OREANDA-NEWS. Temporary power supply restrictions introduced in Poland on Monday highlight the country's limited spare generation capacity, which is likely to remain stretched during seasonal demand peaks for the next few years until new projects come online, Fitch Ratings says.

We expect the power supply-demand balance to be tight when temperatures are high, resulting in limited ability to cope with unexpected shutdowns of power plants. The electricity system will therefore be prone to power supply restrictions until several new coal-fired power generation units under construction begin operating in 2017-2019. These include PGE's 1.8GW plant in Opole, ENEA's 1GW project in Kozienice and Tauron's 0.9GW facility in Jaworzno.

Poland has limited power grid interconnections with neighbouring countries and is dependent on domestic power production. The country relies on electricity production from coal and lignite, representing about 85% of annual electricity production. However, the profitability of coal- and lignite-fired power generation has declined and will remain under pressure in 2015-2016 due to low wholesale electricity prices, declining free CO2 allowances, and a rising share of renewables supported by subsidies in the market.

This has made investment in new coal-fired units less attractive and was one of the reasons for the postponed construction of several units. We believe that some form of capacity payments may be needed to support profitability of the units under construction if market conditions remain subdued until 2020. Another challenge is construction of back-up capacity units, such as gas-fired power plants. These are needed to replace production from wind farms in periods of weak wind conditions. Such units may also need capacity payments to support profitability.

The recent period of unusually high temperatures and a drought in Poland resulted in lower power generation at some coal-fired power plants because of problems with water for cooling. This, combined with expected and unexpected shutdowns of some power units and increased power demand for air conditioning, forced the transmission system operator, Polskie Sieci Elektroenergetyczne S.A. (PSE) to introduce temporary restrictions on power consumption on Monday. The restrictions apply to more than 1,600 companies, mainly large industrial customers.

Temperatures are forecast to remain high this week and as a result temporary limitations are likely to remain in place, though may be less drastic than Monday as some power units were reconnected to the grid after maintenance works. It is possible that limitations will be lifted on Wednesday if more units are reconnected.

Investments in generation together with large capex in distribution networks will increase financial leverage of PGE, ENEA and Tauron. However, we expect leverage to remain within the guidelines for the ratings (PGE: BBB+, ENEA and Tauron: BBB) supporting the Stable Outlooks.