Central European Energy Market · Coal market news . 4 20, rue du Quatre Septembre – 75002 – Paris – tel: +33 (0)1 55 34 36 05 – fax: +33 (0)1 55 34 36 04 – e-mail: [email protected]

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20, rue du Quatre Septembre – 75002 – Paris – tel: +33 (0)1 55 34 36 05 – fax: +33 (0)1 55 34 36 04 – e-mail: [email protected] Information contained in this document are based on sources which are considered reliable.

Indar Energy will not be liable for any use which may be made of the information contained therin Indar Energy is registered with the French Financial advisers and Planners Professional Organization, member of the Autorité des marchés

financiers, and member of CNCEF

General coal market

According to World Coal Association, global coal reserves are only a fraction of global coal resources which are 17 times greater, recoverable reserves of coal are in almost 80 countries and 85% of coal is consumed in countries where it is produced and only 15% of coal is traded internationally

*In a number of countries coal is also the only domestically available energy fuel and its use is motivated by both economic and energy security considerations. This is the case in countries and regions such as Europe, China and India, where coal reserves are much higher than oil or gas reserves. Most of the world’s coal exports originate from countries which are considered to be politically stable – a characteristic which reduces the risks of supply interruptions.

MONTHLY BULLETIN

Central European Energy Market

January 2015 N° 4

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Coal has provided half of the incremental energy demand globally since the beginning of the 21st century. It has been the fastest growing fuel every year since 2000 – 13 years in a row of uninterrupted growth.• New energy this century from coal has been equivalent to all new energy from nuclear + oil + gas + renewables combined. Coal is a vitally important fuel in the global energy mix, providing 30% of primary energy. Power generation is the key driver of growing coal demand. Coal is used to generate 41% of global electricity. Existing coal-fi red power plants generate electricity at a very competitive cost in comparison to other fuels and technologies.• Compared to many other energy sources, which are heavily subsidized, subsidies for coal extraction are almost non-existent.• Subsidies to coal represent just 1.25% of pre-tax fossil fuel subsidies globally. Coal is used to produce 68% of the world’s steel. It is also a key source of energy in energy-intensive industries such as aluminum and cement. Coal is expected to overtake oil as main source of energy by 2020. Coal is expected to still provide 25% of primary energy in 2035 – the same level as it was in 1980 and as it has been for most of the past 30 years. In many regions of the world, this role will be even greater. In Southeast Asia, for example, by 2035 electricity generation is expected to have increased by more than the current power output of India. Coal accounts for 58% of this growth. Coal is here to stay and this is precisely why clean coal technologies are crucial. Average efficiency of coal-fi red power plants around the world is currently 33%. This is well below the state of- the-art rate of 45%. This means that substantial CO2 savings can be made by renovating old plants or replacing them with more efficient ones. If all new coal-fi red power stations were brought up to modern efficiency standards of 45%, this would cut global CO2 emissions by 2.4 Gigatonnes annually. This is more than the total annual CO2 emissions of India – the third largest CO2 emitter in the world.

