33.1 Impact of war in Ukraine on PGE Group’s activities

PGE is the largest energy group in Poland. The Group’s units meet approx. 40% of the country’s electricity demand and serve over 5.5 million customers, while PGE’s distribution area covers over 40% of Poland’s territory, including areas on the border with Ukraine and Belarus. The Group’s activities are therefore of exceptional importance for the country’s energy security. It is crucial for PGE Group to secure the continuity of operation of power plants and CHPs and distribution infrastructure so as to ensure uninterrupted supplies of electricity and heat to residents, institutions and businesses.

In connection with the situation in Ukraine, a Crisis Team has been established at the central level of PGE Group to continuously monitor threats and identify potential risks. The Crisis Team’s work includes monitoring the security of electricity and heat generation and supply and the protection of critical and IT infrastructure. The Team’s tasks also include taking actions to minimise the risk of a crisis situation, preparing the companies in the Group in the event of a crisis situation and planning, organising and coordinating work to ensure the continuity of the Company’s and PGE Group’s operations.

Crisis teams have also been formed at the Group’s key companies, operating 24 hours a day, carrying out continuous monitoring and identifying potential risks in order to minimise risk to electricity and heat supplies.

All key PGE Group companies have adopted guidelines for developing business continuity plans. On this basis, companies develop and then implement their own business continuity plans that take into account the specifics of the company. A key assumption of business continuity plans is the development of a catalogue of risks for critical processes, on the basis of which emergency scenarios (instructions, procedures) are developed and adopted. The emergency scenarios are periodically tested and continuously updated. In the current situation, companies have been tasked with urgently updating and reviewing internal regulations and business continuity plans.

In the current geopolitical situation, the importance of cyber security has increased drastically. PGE Group has implemented special procedures for monitoring ICT networks due to increased activity of criminal groups aiming to attack ICT (Information and Communication Technologies) and OT (Operational Technology) systems. With the CHARLIE-CRP state of alert in force, the emergency plans have been reviewed. This significant change in the Group’s operating context triggered the launch of a threat analysis and risk estimation for cybersecurity incidents. There is also an increased focus on protecting the supply chain against cyberattacks.

The reality of cyber threats is confirmed by attacks carried out against PGE Group’s ICT infrastructure and users of information systems. Targeted attacks aimed at phishing or attempting to install malware have been particularly visible recently. DDoS (Distributed Denial of Service) attacks have also been identified, the aim of which is to seize all available and free resources in order to prevent the entire service from functioning. Identified incidents of attacks have been documented, information has been communicated to the relevant State authorities.

The counter measures taken (monitoring, incident handling and system recovery) allow attacks to be successfully repelled. These actions, combined with adequate management, lead to the build-up of resilience in cyberspace. At the same time, development and improvement of safety management appropriate to the risks identified is being implemented.

The physical security of the Group’s facilities has been strengthened. In order to protect key energy infrastructure, the Group cooperates with all services responsible for security in Poland, with a particular focus on the Internal Security Agency (ABW). In addition, PGE Dystrybucja is continuously supported by the Territorial Defence Forces (TDF).

• fuel availability and prices,
• disruption of the component supply chain,
• rising inflation and interest rates and a weakening of the national currency,
• prices of CO₂ emission allowances,
• improving energy efficiency,
• greater pressure on the energy transition through the development of RES,
• import of hard coal,
• cybersecurity,
• geopolitics,
• counterparties (sanctions lists).

• reduced availability of hard coal on the Polish market due to the embargo on supplies of this raw material from Russia,
• increase in hard coal and gas prices on the international market,
• logistical disruptions due to the high utilisation of rolling stock and changes to current travel routes,
• reduced availability of biomass on the Polish market due to the suspension of feedstock imports from Belarus,
• logistical disruptions in road transport related to fuel prices and the availability of service providers’ employees.

• EC Gorzów and EC Zielona Góra are supplied with field gas (so-called Ln nitrogenous gas). Due to the use of dedicated transmission infrastructure between the mine and the CHP plant, these generating assets are neutral to supply disruptions to Poland’s National Gas Transmission System.
• EC Toruń, EC Zawidawie, EC Czechnica, EC Lublin Wrotków, EC Rzeszów, EC Zgierz, EC Bydgoszcz i EC Kielce receive high-methane gas (so-called E gas). Gas E taken from the National Transmission System is secured in the form of adequate storage and in Poland this is at a relatively high level.

