Strategy and growth prospects

Introduction Financial goals and assumptions of TAURON Group’s Strategy

Strategy adopted for the years 2016-2025, and updated in 2019, ensures financial stability and a prospect for growth, while at the same time providing support for ensuring the stability of the power system. It is assumed that the long-term growth will be driven by solutions based on customer relationships. The Mission and the Vision reflect such management philosophy and are in line with the customer-oriented growth concept.

Strategy describes the approach to developing the individual Segments of TAURON Capital Group’s operations, dividing them into those segments that TAURON Capital Group is planning to strongly expand, the segments that will constitute the foundation of the financial stability and the segments where strong emphasis on cost efficiency is required. In the Update of the Strategic Directions, TAURON Capital Group emphasized the focus on the development of the low and zero emission sources while making TAURON Capital Group’s portfolio of assets more flexible.

The above reflects the need for the energy transition of TAURON Capital Group and for increasing the investment potential aimed at developing the RES, which, combined with the changed management philosophy and the orientation towards the customer and his / her needs, allows for the development of TAURON Capital Group that is innovative and open to the new challenges.

Foundations for the growth of TAURON Capital Group’s value

Strategy sets three priorities that assume the transition of TAURON Capital Group into a growing energy company that is aligned to the market and customer needs, ultimately providing a return on invested capital for its shareholders:

The Update of the Strategic Directions confirmed the validity of TAURON Capital Group’s priorities, emphasizing the need to build a strong capital group through:

  1. transition of the energy mix, and a strategic pursuit of a more than 65% share of low and zero emission sources in TAURON Capital Group’s installed capacity in 2030,
  2. optimization of the coal assets and the capital expenditure (CAPEX) project portfolio.

The overarching goal with respect to the capital expenditures is to adapt the investment project portfolio to the market needs. The update highlighted the need to increase the investment potential aimed at developing the RES. The activities will be geared (oriented) towards:

  1. optimization of the asset structure in all lines of business operations and adaptation to the environmental requirements,
  2. investments in the development and modernization of the distribution grid as well as the low and zero emission generation sources,
  3. implementation of the investment projects that guarantee the expected rate of return on capital and are not burdened with material market risks,
  4. use of off-balance sheet financing, in particular by involving external partners,
  5. investing in the projects in energy related sectors (in particular in services) in order to supplement the value chain that TAURON is operating in and in the so-called new energy sector, among others the prosumer energy, Smart Home solutions, Smart City solutions, electromobility and energy related services.

Strategic goals and growth prospects in the individual operating Segments

Export to Excel
The main goal for the Mining Segment is to provide a stable supply of cost-competitive and adequate, in terms of quality, fuel and to align the output level to TAURON Capital Group’s planned demand for fuel.

The goals set in the Strategy are implemented through such actions as:

  1. optimizing the costs and capital expenditures,
  2. tri-product processing at Sobieski Coal Mine (ZG Sobieski) and Janina Coal Mine (ZG Janina),
  3. expanding the line for packaging eco-pea coal, preparing dedicated fuel for the generating units.

As part of the Update of the Strategic Directions, a strategic option was adopted that involved conducting a market verification of the sale of ZG Janina. (Janina Coal Mine).

The introduction of further restrictions with respect to environment protection, quality of solid fuels placed on the market, taxes and local government regulations (including the anti-smog ones) pose a challenge for the sector.

The energy and climate regulations lead to a successive decline of the competitiveness of the coal fired electricity generation. The directions of the mining industry’s development will also be strongly correlated with the guidelines outlined in the government documents: Poland’s Energy Policy until 2040 (draft) and the National Plan for Energy and Climate for 2021-2030. The above-mentioned documents demonstrate the growing importance of the RES, including off-shore wind energy, new technologies and a gradual change in the country’s generation mix at the expense of conventional Energy.

The future of the Polish mining industry will depend on the ultimate shape of the government program for the mining industry.

