Perspectives and surroundings

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PGE in transformation 2050
Perspectives and surroundings

New note

Short-term outlook (as at May 24, 2023)

Recurring EBITDA: outlook for 2023

The results of the generating segments and Supply segment additionally affected by the impact of legal regulations on limiting electricity prices and support for certain customers in 2023.

	2023 vs 2022 perspective	Main factors
Conventional Generation		Segment planned to be carved out along with the finalization of transfer of the coal assets Higher revenues from Capacity Market and ancillary services Increase in unit cost of CO2 by approx. 50% Assumed higher level of unit cost of hard coal Pressure on production volumes from new RES capacities, assumed higher wind and PV generation, import of energy
District Heating		Higher production volume of gas CHP’s due to sharp decline in gas prices Reference prices published by ERO allow for recovering cost incurred in years 2021-2022 Assumed higher level of unit cost of production fuels (mainly hard coal)
Renewables		Expected higher result of pumped storage power plants New PV capacities
Supply		Lower result on sales in tariff G (households) and tariffs ABC and R due to margin restrictions
Distribution		Expected higher WACC 8.48% (before tax) as result of assumed additional premium for reinvestment Regulatory Asset Base (RAB) at PLN ~19.7bn Pressure on volumes.

CAPEX: outlook for 2023

	2023 vs 2022 perspective	Main factors
Conventional Generation		Segment planned to be carved-out along with the finalisation of transfer of the coal assets Modernization and maintenance outlays
Low-emission sources		Continuation of spending on construction of CCGT units in Dolna Odra. Significant spending due to start of construction of CCGT in Rybnik
District Heating		Increase in expenditures related to the construction of new low-carbon gas units, including: New Czechnica CHPP, Bydgoszcz CHPP, Zgierz CHPP, Kielce CHPP
Renewables		Increase in outlays for the construction of offshore wind farms Consistent increase in outlays as part of the PV development program Regardless of the growing expenditure on organic growth, possible acquisitions
Supply		Implementation of ongoing development and maintenance projects
Distribution		Increase in planned outlays for connecting new sources Implementation of grid grounding program and smart metering installation

The following tables present aspects influencing the development of PGE Group’s operations in the medium term

	Key developments	Potential impact on PGE
MACROECONOMIC ENVIRONMENT – WORLD	Following the energy crisis, there was a major rise in fuel and energy prices, which translated into very high levels of inflation, last seen in developed countries in the 1980s. Price index readings in the eurozone and the US increased month on month in the course of 2022, slowing down only towards the end of the year. The massive increase in energy prices also indirectly pushed up core inflation, prompting central banks to raise interest rates rapidly. Record fuel and electricity prices began to massively contribute to an economic downturn and slowing GDP growth, as well as a decline in electricity demand in the second half of the year. There also was a huge slump in demand in the gas market. There was a major deterioration in leading indicators in basically all of the world’s major economies. The eurozone PMI fell from 59 points in January to 48 points in December. Consumer sentiment indicators also remain at levels signalling recession. Industrial production in the euro area, following a strong rebound in 2021, remained at a similar level in 2022. However, leading indicators suggest that industrial production can be expected to decline in the coming months. The European Commission has adopted the REPowerEU plan, which aims to decouple Europe from Russian fossil fuels and involves redirecting some of the EUR 225 billion in remaining funds and raising EUR 20 billion from the auctioning of CO₂ allowances deferred from future periods.	The downturn in the euro area should also be followed by a decline in industrial production in Poland, which makes it possible to expect a further drop in energy demand in the NPS. High gas prices in Europe are reducing generation in gas-fired thermal power plants. Conversely, rising market prices for coal at ARA ports are translating into increased generation costs using imported coal. Rising global commodity market prices are increasing the capital intensity of investments in both conventional and RES assets. Additionally, the global increase in fossil fuel prices is increasing demand for RES technologies, which also has an impact on increasing investment costs. High levels of core inflation translate into the need to maintain elevated interest rates for an extended period of time, which in turn raises the cost of financing.
MACROECONOMIC ENVIRONMENT – POLAND	2022 was characterised by declining GDP growth. The relatively stable growth in the first quarter was driven by inventory accumulation. In subsequent quarters, demand destruction became noticeable. The uncertainty prevailing in the markets influenced consumer scepticism and inhibited a considerable share of investments. The average annual inflation rate in 2022 was 14.4%. The average annual core inflation rate fluctuated around 9.1%. Rising energy prices was a significant, but not the only, reason for the high inflation rate in 2022. The National Bank of Poland’s reference rate increased during the year from 2.25% to 6.75%. The rating agencies maintained Poland’s high credit rating. They also emphasised that the outlook for the near future is stable. Yields on 10-year government bonds rose over the year from 3.5% in January 2022 to 6.5% in December 2022. Market enthusiasm over the lifting of a significant part of the covid restrictions was dampened by the turbulence resulting from the start of hostilities across the eastern border of the Republic of Poland. For much of the year, the PMI index was at levels signalling a crisis in the manufacturing sector. Throughout the year, a downward trend in PMI was noticeable. Increased population due to migration from Ukraine. The EC forecasts GDP growth in the coming years at 1% in 2023 and 2.6% in 2024.	The expected slowdown in economic growth should translate into reduced demand for electricity. Price pressures (high costs of obtaining energy fuels, CO₂ emission allowances, distribution fees) will reduce energy consumption both in households and in industry and services. High energy prices may affect the profitability of energy-intensive industries. High energy prices and the availability of support schemes are likely to encourage consumers to install renewable energy sources. The influx of a large number of people from Ukraine is estimated to have increased electricity demand in 2022, and that is expected to continue in 2023. In the longer term, lower demand and changes in the energy mix could translate into a lower electricity price on the wholesale market and, especially, negatively affect the economics of coal-fired generation. No change is expected in Poland’s long-term credit risk rating in PLN and foreign currencies, which, with other factors unchanged, should remain neutral for the cost of financing investment programs. Current inflation values and interest rate levels are expected to return to the levels assumed by the National Bank of Poland’s targets in the coming years. Growth in construction price indexes and cost pressures in the specialised construction segment may result in higher expenditures for the planned investment program and higher costs for third-party services. A structural deficit of qualified employees may result in delays in implementing investments and renovations.
TRENDS ON THE ELECTRICITY AND FUEL MARKETS	In 2022, Poland’s electricity demand declined by 0.9 TWh year-on-year, from 174.4 TWh to 173.5 TWh. In the third quarter of 2022, the average price of natural gas purchased from EU countries was over 951 PLN/MWh, a three-time increase year-on-year. The average purchase prices of natural gas significantly dropped – average price amounted to PLN 471/MWh. Coal prices at ARA ports rose from approx. 25 PLN/GJ in January to approx. 77 PLN/GJ in August. At the end of the year, prices are at around 30 PLN/GJ. As in the previous few months, in November 2022 domestic hard coal for the power industry was more expensive than a year earlier. The value of the PSCMI1 index was 26 PLN/GJ. The weighted average price of BASE on the Day-Ahead Market in 2022 was 796 PLN/MWh, denoting an increase by 395 PLN/MWh in comparison to 2021. The weighted average price of the annual contract for 2023 amounted to 1 112 PLN/MWh for the whole of 2022, an increase of 727 PLN/MWh compared to the price quoted for the BASE_Y-22 contract in 2021. CO₂ prices continue to remain high. The average price in 2022 was around 81 EUR/tonne. Gas and electricity prices reached an all-time high in 2022. Prices had already started to rise in the second half of 2021 when the global economy had started to recover from the COVID-19 standstill. And there were commodity shortages as a result of rising energy consumption. The situation was exacerbated by Russia’s invasion of Ukraine and the gradual suspension of gas supplies from Russia to the European Union. Further complications included record high summer temperatures and low availability of nuclear power plants in France. The continuing high level of global fuel prices translated into rising energy prices in neighbouring countries, resulting in a reversal of the balance of cross-border exchange, with Poland becoming a net exporter in 2022. Record electricity generation from PV and wind in the EU in 2022. Poland generation increase of 8.6 TWh y/y. Lower production from nuclear power plants due to failures of existing units and droughts that led to cooling water deficits. Higher coal consumption in Europe due to elevated natural gas prices and difficult supplies from the Russian direction. Partial or complete reduction of gas supplies from Russia for 13 EU Member States. Bulgaria, Poland, Lithuania, Latvia and Finland no longer receive any gas supplies from Russia. Natural gas imports to Europe via LNG terminals from non-Russian suppliers increased by 75% y/y to reach 112 bcm. The Świnoujście LNG terminal received 5.7 bcm in 2022, in 2021 3.6 bcm. The main suppliers to the EU are Norway and the United States. Re-gasification capacity in Europe could be rapidly expanded with floating FSRU terminals. Member states have set a condition that natural gas storage facilities must be filled to at least 80% by November 2022. Storage fill levels exceeded 91% in mid-October. This was driven by increased LNG supply and reduced consumption. Introducing emergency interventions on natural gas consumption: The EU gas demand reduction target is 15% for the period August 2022 – March 2023, compared to the average of the last five years. Natural gas consumption in the EU declined between August and November 2022 by 20% relative to the average level for this period in 2017-2021. The decrease in consumption in Poland was around 20%. Baltic Pipe opening – September 28, 2022. On 30 November, the pipeline reached its target capacity of 10 bcm/year of gas from Norway. Commissioning of the GIPL gas pipeline connecting Poland and Lithuania – May 1. The pipeline enables the receipt of liquefied gas supplies through the Lithuanian LNG terminal in Klaipeda. Synchronisation of the Ukrainian and Moldavian electricity grids with the European continental grid. This will maintain grid stability and create conditions for mutually beneficial electricity trade. Implementation of measures to address higher energy prices: Setting a target for overall reduction in electricity demand. Setting a revenue cap for inframarginal technologies. Solidarity contributions from windfall earnings. Establishment of regulated prices, social tariffs, temporary subsidies for private consumers and businesses (including SMEs and industry). The Law on Emergency Measures to Reduce Electricity Prices and Support Certain Consumers in 2023 came into force. Electricity prices for households in 2023 are frozen at the 2022 price level up to certain consumption limits. A law introducing electricity price caps is in force since December 1, 2022. The maximum prices are 693 PLN/MWh for households and 785 PLN/MWh for utilities, local governments and SMEs. The maximum prices will be in force until December 31, 2023. A cap on energy sales prices is imposed on generating and trading companies. Once these are exceeded, the companies are required to make a contribution to the Price Difference Payment Fund. Electricity traders will be entitled to compensation related to the price cap for consumers paid from the Price Difference Payment Fund. Continuation by the Ministry of State Assets of a project to transform the electricity sector in Poland and spin off coal-fired generation assets from state-owned companies. Changes to the energy market model: Introduction of maximum offered prices in the Balancing Market in September/October 2022. Removal of the stock exchange requirement. New billing model for prosumers, i.e. net-billing. Implementation of Flow Based Market Coupling in trade on the synchronous link in 2022.	There was an increase in coal-fired power generation in Europe in 2022 due to the increase in gas prices on European markets. This translated into an increase in coal prices in both the European and Polish markets. In the short term, there may be a risk of lower availability of domestic coal for the PGE Group’s generation sources. However, the dynamic increase in the installed capacity of RES expected in the near future and the stabilisation of the situation on global fuel markets and, accordingly, energy prices on neighbouring markets should exert pressure on the reduction of generation from coal units. In the long term, problems with the availability of coal for households will lead to a shift away from solid fuels for household heating and towards other solutions, such as heat pumps, district heating or gas heating. Due to the embargo on Russian coal and the difficulty of accessing fuel for households, PGE Paliwa and Węglokoks were required in mid-July 2022 to purchase and import a total of 4.5 million tonnes of coal suitable for individual households into Poland by October 31 of that year. In 2023, Poland will continue importing coal for household needs. PGE Paliwa states that it will import a total of approx. 10 million tonnes of coal by the end of April 2023. Continued upward pressure on energy prices in Poland in the long term may have an adverse impact on energy consumption by energy-intensive consumers and on the competitiveness of electricity versus other energy carriers, and thus on the sales volume realised by PGE Group. Growth in prices for retail customers may have a negative impact on the margins achieved by PGE Group in the Supply segment. The new natural gas supply potential (the commissioned Baltic Pipe and the expansion of LNG terminals) will enable the development of CCGT generation units and the delivery of investments in high-efficiency gas cogeneration under the support scheme. PGE Group is participating in a project to spin off coal generation assets from state-owned companies. The project will significantly change the Group’s generation profile to a low-carbon one and reduce margin and production risks in coal units.

