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Integrated report 2020

26.1.1 Commodity risk

Contents

Commodity risk is related to the possibility of deterioration in the financial result in the commercial area due to changes in commodity prices.

The exposure of the PGE Capital Group to the commodity price risk concerns first of all the following commodities:

  • electricity;
  • CO2 emission allowances;
  • property rights related to certificates of origin for electricity;
  • hard coal;
  • natural gas;
  • biomass and other fuels.

The PGE Capital Group owns lignite mines that supply production fuel to two power plants operating within the PGE Group. Due to this fact, the Group’s exposure to price risk in this area is not significant.

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Selected types of commodity risk (including currency risk) to which PGE Group is exposed (exclusive of applied risk hedging strategies)

Risk Description Description

Risk of changes in electricity prices

  • The PGE Group has a natural long position due to its generation assets and a lack of possibility to place its production on the market at a pre-determined price.
  • The level of margin generated as a result of changes in electricity prices and electricity generation costs;
  • Price of electricity sale contracts to retail customers;
  • Price of transactions to buy/sell energy on the wholesale market.
Risk of changes in the prices of property rights arising from certificates of origin for electricity
  • The PGE Group has a net short position resulting from the obligation to surrender property rights arising from certificates of origin for electricity related to the sale of electricity to end users.
  • Price of transactions to buy/sell property rights on the wholesale market.
Risk of changes in prices of CO2 emission allowances
  • Risk related to changes in the prices of CO2 emission allowances in EUR and risk of changes in EUR/PLN exchange rate;
  • The PGE Group has a short position given its electricity generation at units participating in the EU-ETS scheme.
  • Use of generation sources not as planned due to their varying emission levels;
  • Price of transactions to buy/sell CO2 emission allowances on the wholesale market.
Risk of electricity production fuel price changes (including hard coal, natural gas, biomass, heating oil)
  • Risk of commodity price changes, including commodities denominated in foreign currencies (or indexed to foreign currencies) and foreign currency risk;
  • The PGE Group has a short position due to its need to purchase fuel on the market.
  • Price of transactions to buy/sell fuel on the wholesale market.
Long-term volume risk
  • Risk related to changes in demand for electricity in the National Power System.
  • Macroeconomic situation, especially in energy-intensive industries;
  • Technological changes, particularly in energy efficiency and the development of distributed power generation;
  • Climate changes;
  • Regulations, including preferences for specific sectors of the power generation industry;
  • Degree of integration with foreign energy systems.
Short-term volume risk
  • Risk related to changes in planned electricity sales volumes as a result of changes in end users’ demand for electricity.
  • Trends among retail clients concerning changes in energy suppliers;
  • Regulations, including those pertaining to the opportunity to change energy suppliers;
  • Short-, mid-term weather changes;
  • Risk related to the model for planning demand for energy and quality of source data used in planning.

The PGE Group has a strategy of securing its key exposures in the area of electricity and related products trading; it corresponds to appetite for risk in a mid-term perspective. The level of hedging for an open position is set taking into account the variability of prices of electricity and related products, the liquidity of specific markets, the financial position of the Group, as well as the Group’s strategic objectives.

The PGE Capital Group’s exposure to the commodity price risk (in respect of raw materials) is determined by the volumes of external purchases of individual raw materials. These volumes are presented in the table below:

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Year ended December 31, 2020 Year ended December 31, 2019
COMMODITY Tonnage – external purchase
(thousand tonnes)		 Purchase costs
(PLN million) 		Tonnage – external purchase
(thousand tonnes)		 Purchase costs
(PLN million)
Coal 9,796 2,993 11,105 3,465
CO2 emission allowances for captive use 78,769 6,629 39,539 1,477
Natural gas [thousand m3] 1,305,773 774 1,203,724 918
Biomass 584 140 560 144
Heating oil 49 74 61 111
TOTAL 10,610 6,115
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26.1 Market risk
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26.1.2 Interest rate risk

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