The main goals for the Generation Segment include:

  1. for TAURON Wytwarzanie: to develop an optimal, from the point of view of profitability and risk, generation assets portfolio and the efficient operation thereof,
  2. for TAURON Ciepło: to achieve a return on invested capital.

The goals set in the Strategy are to be accomplished by:

  1. optimizing the costs and capital expenditures as well as streamlining employment (headcount),
  2. optimizing production assets,
  3. selling redundant non-production assets,
  4. investment projects that lead to the upgrading of the generation fleet.

The Update of the Strategic Directions indicated that the priority was to decommission all obsolete coal fired units (120 MW units – by the end of 2020 and 200 MW units – after 2025) and to maintain assets that receive the regulatory support. Ultimately, the modern conventional units will remain a part of the production portfolio: Łagisza 460 MW and Jaworzno 910 MW.

In the heat generation, distribution and trading line of business significant actions include eliminating low emissions, looking for solutions in the co- generation area as well as improving the rate of utilizing the existing infrastructure.

As part of the Update of the Strategic Directions, a market verification of the TAURON Ciepło sale (divestment) option was assumed. In addition, the sale of the shares in EC Stalowa Wola and PGE EJ1 is planned.

The tightening energy and climate policy of the European Union (EU), including the further implementation of the European Green Deal, combined with the increase in the prices of the CO2 emission allowances set the direction of the development of the energy sector.

The curtailment of the support systems for conventional energy, the revision of the EU ETS emissions trading system, the works on the implementation of the carbon footprint tax will mean a permanent loss of profitability for such units. The resignation of the financial institutions from financing both coal installations as well as capital groups that own coal assets, and the impact of the EU Taxonomy on the possibility of financing investment projects in the energy sector reduce the economic sense of maintaining conventional assets.

The key issue will be ensuring the security of the operation of the National Power System (Krajowy System Elektroenergetyczny – KSE). The capacity market has been introduced in Poland, which is one of the elements supporting the transition of the Polish power sector. Obtaining derogations from the requirements to adapt the generating units to the BAT Conclusions represents an opportunity for the conventional power generation.

On the heat market Poland’s policy, aimed at providing support for the co-generation and improving air quality, may lead to an increase of investments and the growth of this area. An important factor is rising social awareness, the actively conducted battle against smog waged by the local government and the national aid programs. On the other hand, the growth opportunities for the heating market are limited due to the improvement in the energy efficiency of buildings and the rising competition from the ever more efficient individual heating devices. The curtailment of the financing and insurance of the coal investment projects should also be taken into account.

The ultimate shape of the domestic conventional energy sector will depend on the final provisions of the government program for the energy sector.

The main goal for the RES Segment is to improve the profitability of its generation assets and the profitable growth of this line of business in wind and PV technologies.

The activities undertaken are focused on improving the operational efficiency, while preparing and implementing investment and expansion projects at the same time. Options for expanding RES installations are being prepared by building in-house sources, acquiring existing installations and ready-made projects.

The Update of the Strategic Directions has strengthened the importance of clean energy development, which will be the basis for building the value of TAURON Capital Group.

The involvement in the low and zero emission energy is implemented through:

  1. investments in on-shore wind farms – the ultimate (target) level of wind-based capacity in 2025: approx. 1.1 GW, which represents an increase by approx.. 900 MW as compared to the level as of the end of 2018,
  2. investments in photovoltaic farms: the ultimate (target) level of PV-based capacity in 2025: approx. 0.3 GW,
  3. readiness to take part in off-shore wind farm projects.
A strong growth of photovoltaics is observed, associated primarily with the launch of the support programs.

According to SolarPower Europe, Poland was ranked fourth in the EU in 2020 in terms of new solar capacity growth. In 2021, another step up increase in new PV capacity is estimated.

An additional factor supporting the growth is the possibility of obtaining funds for investments from the dedicated funds.

The growth of investments in the RES will also apply to on-shore wind farms and, in the long term, off-shore wind farms. The technological changes related to wind farms and the favorable regulations (the potential amendment of the so-called distance act) will translate into the growth of the line of business repowering of the installations, and thus increasing the capacity and improving the efficiency of the use thereof.