	Key developments	Potential impact on PGE
DEVELOPMENT OF NEW TECHNOLOGIES	The US-based Westinghouse Electric Company has been selected as the technology partner to build the first nuclear power plant in Poland. The plant is to be built using AP1000 technology. Conclusion of a letter of intent on the Pątnów nuclear power plant development between the Ministry of State Assets, the Ministry of Trade, Industry and Energy of Korea, ZE PAK, PGE and Korea Hydro & Nuclear Power (KHNP). The growing competitiveness of wind (including offshore wind) and photovoltaic technologies is observed, which is confirmed by the prices achieved in RES auctions and the dynamics of the increase in the number of micro-installations. Considerable growth in the heat pump market. In Poland, sales of heat pumps increased by 121% y/y. In some countries, dynamic dissemination of full-scale, new energy storage technologies is evident, providing, among other things, regulatory services to electricity systems or enhancing local security of energy supply. Systematic development of prosumer energy and a dynamic increase in the number of micro-installations. DEVELOPMENT OF E-MOBILITY Development of information and telecommunications technologies finding new applications in the energy sector. On November 2, 2022, Government adopted 'Polish hydrogen strategy to 2030 with an outlook to 2040 – November 2, 2022.	The stronger competitiveness of new RES installations affects the dynamics of their growth and changes the operating conditions of conventional units. The declining costs of offshore technology make it possible to use it to maintain the PGE Group’s leadership in generation with a significantly reduced average portfolio carbon footprint. Commercialisation of energy storage on an industrial scale will enable better use of RES, complementing conventional capacity in the system balancing role, as well as improving local energy security. The development of DSR will allow the balancing of the NPS and reduce the risk of blackouts in situations of low power reserve due to fuel availability problems or uncontrollable operation of RES units. With the development of prosumer power generation, the variability of grid operating conditions at the local level is increasing, which implies the need for investment in infrastructure (connections, upgrades), with a reduction in the volume of electricity distributed. In the Conventional Power segment, there is a higher demand for generating units with high flexibility to balance distributed power generation. The development of electromobility will increase electricity demand and change its daily profile, which may slightly alter the operating conditions of some conventional units. However, this development requires investment in the development of grid infrastructure and charging points, as well as a charging management system. It is also possible to use batteries in electric cars as storage for energy produced by RES. PGE Group’s use of new technologies and the potential of data resources can allow it to grow into new roles and areas of activity, as well as improving

Surroundings

Societal expectations define the vision for energy

The energy sector has undergone profound changes in recent years. Public expectations are now directed towards energy produced in an environmentally friendly way and solutions that are tailored to customers’ needs and give a sense of independence.

The main trends defining the future of the sector are Decarbonisation, Decentralisation, Competition. Regulatory changes have emerged tightening the European Union’s environmental policy, aiming to achieve climate neutrality by 2050 and efforts are underway to set an interim target for 2040.

With social and regulatory changes, the policy of banks and investors to finance projects in the energy sector has also changed. These days, money flows to investments in zero-carbon generation sources and grid infrastructure.

development of distributed energy
new energy market roles and participants
change in conditions for power grid operations
automation and digitalisation

Decarbonisation

- targets aiming for climate neutrality
- electrification of district heating and transport

Decentralisation

- development of distributed energy
- new energy market roles and participants
- change in conditions for power grid operations
- automation and digitalisation

Competition

- the growing image of environmental neutrality
- new players from outside the energy sector
- simple and attractive product offerings supported by new technologies

Energy transition as element of economic model

Fiscal and investment policy linked to environmental targets

Targeting funds for investment in zero-carbon generating sources and grid infrastructure
Reducing the availability of finance for fossil fuel-based power generation
Companies and cities striving for sustainability

Economic development

Investment stimulus thanks to power grid modernisation

Just transition

Creating an opportunity for post-industrial regions to develop new specialisations

Independence

Use of renewable energy resources and energy storage assets

Challenges for energy companies

Adapting the organisation to competing in a new surrounding

Changes in the surroundings are not only a threat and a challenge for the sector, but also an opportunity to provide an investment boost to the economy through the construction of new generation sources and the modernisation of energy infrastructure. The transition of the energy sector should translate into economic development, sustainable growth for companies and cities, as well as a just transition of regions hitherto associated with coal mining.

Energy transition is becoming part of the economic model. Part of this transformation in Poland is the project of establishing the National Energy Security Agency (NABE) and separating coal assets of companies with State Treasury shareholding, including those belonging to the PGE Group, to it. After completing this project PGE Group’s investments will focus on renewable energy, district heating transition and grid infrastructure.

The total planned investment expenditures in 2021-2030 will amount to PLN 125 billion, of which approx. 50% will be allocated to the development of renewable energy sources (offshore and onshore wind farms, photovoltaics, zero-emission co-generation sources).

This direction is inevitable. Poland's energy sector needs a leader of change.

PGE wants to play the role of a leader in the transition and modernisation of the energy sector in Poland and to support the building of a market environment conducive to energy transition. PGE Group is ready to carry out transition processes in the sector and prepare the conventional base of the power system to function under a new ownership structure.

As a transition leader, PGE is committed to reducing its environmental impact by achieving climate neutrality in 2050 and the updated strategy now aims to achieve climate neutrality in 2040.

Sustainable decarbonisation is planned by changing generation technologies, expanding the RES portfolio and enabling customers to participate in the energy transition through attractive product offerings. The company will pioneer the development and operation of offshore wind energy.

Market environment

Electricity prices - international market

Wholesale market (comparison of day-ahead markets)

Chart: Comparison of average electricity prices on Polish market and on European markets in the fourth quarter of 2022 (prices in PLN/MWh, average exchange rate EUR/PLN 4.73).

_{Source: TGE – RDN price level calculated on the basis of hourly quotations (fixing), EEX, Nordpool}

Chart: Comparison of average electricity prices on Polish market and on European markets in 2022 (prices in PLN/MWh, average exchange rate EUR/PLN 4.69).

