Looking for diversification

Zbigniew Prokopowicz, president of the board, Polenergia interview by Kamila Wajszczuk Polenergia, a company from the Kulczyk Investment group, has ambitious plans not only in the wind energy sector What were the reasons behind the decision to merge Polenergia with Polish Energy Partners with the participation of CEE Equity Partners? Zbigniew Prokopowicz: Polish Energy Partners and Polenergia, as two entities under the same owner, were working together on the present growth strategy. They decided to focus on diversification and on creating the first independent Polish energy group focused mainly on renewable energy but also diversified in terms of energy sources, such as natural gas. Another goal was further integration by adding distribution and trade. These goals were meant to help carry out the existing strategy over a period of ten years. Polish Energy Partners took over assets belonging to Polenergia Holding. At the same time, we needed additional funds in order to carry out our strategy, based mostly on the development of onshore wind energy. They came from the introduction of CEE Equity Partners as a shareholder. This provided PLN 240 million. The second stage will be a share issue on the market that we would like to carry out next year. It is meant to provide additional funds for the implementation of our strategy. The proceeds could be at up to PLN 420 million. [negative]“We are in the energy segment and building value is definitely a mid-term or long-term process.[/negative] What process led you to decide on teaming up with CEE Equity Partners? What was their advantage? At the beginning of 2014, we launched an investor search process, with cooperation on the part of Rothschild. Hence, CEE Equity Partners was picked as part of this process. Their offer was advantageous of course. Also, some other elements were important for us. CEE Equity Partners has an investment perspective that is in line with our strategy. We are in the energy segment and building value is definitely a mid-term or long-term process. Their investment period is eight to ten years, which is coherent with the period that we need to generate optimal return for shareholders. The second important factor is that the fund was capitalized mostly by Exim Bank, which is one of the biggest banks in China. This means that there is a potential option of broadening our scope of cooperation to other areas. Taking into consideration the assets of CEE Equity Partners, which plans on raising new funds apart from what it already has, they are a long term partner with access to new financing. This may be important when new development opportunities appear. The third factor is that we have easily managed to work out the conditions of the transaction, the amount they could invest and other obligations on the part of the company and the investor. [caption id="attachment_66444" align="aligncenter" width="488"] Image: Jan Malinowski[/caption] Renewable energy is your priority. How do you see the perspectives of this energy segment in Poland? To answer this question, we need to describe how the energy sector is developing worldwide and in Europe. Changes that are happening, the broad introduction of renewable energy into production capacity, are generally causing price cuts on the wholesale market, which in the long term is favorable to the economy. Renewable energy is now becoming more competitive, mostly thanks to technology development. I am sure that onshore wind energy will not require any support for further growth after 2020. Today’s energy sector investments take place either in areas that are supported, such as renewables; or regulated, such as distribution and transmission. Other segments do not see investments that would be market-based and approved by shareholders. With today’s energy prices, such investment would not be reasonable. Such a situation cannot last long and significant changes on the energy market will take place. They will result from growth in the renewables segment and in distributed energy resource systems. The shape of the typical energy system will definitely change over the coming ten years, due to an active approach to demand management. Because it is easier to make decisions in the supported segment of renewable energy and in the regulated area of transmission and distribution, these are the directions that we want to develop in. So it happens that in the current conditions in Poland, it is wind energy that is most competitive. There are three major issues related to the development of renewable energy in Poland. The first one is the final shape of the new law. We expect the regulation to come into force at the end of the first quarter of 2015 and the new support system to start operating from January 1, 2016. The question is what will be with the potential investment gap. If the new support system comes into force in January 2016 and the old one ends in December 2015, then there will be a period when no investments are launched, at least until the first auctions take place. The first installations will be completed probably some 18 months after those first auctions take place. The second issue is that if we have an auction system with the goal of lowering energy costs for end users, we will have to hold more auctions in a shorter time. The higher number of auctions and the higher the auctioned capacity, the more expensive they will be. So the goal of lowering costs may be impossible to achieve, especially as the cost in the certificate system is already low. The government and parliament may unintentionally raise costs with the two-year pause. The third issue is the cost for the end user. The longer the gap, the less