The seven temptations of the Polish power sector in 2016 according to PwC

The Development of the power sector depends on finding a balance between the goals of investors and state plans.  It should be noted that it is the companies that face the biggest challenges  

The most important ones are presented in the report by the PwC, The Seven Temptations of the Polish Power Sector 2016.

“For the Polish power sector, the current year is dominated by seeking a balance between the goals of investors and those of the state in the area of providing generation capacity in the long-term perspective.  In an environment of growing competition and falling wholesale energy prices, companies are looking for new solutions that would give them a sustainable market advantage.  In their opinion, the sources of competitive advantage include innovation, digitization and development of the product offer.  At the same time, they often forget the potential that is still hidden in the integration of operations”, says Dorota Dębińska-Pokorska, the PwC Energy Group Leader.

Here are the seven temptations of the Polish power sector in 2016:

1. Withdrawal from the conventional energy market
   The profitability of the Polish conventional generation segment has decreased significantly.  This is mainly due to persistent low wholesale electricity prices and an increased share in non-conventional sources of power generation.  The present operating profit (EBIT) in the generation sector (for the four largest power groups – PGE, Enea, Tauron, Energa) is below PLN 10 billion, which is largely due to impairment of assets.
   Selected conventional generation entities, which are the most exposed to a loss of margin, work fewer hours per year.  Combined with falling electricity prices, this has led to a decrease of 13%–25% in their revenues.   Some of these entities are even unable to cover their operating expenses.  As a result, they will naturally be tempted to withdraw from the market by closing unprofitable units, even though they are often necessary to ensure the safe operation of the power system.
   Under these circumstances, the only way to fight against the temptation to withdraw from the generation market is to introduce appropriate regulations.  On the one hand, such regulations will make it possible to maintain profitability of assets and, on the other, they will guarantee energy security based on the selection of the optimum energy mix.  It is important, however, that the cost of the system’s security be as low as possible.
   
   
2. Identical support for all cogeneration entities
   The temptation to provide identical support to all cogeneration entities is associated with the architecture and beneficiaries of the future cogeneration support system.  To date, under the mechanism based on energy certificates of origin, all cogeneration entities received support.  This support system will expire in 2018 and a new solution is now being developed.  Regulators and legislators may be inclined to extend the present regulations and maintain the same principles for supporting all cogeneration sources.  This approach could, however, have an adverse effect on the cost of operation of the support system and, consequently, cause an increase in energy prices for end users.
   The cogeneration segment requires support from the state.  This is because cogeneration improves energy efficiency and contributes to a reduction in CO2 emission.  However, such support should not be available to all cogeneration sources in the same amount.  The target system architecture should allow adjusting the level of support not only to the type of fuel, but also to the nature or age of the source, or investments made.  As a result, it will be possible to manage the costs of the support mechanism reasonably and to address the aid to those entities that actually need it.
   
   
3. Resignation from the auction system for renewable energy sources
   The rate of growth of renewable energy capacity in Poland decreased in relative terms in 2014 as a result of the commencement of work on the new Renewable Energy Act in the preceding year.  Once the new law had been enacted, together with the regulations applicable in the period of transition from the support system based on green certificates to the new mechanism based on green energy auctions, renewable energy capacity increased again.  As a result, Poland may even exceed the share of renewable energy in the gross final consumption assumed in the National Renewable Energy Action Plan for 2015.  This leads to the temptation not to implement the new auction-based support system for renewable energy installations, as the installed capacity is growing fast under the green certificate system.
   However, PwC experts note that the auction-based support system has many advantages over the green certificate-based system.  The most important ones include full control of the state over the development of the installed capacity from renewable sources and supervision over the preferred technology and direction of capacity installations in the country.
   
   
4. From now on we shall be innovative
   The European (including Polish) energy companies are affected by a number of regulatory, technological and market factors that will force them to improve innovation across the value chain.  As a result, the present operations of the generation, distribution and sale segments, also known as the old energy world, are undergoing more or less dramatic transformation.
   Financial expenditure on innovation is a necessary, but not sufficient success factor in sectors that are under such great pressure as the power sector.  Many companies have taken an important step to respond to the challenge of innovation, namely, they have built innovation strategies defining the areas of concentration and assigning specific funds.  However, in order to be successful, i.e. to achieve actual leadership and solve strategic challenges through innovation, the companies must transform innovation from a cost centre to a profit centre.  To do this, they must go through the time-consuming process of implementing a number of elements, including combining innovation with the company's business objectives and design and implementation of the operating model for the innovation.
   
   
5. The more products are offered to the customer, the better
   Growing customer awareness and competitive struggle on the mass electricity market have led to a significant growth in customer migration.  From the perspective of energy companies, it is necessary to find a new competitive advantage that will make it possible for them to stop losing customers and obtain new ones, while at the same time maintaining profitability.  Therefore, many energy companies focus on optimizing the costs of customer service and obtaining new customers by extending the product offer as much as possible by adding “uncomplicated” products from other markets.
   In the opinion of the authors of the PwC report, the value proposition of an energy company should be tailored to the expectations of its customers and the value they represent for the company.  An extensive offer of uncomplicated products may be a good solution addressed to a selected group of customers.  It should be remembered, though, that it does not guarantee a sustainable competitive advantage.
   
   
6. We must be digital
   Digitization is a global trend which is considered revolutionary.  Business organizations see it as a development opportunity, just as they saw the previous economic revolutions.  Therefore, digital transformation is on the agenda of the largest companies in the context of increasing efficiency and building competitive advantage.  In our 2015 Annual Global CEO Survey, 81% of the respondents admitted that technological development was the biggest challenge and, at the same time, the biggest opportunity for their business.  In this year’s survey the number grew to 90%.
   The PwC experts stress in the report that digitization is necessary.  One cannot ignore the companies that built their entire business model around technology, disturbing the status quo of the whole industry sectors and achieving unprecedented success within a short time.  Two-thirds of CEOs want to have a digital transformation strategy embedded in their corporate strategy.
   From the perspective of the Polish power sector, digitization is not the key to success on the market.  Digitization is certainly a trend that should be followed, but the main theme should be “technology tailored to the company’s business strategy”.
   
   
7. Intra-group integration is already over
   Integration processes are characterized by significant complexity.  Their implementation requires the considerable employment of organizational resources.  At the same time, many energy groups have managed to design and implement a model of the relationship between the parent and subsidiaries.  From this perspective, the parent companies, which create changes, may consider the integration process to be complete.
   In the opinion of the authors of the PwC report, the essence of integration is effective cooperation between subsidiaries on the operational level, which improves the operational efficiency of the whole group.  Consequently, if the integration processes are not continued, the group may lose its competitive position. Maintaining the present approach, which is characterized by perceiving the integration process from the point of view of the relations between the parent and subsidiaries, will strengthen the corporate structures and central management and, consequently, lead to building operational silos at the level of the individual business lines.  The emphasis will be placed on reporting, controlling and strategy rather than operations. On the other hand, effectively coordinated and managed cooperation on the operational level creates a potential for building advantage, improving efficiency and real integration.