Source: TGE – RDN price level calculated on the basis of hourly quotations (fixing), EEX, Nordpool

_{Source: TGE, EEX, Nordpool}

In the fourth quarter of 2022, the y/y increase in prices on neighbouring markets ranged between PLN 52 and PLN 387/MWh, whereas in Poland the average price level increased by PLN 138/MWh y/y (increase by approx. 22%).

The low correlation of energy prices results from differences in the technological mix (share of renewable energy sources) and the situation on the markets for related products. The price spread between Poland and its neighbouring countries is also due to differences in realised coal prices at home and abroad.

The price of hard coal in ARA ports rose by 62% y/y in the fourth quarter, while the domestic pulverised coal price index, PSCMI-1, increased by 123% over the same period.

On an annual basis, average energy prices in the neighboring markets increased in range PLN 342-753/MWh y/y, whereas in Poland the average price level increased by PLN 387/MWh y/y (approx. 97%).

The price spread between Poland and its neighbouring countries was largely due to differences in realised coal prices and natural gas at home and abroad.

_{Source: ARP, Bloomberg (API21MON OECM Index), own work.}

_{* The comparison is illustrative only. Methodologies of counting the ARA and PSCMI1 indexes are different. Among other things, the ARA index includes insurance and delivery costs. The PSCMI 1 is an ex-mine index without insurance and delivery costs. Standards for calculating the caloric values are also different (ARA – 25.12 GJ/t vs. PSCMI1 caloric value – range 20-24 GJ/t). The aim is to compare the trend and not the absolute level. For illustration purposes ARA index is recalculated from USD/t to PLN/GJ.}

Trading

_{Source: own work based on data from PSE S.A.}

Global increase in fuel prices (which translate into an increase in the costs of electricity production from natural gas and hard coal) translated into an increase in energy prices in neighbouring countries, which in turn increased electricity export from Poland to neighbouring countries.

In the fourth quarter of 2022, Poland was a net exporter of electricity, with a trade balance of -0.1 TWh (imports 2.4 TWh, exports 2.5 TWh), up y/y by 1.3 TWh. Imports from Sweden (1.0 TWh) and Germany (0.9 TWh) had the greatest impact on the trade balance. At the same time, we exported the most electricity to Slovakia (1.4 TWh) and Lithuania (0.4 TWh).

In 2022, the trade balance had a per export direction and amounted to -1.0 TWh (imports 9.1 TWh, exports 10.1 TWh). The largest contribution to the trade balance came from imports from Sweden (3.9 TWh), Germany (1.8 TWh) and Lithuania (1.7 TWh). At the same time, we exported the most electricity to Slovakia (5.4 TWh) and Germany (2.7 TWh).

Retail market

The diversity of electricity prices for retail customers in the European Union depends both on the level of the wholesale prices of electricity and fiscal system, regulatory mechanism and support schemes in particular countries.

In Poland in the first half of 2022 an additional burden (over sale price and cost of electricity distribution) for individual customers accounted for 38% of the electricity price. For comparison, in Denmark the proportion of additional charges in the price of electricity exceeded 48%.

_{²Eurostat data on retail market are published in semi-annual intervals.}

Chart: Comparison of average prices for individual customers in selected EU countries in the first half of 2022 (prices in PLN/MWh, average exchange rate EUR/PLN 4.63).

_{Source: own work based on Eurostat data.}

Prices of certificates

In the fourth quarter of 2022 the average price of green certificates (index TGEozea) reached PLN 173/MWh and was lower by 37% compared to the analogical period of the previous year.

An obligation to redeem green certificates changed as compared to 2021 (19.5%) and stood at 18.5% for 2022. The average price of green certificates in 2022 amounted to PLN 192/MWh and was at the same level as in 2021.

A regulation was published in July 2022 on the level of the green certificate redemption obligation for 2023. In 2023 the obligation level is set at 12%.

_{Source: Own work based on TGE quotations.}

Prices of CO2 emission rights

EUA (European Union Allowances) prices are one of the key factors determining wholesale energy prices and PGE Group’s financial results. Installations emitting CO₂ in the process of electricity or heat production bear the expenses for purchasing EUA allowances to cover the deficit (i.e. the difference between CO₂ emissions at PGE Group’s generating units and the free-of-charge allowances received under derogation in accordance with the National Investment Plan).

Wherein, last allocations granted free of charge were planned for realisation of investment tasks for 2019. It means that the free allocations for electricity generation, in accordance with the currently used method, ended when 2019 allowances were received.

In the fourth quarter of 2022 the weighted average price of EUA DEC 22 was EUR 77.38/t and was higher (by approx. 14%) than the average price of EUR 68.16/t for the EUR DEC 21 instrument in the similar period of the previous year. In the whole year 2022 the weighted average price of EUA DEC 22 was EUR 80.85/t and was 50% higher y/y than the average price of EUR 53.87/t for the EUR DEC 21 instrument in the previous year.

_{Source: own work based on ICE exchange quotations}

CO₂ emission rights granted free of charge

In accordance with Commission Implementing Regulation (EU) 2019/1842 of October 31, 2019 laying down rules for the application of Directive 2003/87/EC of the European Parliament and of the Council as regards further arrangements for adjustment of the allocation of free CO2 emission allowances due to changes in activity levels, the competent authority may suspend the issuance of free emission allowances to an installation until it is determined that there is no need to adjust the allocation to that installation or the Commission has adopted a decision concerning adjustments to the allocation to that installation.

In national legislation, the Act on the Greenhouse Gas Emission Trading Scheme introduced an additional condition for the issuance of emission allowances to installations. According to the general rules, allowances are issued by February 28 each year, however, in the case of installations, the issue of emission allowances takes place after the submission of an activity level report and the publication of information in the Public Information Bulletin on the website of the office serving the Minister of Climate and Environment.

According to the Commission Regulation, activity level reports are submitted by March 31 each year, hence on April 8, 2022 emission allowances were issued to the accounts of the operators of installations in the Union Registry in accordance with the publication in the Public Information Bulletin of the Ministry of Climate and Environment on April 7, 2022. Entities whose reports were still being verified by the EC received allowances on April 28, 2022.

Emission of CO₂ compared to the allocation of CO₂ emission allowances for 2022 (in tonnes).

XLS

Product	CO₂ emissions in 2022	Allocation of CO₂ emission rights for 2022¹
Electricity and heat	70,010,418	633,258

¹ Allowances for heat production.

Competitive environment

Generation of electricity

Transmission, responsibility of the TSO – PSE S.A.,

Distribution

Retail sale

District heating sector may be also distinguished, within which PGE Group is active in heat generation, distribution and sales.

The key participants of the electricity market in Poland are four nationwide, vertically integrated energy concerns: PGE, TAURON Polska Energia S.A., ENEA S.A. and ENERGA S.A., which was acquired by PKN Orlen in 2020.

PGE Group is the undisputed leader in electricity generation with a market share of more than 40%. The Group produces more electricity than all of the competitors on the consolidated market combined, whilst having the largest achievable capacities, both conventional and renewable. Aside from integrated energy groups, significant producers on the market include PKN Orlen S.A., ZE PAK S.A. („ZE PAK”), and PGNiG Termika S.A., since November 2022 in the PKN Orlen Group. While ZE PAK’s production is based on industrial plants, PKN Orlen’s and PGNiG’s production is based on cogeneration units generating electricity together with heat.

In 2022 50% of the electricity produced in the country was hard coal-based – and this is a key fuel for PGE Group’s competitors. Approximately 27% of the electricity produced in Poland was lignite-based. Aside from PGE Group, ZE PAK also bases its electricity production on lignite. The market share of renewable energy sources increased. Wind farms as well as photovoltaic installations have respectively approx. 10% and 5% share in electricity generation.

Chart: Estimated share of largest Polish electricity generators in installed capacity and net generation after three quarters of 2022.

_{Source: own work based on information published by the companies and Agencja Rynku Energii S.A. (”ARE”).}

Energy production from renewable sources is much more dispersed than the conventional generation market. In the previous year wind photovoltaics was the most dynamically developing sector. As of the end of December 2022, this technology had the largest share in total installed RES capacities – 12.2 GW, although the vast majority of installations (8.8 GW) belonged to approx. 1.2 million prosumers.

The development of photovoltaics is an element of PGE Group’s investment plan, which sees the construction of approx. 3 GW in capacity by 2030. So far, PGE Energia Odnawialna has secured approx. 3.5 thousand hectares of land for the purpose of building farms with a capacity of almost 2 GW. Moreover, in 2022 the company received approvals for the implementation of new projects with a total capacity of more than 250 MW. PGE Group remains the entity with the highest installed wind capacity – 772 MW and has over 9% share in total wind capacity installed in Poland. Other notable wind farm operators include EDP Renewables Polska sp. z o.o., RWE Renewables Poland sp. z o.o., Polenergia S.A., TAURON Ekoenergia sp. z o.o. and PKN Orlen.

Offshore wind farms are an emerging RES segment in Poland. In the system’s first phase, support is awarded by way of an administrative decision issued by the President of the Energy Regulatory Office, and from 2025 offshore wind farms projects will be able to participate in the auction system.

In December 2022, the President of the Energy Regulatory Office issued decision in case of individual prices in contracts for difference for two offshore projects Baltica 2 and Baltica 3 with a total capacity of 2.5 GW which are being implemented jointly by PGE and Ørsted (JO).