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Coal market news

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Market Situation in 2014 Global market According to German coal importers association: Verein der Kohlenimporteure e.V. (VDKi), global coal production has fallen in 2014 below 2013. The decrease calculation will depend on “how rigorously last year’s mandated 15mn t cut in import was implemented in China and to what extend it was balanced by imports to India, Southeast Asian nations (Thailand, Malaysia and Philippines).According to VDKi 2014 global production was around 7.2bn t including seaborne hard coal trade and excluding coking coal (estimated at 860 mnt). Estimates for Australia exports are 378mn t and for Russia exports 153mn t. Colombian and South African were stable compared to previous year at 73mn t each, situation was stable for Indonesia as well at 335mnt. US exports of hard coal and cooking coal to Europe fell by 20% due to lower prices and were estimated at 37mn t. In 2014, regulatory interventions, such as China’s import duty on bituminous coal, have affected the global coal market. In Europe Squeeze on the European market was linked to growing role of renewable electricity in countries such as Italy, Germany and Spain and UK where the fall in imports was around 25%. In Central Europe Ukrainian imports from Russian thermal coal remained limited. Deliveries from some Russian producers such as Kuzbasrazrezugol and Stroysesrvis have been piling as Russian state owned operator – RZD did not deliver new applications for Ukraine bound deliveries since end November 2014. Centrenergo and DTEK have experienced difficulties in receiving coal in January 20154 and have contracted a tender for 300 000t from other sources such as South Africa, Australia, Vietnam. According to The Industrial Development Agency (ARP), Polish thermal coal fell in 2014, hitting the lowest level in April, despite Polish mining firms reducing stocks of unsold coal and strong demand, competition of renewable production in power sector and low prices in Germany put the price down. Loss making production and decreasing demand pushed Polish mining firms to seek for cost cuttings and Polish Government decided to split up the largest Polish producer Kompania Weglowa, so they can improve operations on 9 remaining mines. Polish mines are forced to compete with increasing volumes of imported Russian coal, mainly sized coal which gained shares mainly in households and small commercial and public users. Poland had about 1.4pct of imported coal rise in 2014, with a rise of 5% of Russian coal. Average volumes imported over January/November 2014 were of 9.2mn t according to ARP. To be noted that as from the 1st of October The Industrial Development Agency (ARP) and Polish Power Exchange (POLPX) have launched, indices for standard steam coal sold by mines and coal supply companies to electricity and heat generators on the domestic market. They reflect the commercial value of the commodity with certain quality specification as regards the assortment, sulphur content and calorific value, under pre-defined delivery terms. The indices rely of monthly ex-post data collected by the Katowice Branch of the Industrial Development Agency which, on behalf of the Minister of Economy, implements a Statistical Survey Programme of Official Statistics on “Hard Coal and Lignite Mining Industry”.

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1-ELECTRICITY MARKET 1.1 – Day Ahead

€/MWh

Monthly average of day-ahead power prices (BASELOAD) from last 3months

POLPX OKTE OTE OPCOM HUPEX EPEX DE NORDPOOL

October 45,96 35,36 34,19 42,99 52,84 35,25 30,63

November 49,81 37,66 36,49 44,52 46,21 36,37 29,87

December 41,46 34,81 33,75 40,19 41,66 32,89 31,67

January 34,07 31,26 29,62 39,42 42,14 28,72 30,08

January/ December%

-21,00 -11,36 -13,94 -1,95 1,14 -14,52 -5,29

During last month day-ahead prices went down mainly due to general slowdown on the market at the beginning of the year. Favourable wind renewable production in Germany and good hydro production in Romania drew day-ahead prices down. Day-ahead prices decreased from previous month by -1,95 % in Romania, and -21% in Poland. In Hungary day-ahead prices went slightly up by 1,14 % due to limited transport capacity. Hungary has also the highest monthly price average at 42,14 €/MWh for day-head as the country is still strongly dependent from electricity import. Hungary imports part of its electricity from Ukraine, but the last month of 2014 showed that electricity exports were heavily impacted

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by which limited electricity exports were. Meanwhile Ukraine increased its electricity imports from Russia, and Moldavia. Despite power shortage Ukraine remains keen to export its electricity in order to take profit from higher prices from neighbouring countries. 1.2– Electricity Term market

Term prices for Calendar 2016 were slightly lower than previous month. Calendar 16 contracts for Czech, Slovakia, Hungary and Poland lost on monthly average from 2% (Hungary) to 5 % (Czech Republic) compared to the previous month. Weak oil put pressure on gas and coal market and it drew term power price down. Opposing movements on European coal swaps & carbon emissions allowances prices gave little direction and market remained stable.

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European Front year (Cal 16) went slightly down during last month for all countries on the graph above. Monthly averages were between 28,66 €/MWh (Nordpool) and 45,18 €/MWh (Omel). Prices followed general bearish trend of fossil fuels.

