Bloomberg informed, that biggest power producer in Poland BOT Gornictwo i Energetyka sees possibility of power prices to surge by over 20%. This scenario could rise if the European Commission slashes Polish CO2 credits allocation for the second phase from 2008 through 2012, which would create unspecified shortfall. Polish government is looking for increase in average annual allocations for the second phase by 7.7% to 257.4m tons, while there is a threat it can be cut by some 10%.
Our view:
Price of electricity in Poland stands currently at levels around EUR 32/MWh and doesn’t really reflect price of CO2 credits. If we we compare price of CO2 credits for the first phase of EUR 3.29/ton and price for the second phase of EUR 15.3/ton, jointly considering the fact that power producers doesn’t have to buy CO2 credits, while they could be forced to do so in the future, electricity price will have to reflect it. Note that hard coal power plants produces approximately 0.7 ton of CO2 per 1 MWh of electricity. Therefore there is possibility for substantial increase in electricity prices. We expect that share of revenues from CEZ Polish operations on total consolidated CEZ revenues in 2007 will reach approx. 4%. CEZ expects prices to converge to German levels in 4 to 6 year period. German 2008 electricity forwards are currently traded at EUR 53.6/MWh. At the moment we see the news as neutral, until there is more color on actual allocation.