Business segments

We operate across the entire value chain: we produce electricity and heat at our conventional and CHP plant, then we sell and supply these to our customers throughout Poland, including households, businesses, institutions and local governments.

In PGE Group also functions the area of management of combustion by-products within the segment: Circular Economy. The use of combustion by-products makes it possible to reduce the extraction of natural resources, limit environmental impact and reduce CO₂.

In this way, PGE Group is implementing measures to make energy generation waste-free, in line with the idea of the Circular Economy, and focused on environmental protection.

This segment includes lignite mining and generation of electricity in conventional sources.

The main source of revenue in the Conventional Generation segment is revenue from the sale
of electricity on the wholesale market, based on electricity prices that are shaped by supply and demand mechanisms, taking into account the variable costs of generation. At the same time, the segment’s key cost items, given their size and volatility, and thus their impact on operating results, are the fees for CO2 emissions and cost of production fuels, mainly hard coal. Lignite-based production, which is of key significance for the Group, is based on own mines, therefore its cost is relatively stable and reflected mainly in fixed-cost items, i.e. personnel costs, third-party services and depreciation.

Revenue from the Capacity Market, a mechanism introduced to prevent electricity shortages in the NPS, constitutes a significant item in the segment’s revenue in 2021. PGE GiEK S.A.’s power plants receive fees for performing the capacity obligation (a Capacity Market entity being on standby to supply electricity to the system and the obligation to supply specified capacity to the system when the system is under threat). Capacity Market revenue compensated for revenue from ancillary services. The cold intervention reserve and operational capacity reserve services were discontinued, while revenue from capacity reallocation remained.

In addition, this segment generates revenues from sales of heat produced at industrial plants.

Under the provisions of the Emergency Measures Act, from December 2022, electricity generating entities are required to make a contribution to the Price Difference Payment Fund.

Conventional Generation segment consists of: 2 lignite mines and 5 conventional power plants.

Conventional Generation is the leader of lignite mining (its share in the extraction market of this raw material accounting for 94%¹ of domestic extraction), it is also the largest generator of electricity as it generates approx. 35%² of domestic gross electricity production. The generation is based on lignite extracted from mines owned by the company as well as hard coal and biomass.

¹Own calculations based on data from Central Statistical Office of Poland.
²Own calculations based on data from PSE S.A.

Core business of the District Heating segment includes production of electricity and heat from cogeneration sources as well as distribution of heat. District Heating is the largest heat producer in Poland. Generation is based mainly on hard coal and natural gas.

As in the case of Conventional Generation, this segment’s significant revenues are revenues from electricity sales, however, they are usually directly related to generation of heat which in turn depends on demand that is highly seasonal and depends on external temperatures. This is why, in contrast to industrial power plants in Conventional Generation, as a rule,CHP plant do not have any considerable impact on the development of prices for electricity on the wholesale market.

Revenues from the sale and distribution of heat are regulated revenues. Energy companies independently set tariffs and present them to the President of the Energy Regulatory Office (the “ERO President”) for approval. Heat production at PGE Group takes place in cogeneration units, which tariffs for heat are calculated using a simplified approach (compared to tariffs based on a full cost structure), based on reference prices, conditioned on average sales prices for heat generated in units with specific fuel other than cogeneration units.

They are published each year by the ERO President. Tariffs for heat production for cogeneration units in a given tariff year thus reflect changes in the costs of heat-generation units (not co-generation units) in the previous calendar year.

The cost approach is applied in the case of tariffs for heat distribution, which allows to cover justified costs (mainly the costs of heat losses and property tax) and a return on invested capital, in line with guidelines from the ERO President. Distribution tariffs for heat are in place at branches in Gorzów and Zgierz, as well as by Kogeneracja S.A., PGE Toruń and Zielona Góra CHP.

Generation of heat and electricity is directly related to key variable costs of the segment, i.e. the cost of production fuel used (in particular, hard coal and gas) and the cost of fees for CO₂ emissions and contribution to PDP fund.

Electricity production in high-efficiency cogeneration is additionally remunerated. Until 2018, CHPs generated revenue from the sale of energy origin certificates, i.e. cogeneration certificates (yellow and red). From 2019, due to a change in support model, they receive support at a level covering increased operating costs related to production. The support mechanism in the form of certificates is in place also for biomass-fired generating assets.