investment and less opportunity for using technology progress in the sector, which could contribute to raising energy costs. What role does conventional power generation play in your strategy? When it comes to conventional energy sources, we have a gas-fired combined heat and power plant in Nowa Sarzyna. Thanks to the stranded costs compensation system and to gas compensation, it provides a foreseeable return until 2020. After 2020, it will certainly be a very valuable asset because it will be fully amortized, with all debts paid off. If anything gas-fired will be cost-effective, it will be this unit. As far as new projects are concerned, our portfolio includes the Północ Power Plant, in the Pelplin municipality in northern Poland. The project is practically ready to be carried out. However, due to market conditions, we are unable to secure a long-term contract for selling electricity from this plant, which could otherwise be a base for obtaining long-term debt financing. Also, based on the current prices, we are unable to secure a relevant, reasonable return. That is why we cannot make an investment decision. We are nevertheless counting on changes in the configuration if wholesale energy prices grow. We would need them to grow to, let’s say, PLN 230 per MWh. Or, what is perhaps more probable, the government could introduce some form of support, such as capacity payments. It would then follow the example of other countries, such as France, Belgium or the United Kingdom and soon Germany, which saw the lack of investment in the conventional segment within a ten-year perspective. After all, the construction of a conventional power plant takes five years. It would be sensible to debate the issue with investors and decide on possible support in order for new capacity to be built. Polenergia has recently suggested its involvement in building the Bernau-Szczecin gas pipeline, which would be part of a system linking Poland’s border with Germany and Ukraine. What are the perspectives of this project? [negative]“So it happens that in the current conditions in Poland, it is wind energy that is most competitive.[/negative] Our strategy includes the transmission and distribution segment and this project fits into that area. On one hand, it would provide the possibility of introducing 5 billion cubic meters of German natural gas from the German market, which has high liquidity, allowing for higher diversification in Poland. On the other hand, the project envisages the inclusion of Ukraine in the European gas system. It will also give Polish businesses the opportunity to buy German gas at prices lower that those offered now. This project is now awaiting political decisions. The further carrying out of this very advanced venture, which is largely developed on both the German and the Polish side, requires an agreement with Gaz-System, because as a privately-owned entity we cannot operate a gas pipeline in Poland. We also need to agree on the conditions of the entry of gas to Poland after its exit from Germany has been agreed upon with German operators. Another thing to discuss is gas exiting from Poland, because an option also exists for Polish gas to be sent to Germany. For example, more use could be made of the soon to be opened LNG terminal in Świnoujście. After the agreement with Gaz-System, we will need to carry out an open season procedure, hopefully this year, which would help define demand for transfer capacity. If this stage is successful, the pipeline could be completed by early 2019. The timing is a major asset in view of potential gas supply contract negotiations between PGNiG and Gazprom. The present contract expires in 2022, so new negotiations are likely to start in 2019. The more options there are for buying gas from various sources, the better the negotiating position and the bigger the chance for lower prices. What are Polenergia’s plans for the near future? The general plan for the near future is 460 MW in wind farm capacity by the end of 2016. The company will mostly invest in this area. It depends highly on the transition period in the earlier described legal regulations, which would allow for the investments to enter the present certificate system in 2016. A transition period will be necessary from the macro perspective and for new investments to surface in that year. What amounts have you earmarked for upcoming investments? We have recently launched two wind farms with a total capacity of 67 MW. We are building a 37 MW facility. This accounts for some PLN 250 million. Apart from that, another possible 200 MW will require PLN 1.5 billion. Do you plan to grow organically or will there be asset purchases? Our strategy is based on our current portfolio in development. We have a lot of assets that we can work on, so organic growth will be the main focus. Nevertheless, if acquisition opportunities appear we will consider them. If they fit in and if the competitive process does not excessively inflate the price of the assets, then we will approach them. We do not want to do things at any price and we do not want to make expensive purchases.

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Zbigniew Prokopowicz President of the management board at Polenergia since 2008. Before assuming the post, he served as president of the company’s supervisory board for four years. He has managerial experience at a wide array of companies and industries, including the automotive sector, packaging and utilities. In 1999-2004, he worked at the executive level of paper industry firm Mondi Packaging. He is a graduate of the Paris Dauphine University and studied at the Warsaw School of Economics. He holds an MBA from the Paris Institute of Political Studies.