Growth in the market prices of energy allows for the development of RES investments also outside the support system, based on PPAs.

In the distribution area, the country is divided into regions, with four large distribution system operators (the “DSO”) on the market, who are required to carve out distribution activities from their other business: PGE Dystrybucja S.A., TAURON Dystrybucja S.A., Enea Operator sp. z o.o. and Energa-Operator S.A.

Aside from the above-mentioned energy groups, another significant entities include Stoen Operator sp. z o.o. (company from E.ON Group, previously innogy Stoen Operator sp. z o.o.), responsible for electricity distribution in Warsaw, as well as PKP Energetyka S.A. managing the railway electric network throughout the country (in December 2022 PGE S.A. signed preliminary agreement for acquisition of PKPE Holding sp. z. o.o., and indirectly of 100% shares in PKP Energetyka S.A.).

A historical division of the distribution areas has substantial impact on the operating conditions of the business, and this specific situation is reflected in the distribution tariffs approved by the URE president. PGE Group operates in an area that is less urbanised and industrialised, meaning that it has approx. 5.7 million clients throughout an area of approx. 130 ths km2 in the Distribution segment. For comparison, TAURON has a similar number of clients in an area nearly twice smaller and distributes a larger amount of energy.

Areas of operation of Polish distribution system operators.

_{Source: own work.}

Share of particular energy groups in volume of energy distributed and sales of electricity to final off-takers after three quarters of 2022.

_{Source: own work based on information published by the companies, ARE and ERO.}

In the retail segment, which covers sales to end customers – individual, small and medium enterprises as well as large industrial customers – most of the sales are conducted by the four largest energy groups and E.ON Polska S.A. (formerly innogy Polska S.A.). PGE Group and TAURON remain the leaders, having over 50% of the market. Both PGE Group and TAURON sell electricity to over five million clients.

Despite a growing number of competitors in the segment, including companies for which electricity is not a core product, companies from outside the four largest Polish groups continue to control little market share. The leaders control almost 80% of the market, while other significant player is E.ON Polska S.A., based on sales connected with serving as distributor for the Warsaw area, as well as PKP Energetyka S.A.

The district heat production market in Poland is highly dispersed, with the four leading producers accounting for less than 40% of production countrywide. PGE Group is the undisputed leader of this market, too with a share at a level of approx. 20%.

This market is of a local nature and bears the traits of a natural monopoly, with heating prices being set in an administrative procedure – tariffs approved by the President of the Energy Regulatory Office.

The dominant producers focus their production activities in different urban areas therefore sector competition is limited and is local in nature. Besides PGE Group, the key producers of heat are:

Polskie Górnictwo Naftowe i Gazownictwo S.A. (PGNiG) – Warsaw agglomeration,
Grupa Veolia – Poznań agglomeration, Łódź.

Energy group profiles

The electricity sector is divided into segments, what is reflected in the operating segments of the respective energy groups. The generation and distribution segments play the largest role in creating the PGE Group’s EBITDA.

This allows to optimally deploy its competences and capitalise on opportunities arising in the generation area (both conventional and renewable) as well as in wholesale energy trade, whilst generating high and stable EBITDA on regulated activities.

With acquisitions of the Bogdanka mine and Połaniec power plant and the launch of a new unit at the Kozienice power plant, ENEA increased its share of EBITDA from the generation segment. This brought ENEA’s profile closer to that of PGE Group.

A key feature of all the groups is a relatively small contribution of retail sales to operating profit, which is a result of sales margin levels, driven by strong competition in the segment.

Chart: Profiles of Polish energy groups (size of the chart is proportionate to share in the 9M 2022 EBITDA of respective business segments and the amount of total EBITDA).

_{¹ Conventional and renewable generation, mining and district heating}

_{Source: Own study based on information published by companies.}

Regulatory environment

PGE Group operates in an environment with a significant impact of domestic and foreign regulations. Presented below is a summary of the most significant decisions, which took place in period from January 1, 2022 until the publication date the report for 2022 and which could have an impact on PGE Group’s operations in the coming years.

