3.1 Description of assumptions for the Conventional Generation segment

Impairment tests were conducted on December 31, 2022, on cash generating units basis by establishing their recoverable amounts. Determining fair value for very large groups of assets for which there is no active market and there are few comparable transactions is very difficult in practice. In the case of complete power plants and mines for which a value on the local market should be determined there are no observable fair values. Accordingly, the recoverable amount of the assets under review was determined based on an estimate of their value in use using the discounted net cash flow method on the basis of financial projections prepared for the period from January 2023 to the end of their useful life. According to the Group, financial projections longer than five years are justified due to significant and long-term effects of projected changes in the regulatory environment. Using longer projections, recoverable amounts may be determined more reliably.

Presented below are the key assumptions having impact on estimates of the useful value of CGU:

• classify the following as one CGU due to technological links:
  • Branch KWB Bełchatów and Branch Elektrownia Bełchatów,
  • Branch KWB Turów and Branch Elektrownia Turów,
• consider Elektrownia Opole, Elektrownia Rybnik and Elektrownia Dolna Odra as three separate CGUs,
• adopt the following assumptions about going concern:
  • until 2036 for the Bełchatów complex, based on a shut-down date for all units accepted by the trade unions and adopted for the purposes of the Just Transition Plan for Łódzkie Voivodship,
  • until 2044 for the Turów complex, based on a decision prolonging the mining concession to 2044, dated April 28, 2021,
• take into account work cost optimisation resulting from current work plans, among other things,
• maintain production capacities as a result of replacement-type investments,
• adopt varied levels of WACC after tax for the projection period, depending on the CGU, in accordance with an individually estimated level of risk:
  • for 2023-2025: average annual level for each CGU of 8.30% – 9.30%,
  • for 2026-2036: average annual level for each CGU of 6.73% – 7.64%,

As at December 31, 2022, the value of tested property, plant and equipment and intangible assets at PGE GiEK S.A. amounted to PLN 28,774 million. This value does not include CGUs for which the useful value of tested assets is negative. As a result of an asset impairment test, the Group concluded that there is no need to recognise or reverse impairment losses on these assets. The absence of the need to release impairment losses is related to the fact that the future financial flows of PGE GiEK S.A. are subject to uncertainties and the realisation of assumptions, which in a significant part are beyond the control of PGE’s CGUs. Therefore, in the Group’s view, there is no reason to reverse impairment losses recognised in previous reporting periods.

In accordance with IAS 36 Impairment, the Group carried out a sensitivity analysis for generating units in the Conventional Generation segment.

Presented below is the impact of changes in key assumptions on the useful value of assets in the Conventional Generation segment as at December 31, 2022.

A decline in electricity price by 1% would have caused a PLN 3.0 billion decrease in useful value.

An increase in WACC by 0.5 percentage points would have caused a PLN 0.6 billion decrease in the useful value of assets.

An increase in the price of CO₂ emission allowances by 1% would have caused an approx. PLN 1.4 billion decrease in useful value.

An increase in the price of hard coal by 1% would have caused an approx. PLN 0.3 billion decrease in useful value.

The future of the Polish energy market is determined by the European Union’s climate policy, and developments in the electricity market through 2050 will be influenced by the European Green Deal („EGD”), which aims to achieve EU climate neutrality by 2050. One of the most important steps towards achieving climate neutrality was the European Council’s acceptance in December 2020 of a new binding EU target to reduce net greenhouse gas emissions by at least 55% by 2030 relative to 1990 levels. The consequence of a higher CO₂ emission reduction target is the growing cost of CO₂ emission allowances, which may have a negative impact on the results of the Conventional Generation segment and PGE Group. The macroeconomic assumptions adopted for the impairment tests take into account the new higher CO2 emission reduction target in 2030 and, as a result, the increasing level of CO₂ emission allowance prices in the long term.

PGE Group’s business environment is characterised by high volatility and is dependent on macroeconomic, market and regulatory conditions, and any changes thereto may have a substantial impact on PGE Group’s financial situation and financial results. This is why the aforementioned assumptions and others used in estimating the useful value of assets are periodically analysed and verified. Any changes will be recognised in future financial statements.