What is moving the coal market?

By Ondrej Zicha – Polish version

2016 could be a year marked by the trend reversal of world coal prices. After years of steady decline, coal prices rebounded in March. In October, API2-prices event hit the level of 65 dollar per tonne, a level last seen one and a half years ago.

Source: Own study

Since 2011, coal prices lost more than 70%. Coal was marked as a “dirty” fuel and in line with the wide spread policy of decarbonisation, other energy sources were preferred. This made demand decrease faster than supply, so prices continuously went down to reach levels below 40 dollars per tonne in February and March this year. These prices made it difficult for miners to be profitable, endangered the entire sector and even caused bankruptcy of some big players like Peabody.

China drives world coal prices

Changes of the Chinese policy are the main reason for the price rebound. China takes about 50% of both worldwide production and consumption. In February, Chinese officials announced the country will close more than 1000 coal mines before the end of year. The mines on the list were mostly rather small ones and had to be closed because of inadequate working conditions. In April, this decision was followed by another one limiting the number of working days in local mines by 16%.

Limiting the coal production should go hand in hand with decreasing coal consumption, as China is pushed to do so because of extremely high air pollution. However, changing to other more ecologically friendly fuels will take some time while mines will already be closed at the end of this year. China is now investing a lot in renewable sources but these investments need some time to be realised. Additionally, some analysts remark that the current grid system is not prepared for more and potentially unstable renewable sources and therefore requires further investments.

On top, we should take into account that China has proven its statements to not always be 100% correct. China claims it’s abandoning fossil fuels, but according to Greenpeace’s report published in July, the country is currently building another 400 GW of installed coal capacity while the shutdown is only 70 GW.

This means China mainly needs to import more coal in the short term (year-on-year increase in August was 52%), which brought coal prices back at profitable levels and is good news for coal miners all around the world.

Situation in Poland

The rising coal prices are great news for Polish miners as they are struggling with serious problems. Kompania Węglowa, the biggest coal producer in the EU was restructured to Polska Grupa Górnicza (PGG) in order to save the Polish coal sector from bankruptcy. The higher coal prices could help the company to stay alive in a tough market.

On the other hand, the new company is still facing many difficulties which decreases its competitiveness. First of all, the benchmark price index for coal mined by PGG unfortunately is the Polish Coal Index PSCMI1 (not the API2 like on other European markets). However, the Polish index usually follows the European benchmark but this hasn’t happened (yet). As we can see on the graph below, the polish coal prices are even below the API2 index since June.

Additionally, PGG is still struggling with too high mining costs. The unions have a very strong position in the Polish coal sector and generally are not willing to reduce the non-standard benefits of workers in the mining sector. Despite some positive changes in the last months like a temporary suspension of 14^th month salaries, further and more radical changes are necessary to make PGG fully competitive.

Outlook for the future

Mining restrictions in China led to tight supply in certain regions. As a consequence, the Chinese government last month decided to ease the mining restrictions. In case of problems with supply, local mines would be allowed to increase production to meet demand. On top, the limited working days in the most efficient Chinese mines could be eased as well. However, this was not confirmed by the Chinese officials and for the time being, the market isn’t taking this into consideration.

Seeing the above, we can only be sure about one thing – China is the main driver of coal prices at this moment and any political decision there can impact the market situation.

Meet the blue certificate, another certificate of the polish property rights market

Prefer the Polish version? You can find it here:

By Bartosz Palusiński

On June 28^th, the polish president signed the amendment to the RES law. The changes will come into force on July 1^st, 2016. The first change that will impact the polish end consumer is the reduction of the share of the green certificate obligation from 15% to 14,35% for the second half of 2016. This means the energy seller will need to submit less green certificates for electricity sold to the end consumer.

Unfortunately the reduction will be compensated by the introduction of a new type of certificate: the blue certificate. These certificates confirm that the energy is produced from agricultural biogas. The obligation will be set at 0,65% of the volume of purchased energy, exactly the same amount as the reduction on the obligation of green certificates.

At first sight you’d think this change should have a neutral impact on the end consumers. The price of both certificates is calculated in a different way. The price of green certificates is based on a market mechanism and at the moment these certificates are traded at around 70 zł/MWh.

The price of the blue certificates will probably be aligned with the replacement fee. The replacement fee is a maximum price for certificates set by the regulator to increase liquidity. The current replacement fee is at 300,03 zł/MWh which is more than four times more expensive than the current price of the green certificates!

Table 1: Obligation of the Property Rights (source: Grid Fees & Taxes section of E&C Consultants)

Moreover, the percentual obligation of both certificates will rise to 19,35% for green certificates and 0,65% for blue certificates as of 2017. However, this is a maximum and the legislation mentions the minister in charge of energy is allowed to make adaptation until November 30^th, 2016. This ability introduces a fairly large uncertainty on the market.

In the offers of suppliers for 2017, 2018 and 2019 we notice different approaches in establishing the final price for end consumers based on the different legislative changes (introduction of new colours such as the blue certificate and the end of others such as the yellow and red ones in 2019). Next to this, sellers apply different calculations to define the price of property rights for the next three years, keeping in mind risks of changes in price and liquidity on the TGE. This makes it even more important to implement a strategy to handle this unstable market environment and limit its impact on the energy cost of the end consumer’s business.

Table 2: Share of the obligation of the Property Rights (source: Grid Fees & Taxes section of E&C Consultants)                                * Energy Minister change that value by 30/11/2016

Influence on the energy cost of end consumer

This highly unpredictable legislative environment makes it hard to clearly define the energy budget for the next few years. In the table below you can find an estimation of the price of each colour for 2017, 2018 and 2019. An end consumer using 100.000 MWh electricity per year, might lose 1,4 million zloty if there is no prolongation of the existing law to support the yellow, red and violet certificates.

Table 3. Estimated price of particular colour (source: Grid Fees & Taxes section of E&C Consultants)

Other changes to the RES law

As of July 1^st, the RES fee will be introduced on the electricity bills. This fee covers distribution services and will be collected by the distribution system operator. For the second half of 2016 this fee is set at 2,51 zł/MWh. The rate for 2017 will be announced before November 30^th by the regulatory office. Companies that obtained the status of industrial consumer can be granted a reduction.

As well, transition fees will increase as of January 1^st, 2017. This fee is added to the invoice for the distribution services and covers the producers’ cost in case of an early termination of a long-term contract or the sale of capacity and electricity. Below you can find the fees for end-users (other than households) that have installations connected to the grid:

1. Low voltage transition fee increases from 0,85 to 1,65 zł per month per kW of contracted capacity
2. Medium voltage transition fee increases from 2,10 to 3,80 zł per month per kW of contracted capacity
3. High and extra high voltage transition fee for 2017 will stay unchanged
4. High and highest voltage transition fee increases from 1,08 to 1,10 zł per month per kW per contracted capacity for end-users that consume more than 60% of the contracted capacity and for which the cost of electricity is more than 15% of their production value.

Would you like more information on these regulatory changes in Poland? Feel free to contact us via info@eecc.eu or call Bartosz Palusiński via +48 509 82 00 25.