26.1.1 Commodity risk

Commodity risk is related to the possibility of a deterioration in the financial result in the trading area due to changes in commodity prices.

PGE Group companies’ exposure to commodity risk relates to the following commodity markets:

  • electricity
  • CO2 emission allowances
  • rights to electricity origin certificates;
  • hard coal;
  • natural gas;
  • biomass and other fuels.

PGE Group owns lignite mines that deliver production fuel to two power plants operating within the PGE Group. Due to this fact, the Group’s exposure to price risk in this area is not significant.

Selected key types of commodity risk (including currency) that PGE Group is exposed to (without taking account of the risk hedging strategies applied):

XLS

Risk associated
with		 Description Example of exposure source
Risk of changes in electricity prices
  • PGE Group has a natural long position due to its generation assets and a lack of possibility to place its production on the market at a pre- determined price.
  • The level of margin generated as a result of changes in electricity prices and electricity generation costs;
  • Price of electricity sale contracts to retail clients,
  • Price of transactions to buy/sell energy on the wholesale market.
Risk of changes in the prices of rights to electricity
origin certificates.
  • PGE Group has a net short position resulting from the obligation to redeem rights related to the sale of electricity to end users.
  • Price of transactions to buy/sell rights on the wholesale market.
Risk of changes in the prices of CO2 emission allowances
  • Risk related to changes in the prices of CO2 emission allowances in EUR and risk of changes in EURPLN exchange rate;
  • PGE Group has a short position given its electricity generation at
    units participating in the EU-ETS scheme.
  • Use of generation sources not as planned due to their varying emission levels;
  • Price of transactions to buy/sell CO2 emission allowances on the wholesale market.
Risk of changes in prices of fuel for electricity generation (including hard coal, natural gas, biomass, heating oil)
  • Risk of commodity price changes, including commodities denominated in foreign currency (or indexed to foreign currency) and foreign currency risk;
  • PGE Group has a short position due to its need to purchase fuel on the market.
  • Price of transactions to buy/sell fuel on the wholesale market.
Long-term volume risk
  • Risk relating to changes in demand for electricity in the National Power System and the long-term risk of PGE Group’s generating units being replaced in meeting this demand by generating units with lower generation costs (in particular renewable energy sources).
  • Macroeconomic situation, especially in energy-intensive industries;
  • Technological changes, especially in energy efficiency and development of distributed energy (renewable energy sources);
  • Climate changes;
  • ESG regulations, including preferences for specific sectors of the energy industry;
  • Degree of integration with foreign power systems.
Short-term volume risk
  • Risk relating to changes in the planned volume of electricity sales as a result of changes in customers’ demand for electricity or short- and medium-term substitution of PGE Group generating units by generating units with lower generation costs (in particular renewable energy sources) in meeting this demand.
  • Trends among retail clients concerning changes in energy providers;
  • Regulations, including those pertaining to the opportunity to change energy providers;
  • Short-, mid-term weather changes;
  • Short-term changes in the availability of supply from renewable energy sources;
  • Risk associated to the model for planning demand for energy and quality of source data used in planning.

PGE Group has a strategy for hedging key exposures in trading electricity and related commodities adequately to the level of risk appetite over a mid-term horizon. The level of hedging for an open position is set taking into account risk appetite, results of monitoring the risk of electricity and related product prices, liquidity of specific markets as well as the financial situation of the Group and the Group’s strategic objectives.

PGE Group’s exposure to commodity price risk (as regards raw materials) specifies the volume of external purchases of each raw material, as presented in the table below:

XLS

Year ended December 31, 2022 Year ended December 31, 2021
COMMODITY Tonnage – external purchase (in thousand tonnes) Purchase costs (PLN million) Tonnage – external purchase (in thousand tonnes) Purchase costs (PLN million)
Hard coal 11.348 8.085 9.983 2.932
CO2 emission allowances for captive use 48.343 11.765 116.206 14.024
Natural gas [m3 000s] 832.945 1.570 1.173.366 980
Biomass 491 196 719 150
Fuel oil 72 272 66 160
TOTAL – 21.888 – 18.246
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26.1 Market risk
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26.1.2 Interest rate risk

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