Regulation	Regulation objectives	Regulation	Next stage	Impact on PGE Group
The bill on the amendment to the Energy Law and the Renewable Energy Sources Act. GLC list: UC74	The draft act includes, in particular, proposals for provisions implementing into the Polish legal system Directive (EU) 2019/944 of the European Parliament and of the Council of June 5, 2019 on common rules for the internal market in electricity and amending Directive 2012/27/EU. The draft expands on the directions of changes in regulations initiated in the act of May 20, 2021 on amendment of the act – Energy Law, and certain other acts. These include: the technical ability to change electricity supplier within 24 hours, starting from 2026, implementation of civic institutions of energy communities, the customer’s right to voluntarily and temporarily reduce electricity consumption (“DSR”), aggregation, contracts with dynamic electricity prices, definition of the aggregator’s function on the electricity market, along with its tasks and authorisations, definition of demand response and active customer on the energy market, allow DSOs and TSOs to own certain energy storage installations, expand the Energy Regulatory Office’s authority, regulations concerning system services, flexibility services and changes in balancing, implementation of provisions introducing the separation of transmission and distribution activities from energy storage – (an energy system operator, with the exceptions provided for in the draft, cannot be the owner of and cannot build, operate or manage an energy storage system).	The deadline for submitting comments was June 23, 2021. On July 6, 2022, the Council of Ministers Committee on Digitalisation approved the draft. The draft is at the stage of work in the European Affairs Committee at the Council of Ministers.	Referral for work in the Permanent Committee of the Council of Ministers.	The proposed solutions will have an impact on all of PGE Group’s operating segments, especially the Supply and Distribution segments. The draft introduces or applies numerous EU laws addressing the electricity market, including directive 2019/944 on common rules for the internal market for electricity, and grid codes.
The bill on the amendment to the Energy Law and the Renewable Energy Sources Act GLC list: UD162	The bill includes proposals for legislation to abolish the exchange obligation and to tighten liability for electricity market manipulations. The ERO President will have at their disposal appropriate tools to prevent abuses and attempted abuses in the electricity market. According to the explanatory memorandum to the bill, the abolition of the obligation is included in the Polish Electricity Market Reform Implementation Plan.	At a session on November 4, 2022 the Polish parliament adopted the act. On November 15, 2022 the bill was signed by the President of Poland.	The bill entered into force on November 29, 2022.	The change to abolish the exchange obligation will have no adverse impact on the PGE Group’s operations.
Draft act on amendment of act on renewable energy sources and certain other acts. Sejm print no.: 1 382	The act introduces a change in the settlement method for renewable energy prosumers by replacing the current discount system, which provides for the possibility of storing energy in the grid and consuming it at any other time, with a net billing system, which means that energy is ultimately valued according to the value from the hour of generation and hour of consumption. Furthermore, the act requires prosumers entering the system from April 1, 2022 to pay a distribution fee (previously paid on behalf of prosumers by energy vendors). In order to enable vendors to settle with prosumers, the act requires DSOs to provide vendors with detailed metering information. Vendors will be required to provide detailed billing information to prosumers via a dedicated ICT system. The act also introduces the institution of collective prosumer (entered into force on April 1, 2022) and virtual prosumer (effective from July 2, 2024).	On December 14, 2021 the President signed the act. The act entered into force on April 1, 2022, with the exception of provisions pertaining to the acquisition of the right to participate in the existing prosumer support system, which went into effect on December 22, 2021 and provisions concerning the virtual prosumer, which will enter into force on July 2, 2024.	–	The draft is of key importance for the Supply segment, which currently has obligations to settle with prosumers and pay a distribution fee on their behalf to DSOs, and for the Distribution segment, which will be required to collect and compile metering data on prosumers.
Draft act on amendment of the act on renewable energy sources and certain other acts Government Legislation Centre list: UC99	The act introduces amendments to several acts, including: Energy Law, Environmental Protection Law, in connection with heating going green, and other changes related to the necessity to implement directive RED II (regarding the promotion of the use of energy from renewable sources). Moreover, the act introduces new support systems for biomethane, to modernise RES installations and for existing RES installations to cover operating expenses. The act also changes the definition of hybrid RES installations.	The draft act was published for consultation on February 25, 2022. It is currently the subject of internal work at the Ministry of Climate and Environment.	Referral to work in the Committee for European Affairs.	The draft is of significance for the Renewables segment, especially due to the possibility of using new support systems and for the District Heating segment in terms of increasing the use of heat generated from RES.
Amendment of the act on investment in wind farms. GLC ref. no. UD207	Modification of rule 10H – mitigation by allowing municipalities to define in local spatial development plans (after consultation with local communities) a distance less than the statutory distance for wind farms from residential buildings, but not less than 500 m.	OnDecember 15, 2021, the Joint Commission of the State Government and Local Government issued a positive opinion on the draft. InApril 2022, the draft was transferred from the Ministry of Development and Technology to the Ministry of Climate and Environment. On July 5, 2022, the draft was adopted by the Council of Ministers and referred to the Sejm.	Parliamentary works.	The draft is of significance to the development of the Renewable Energy segment.
Act amending the act on maritime safety and the act on maritime areas of the Republic of Poland and maritime administration. GLC ref. no. UD232 Sejm print no.: 2071	The act contains provisions aimed at ensuring safety during the construction and operation of offshore wind farms in the Polish exclusive economic zone of the Baltic Sea and equipment for the off-take of power from these installations. The legislation provides for the implementation of oversight mechanisms over the design, construction and operation of offshore wind farms, including a certification system and oversight activities related to the investment implementation process.	On July 7, 2022, the draft was passed by the Sejm. On July 20, 2022 the act was signed by the President of the Republic of Poland. The act entered into force on August 12, 2022.	–	The act is of significance to investments in the development of offshore wind farms. The introduction of excessive certification mechanisms may delay the investment and increase the cost of the investment to develop offshore wind farms.
Draft Act amending the Act on the greenhouse gas emission allowance trading scheme and the Act – Environmental Protection Law	The aim of the act is to establish national legislation governing the establishment and operation of the Energy Transition Fund. The Energy Transition Fund is to be used to finance investments in the energy and industrials sectors excluding solid fossil fuels, i.e. coal.	On April 6, 2022, a revised version of the act was published by the Government Legislation Centre. PGE submitted comments on its own and as part of the Polish Association of Combined Heat and Power Plants and the Economic Association of Polish Power Plants. Analysis of the submitted comments is in progress.	Examination of the draft by the Council of Ministers and referral to the legal affairs committee of the Government Legislation Centre for consideration.	The draft will be relevant for the entire PGE Group, excluding coal assets. Funds from the Energy Transition Fund will be available to finance investments in the areas: RES, grids, storage, etc.
Draft Act amending the Act on reserves of crude oil, petroleum products and natural gas and the rules of conduct in situations of a threat to the state’s fuel security and disturbances on the oil market and some other acts. Government Legislation Centre list: UC52	The draft intending to align the legal order regulating various aspects of ensuring fuel security in the field of natural gas with the provisions of Regulation (EU) 2017/1938 of the European Parliament and of the Council of 25 October 2017 concerning measures to safeguard security of natural gas supply and repealing EU Regulation No 994/2010. The draft introduces a number of recommended solutions that, among other things: change the rules for creating and maintaining (strategic) natural gas reserves, which will be the responsibility of the Government’s Strategic Reserve Agency, set the volume of natural gas reserves per gas year at 35% of the total demand for type E gas during a period of 30 days of exceptionally high gas demand which may not occur more than once in 20 years, a new way of financing natural gas reserves, which will consist of a monthly contribution to a special fund by a gas fee paid by obliged undertakings, a protected customer, who, in principle, will not be subject to restrictions on the consumption of natural gas during supply degrees, regulate the rules for dealing with natural gas supply emergencies.	The deadline for submitting comments was May 13, 2022. May 30, 2022, comments were published, but without a comment from the draft author.	Analysis by the Minister of Climate and Environment of the comments submitted as part of the public consultation.	The project is of significance to trading in gaseous fuels and the generation of electricity and heat in natural gas-fuelled generating units, taking into account the obligation of customers of the transmission service to pay a gas fee and the need to reduce the volumes of gas consumed during the introduction of feed-in stages.
Regulation of the Minister of Climate and Environment on change in volume share of sum of electricity resulting from redeemed certificates of origin confirming the generation of electricity from renewable energy sources in 2023. GLC ref. no. 816	The regulation defines the level of obligation to redeem certificates of origin of energy from RES (PM OZE) for the so-called obligated entities in 2023. The regulation reduces the level of obligation for PM OZE from 18.5% in 2022 to 12.5%. At the same time, the rationale to the regulation provides for the possibility to further reduce the obligation level in subsequent years.	The regulation was adopted on July 13, 2022 and entered into force on August 11, 2022.	–	The reduced level of obligation may lower incremental revenue in the Renewable Energy segment from the sale of PM RES. At the same time, it reduces the burden on the Supply segment with the need to purchase a certain amount of PM OZE in relation to the volume of electricity traded.
Regulation of Climate and Environment Minister regarding energy market processes. Government Legislation Centre list: UD603	Regulation of Climate and Environment Minister regarding energy market processes implements the statutory delegation contained in art. 11zh sec. 1 of the act – Energy Law. The regulation is to enable the preparation of IT systems (remote reading systems for electricity distribution system operators and the central energy market information system) in connection with new challenges on the electricity market. The definition of a full catalogue of energy market processes is necessary to ensure the transparency of obligations of all energy market participants, both electricity system users obligated to implement energy market processes through the Central Energy Market Information system („CSIRE”), and for the Energy Market Information Operator („OIRE”) so that it is possible to assess the fulfilment by the above-mentioned entities of the obligations imposed on them. The regulation will define a catalogue of energy market processes, the implementation of which through CSIRE will be obligatory for system users. The catalogue of energy market processes includes the basic processes currently implemented on the electricity market, taking into account the greatest usefulness of CSIRE for system users.	On January 11, 2022 the Minister of Climate and Environment signed the regulation. The regulation went into effect on February 16, 2022..	–	The regulation will have a significant impact primarily on the Distribution segment, but also on the following segments: Conventional Generation, Renewables and Supply.
Regulation of Climate and Environment Minister regarding metering system Government Legislation Centre list: UD507	The regulation implements the statutory delegation contained in art. 11x sec. 2 of the act – Energy Law, which imposes on the minister responsible for energy the obligation to regulate therein, in consultation with the minister responsible for computerisation, the detailed requirements and standards to be met by the metering system. In addition, the draft regulation satisfies the obligation specified in art. 19 sec. 3 of Directive (EU) 2019/944 of the European Parliament and of the Council of June 5, 2019 on common rules for the internal market in electricity and amending Directive 2012/27/EU, according to which Member States joining the introduction of smart metering systems adopt and publish minimum requirements functional and technical related to smart metering systems to be introduced in their territories.	The regulation was issued on March 22, 2022 and entered into force on April 23, 2022..	–	The regulation will have a significant impact primarily on the Distribution segment, but also on the following segments: Conventional Generation, Renewables and Supply. As regards the DSO’s activities, it will be necessary to clarify requirements for metering systems, including electricity meters and metering system.
Act on support allowance RCL register: 1 820	The act is intended to provide support to approx. 6.84 million households in Poland, including the most energy-poor households, by covering a part of their energy expenses and the related growing food prices.	The act, published in the Journal of Laws of 2022 item 1, entered into force on January 4, 2022.	–	The act generates costs for Supply segment due to new information obligations.
Draft Regulation on determination of specific conditions for loss of waste status for waste generated from combustion of fuels by energy Government Legislation Centre list: 655	The aim of the proposed regulation (hereinafter: „draft”) is to set out detailed conditions for the loss of waste status for waste generated in the process of combustion of fuels for energy-generation purposes. The conditions set out in the draft are intended to standardise the procedure for losing the status of waste already existing in business practice on the basis of general conditions for the status of waste (art. 14(1) of the Waste Act), to the extent applicable to waste generated in the process of combustion of fuels for energy-generation purposes.	On July 4, 2022, the draft was released from the legal committee. The EC notified the draft on July 13, 2022.	Draft referred for further work in the Council of Ministers.	The project is important from the point of view of waste/combustion by-product management in PGE Group, especially for the Conventional Generation and District Heating segment.
Regulation of the Minister for Climate and Environment on defining methods for economic cost-benefit analysis and data or data sources for this analysis. Government Legislation Centre list: 794	The regulation fulfils the obligation to eliminate an infringement identified by the EC regarding incorrect application and transposition of the Energy Efficiency Directive. In order to rectify this breach, a delegation for the minister responsible for energy matters to issue a regulation on defining methods for economic cost-benefit analysis and data or data sources for the purpose of this analysis was introduced. The aim of the analysis is to enable a more efficient allocation of resources by demonstrating the superiority of a given project over others from the point of view of social benefits.	On July 1, 2022 the regulation was adopted. It entered into force on July 20, 2022.	–	The regulation is of significance to the District Heating segment.