At the end of December 2020, the Parliament adopted the Act on promoting electricity generation in offshore wind farms, assuming a two-phase support model and granting, in the first phase, support for wind farms with a total installed capacity of 5.9 GW and conducting the first auctions in 2025

The main goal for the Distribution Segment is to maintain its leadership position on the Polish market in terms of the security and efficiency of the grid operation.

The level of annual capital expenditures in the Distribution Segment stands at PLN 2 billion. Mainly tasks related to connecting new customers to the grid, as well as upgrading and expanding of the grid are carried out.

Activities underway are aimed at ensuring the flexibility of the grid and simplifying the procedures related to connecting new customers to the grid. The investment projects underway are adapting the distribution assets to the growing volume of electricity generated by the RES, are aimed at ensuring the timely implementation of the process of connecting micro-installations to the grid and are also preparing the grids to interoperate with the infrastructure for charging electric vehicles.

The Single Distribution Program, that was made up of projects aimed at optimizing the company’s operational processes, including; activities leading to raising customer satisfaction and improving the company’s image, was completed.

The activities aimed at ensuring the reliability of electricity supply and simplifying the procedures related to connecting the new consumers and micro-installations to the grid will be continued.

The investment projects carried out will allow for adapting TAURON Capital Group’s distribution assets to the growing volume of electricity generated by the distributed RES, and also for preparing the grid to interoperate with the infrastructure to be used for charging electricity vehicles.

The development of TAURON Capital Group with respect to smart grids and meters will allow for introducing additional functionalities, both on the part of the distributor, as well as the customer.

The Distribution Segment’s growth will be significantly affected by the ability to obtain aid funds, both with respect to improving the grid security, as well as the research and development (R&D) activities.

The Distribution Segment’s operations are dependent on the new elements of the regulatory policy introduced by the President of ERO. Significant changes to the functioning of the Distribution Segment may be a consequence of changes to the energy law. – work is underway to amend the Energy Law regarding smart metering, energy storage and DSO unbundling.

The main goal for the Supply Segment is to achieve the leadership position in the relationships with the customers based on the high-quality customer service as well as product leadership.

A number of initiatives are implemented, i.e.: increasing the sales potential by transforming the customer service channels into integrated customer contact channels, increasing the value of the products and services sales to mass customers by developing the product offering and sales techniques, developing products and developing contact channels with respect to specialty products as well the partnership offering addressed to the mass customer segment.

The Update of the Strategic Directions confirmed the continuation of the development of new energy related products and services, including:

  1. for business customers: consulting and management of energy assets and infrastructure, energy audit and efficiency improvement services,
  2. for institutional customers: products and services with respect to Smart City, electromobility, low emission reduction, multiutility.
The actions taken by the competition and the rising customer expectations have an impact on developing the product offering and maintaining the highest customer service standards. The growing customer awareness has an impact on the rising requirements, both with respect to the products offered, as well as the speed and quality of the customer service. The importance of ecology, a change in the customer’s approach to the way electricity is consumed and a large increase in the number of prosumers are ever more affecting the needs and expectations of customers.

TAURON Capital Group is systematically expanding its product offering, tailoring it to the expectations of the individual and business customers, and developing the communications channels, both on the level of digital platforms, as well as that of direct contacts.

Competing companies are offering products on the market that are often very similar to the products offered by the Supply Segment. With similar price offerings the competition for a customer will take place on the level of innovative product and service proposals, in particular on the level of customer communications platforms and customer service quality.

In the longer term the Strategy assumes the full utilization of the potential of TAURON Capital Group’s assets, which is to support innovations, organizational culture and, first of all, focusing on the customer needs. Taking into account the need for TAURON Capital Group’s energy transition, the optimization of the investment portfolio and maintaining financial stability, the strategic options to be implemented were adopted as part of the Update of the Strategic Directions.

TAURON Capital Group’s adopted strategic options