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2-COAL 2.1 – International market

Coal prices were very volatile during the month. Oil price put significant pressure on the coal market. Benchmark ARA month-ahead was quoted during the month between 53,35 $/mt and 64,7 $/mt. Calendar 2016 ARA contract had a monthly average at 60,6 $/mt and went down by 15,4% from the previous month . Since the end of November 2014, when OPEC decided to not to cut actual level production and ARA coal prices went down by around 21 %. Coal market met this month a great challenge being in the competition with oil-linked gas prices. Till the middle of the month coal prices continued their bearish trend and then started to rebound due to limited coal production in Russia caused by lower temperatures and information from-Glencore, one of the biggest coal producers, concerning closing of some coal mines in South Africa. With the end of the month stocks at the main European port ARA remained at high level.

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The key anthracite producers (USA, China, Russia, Ukraine, Australia, South Africa and Vietnam) expected that high production in 2014 will be keep in 2015 or might be even higher as demand for this high quality coal grows. 3-OIL AND OIL PRODUCTS

Oil prices continued their downward trend for first 3 weeks of the month. Brent front month contract started the month at 55, 58 $/bbl and ended the month at 46,92.$/bbl. With the last days of the month prices went slightly up getting different signals from the market such as information about record weekly decline in U.S drilling and IEA report’s saying that weak oil prices start to reduce oil production in some regions. Moreover there was also some speculations that seven month of oil bearish trend is over. On the last day of editing (09.02.2015) Brent front month contract was quoted at 56, 45 $/bbl. According to World Bank, oil price will achieve average of 53 $/bbl this year, more than 40% lower than in 2014.

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Weak oil prices are favourable for gas importers in contracts based on crude oil prices and for developing countries where competitive prices could contribute to the growth of this countries.

From the other side low level of oil prices has a negative impact on investments in renewable energy sector. 4-NATURAL GAS MARKET 4.1 – Day Ahead

Comparing to the previous year day-ahead gas prices on POLPX changed significantly. In January 2014 prices were between 27,15 €/MWh and 25,84 €/MWh, while in January this year between 27,26 €/MWh and 18,41 €/MWh.

€/MWh Monthly average of day-ahead gas prices (BASE) from last 3months

Zeebrugge TTF NBP NCG POLPX

October 21,33 21,22 21,48 21,59 25,50

November 22,96 22,98 23,48 23,16 26,24

December 22,57 22,45 23,17 22,78 26,78

January 19,86 19,69 20,49 20,07 22,86

January/ December

% -13,65 -14,02 -13,08 -13,50 -17,15

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Day-ahead gas prices went down during last month. Monthly average moved from -13, 08 % (NBP) up to -17, 15 % on POLPX. During the month, temperatures close to average did not increase gas demand and stocks were high At the end of the month an outage at the biggest Norwegian offshore and rising tension between Russia and Ukraine pushed the prices on the spot market up. 4.2 – Term market

Term gas market continued its bearish trend till the end of the month, taking profit from weak oil prices. After mild winter, gas storage over Europe remained stable. At the end of the month prices went slightly up due to ongoing tension between Ukraine and Russia and prices went slightly up. TTF Gas Baseload Cal 16 ended the month at 20,35 €/MWh, while POLPX Cal 16 at 23,68 €/MWh. In January spread between POLPX Cal 16 contract and its TTF counterpart was between 3, 01 and 5, 40 €/MWh – slightly higher spread than previous month.

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As the gas prices the contracts are indexed to oil prices, we may expect that, gas prices will not move significantly very soon. 5-CO2

Benchmark Dec 15 begun the year at 7, 09 €/t EUA, and first weeks did not brought significant price movements. The situation has changed slightly in the second part of the month due to insecurity on the CO2 market concerning earlier MSR reform. Finally voting on EU Parliament has not brought new decision, but did not draw carbon prices dawn. Dec 15 contract ended the month at 7, 15 €/t EUA, while its counterpart for 2016 at 7, 28 €/t EUA.