Regulation of the Minister of Climate and Environment amending the regulation on detailed rules for preparing and calculating tariffs and billing for heat supply Government Legislation Centre list: 795	The regulation intends primarily to: definition of the k value, being an element of the formula for calculating the reference index so that the k value can be calculated and published by the President of the Energy Regulatory Office depending on changes in the operating conditions of energy companies that burden the production of heat in cogeneration – for individual types of fuel referred to in art. 23 sec. 2 point 18 letter c of the Energy Law, determination of the k value so as to reflect the lack of a full sample of ETS sources in the average heat sale prices published by the President of the Energy Regulatory Office.	The regulation was published in the Journal of Laws on March 15, 2022.	–	The draft is relevant to the District Heating segment as it will increase the heat tariff.
Draft Regulation of the Minister for Climate and the Environment amending the Regulation on detailed rules for shaping and calculating tariffs and settlements for heat supply Government Legislation Centre list: 916	In order to introduce the possibility of generating revenue that covers the cost of running the business of producing heat in cogeneration units, it is necessary to amend § 13 sec. 6 of the amended regulation in such a way as to reflect the possibility of increasing the planned revenue, in accordance with the reference index published pursuant to art. 47 sec. 2f of the Energy Law by the President of URE, the value of which is determined on the basis of „value k” – i.e. the change in the costs charged to the unit of heat produced in cogeneration units, resulting from a major change in the conditions for energy enterprises to engage in business activity to the extent to which the costs associated with the business activity will be charged to heat production in the period in which the reference index is in force and were not charged to it in the period preceding the period of determining this indicator.	Public consultation on the draft until September 29, 2022.	Analysis of comments submitted in the course of the public consultation.	The draft will increase revenues of CHP units commissioned prior to November 3, 2010. Depending on the final shape of the legislation, there is a risk of reduced revenues as a consequence of lower fuel and CO₂ prices.
Draft Act on amending the Act on maritime areas of the Republic of Poland and maritime administration Government Legislation Centre list: UD361	The purpose of the draft act is to modify the regulations on issuance of permits for the erection or use of artificial islands, structures and equipment in Polish maritime areas and on issuance of permits or agreements for cables or pipelines concerning a set of equipment for power evacuation. The draft also introduces regulations concerning the settlement of ties in proceedings to resolve applications for the issuance of permits to erect or use artificial islands, structures and equipment in Polish maritime areas.	The draft was adopted by the Sejm and referred to the Senate on October 27, 2022.	Consideration of the bill by the Senate.	The draft is of significance from the viewpoint of PGE Group due to its impact on investments in the construction of offshore wind farms. The draft regulates issues related to the determination procedure, which will be necessary to grant a permit for the erection or use of artificial islands, structures and equipment in Polish maritime areas.
Draft Regulation of the Minister of Infrastructure amending the Regulation on evaluation of applications in settlement procedures Government Legislation Centre list: 213	The aim of the draft is to clarify the rules for the determination procedure necessary for the selection of an entity that will obtain the permit for the erection or operation of artificial islands, installations and equipment in Polish maritime areas for the construction of offshore wind farms. The draft assumes, inter alia, changes in the scoring for fulfilling the criteria, as well as in the way of assessing the criterion concerning the financing of the planned project. It also resolves issues concerning the submission of documents by entities that prepare financial statements for which the financial year does not coincide with the calendar year.	On July 29, 2022 the project was signed by the Minister of Infrastructure and published in the Journal of Laws. The regulation entered into force on August 4, 2022..	–	The draft is important for PGE Group due to its impact on investments in the construction of offshore wind farms.
Draft Regulation of the Minister of Climate and Environment on the method of conducting settlements and balancing of the gas transmission system in periods of mandatory reserves of natural gas and during the period of restrictions in the off-take of natural gas. Government Legislation Centre list: 821, 929	The draft is intended to set out how settlements are to be carried out for released compulsory natural gas reserves and how the price for gaseous fuels used for these settlements is to be calculated, as well as how balancing of the gas transmission system is to be carried out and how imbalances are to be settled during the release of stocks. The draft sets out formulas for the calculation of: fees for collected mandatory reserves, fees for the release of mandatory reserves to the relevant entity ordering transmission services, fees for balancing activities, taking into account an entity ordering transmission services whose imbalance is negative and positive respectively, a fee related to the financial neutrality of balancing during the period of mandatory reserve release.	On May 17, 2022, the draft was published on the Government Legislation Centre’s website and sent for public consultation, which ended on May 20, 2022. On October 5, 2022, a new draft regulation was published, starting a legislative process. October 10, 2022 was the deadline for comments in the public consultation.	Analysis by the Minister of Climate and Environment of the comments submitted as part of the public consultation.	The draft is of importance from the point of view of trading in gaseous fuels, given the establishment of a system of settlements between PSE S.A. and the rules of the transmission service for balancing activities undertaken by PSE S.A.
Draft Act amending the Act on the Management of Agricultural Property of the Treasury and certain other acts Government Legislation Centre list: UD376	The draft introduces regulations according under which agricultural properties belonging to the Agricultural Property Stock of the Treasury, which include at least 70% of uncultivated land/land of class IV will be able to be leased for the purpose of obtaining electricity from RES.	On April 19, 2022, the draft was published on the Government Legislation Centre website. On May 10, 2022, the public consultation closed.	Analysis by the Ministry of the Environment of the comments submitted in the public consultation.	The draft will make it possible to acquire new land, in particular wasteland included in the Agricultural Property Stock of the State Treasury, for RES investments.
Draft Act amending the Act on Spatial Planning and Development and certain other acts Government Legislation Centre list: UD369	The draft introduces the principle that photovoltaic (PV) investments above 1 MW will only be allowed on the basis of a Local Spatial Development Plan. In the absence of an adopted Local Spatial Development Plan, it will not be possible to realise the investment in question on the basis of a decision on development conditions. The draft also provides for the possibility of applying a simplified procedure for the enactment or amendment to the Local Spatial Development Plan, including in the case of PV investments, but this does not apply to investments with significant impact on the environment.	On September 19, 2022, a new draft law was published on the Government Legislative Centre’s website, that was once again subject to inter-ministerial consultations. Following inter-ministerial consultations, an amended draft act was published on October 25, 2022. The draft was examined by the Digitalisation Committee on November 7, 2022.	Referred for the Standing Committee of the Council of Ministers.	The draft may slow down PV investments due to necessity to embed such investment in the Local Spatial Development Plan. The average time required to enact the Local Spatial Development Plan is around 3 years.
Draft Ordinance of the Minister of Climate and Environment amending the Ordinance on fuel reserves at energy companies. Government Legislation Centre list: 849	The draft regulation differentiates the size of the reserve obligations for energy companies involved in (i) the generation of electricity in Centrally Dispatched Generating Units and (ii) the generation of heat, including cogeneration, or electricity in units other than Centrally Dispatched Generating Units, and introduces new algorithms for determining the size of this obligation for these companies.	On July 5, 2022 the draft was published on the Government Legislation Centre’s website. On July 12 2022 the public consultation ended. The draft was the subject of a meeting of the Law Committee on September 19, 2022.	Improvement of the draft by the Ministry of Climate and Environment according to the comments of the Law Committee.	The draft is relevant to electricity and heat generation. Adopting the new rules for determining fuel reserves will mean that they will need to be explicitly replenished for the needs of Centrally Dispatched Generating Units (counting the quantity depends on the installed capacity of the unit), which may be difficult or unfeasible in the face of the present energy crisis.
Draft Regulation of the Minister of Climate and Environment on reference values for new and substantially modernised cogeneration units in 2023 Government Legislation Centre	The draft implements the statutory mandate contained in art. 15 sec. 7 of the Act of December 14, 2018 on the promotion of electricity from high-efficiency cogeneration (Polish Journal of Laws of 2022, item 553), which requires the minister responsible for energy to determine, by means of an Ordinance, by October 31 of each year, the reference values with a breakdown for new cogeneration units and substantially modernised cogeneration units, applicable in the following calendar year.	The regulation was published in the Journal of Laws on October 31, 2022.	–	The draft affects the District Heating segment through reference values for new and substantially modernised CHP units participating in the support scheme for high-efficiency cogeneration.
Draft Regulation of the Minister of Climate and Environment on the maximum quantity and value of electricity from high-efficiency cogeneration covered by support and the unit amounts of the guaranteed bonus in 2023. Government Legislation Centre list: 928	The draft Ordinance implements the statutory authorisation contained in art. 56 sec. 1 of the Act of December 14, 2018 on the promotion of electricity from high-efficiency cogeneration (Polish Journal of Laws of 2022, item 553), which requires the minister responsible for energy to determine, by way of an Ordinance, by October 31 of each year, the maximum quantity and value of electricity from high-efficiency cogeneration subject to support, including for cogeneration units located outside the territory of Poland. Additionally, the draft Ordinance sets out the unit amounts of the guaranteed bonus, also for small cogeneration units, and the maximum amount of the individual cogeneration bonus.	Public consultation on the draft until September 13, 2022.	Analysis of comments submitted in the course of the public consultation.	The draft affects the District Heating segment by defining the level of the guaranteed unit bonus and the maximum amount of the individual CHP bonus for units participating in the support system for high-efficiency cogeneration.
Draft Regulation of the Minister of Climate and Environment on the granting of public aid for investment in heating (cooling) sources in district heating systems under the National Recovery and Resilience Plan (NRP). Government Legislation Centre list: 930	The intent of issuing the proposed regulation of the Minister of Climate and Environment on granting public aid for investments in heating (cooling) sources in district heating systems under the NRP is to specify the detailed purpose, conditions and procedure for granting public aid for investments under the title B 1.1.1. Investments in heating (cooling) sources in district heating systems under the NRP. In the regulated scope, public aid will be granted to investment projects in heating (cooling) sources in district heating systems, concerning generation of energy in high-efficiency co-generation and generation of energy from renewable sources, which will allow the development and modernisation of district heating systems for municipal and household purposes.	Public consultation until October 16, 2022.	Analysis of comments submitted in the course of the public consultation.	The draft affects the co-financing of investments in district heating systems from NRP funds. The District Heating segment may become a beneficiary.
Draft Regulation of the Ministry of Development Funds and Regional Policy on the granting of aid for investment in high-efficiency cogeneration systems and for the promotion of energy from renewable sources under the regional programs for 2021-2027. Government Legislation Centre list: 37	The goal of this regulation is to create the conditions for supporting the social and economic development of the regions by allowing state aid for investment in high-efficiency cogeneration systems and for the promotion of energy from renewable sources under the regional programs for 2021-2027.	Public consultation until October 17, 2022.	Analysis of comments submitted in the course of the public consultation.	The draft establishes the conditions to enable the granting of public aid for investment in high-efficiency cogeneration systems and for the promotion of energy from renewable sources under the regional programs for 2021-2027. The district heating segment can be a beneficiary.
Draft Regulation of the Minister of Development Funds and Regional Policy on the granting of aid for investments in support of energy efficiency under the regional programs for 2021-2027 Government Legislation Centre list: 40	The aim of the regulation is to create the conditions for supporting social and economic development of regions by allowing public aid to be granted for investments leading to the achievement of energy efficiency as part of the regional programs for 2021-2027.	Public consultation until October 17, 2022.	October 17, 2022.	The draft establishes the conditions for enabling the provision of public aid for investments leading to the achievement of energy efficiency as part of the regional programs for the period 2021-2027. The district heating segment can be a beneficiary.
Regulation of the Minister of Development Funds and Regional Policy on the granting of aid for industrial research, experimental development works and feasibility studies under the regional programs for 2021-2027 Government Legislation Centre list: 42	The aim of the regulation is to create an aid scheme regulating public aid for industrial research, experimental development and feasibility studies under the regional programs for the period 2021-2027.	Public consultation until October 17, 2022. A table with comments was published on November 2, 2022.	Referred for further work in the committees of the Council of Ministers.	The draft establishes the conditions to allow public aid for industrial research, experimental development and feasibility studies under the regional programs for 2021-2027. The district heating segment can be a beneficiary.
Regulation of the Minister of Development Funds and Regional Policy on the provision of investment aid for research infrastructure under the regional programs for 2021-2027. Government Legislation Centre list: 38	The Regulation sets out the specific purpose, conditions and procedure for granting investment aid for research infrastructure to businesses under the regional programs for 2021-2027.	Public consultation until October 17, 2022. A table with comments was published on November 2, 2022.	Referred for further work in the committees of the Council of Ministers.	The project establishes the conditions and modalities for granting investment aid for research infrastructure to entrepreneurs under the regional programs for the period 2021-2027. The district heating segment can become a beneficiary.

