companies has changed significantly.  When we started the monitoring, just over 80% of the licensed companies operated as limited liability companies, while in 2020 the figure had already risen to 95.5%.
• In 2020, the surveyed heating companies had networks with a total length of over 22 thousand km.
• A gradual increase in the length of heating networks has been observed in recent years. Over a period of nineteen years, the length of the network per one company has more than doubled. In 2020, there were more than 60 km of network per company while in 2002 it was less than 24 km, and in 2019 – less than 59 km.
• In 2020, the value of the installed thermal power was 53,271.1 MW and the generating thermal power was 52,593 MW (in 2019, these values were 53,560.9 MW and 52,555 MW, respectively).
• The companies generated heat in predominantly small sources, i.e. up to 50 MW of installed capacity (44.6% of the companies in 2020). Only ten licensed companies had the generating capacity of their sources exceeding 1,000 MW each, and their combined generating capacity accounted for more than 1/3 of the generating capacity of all licensed sources.
• Diversification of fuels used to produce heat is progressing very slowly. Coals continue to dominate, accounting for nearly 69% of fuel consumed in heat sources in 2020 (71% in 2019, 72.5% in 2018, and 74% in 2017).
• Since 2002, the share of coal fuels has decreased by 12.8%.
• At the same time, the share of gaseous fuels has been increasing – by 6.9% since 2002, and RES – by 7.2% during the same period .
• In 2020, the total debt decreased and the liquidity of companies in the sector increased.
• From 2002 to 2020, there was a significant increase in the reproduction rate of fixed assets. The value increased by 37.5 percent, indicating a high level of investment, exceeding the depreciation of fixed assets.
• In 2020, more than 90% of all surveyed companies were engaged in heat generation. They produced, including heat recovered from technological processes, almost 394 000 TJ of heat, which means a 1.6% decrease in production compared to the previous year.
• In 2020, the share of heat from cogeneration was 65.2% of total heat production.
• 370 heat generating companies participated in the survey. 128 of them also produce heat in cogeneration – 34.6%. 
• The average single-component heat price[2] in 2020 was at 55.95 PLN/GJ and was 7.7% higher than in 2019 (51.93 PLN/GJ) and 13.1% (49.46 PLN/GJ) higher than in 2018.
• In 2020, the volume of total heat sales by licensed heating companies (including resale to other companies) was approximately 344 000 TJ and was 0.3% lower than in 2019.
• In 2020, the average price of heat[3] sold from all licensed heat generating sources was 44.33 PLN/GJ, thus showing an increase of 8.2% compared to 2019 (40.97 PLN/GJ), with the average price of heat sold from licensed heat generating sources without cogeneration being 51.87 PLN/GJ and the average price of heat sold from licensed heat generating sources with cogeneration being 41.32 PLN/GJ.