3. Impairment tests on property, plant and equipment, intangible assets, right-of-use assets and goodwill
Property, plant and equipment is PGE Group’s most significant group of assets. Due to variable macroeconomic conditions PGE Group regularly verifies indications of impairment for its assets. When assessing the market situation PGE Group uses both its own analytical tools and independent think tanks’ support. In previous reporting periods, PGE Group recognised substantial impairment allowances of property, plant and equipment of Conventional Generation segment and the Renewables segment. An impairment loss that had been recognised in the Renewables segment was also completely reversed in previous reporting periods.
In the current reporting period, the Group analysed the rationale and identified factors that could have significantly contributed to a change in the value of non-current assets held in the above segments and in PGE Gryfino 2050 sp. z o.o.
- PGE’s market capitalisation remaining below net asset book value.
- Global energy crisis, which is characterised by rising levels of fuel, electricity and CO2 prices and levels of volatility hitherto unobserved. This crisis was exacerbated by Russia’s invasion of Ukraine on 24 February 2022 and the emergence of the risk of coal and gas shortages in Europe:
- The average electricity price for forward contracts for the year ahead (Y+1) in 2022 was 1,112 PLN/MWh, i.e. 188% higher than in 2021;
- CO2 prices, after a sharp collapse triggered by the pandemic outbreak in mid-March 2020, began to recover until a sharp increase began in November 2021. In 2022, the average weighted price of the EUA DEC 22 instrument was 80.85 EUR/t and was significantly higher (50%) than the average price of EUA DEC 21 observed in 2021;
- The average price of hard coal at ARA ports in monthly follow-on contracts in 2022 was 253 USD/t, up 234% compared to 2021,
- The average price of natural gas in futures contracts with delivery in 2022 was 118 EUR/MWh, an increase of 293% compared to 2021.
- The Act of October 27, 2022 on emergency measures to reduce electricity price levels and support certain consumers in 2023 requires generating entities to make payments to the Price Difference Payment Fund for each month from December 2022 to December 2023. These funds are intended to cover the difference between the maximum energy price adopted in the Act and the contractual or reference price to be paid to electricity sellers in the form of compensation.
As a result of the analysis of the above-mentioned rationale, the Group carried out asset impairment tests as at 31 December 2022 for the segments Conventional Generation, Renewables, the Heat segment to which goodwill is allocated, PGE Gryfino 2050 sp. z o.o. and EW Baltica 2 sp. z o.o. and EW Baltica 3 sp. z o.o. to which goodwill is allocated. No need to recognise impairment losses or reverse all that is needed for the aforementioned segments and companies is observed.
The key price assumptions, i.e. the price of electricity, CO2 emission allowances, hard coal, natural gas, and assumptions related to production at most of the Group’s installations were derived from a study prepared by an independent expert, taking into account own estimates based on the current market situation for the first three years of the forecast.
Electricity price forecasts assume a growth trend in 2024 relative to 2023 prices, followed by an average annual decrease of approx. 22.4% in 2025-2026 relative to 2024, and an average annual increase of approx. 5.6% in 2027-2030.
Price projections for CO2 emission allowances assume an increase in 2024 relative to 2023, followed by an average annual decline in 2025-2026 at approx. 14.9% relative to 2024, and an average annual increase between 2027 and 2029 of approx. 14.6%. A slight decrease is expected in 2030, in comparison with 2029, followed by stable growth at approx. 3.7% annually until 2040.
Hard coal price forecasts assume an average annual decline of about 28.9% between 2024 and 2026 relative to 2023 prices, followed by an average annual increase of approx. 2.4% until 2040.
The forecasts for natural gas prices expect an annual average decrease of approx. 38.6% in 2024-2026 relative to 2023, followed by an average annual growth of approx. 3.8% in subsequent years.
The price forecasts for certificates of energy origin expect an average annual decrease of approx. 9.6% in 2024-2031 relative to 2023, which is related to the decreasing obligation to redeem these certificates.
The forecast for revenue from the capacity market for 2023-2027 is based on the results of completed main and additional auctions for these delivery periods, taking into account the joint balancing mechanism at PGE Group companies. From 2028, the forecast was developed by a team of experts at PGE S.A. on the basis of assumptions concerning estimated future flows for generating units, based on, inter alia, results of completed auctions and forecasts from an external expert. As of 1 July 2025, all Capacity Market Entities that have entered into capacity contracts after 31 December 2019 (i.e. for contracts entered into in the Main Auction for the delivery year 2025 onwards) will be subject to an emissions criterion of 550g CO2/kWh (so-called EPS 550), which will effectively exclude all coal units from participating in subsequent Capacity Market auctions.