Segments	Regulation	Regulation objectives	Latest conclusions	Next stage	Impact on PGE Group
European Green Deal/ Fit for 55 package
	Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the EU (ETS Directive) as well as implementing and delegated acts, Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme (MSR Decision).	Combating climate change. Development of investment incentives through a CO₂ price signal to develop low-emission sources.	On April 5, 2022 the EP plenary adopted its position on the revision of the MSR decision. On 22 June 2022, the EP adopted its position on the revision of the ETS Directive at its plenary session. On June 29, 2022, the EU Environment Council adopted a general approach to the revision of the ETS Directive. The first (July 11, 2022) and second and third (October 10, and November 10, 2022) round of inter-institutional negotiations between the Commission, the EP and the Council took place within the framework of the trilogues, which were inconclusive. On February 8, 2023, the text of the agreement was approved by the ENVI Committee of the EP	The agreement reached in the trilogues still needs to be formally adopted by the Council and the EP during the plenary vote. The deadline for the transposition of the ETS Directive has been set as December 31, 2023, with a few derogations possible until June 30, 2024.	Increased competitiveness of renewable sources to the detriment of generation assets using high-emission fuels. Increase in operating costs for conventional generation of electricity and heat. Option to obtain direct investment support from the Modernisation Fund and Innovation Fund and partial free allocation of allowances to district heating. The introduction of changes to the mechanism provided for in art. 29a of the ETS Directive may reduce the fluctuations of the price of emission allowances. Revision of the ETS Directive and MSR decision, through the more ambitious climate goals, is likely to cause a further increase in prices of emission allowances.
	Directive 2018/2001 on the promotion of the use of energy from renewable sources (Renewable Energy Directive).	To adapt legislation related to increased share of renewables in reference to EU’s new higher GHG reduction target by 2030.	On June 27, 2022, the Transport, Telecommunications and Energy Council adopted a general approach on the RES Directive . On July 13, 2022, the EP’s lead committee ITRE adopted the final report on the RES Directive and the final standpoint of the European Parliament was adopted at the plenary session on September 14, 2022. On October 6, November 15 and December 15, 2022, and on February 14 and March 6, 2023, trilogues were held between the EC, the Council and the EP. As part of the trilogues, proposals for additional changes to the RES Directive will also be taken into account, resulting from legislative proposals included in the REPowerEU communication of the EC of May 18, 2022, on which the EP voted its position on December 14, 2022, and the Council adopted a general approach on December 19, 2022.	Further works as part of trilogues are on-going on the technical and political level. The proposed deadline for transposing the proposal into national law is December 31, 2024.	Improvement in the competitiveness of low-emission sources of energy in comparison with high-emission sources. Larger share of renewable sources in the Polish energy mix by 2030, including a faster path of decarbonization of District Heating. Possibility of wider use of power-to-heat solutions in District Heating.
	Directive 2012/27/EU on energy efficiency (EED Directive). (dyrektywa EED).	To adapt legislation related to energy efficiency improvements in reference to EU’s new higher GHG emission reduction target by 2030.	On June 27, 2022, the Transport, Telecommunications and Energy Council adopted a general approach on the EED Directive. On July 13, 2022, the EP’s lead committee ITRE adopted the final report on the EED Directive and the final standpoint of the European Parliament was adopted at the plenary session on September 14, 2022. On October 6, November 22 and December 14, 2022, and on March 2, 2023, trilogues between the EC, the Council and the EP took place, and on March 9 and 10, 2023, the last round of interinstitutional negotiations between the Commission, the EP and the Council took place, which resulted in a final agreement on the provisions of the EED directive. As part of the arrangements, a new binding EU-level target was set to reduce final energy consumption by 11.7% by 2030 compared to 2020. The on-going trilogues also included a proposal for an additional amendment to the EED, resulting from the legislative proposals included in the REPowerEU framework, referred to above in the EC REPowerEU communication.	The agreement reached in the trilogues still needs to be formally adopted by the Council and the EP. The published draft does not include a deadline for transposing the directive into national law.	Improvement in the competitiveness of low-emission sources of energy in comparison with high-emission sources, particularly in heating systems. A faster phase-out of coal-based cogeneration from heating systems in connection with the introduction of a new emission criterion.Need for more extensive development of renewable sources and waste heat in district heating systems.A higher factor for annual final energy savings, resulting in an increase in burdens on the energy efficiency certificate system.
	Directive 2010/31/EU on the energy performance of buildings (EPBD).	Alignment of legislation related to improving the energy performance of buildings in the EU with respect to the 2050 climate neutrality target and the new higher 2030 EU GHG reduction target.	On October 25, 2022, the TTE Council adopted a general approach on the EPBD. Further work in the EP and the Council’s general approach take into account the proposals for additional amendments to the EPBD presented in the legislative proposal included in REPowerEU referred to above. On February 9, 2023, the ITRE committee adopted the final report on the EPBD. The position of the EP was adopted at the plenary session on March 14, 2023. In accordance with the EP’s approach, from 2026 new public utility buildings, and from 2028 new residential buildings will have to meet the zero-emission criteria and, as a rule, be powered only with energy from RES. At the same time, the EP proposes minimum requirements for improving the efficiency of existing buildings, targets for solar energy and provisions to accelerate the development of charging points.	Adoption of positions by the Council and the EP allows the start of tripartite negotiations between the EC, the Council and the EP. The date for transposition of the Directive into national law is not specified in the published draft.	Greater competitiveness of renewable energy sources as a heat source in buildings. Reduction in the heat demand of buildings due to improved energy performance. Faster rate of displacement of fossil fuels in the heating sectors, including district heating. Potential inhibition of growth of existing district heating systems due to proposed requirements for new and modernised buildings.
	Alternative Fuels Infrastructure Regulation (AFIR Regulation).	The aim of the new regulation, which repeals Directive AFID, is to ensure faster development of charging infrastructure and implement targets for charging station locations, including targets concerning distances between charging points throughout the trans-European TEN-T network.	On June 2, 2022, the Transport, Telecommunications and Energy Council adopted a general approach on the AFIR Regulation. On October 3, 2022, the EP’s lead Committee on Transport and Tourism (TRAN) adopted its final report on the AFIR regulation. MEPs on the TRAN committee adopted more ambitious targets for the development of electromobility than originally proposed by the EC, as well as a greater consideration of the role and impact on distribution system operators. The EP plenary vote on the position on the AFIR regulation took place on October 19, 2022. On October 27, 2022, the first trilogue took place between the EC, the Council and the EP, during which the positions of the institutions were presented.	After the first trilogue, work was directed to the technical level. The next trilogue will take place on November 30, 2022.	The necessity to prepare the power grid to perform obligations resulting from the AFIR Regulation in the distribution area.
	Directive 2010/75/EU on industrial emissions (integrated pollution prevention and control).	Introduction of new requirements tightening up the way in which emission levels are set in the integrated permit, the rules for obtaining derogations from BAT requirements and giving new competences to the EC. Public participation in appeal proceedings will be increased. Operators will be required to introduce an Environmental Management System, which will include, inter alia, a plan for the transition by 2050 in towards a sustainable, clean and climate neutral circular economy.	On April 5, 2022 the EC presented draft amendments to the Directive. A preliminary draft report in the Environment, Public Health and Food Safety (ENVI) Committee was presented on November 14, 2022 and on December 7, 2022, amendments to the report were submitted. On December 20, 2022, a orientation discussion of EU ministers was held in the Council. On March 16, 2023, the Environment Council approved the general approach. According to the position of the Council, the approach to specifying emission levels in integrated permits was revised in order to maintain the current rules, and additionally, new derogations for installation operators and relaxation of provisions penalizing infringements of the provisions of the directive proposed by the European Commission were foreseen.	The legislative proposal is subject to further work in the European Parliament. The new directive is scheduled to enter into force at the end of 2024. The ENVI committee’s position is likely to be voted on April 25, 2023. A plenary vote in the EP is expected in May 2023.	The entry into force of the proposed solutions may result in additional capital expenditures being incurred in the Conventional Generation and District Heating segments as well as cause additional costs related to the operation of installations falling under the scope of the IED Directive.