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6-KEY MARKET NEWS Just 2 energy groups in Poland? Poland plans to consolidate its four major power producers into two companies in order to support their position on the European market. Additionally plan will also support country’s coal industry. One of the option would be joining power giant PGE with smaller Energa and second largest utility Tauron with Enea. Consolidation of the major Polish energy groups may create more stable environment for new investments in Poland as well as abroad Poland doubled gas import capacity from Germany In the beginning of the month Poland has doubled its import capacity with Germany through a reverse flow at pumping station in the German town Mallnow. The capacity increased from 2,3 bcm annually to 5,5 bcm. It will provide more security to the polish energy sector and allow to defence in case of any short term gas supply disruption from Russia. Gazprom plans to construct LNG plant on the Baltic Sea In the second part of the month, Gazprom- one of the main conventional gas producer has announced in the second part of the month that they would construct a liquefied natural gas plant with a yearly capacity up to 15 million tonnes at the sea port of Ust-Luga. The Baltic States and Finland planned even before Russia to build an LNG terminal in the region in order to reduce dependence from Russia. New terminal may share potential investors and two similar project may be confusing. Ukraine increased its gas imports from Europe in 2014 close by 60 % In 2014 Ukraine imported from Europe 5,1 bcm of Natural Gas which up by 143 % year by year , according to the UkrTransGaz. Ukraine has imported gas via Slovakia, Poland and Hungary. (In September 2014 Slovakia has opened a pipeline to supply Ukraine through revers flow). Ukraine expects also that in 2015 gas import from Russia will consist less than one third of its needs and increasing liquidity on the European markets will help to cover Ukrainian gas demand. Poland-Ukraine new gas link State owned company Naftogaz and Polish pipeline operator Gaz system signed a deal for the construction of a gas interconnector between a newly-built liquefied natural gas terminal in Poland and Ukraine. New gas link will be able to transport 10 bcm of gas yearly. Moreover this will also provide Ukraine with access to German gas market. According the plans first LNG transport from Swinoujscie (Poland) will be delivered to Ukraine in 2018. Lithuania with its new LNG terminal in Klaipeda expressed its willingness to supply Ukraine with LNG.

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Hidroelectrica sold its micro hydro power plants Romania’s largest electricity generation company-Hydroelectrica plans to sell 33 of its 128 micro hydropower plants in February this year. The 33 installations with total installed capacity of 26 MW will be put on sale in February and are located in Suceava, Bacau, Neamt, Hunedoara, Maramures, Brasov, Timisoara, Sibiu, Arges, Buzau and Valcea counties. The initial price is estimated at around 84.7 million lei (EUR 18.8 m). Hungary needs gas supply After Russia’s withdrawal from the construction of South Stream’s the situation in Central and South-eastern Europe boosted gas market in this region in order to find alternative gas supply. Hungary looks for a new destination of gas supply. Hungary plans to negotiate with Greece, Macedonia and Serbia over supplying Russian gas to Central Europe via Turkey. Additionally Hungary has revived interest in other gas supply concepts: access to gas from Azerbaijan, pipeline Romania-Hungary-Austria, which would deliver gas from recently discovered fields in Romania, construction of connectors between Greece, Bulgaria, Romania and Hungary, as well as gas corridor North-South, including the possibility of supply from LNG terminals.

The information and opinions contained in this report have been obtained from public sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate or complete and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy any securities or other investment. Information and opinions contained in the report are published for the assistance of recipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient; they are subject to change without notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein. This report is for the use of intended recipients and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without the prior written consent of INDAR ENERGY

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Central European Energy Market · Coal market news . 4 20, rue du Quatre Septembre – 75002 – Paris – tel: +33 (0)1 55 34 36 05 – fax: +33 (0)1 55 34 36 04 – e-mail: [email protected]