This type of production is additionally remunerated by awarding origin certificates, i.e. green certificates, the sale of which generates additional revenue. Within the segment such revenues is obtained at  Szczecin biomass CHP and biomass unit in Kielce CHP.

Revenue from the Capacity Market, a mechanism introduced to prevent electricity shortages in the National Power System, constitutes a significant item in the segment’s revenue, starting from 2021. CHP plant receive fees for performing the capacity obligation (a Capacity Market entity being on standby to supply electricity to the system and the obligation to supply specified capacity to the system when the system is under threat).

Weather conditions substantially affect the segment’s results. Temperatures directly shape the level of heat demand. Simultaneously, the level of heat production determines the level of electricity production in co-generation, which is an additional source of revenues that decisively affects the CHP plant’s profitability.

Under the provisions of the Emergency Measures Act, from December 2022, electricity generating entities are required to make a contribution to the Price Difference Payment Fund.

The following companies are included in the segment: PGE EC S.A., KOGENERACJA S.A., EC Zielona Góra S.A., PGE Toruń S.A. and MEGAZEC sp. z  o.o. In addition, from July 1, 2021, Szczecin CHP, Pomorzany CHP and the district heating network in Gryfino, recognised until June 30, 2021 as part of the Conventional Generation segment, were included in the structures of the District Heating segment.

This segment is involved in the generation of electricity from renewable sources and in pumped storage power plants.

The Renewables segment is based mainly on revenues from the sale of electricity, however contrary to production at industrial plants within the Conventional Generation segment, this revenue is subject to a larger degree to changes in weather conditions and prices on the spot market due to the renewables sales model in place.

Electricity output volume translates into property rights (green certificates) and revenue from the sale of energy origin certificates obtained by the segment’s assets, excluding hydropower plants over 5 MWe.

Revenue from the Capacity Market, a mechanism introduced to prevent electricity shortages in the National Power System, constitutes a significant item in the segment’s revenue, starting from 2021.

Selected power plants in the Renewables segment receive fees for performing the capacity obligation (a Capacity Market Entity being on standby to supply electricity to the system and the obligation to supply specified capacity to the system when the system is under threat).

Capacity Market revenue compensated for revenue from ancillary services. The readiness intervention reserve service was discontinued.

On the cost side, the most important items include: use of energy to pump water at pumped-storage plants, depreciation of segment assets and third-party services, mainly the repair services. Property tax and employee wages also constitute a significant cost item in this segment. Under the provisions of the Emergency Measures Act, from December 2022, electricity generating entities are required to make a contribution to the Price Difference Payment Fund.

The PGE Capital Group’s operations in renewable energy are managed by the PGE Energia Odnawialna S.A.

Due to the profile of operations, the segment also includes companies from the Offshore area, which are responsible for all activities related to offshore wind energy.

Assets in the segment include:

• 20 wind farms,
• 24 photovoltaic power plants,
• 29 run-of-river hydro power plants,
• 4 pumped-storage power plants, including 2 with natural flow.

Key factors affecting the y/y results of Renewables included:

We are the second largest energy distributor in terms of the number of customers, with approx. 25 percent. share in the Polish energy distribution market. Our distribution area covers almost 40 percent. area of Poland. With the use of over 290 thousand. km of the power grid, we supply electricity to over 5.7 million customers.

Core business of the segment includes supply of electricity to final off-takers through the grid and HV, MV and LV infrastructure.

Segment revenue is based on a tariff for electricity distribution services, which is approved by the ERO President every year at company request and is regulated.

The tariff allow costs related to the distribution system operator’s on-going activities to be transferred. These are both justified operating costs, depreciation, as well as costs related to the necessity to cover grid losses on electricity distribution or the purchase of transmission services from the TSO.

At the same time, the tariff reflects the costs transferred in fees such as the RES fee, the transition fee, the co-generation fee and the capacity fee.

The key element shaping the Distribution segment’s result is return on company’s invested capital. This is based on the Regulatory Asset Base (“RAB”), which is established on the basis of completed investments and taking into account asset depreciation.

