Fitch Ratings says the Polish energy market's increasing liberalisation and upcoming privatisation offer growth and diversification opportunities for European utilities. It also presents less expected volatility and risk compared to other countries where energy sectors were recently opened for foreign investors such as Russia and Turkey.

"Investment needs are considerable as most of Poland's 35GW generation assets are more than 30 years old and often written-off. The sector needs to add about 1GW-1.5GW of capacity annually to replace ageing assets and to meet growing demand," says Jacek Kawalczewski, Associate Director in Fitch's Energy, Utilities and Regulation team.

Expected full liberalisation of electricity prices from January 2009, the consolidation of state-owned energy assets ahead of their privatisation, and the cancellation of long-term supply agreements have all caught the attention of many European utilities. Retail electricity prices - which are expected to be set on a cost-plus basis, will improve the feasibility of investments in generation assets. Other important contributory factors are strong Polish GDP growth prospects and the government's support for foreign investments in the energy sector.

Fitch also points out structural changes have helped to create a favourable regulatory and operating environment for the Polish energy sector. The planned IPO of four large power groups and their listing on the Warsaw Stock Exchange should further improve the transparency of the market. On the other hand, the Polish power sector remains inefficient, burdened with over-employment and rigid agreements with trade unions. Additionally, its generation mix is biased towards coal (90% of generation capacity), which could prove challenging after 2012 when CO2 emission allowances are to be purchased on the market. Fitch expects that the cost of CO2 will dramatically increase the electricity prices in Poland.

Poland is already targeted as a key market for expansion by companies like Czech Republic-based CEZ ('A-' (A minus)/Stable) and Germany's RWE AG ('A+'/ Negative). Despite limited privatisation of the Polish power sector so far, foreign utilities already have a substantial presence and control around 18% of the country's generation assets. Strongly positioned foreign players are Electricite de France ('AA-' (AA minus)/Stable), Electrabel and Vattenfall AB ('A+'/ Negative), while CEZ and E.ON AG ('A+'/ Negative) hold smaller stakes in Polish energy companies. Vattenfall and RWE also control about 14% of Polish power supply assets.

Fitch estimates that recent decisions taken by RWE, CEZ and Vattenfall to construct five new power plants and large wind parks could result in more than EUR7.5bn of direct investments in the Polish energy sector. These investments will improve the utilities' generation mix and contribute about 3.5GW of new generation capacity in Poland.

The initial public offerings of Enea S.A., Polska Grupa Energetyczna S.A., Tauron Polska Energia S.A. and Energa S.A. are planned for 2008-2010, with proceeds earmarked for capex funding. A number of European utilities are also expected to focus on the second phase of the privatisation process scheduled for 2009-2011, which will involve the sale of controlling stakes to investors. Fitch notes the sector's privatisation will also provide European utilities with locations for the construction of new power plants, which is particularly useful as similar new build projects face growing public resistance in western Europe.