26.1.3 Currency risk

Currency risk is related to the possibility of deterioration in the financial result due to changes in currency exchange rates.

The main sources of the exposure of the PGE Capital Group to the currency risk are set out below:

• capital expenditures denominated in or indexed to foreign currencies;
• debt denominated in foreign currencies;
• purchase and sales of electricity denominated in foreign currencies;
• fees denominated in or indexed to foreign currency exchange rates on account of purchase of transmission capacities;
• sales and purchase of CO₂ emission allowances and gas as well as purchase of hard coal and other fuels denominated in or indexed to foreign currencies;
• expenditures related to current operation of generation assets denominated in or indexed to foreign currencies;
• investment financial assets denominated in foreign currencies;
• other operating cash flows denominated in or indexed to foreign currencies.

The PGE Capital Group controls the currency risk through a system of limits relating to the maximum potential loss due to changes in exchange rates with respect to the consolidated currency risk exposure of the Group companies. The currency risk measure is based on the value-at-risk methodology understood as a product of the amount of the absolute currency position and the value of a potential change in exchange rates.

Moreover, the PGE Capital Group establishes hedging strategies with respect to its exposure to the currency risk in the form of hedging ratios subject to approval of the Risk Committee and the Management Board. The implementation of hedging strategies and the level of currency risk are subject to monitoring and are reported regularly to the Risk Committee.

The PGE Capital Group companies enter into currency exchange rate derivative transactions only for the purpose of hedging identified risk exposures.

The regulations in force in the PGE Capital Group do not allow, with regard to currency exchange rate derivative transactions, entering into speculative transactions, i.e. transactions which would be aimed at generating additional profits resulting from changes in the level of foreign currency exchange rates, while exposing the Group to the risk of incurring a potential loss on this account.

The outbreak of the COVID-19 pandemic entailed a significant reduction in the dynamics of economic development, and uncertainty as to its possible severity and scope weakened the PLN exchange rate and increased the dynamics of its fluctuations. In the case of the PGE Capital Group, the increase in currency exchange rate risk  translated mainly into an increase in the average cost of hedging currency exposure resulting from the current operating activities conducted in 2020. In connection with the adopted currency risk management strategy based on minimising and hedging exposure to risk, the cost of servicing liabilities in foreign currencies, in the medium and long term, did not change significantly due to the hedging measures taken before the outbreak of the pandemic.