The Regulatory Asset Base serves as the basis for calculating return on capital, using weighted average cost of capital, which is published by the ERO President in accordance with a set formula and using as the risk free rate the average yield on 10-year State Treasury bonds with the longest maturity during the 36-month period preceding the tariff application submission, quoted on the Treasury BondSpot market. In addition, return on capital depends on the achievement of individual quality targets set by the ERO President for performance indicators including: interruption time, interruption frequency, connection time and (not yet included) time to provide metering and settlement data.

Segment revenue is based on a tariff for electricity distribution services, which is approved by the ERO President every year at company request and is regulated.

PGE Dystrybucja S.A. operates in the area of 129 829 sq. km and delivers electricity to approximately 5.7 million customers.

Key factors affecting results of Distribution segment y/y included:

Supply segment activities include Group’s wholesale and retail trading of electricity.

Wholesale trading includes mainly electricity trading on behalf of and for Conventional Generation segment, District Heating segment and Renewables segment.

As part of retail-market activities, the key source of segment’s revenue is sale of electricity to final customers.

This is sale to business and institutional clients, which constitutes more than 70% of the sales volume, and to retail clients.

The segment’s revenue also includes the sale of natural gas and fuels, mainly: pulverised coal and coarse coal, which is sold by PGE Paliwa sp. z o.o. In 2022, in connection with the decisions of the Prime Minister, PGE Paliwa was required to purchase thermal coal with parameters similar to the quality parameters used by households and import it to Poland.

Additionally, based on the provisions of the Emergency Measures Act, a system of compensation for trading companies for maximum prices and discounts was introduced from December 2022.

At the same time, electricity trading companies are required to make a contribution to the Price Difference Payment Fund.

Electricity sales are matched by the costs to purchase electricity on the wholesale market and costs to redeem certificates as part of the support system for renewable sources and energy efficiency.

As part of the activities on the wholesale market, CO₂ purchases are made for the needs of the Conventional Generation and District Heating segments, which is reflected both in terms of costs and revenues. At the same time, a significant revenue item is the provision of services to the Group’s companies related to the management of purchases and sales of electricity and related products.

The Supply segment also incurs costs related to the Group’s corporate centre.

Key factors affecting EBITDA of Supply segment y/y included:

The management of combustion by-products at PGE Group turns waste into high-value substances that are used in other branches of economy (cement industry, construction, road-building, mining) and thus reduces the volume of ultimate waste generated.

The activities of the segment include the provision of comprehensive services in the field of management of combustion by-products („UPS”), provision of services in auxiliary areas for electricity and heat producers and the supply of materials based on UPS.

The main revenue source in the Circular Economy segment is revenue from the economic use
of combustion by-products, which includes revenue from the sale of products manufactured on the basis of combustion by-products in internal production processes and the sale of services related to the management of combustion by-products.

The level of revenue depends on multiple factors, including commercial potential for selling combustion by-products, in processed and unprocessed form, seasonality of industries purchasing combustion by-products, seasonality of suppliers of combustion by-products (power plants, combined heat-and-power plants), volumes collected, efficiency of production infrastructure, capabilities for storing combustion by-products as materials inventories intended for production, as well as market conditions.

• Higher revenues from sale of combustion by-products, caused by higher collection volumes of combustion by-products from producers that is possible to be managed.
• Higher revenues from the sale of services, which is the result of higher revenues from the rental of heavy equipment and higher service labour costs.
• Higher level of personnel costs is mainly the result of the ongoing process of changing wages.
• Higher third-party service costs, resulting mainly from higher combustion by-products management costs.
• Higher level of item Other, mainly due to an increase in the consumption of fuels and production materials and lower revenue from the sale of other goods.

Core activities of the segment include provision of services to PGE Group, inter alia organisation of capital raising in form of Eurobonds (PGE Sweden), provision of IT, payroll and HR services, transportation and investing in start-ups.

In addition, the segment’s structures include companies responsible for the construction of new, low-emission generation units- gas and steam units at Dolna Odra Power Plant (PGE Gryfino 2050 sp. z o.o.) and unit on the premises of Rybnik power plant  (PGE Rybnik 2050 sp. z o.o.) This results in significant investment outlays reported in the segment.