26.4 Climate risk

PGE Group is aware of the impact of its activities on the climate, as well as the threats posed by climate change to the Group’s operations. It is well known that our business activities both influence and depend on the climate, this interdependence generates both risks and opportunities for growth. We therefore understand the expectations of stakeholders in terms of reporting on the environmental impact of the business, recognising climate risk management as a key element of strategic management, with a direct impact on financial aspects.

PGE Group is therefore focusing not only on risks but also on opportunities to ensure resilience to risks and to increase sustainable Group revenues. PGE Group has taken a number of actions in 2022 aimed at achieving climate neutrality in 2050, already indicated in PGE Group’s Strategy to 2030, and continues to work on the implementation of PGE Group’s ESG Strategy, focusing on 4 areas: competitiveness in the financial market, a leader in green transformation, a corporate culture that supports sustainable development and active communication on sustainable development with all stakeholders. The Group is also implementing measures to meet regulatory requirements, both national and European. This includes, among other things, the EU Taxonomy, preparation to the Corporate Sustainability Reporting Directive (CSRD), as well as the expectations of financial institutions, investors and customers.

Climate risk issues are subject to the rigours and guidelines arising from the corporate risk management process. The body responsible for overseeing PGE Group’s enterprise risk management process, including climate risk, is the Risk Committee, as in the case of financial risks. Having a Risk Committee at the top executive level that reports directly to the Management Board ensures supervision over the effectiveness of risk management processes across the entire Group. This positioning of the risk function allows for an independent assessment of individual risks, their impact on PGE Group and the mitigation and control of significant risks through dedicated instruments.

The assessment of climate and environmental risks is carried out on the basis of the General Procedure for Enterprise Risk Management. At PGE Group, climate risk is analysed both in the context of the impact of climate change on business as well as the impact of business on climate change. Identification and analysis of climate risk as well as continuous improvement of pro-environmental solutions and control tools allow effective management and minimisation of the impact on climate, while ensuring financial results for PGE Group. The solutions developed by PGE Group are aimed at its development and sustainable transition in line with climate-related requirements and with care for all stakeholders.

Climate issues are assessed centrally in PGE S.A., taking into account all activities of the Group and its constituent entities. This means that the result of the assessment is given collectively, at the Group level.

The approach to climate risks is inspired by the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), however, the method concerning inventory and risk assessment adopted is an internal PGE concept.

In 2022, PGE Group once again took part in an international study on the company’s environmental impact, i.e. Carbon Disclosure Project – CDP (https://www.cdp.net/en). The Group responded to global investor queries on the climate and water resource impacts of its operations and identified both the risks and opportunities involved.

There is an interdependence between the risks and opportunities for businesses related to the climate. Any business is affected by two types of climate risk:

• physical risks, related to the physical effects of climate change, i.e. real threats in the form of extreme weather events, drought, flooding;
• transition risks (also known as transformation risks) towards a low-carbon and climate-resilient economy; these relate to meeting regulatory requirements, implementing new technologies or the impact on a company’s reputation.

The changing climate and climate change mitigation and adaptation efforts simultaneously provide new opportunities and chances for business development. This is why PGE Group focuses not only on risks but also on opportunities so as to ensure resilience to risks and to increase sustainable earnings. Climate-related opportunities at PGE Group primarily concern:

• resource efficiency, e.g. by working on waste management solutions and recovering valuable products from wind turbine blades,
• new energy sources, e.g. through investment in offshore and onshore wind farms, as well as PV farms, the construction of emission-free hybrid electricity storage,
• new products, e.g. expanding the product portfolio with PRO EKO initiatives – products that align with low-carbon heating systems, developing products/offerings that promote low-carbon activities, following changes in consumer preferences or developing insurance solutions for Offshore Wind Farms,
• increased resilience to climate change in the form of, among other things, competence building in the offshore wind power industry as part of PGE S.A.’s cooperation with secondary schools and universities in Poland, the establishment of scientific and research cooperation between PGE S.A. and institutions from the offshore wind power industry in Poland, or underground cabling.

PGE Group defines climate risk in five areas:

• securing aid funds and investment incentives in national regulations – related to increasing the impact of climate requirements relevant to the allocation of aid funds and investment incentives in national regulations,
• international regulations – related to EU legislation on energy and climate policy, in particular as part of the current Fit for 55 package,
• CO₂ emissions – related to the rising costs of emission allowances, which may adversely affect the profitability of generating units or lead to discontinuation of production in these units,
• operations – related to extreme weather events or changes in climate conditions that may adversely affect the assets and operating activities of PGE Group,
• investments – concerning PGE Group’s failure to meet its investment commitments, aimed at green transition, at EU, national and own strategic objectives.

Each climate risk area is assessed in the short term, medium term and long term. The adopted time horizons are due to analogies with ongoing external research.

Global warming, changing precipitation patterns, rising sea levels and extreme weather events are increasingly posing serious challenges to the resilience of electricity systems, increasing the likelihood of disruption. Climate change directly affects every segment of the electricity system: both generation potential and capacity, heating and cooling demand, the resilience of transmission and distribution networks and demand patterns.