	Amendment of Commission Delegated Regulation (EU) 2015/2402 on the review of the harmonised efficiency reference values for separate production of electricity and heat in application of Directive 2012/27/EU.	Update of the efficiency of separate generation of electricity and heat for the calculation of the primary energy savings ratio for the purposes of demonstrating compliance with the criteria for highly-efficient cogeneration.	On December 2, 2022, the EC launched public consultations on the draft amendments to the Delegated Regulation, which ended on December 30, 2022. The EC proposes to increase the efficiency of separate generation of heat and electricity (applied to, among others, hard coal and lignite) to the levels that are already in force for natural gas. The new values would apply to new and modernized fossil fuel cogeneration units put into operation from January 1, 2024. The harmonized efficiency reference values apply for a period of 10 years from the year of construction, and from the 11th year the values that would apply for a 10-year unit are applied (applicable for 1 year).	Adoption of amendments to the regulation delegated by the EC is planned in H2 2023.	Improvement of the competitiveness of low-emission energy sources compared to energy from high-emission sources, in particular in district heating systems.
The regulations concerning the financial perspective 2021-2027 and financing for sustainable economic growth
	The Regulation 2020/852 on the establishment of a framework to facilitate sustainable investment, changing the regulation (EU) 2019/2088 (the Taxonomy Regulation) and Delegated Regulation 2022/1214 specifying technical screening criteria for nuclear and gas power.	Facilitation of funding for sustainable economic growth in EU.	On February 2, 2022 the EC unveiled a delegated act setting out detailed technical screening criteria for the use of nuclear power and gas. On March 9, 2022, the European Commission officially adopted this delegated act. On June 14, 2022, the ECON and ENVI committees voted a resolution for the EP to reject the delegated act. However, the resolution was rejected when the EP plenary voted on July 6, 2022. On July 11, 2022, the deadline for the EP and Council to object expired. In the Council, the delegated act was also not rejected. On July 15, 2022, Delegated Regulation 2022/1214, setting out technical screening criteria for nuclear and gas power, was published in the Official Journal of the EU.	The delegated regulation applies from January 1, 2023.	Impact on availability and cost of funding obtained by PGE Group companies for investments. Direct impact on raising external capital in condensation and high-efficiency gas-fired cogeneration, depending on the locations and meeting criteria established by an additional delegated act. The obligation to include information on the share in the trade, CAPEX and OPEX of environmentally sustainable activities in the statement on non-financial information. Compliance with the “no significant harm” principle will be an additional criterion for the assessment of investment projects under EU financial instruments.
	Directive 2022/2464 amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) 537/2014 on reporting companies in the field of sustainable development (CSRD).	Increasing corporate accountability and transparency on ESG issues (Environmental, Social and Corporate Governance).	On February 24, 2022, the Council adopted a general approach on the CSRD. On March 15, 2022, the JURI committee adopted the position of the EP. On June 21, 2022, the Council, the EP and the EC reached a political agreement. On November 10, 2022, the political agreement was approved by the plenary of the EP. The Council approved this agreement on November 28, 2022. On December 16, 2022, the directive was published in the Official Journal of the EU and entered into force on January 5, 2023.	This directive will apply to large enterprises for financial years beginning on or after January 1, 2024.	Increased obligations in the field of non-financial reporting by the PGE Capital Group.
	Directive of the European Parliament and of the Council on corporate sustainability due diligence and amending Directive (EU) 2019/1937 (CSDD).	To establish a framework that encourages companies to contribute to the pursuit of respect for human rights and environmental legislation in their operations and through their value chains.	On February 23, 2022, the EC presented a legislative proposal for a directive on corporate sustainability due diligence. The EC proposes the need to identify current and potential negative environmental and human rights impacts resulting from the company’s activities and, in the case of the value chain, from the activities of the established business relationship of a given entity, the need to take appropriate measures to prevent, or where prevention is not possible or immediate, to adequately mitigate potential negative impacts on human rights and the environment arising from the company’s activities and its subsidiaries and, in the case of the value chain, from the activities of the established business relationship. lead committee in the EP is the Law Committee on Legal Affairs (JURI).	Working discussions will continue in the Council on the proposal for this directive. The EP position is expected to be finalised in the second quarter of 2023.	Increasing reporting obligations for PGE Group’s value chain in terms of environmental and human rights impacts. Incorporating the due diligence policy on sustainability in the activities of the entire PGE Group.
	Regulation of the European Parliament and of the Council amending Regulation (EU) 2021/241 as regards REPowerEU chapters in recovery and resilience plans and amending Regulation (EU) 2021/1060, Regulation (EU) 2021/2115, Directive 2003/87/EC and Decision (EU) 2015/1814.	Adding specific chapters to the NRP covering new reforms and investments to achieve REPowerEU objectives.	On May 18, 2022, the EC presented a legislative proposal to amend the Regulation establishing the Reconstruction and Resilience Facility (RRF). On October 3, 2022, the ENVI committee adopted its opinion on the regulation amending the RRF regulation indicating that the €20 billion for REPowerEU distributions in the NRP should be raised entirely from the sale of allowances from the Member State auction pool foreseen for 2027-2030 – with a deadline for sales by the end of 2025. On October 4, 2022, the Council reached agreement on a general approach regarding amendments to the RRF Regulation. According to the general approach: The €20bn for the REPowerEU allocation in the NRP will come from the early sale of allowances from the Innovation Fund (EUR 15 billion) and from the Member States’ auction pool (EUR 5 billion); these allowances are to be sold by the end of 2026, the scope of investments that can be financed under the REPowerEU chapter of the NRP has been expanded to include bottlenecks in the case of distribution and energy efficiency in the case of critical energy infrastructure, the allocation key has been changed in relation to the RRF Regulation, introduced the possibility for the EC to pay advances of 15% of the amount requested by a Member State to finance the On October 25, 2022, the Committee on Budgets (BUDG) and ECON adopted the EP’s position regarding new RRF chapters within REPowerEU. According to this position: an advance of 20% of the amount per Member State was introduced; investments started after January 31, 2022 were financed; it was decided that at least 35% of the funding received by a Member State should be allocated to actions with a cross-border or multinational dimension; the scope of investments that can be supported has been extended to include investments that increase energy storage capacity.	–	The possibility of raising funds from the NRP for PGE Group’s investments.
Regulations introducing changes on the electricity market in the EU
	Council Regulation on emergency intervention to address high energy prices	To establish emergency interventions to mitigate the effects of high energy prices through exceptional, targeted and time-limited measures.	On September 9, 2022, at an extraordinary meeting, the TTE Council called on the EC to propose measures to improve the energy market. On September 14, 2022, the EC presented a draft Council regulation (pursuant to Article 122 TFEU). On September 30, 2022, the TTE Council reached a political agreement on this regulation. On October 6, 2022, the TTE Council formally adopted the regulation by qualified majority. On October 7, 2022, Council Regulation 2022/1854 on emergency intervention to address high energy prices was published in the EU Official Journal. It entered into force the day after publication. This regulation introduces an obligation to reduce electricity consumption, a cap on the market revenues that some producers earn from electricity generation and requires Member States to redistribute these funds in a targeted manner to end users. The regulation also allows Member States to use public intervention to set prices for the supply of electricity to households and small and medium-sized businesses and introduces provisions for a temporary solidarity levy on EU companies operating mainly in the oil, gas, coal and refinery sectors.	From December 1, 2022, there is a requirement to apply key articles of the regulation concerning the revenue cap for energy companies and the reduction of electricity consumption. A draft electricity market reform is expected to be published in the first half of 2023.	The direct financial impact on PGE Group depends on the solutions adopted at the national level. Potential outflow of a part of PGE Group’s revenues from RES generation and lignite-fired power plants (potentially also from hard coal-fired power plants).

Impact of the COVID-19 pandemic on PGE Group's operations

PGE Group from 2020 identified, on an ongoing basis, the risk factors that affect the Group’s performance in connection with the COVID-19 pandemic. In 2022, the impact of the pandemic no longer affected the Group’s financial results.

PGE Group’s plants are of strategic importance for maintaining undisturbed production and supply of electricity and heat in Poland. The COVID-19 pandemic has affected the change of work organisation, especially with respect to PGE Group’s generation units. In the area of retail customer service, PGE Group focused primarily on expanding remote service channels.

Impact of war in Ukraine on PGE Group's activities

PGE Group is the largest energy group in Poland. The Group’s units meet over 40% of the country’s electricity demand and serve over 5.5 million customers in Supply segment, while PGE Group’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.

Its tasks also include undertaking actions minimising the risk of a crisis situation, preparing the Company in the event of a crisis situation and planning, organising and coordinating works ensuring continuity of the Company’s and PGE Group’s operations.

Further information is available in the Energy security section.

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