Energy Regulatory Office The President of URE publishes the report “Heating energy market in numbers" - News -

In 2023, compared to 2022, the number of licensed district heating companies has increased slightly: from 392 to 398. Relatively small-size generation sources continued to dominate, with companies with an installed capacity of 50 MW or less accounting for more than 55 per cent of all licensed generators.

In 2023, district heating companies recorded record low heat sales of 335,430.34 TJ . This is more than 6 per cent less than in 2022. There was also a slight decrease in installed and ordered capacity. In contrast, the length of the networks at the disposal of the district heating companies increased by almost 260 km (from 22 578.4 km in 2022 to 22 837.8 km).

High costs and price freezing

The year 2023, like the two years preceding it, was a difficult one for the district heating industry. The effects of the war in Ukraine continued to impact the market, forcing a diversion of fuel supplies, which in turn drove up the price of energy resources and, consequently, translated into higher prices and tariffs for heat consumers. In addition, the EU's ambitious climate protection targets necessitated costly climate and energy transition investments by energy companies.

The cost of district heating operations in 2023 was almost 33 per cent higher than in 2022, mainly due to inflation, high prices of fuels and CO₂ emission allowances. In 2023, district heating companies spent more than PLN 41.5 billion on ETS charges, almost 17 per cent more than the year before. Although the situation on the fuels market has started to stabilise, many companies were using previously concluded long-term contracts and stocks built up during the period of the biggest price increases.

The increase in the operating costs for the companies has clearly translated into heat prices. The average price of heat sold from all licensed sources in 2023 was 104.65 PLN/GJ. This represents an increase of more than 63 per cent compared to 2022. On the other hand, the average price of heat sold from licensed sources producing heat without cogeneration was 125.52 PLN/GJ (an increase of 64.31 per cent), and the average price of heat sold from licensed sources producing heat with cogeneration was 93.14 PLN/GJ (an increase of 68.89 per cent).

However, consumers were not affected by the increase in the cost of system heat due to the continuation of the price control measures introduced by the legislator (from March 2023 the rules for heat pricing with compensation were changed). The district heating companies received an offset to the tariff rate from Zarządca Rozliczeń, thus generating reasonable revenues, reflecting their operating costs.

In 2023, 564 proceedings for the approval or amendment of heat tariffs were closed at the Energy Regulatory Office, a significant decrease from the 925 proceedings conducted in the record year 2022. This is related to the reduced price dynamics in the fuel markets.

Financial situation of district heating companies

The profitability of district heating companies in 2023 improved slightly compared to 2022. Although the sector still recorded losses, they were less severe compared to the year before. The profitability of all licensed district heating companies was (-)22 per cent in 2022 and (-)9.5 per cent in 2023. CHP-based heat generators (i.e. those that simultaneously generate electricity in the same process), for whom tariffs were approved under the so-called simplified model, are responsible for the negative result. Companies generating heat alone, on the other hand, recorded a positive profit margin of 2.6 per cent.

At the same time, it should be borne in mind that in the case of cogeneration, there is no set pattern of cost sharing between electricity and heat production. The cost allocation criteria used by the companies may reward the profit made from the sale of heat or the profit made from the sale of electricity in their financial performance.

On the other hand, due to the huge increases in fuel prices in 2022, the legislator has decided to introduce legal changes to support CHP-based generators. The regulation on the principles for setting and calculating tariffs was amended to include rising production costs in the simplified model^[1]. By contrast, in August 2023, an amendment to the Energy Law enabled CHP-based generators to switch once from a simplified tariff setting model to a cost model^[2].

The measures taken appear to have had an effect, as there was an increase in the number of companies generating heat from cogeneration – from 131 entities in 2022 to 140, representing 36.7 per cent of all concessionaires generating heat in 2023. There was also an increase in the share of cogeneration heat in total production (64 per cent, 2 percentage points higher than the previous year).

Certainly, the guarantees provided by Bank Gospodarstwa Krajowego for loans to finance current operations and investments have also contributed to improving the liquidity of district heating companies. These have been made available to the sector at the initiative of the President of URE and their costs are included by the Regulator in heat tariffs.

Gradual change of the energy mix

In 2023, coal continued to be the dominant energy source in the district heating system, although its share fell from 66.2 to 61.2 per cent. Gas use increased from 9.3 per cent to 13 per cent. The district heating sector also used more energy from renewable sources in 2023 – 14.4 per cent compared to 12.6 per cent the year before.

The share of individual fuels in heat generation varies territorially in our country. The report of the President of URE shows that the greatest use of renewable energy was made by the heating industry in the Podlaskie, Kujawsko-Pomorskie and Warmińsko-Mazurskie Voivodeships. In contrast, heat producers in the Świętokrzyskie, Dolnośląskie, Małopolskie and Łódzkie Voivodeships relied almost exclusively on coal. The Lubuskie and Podkarpackie Voivodeships led the way in the use of gaseous fuels.

Transformation of the heating industry

According to the draft revised National Energy and Climate Plan, by 2030. 35.4 per cent of energy in heating and cooling is to come from renewable sources, and by 2040 this figure could reach 62.6 per cent. Estimates by the Polish Association of Heat Energy (PTEC)^[3] indicate that investment expenditures for the transformation of district heating should amount to between PLN 299 and 466 billion by 2050. In view of the annual revenues of the entire industry of PLN 42 billion, these forecasts illustrate the scale of the challenge.

In 2023, expenditure on modernisation increased by less than 5 per cent (from 4.73 billion to 4.96 billion). The level of investment is still too low, but it should be noted that funding from external sources has increased, from 31 per cent in 2022 to more than 37 per cent in 2023.

***

• Report – “Heating energy market in numbers” for 2023 (in Polish).
• Cogeneration (CHP, Combined Heat and Power) is the generation of electricity and heat in a single process.
• The simplified model for determining cogeneration tariffs is based on the average heat sales prices in the previous year in non-cogeneration units (i.e. producing heat alone). Heat generation prices are taken into consideration separately for different fuels. For the calculation of the tariff rate, last year's prices are multiplied by a reference index.
• The most important changes to the tariff regulation were enacted in March and November 2022. In March, the calculation of the cogeneration reference index was modified. This made it the first time that the maximum heat prices for CHP-based companies exceeded the heat sales prices from heat-only units in the previous year. The amendment also made it possible to assign the simplified price calculation only to CHP units (and not – as previously – to entire sources where CHP units were installed). In November 2022, the Regulation of tariffs was amended once more – the maximum rate of increase in revenues from the sale of heat in CHP units was increased and additional amounts were allowed to be added to the tariff rates to cover fuel costs (from 22 to 30 PLN/GJ, depending on the fuel used).
• In 2021, the President of URE has changed the regulatory model for the district heating sector to promote investment and transformation of the sector (the investment premium has been increased, an efficiency premium mechanism has been introduced, the regulatory value of assets takes into account the planned capital expenditure for the implementation of strategic energy policy objectives.