PGE Group, being aware of the risks posed by climate change, as part of the first phase of the climate risk management process, conducted an assessment in 2022 of the relevant climatic physical (material) risks – which could have a negative impact on its operations, supporting adaptation to climate change and enhancing resilience to climate risks. Climatic factors in the form of mainly temperature, precipitation and wind and their negative impact on key activities in the Group were assessed.

An assessment of the risks associated with climatic physical hazards in the PGE Group in 2022 was carried out in the current and long-term perspective using scientific models describing possible climate scenarios, i.e:

• RCP 4.5- the optimistic scenario, which assumes the introduction of new technologies to achieve a higher reduction in greenhouse gas emissions than is currently the case, assuming an increase in global average temperature of approx. 2.5° at the end of the 21st century relative to the pre- industrial era and
• RCP 8.5- a pessimistic scenario that assumes a continuation of the current rate of increase in greenhouse gas emissions, on a business-as-usual basis, assuming that, by the end of the 21st century, the Earth’s average temperature will have risen by 4.5° relative to the pre-industrial era.

The assessment carried out showed a low to medium impact of risks related to climatic physical hazards on key activities in the Group in 2022. According to the criterion adopted, risks whose assessment showed a high impact were tested. An important role in the impact assessment process is played by, among others, the implementation of adaptation measures developed in PGE Group to increase the resilience of the power systems to climate change in the form of the use of more weather-proof solutions in the form of a cabling programme (replacement of overhead transmission networks with cables placed in the ground), preventive management of key infrastructure elements affecting the continuity of operations, insurance against events related to weather phenomena or precise analyses of land for new investments.

The PGE Group’s transitional climate risks mainly relate to areas affecting the transformation towards achieving the planned climate neutrality by 2050, i.e., among others: requirements and regulation of existing products and services (area: policy and law), replacement of existing products and services with their low-carbon counterparts (area: technology) and stakeholder concerns/negative feedback (area: reputation). Examples of risks from the above areas are listed below, by category:

Politics and law

Climate regulations have a direct impact on energy companies. PGE Group companies, like other entities in the energy sector, are exposed to risks and threats resulting from the nature of their operations and functioning in a specific market and regulatory and legal environment. PGE Group operates in an environment characterised by a significant impact of domestic and foreign regulations. The risk of current regulations is particularly relevant in the context of raising capital, grants and support from aid funds.

PGE Group undertakes a number of activities related to monitoring available sources of support, the reliable preparation of application documentation and the use of expert know-how. PGE Group has extensive experience in obtaining preferential support and has the knowledge and staff to successfully implement this process.

Emerging regulations

The emerging regulations are important to implement the strategy and to support an effective transition to low-carbon technologies. PGE Group aims to make full use of available financing options for green investments. Emerging regulatory changes, such as support for EU infrastructure to stimulate sustainable investment, addressing the lack of financing, penalties for climate-negative transactions, may give rise to significant risks. These changes will have an impact on credit risk and may affect the cash flows generated by PGE Group assets and thus affect their income value.

The risk of rising costs of greenhouse gas emission allowances, including a reduction in the cap on free emission allowances for district heating, has the effect of reducing the ability to finance low- and zero- carbon investments.

PGE Group is systematically taking measures to reduce greenhouse gas emissions. Decarbonisation of generation assets will intensify with the implementation of the new PGE Group strategy. As a result, PGE’s contribution to avoiding CO₂ emissions by 2030 is expected to be 120 million tonnes. At the same time, pro-environmental investments form the core of PGE Group’s investment activities. In addition, the Group invests in asset modernisation and development investments, including optimising combustion processes and introducing solutions to improve generation efficiency, higher fuel and raw material consumption efficiency and reducing the energy intensity of generation processes and internal needs.

Technology

A permanent reduction in emissions intensity is to be achieved in the PGE Group by changing generation technologies, investing in new technologies, expanding the renewable portfolio, developing the circular economy and enabling customers to participate in the energy transition. Technology risk also includes the selection of optimal and efficient new technologies, the exploitation of potential by PGE Group. By 2030, the share of low- and zero-carbon sources in the Group’s generation portfolio is expected to reach 85% and renewables will account for 50% of the energy generated. PGE Group aims to achieve climate neutrality by 2050.

Reputation

Reputation risk for PGE Group is very significant as the energy sector plays an important role in supporting an effective transition to a low-carbon and ultimately zero-carbon economy. As a transition leader, PGE Group is focused on reducing its environmental impact. A sustainable reduction in emissions intensity is to be achieved by changing generation technologies, expanding the renewable portfolio and enabling customers to participate in the energy transition by offering them attractive products. Failure to pay due attention to the low-carbon economy and ESG issues can cause problems with access to capital.

In order to mitigate risk at PGE Group, a team for the calculation of the carbon footprint of the PGE Group was established, a joint initiative was created within the Polish Association of Combined Heat and Power Plants to develop a sectoral guide for the uniform recognition of the carbon footprint of power plants, combined heat and power plants, including heat transmission and distribution, and electricity distribution activities, and the staffing of organisational units involved in processes related to reporting, decarbonisation and risk assessment was increased.