PGE Group has no influence on the directions of supply and management of the transmission of gaseous fuel, therefore the risk of possible disruptions lies with PKN Orlen S.A. (formerly PGNiG S.A.) and the Transmission System Operator OGP Gaz – System S.A.(Gaz-System). PGE has established communication channels with PGNiG and Gaz-System in commercial and operational management in cooperation with the respective PGE Group location. In accordance with national gas supply constraint management programs, securing supplies for electricity and heat generation is favoured over other customers.

• In the case of gas fuel, due to the lack of stock-holding capacities, a reduced availability translates into an immediate disruption in electricity and heat production. However, if there are back-up coal- fuelled water boilers at a CHP plant, it is possible to produce heat until these stocks are exhausted (this pertains to CHP Lublin Wrotków and CHP Rzeszów). In the case of CHP Gorzów, an OP-140 coal-fired steam boiler constitutes a back-up. At the EC Zielona Góra location, the reserve for heat production is constituted by oil boilers.
• The main suppliers of hard coal for electricity and heat production are Polish mining companies and coal importers. The CHPs have reserves of hard coal to enable uninterrupted production of electricity and heat. Due to the significant load and problems in the hard coal market, centrally-dispatched generating units have problems maintaining the minimum required stocks, resulting in the need to reduce production in order to maintain continuous operation of the units.

The electricity supply for PGE Dystrybucja S.A. and PGE Obrót S.A. is secured on a commercial basis. The physical supply of energy is conditioned by the current situation of balancing and operation of the National Power System. Disruptions in electricity generation will affect the energy supply depending on the location on the grid in the NPS. So far, PGE Group has not identified any risk associated with electricity or heat supply to residents, institutions and businesses.

The energy crisis has spread across Poland, Europe and the world. The war in Ukraine is having a major impact on the heat and electricity market in Poland. It has a major impact on the prices and availability of energy raw materials, which has translated into higher energy and CO₂ emission allowance prices and the prices of goods and services, thereby affecting the levels of margins generated and capital raising opportunities. The disruption or complete shutdown of many production sites in Ukraine has disrupted the supply chain of components for key investments, or significantly increased their prices. The war in Ukraine has also highlighted the huge role of renewable energy sources (RES), the development of which is a response to the cut-off of energy supplies from Russia and high energy prices. Renewable sources are not burdened by fuel and CO₂ costs. High energy prices are forcing improvements in energy and operational efficiency. There is also pressure mounting to accelerate the energy transition in line with the European Union’s climate policy, using the phase-out of fossil fuels to modernise the Polish economy. As the leader of Poland’s national energy transition, PGE Group is integrating the need to achieve climate neutrality into its long-term business strategy. At the same time, PGE Group is making an important contribution to maintaining the country’s energy security by ensuring the import of hard coal from directions such as South America for the needs of both electricity producers and households. A change in the behavioural patterns of energy market customers is also inevitable, leading to efficient energy consumption. This is intended to avoid problems with heat and electricity shortages during the winter. PGE Group mitigates these risks by continuing its policy of hedging electricity generation costs along with energy sales on the wholesale market, which is reflected both in hedging CO₂ emission allowances and foreign currencies for transaction purposes. 

In order to protect against major increases in electricity prices for some consumers, regulations have been put in place resulting in an obligation to apply price caps in the supply of electricity to eligible consumers. The regulations provide for compensation for trading companies that sell electricity at capped prices. The way compensation is calculated generates the risk of not fully covering the costs associated with electricity supply and limits the margins earned on electricity sales. 

Also, in line with the current decision to impose war sanctions on Russia and Belarus, PGE Group has introduced contractor compliance verification in its supply chains. 

As a consequence, the aforementioned risks may have a material impact on individual areas of PGE Group’s operations and future financial performance. In particular, the recoverable amount of selected asset items, the level of expected credit losses and the valuation of financial instruments may change. 

The introduction by the European Union of an embargo on oil supplies from Russia will not be without an impact on the wider energy market, not least because of potential fuel price increases. 

In view of the dynamic course of the war on the territory of Ukraine and its macroeconomic and market consequences, PGE Group will monitor its development on an ongoing basis and any events that occur will be reflected accordingly in the Group’s future financial statements.