Unit availability was estimated based on repair plans, taking into account statistical failure rates.
Weighted average cost of capital
The year 2022 in the energy and related products market remained under strong pressure from the post-Covid rebound in economies around the world as well as changes in financial markets, where tighter monetary policy is being pursued. In addition, there is a war in Ukraine, which has created additional risks to the availability of hydrocarbons from the east. These factors have caused major disruption and abruptly changed trends in financial and commodity markets. One important element of the market that has been affected is the discount rate (weighted average cost of capital) adopted for asset impairment testing. According PGE Group, the determination of a fixed cost of capital for the following years on the basis of the market characteristics of the last period is not justified, therefore it was decided that in the first years of the projection the situation is influenced by current events, while in the following years the weighted average cost of capital will approach the average of the last 11 years (covering the full business cycle since the last crisis in the financial and commodity markets).
In July 2021, the European Commission published the Fit for 55 legislative package, which intends to, inter alia, reduce GHG emissions in the EU by 55% (previously by 40%) by 2030, relative to 1990. In line with the expectations of market participants, the EU ETS reform included in the package should result in a considerable increase in the prices of CO2 emission allowances, which in practice already took place in 2021. The high prices of CO2 allowances also continued in 2022. The changes introduced may adversely affect the margins earned by high-carbon generating units, particularly to the extent that the increase in the price of CO2 allowances is not passed on in the price at which these units sell the electricity or heat produced.
The 2050 Decarbonisation Plan for the District Heating segment was adopted at PGE Group in December 2022, aiming to fulfil regulatory requirements in the energy industry and retain the existing generation potential in the long-term in order to meet customer needs. The Decarbonisation Plan operationalises objectives specified directly in PGE Group’s strategy and in the District Heating segment strategy implementation plan. The plan identifies the locations where the transformation of manufacturing assets will take place, the timing of major activities, planned expenditures and effects. Generation capacity transition via new low- or zero-carbon generating units is planned for the 2030 horizon, and climate neutrality for the 2050 horizon. To this end, the District Heating segment is gradually replacing old coal-fired sources with new low-emission sources fired with gas and oil. The new generating units will be characterised by greater operational flexibility and reliability. This is contributing to lower emissions in the cities where they will be built. Between 2023 and 2029, most of the locations where PGE Group’s district heating assets are located will be commissioned with installations that will result in a complete or significant shift away from coal fuel. Gas, municipal waste, biomass, waste heat and renewable energy will be used to produce heat in the new and modernised district heating units. The decarbonisation plan was taken into account when estimating the value in use of the generation assets of the District Heating segment.
Conventional Generation segment assets. The divestment of coal assets to the National Energy Security Agency is planned. This issue is provided with a description in note 33.2 to these financial statements.
The aforementioned changes mean that a decrease in the volume of production from conventional generation is expected and a decrease in margins generated by these assets in the future. As a consequence, this results in a reduction of expenditures (CAPEX and OPEX) for the maintenance of coal assets, which additionally affects the expected decline in profitability through the gradual deterioration of the availability of these units. At the same time, these legislative and market changes are encouraging the development of zero- and low-carbon sources, which, when the Group invests in these particular technologies, positively translates into the value in use of the assets under test. It should also be kept in mind that fossil fuel-based generation facilities, in the face of the uncertainty of RES generation (driven by environmental factors: water, wind, solar), are still needed in the electricity system to balance it.
Material changes in the regulatory environment, both in terms of domestic and foreign regulations, which affect or will affect the operations of PGE Group, are described in note 4. Regulatory environment in the Management Board report on PGE Group’s activities in the year ended on December 31, 2022.
More information on climate risks is presented in note 26.4 of these financial statements.
Climate issues are included in the assumptions used for impairment testing to the best of the Group’s knowledge, with the support of an external, independent expert. PGE Group is monitoring the market and regulatory situation on an on-going basis. The current record levels of fuel, electricity and CO2 prices and their hitherto unobserved levels of volatility mean that the PGE Group faces considerable uncertainty about future developments. This is why, in the long term, the Group has decided to leave the assumptions developed by the independent think tank adopted for the impairment tests carried out in 2021. These assumptions have been adjusted for own estimates for the first three years of the forecast so as to account for the best present knowledge of the situation in energy markets. Future changes on the electricity market may differ from the current assumptions, which may lead to substantial changes in PGE Group’s financial situation and results. They will be recognised in future financial statements.