3.3 Description of the circumstances relating to the Renewable Power Generation segment

In 2019, the PGE Group reversed impairment write-downs on property, plant and equipment recognised in previous reporting periods in the Renewable Power Generation segment. The key assumptions adopted for asset impairment tests performed in 2019 are described in the consolidated financial statements of the PGE Capital Group for the year 2019.

During the current reporting period, the Group analysed the existing circumstances to verify whether further write-downs or the reversal of the earlier write-downs is necessary. On June 25, 2020, two new wind farms “Starza/Rybice” and “Karnice II” owned by PGE Klaster sp. z o.o., belonging to the Renewable Power Generation segment, were commissioned. In connection with the commissioning of the wind farms, PGE Klaster sp. z o.o. conducted impairment tests of its fixed assets as at December 31, 2020 and verified its value.

The following separate cash-generating units “CGUs” are identified and analysed within the Renewable Power Generation segment:

• all pumped storage power plants,
• all other hydroelectric power plants,
• individual PGE EO wind farms,
• all PGE Klaster wind farms.

The analysis of the circumstances comprised the following most relevant factors:

• the financial plan,
• a confirmation that the investment plan is up to date,
• the prices of electricity and energy origin property rights,
• assumptions concerning the so-called capacity market,
• estimates of margins on electricity generation and sales in future periods, in the light of forecasts of energy prices.

The conducted analysis of the circumstances of the CGUs in PGE EO S.A. indicated that the generating units in the Wind area were implementing the financial plan above the assumed values, which was the result of higher prices of property rights and higher production volumes due to better wind conditions. In the Water area, due to lower than assumed electricity sale prices, a deviation from the financial plan was observed. Nevertheless, lower results were compensated by lower than assumed investment expenditures, which had a neutral impact on the estimated value of these CGUs based on the income approach. Forecasts of electricity prices and property rights available to the PGE Capital Group did not change significantly, thus their impact on forecast results is neutral. Moreover, forecasts concerning the level of support for the capacity market did not change significantly, either and are at a similar level. In view of the above, in the opinion of the PGE Capital Group, as at the reporting date there are no circumstances indicating the necessity to write down property, plant and equipment in the Renewable Power Generation segment with respect to the CGUs in PGE EO S.A., nor to reverse any write-downs recognised in the previous periods.

Some important regulatory assumptions adopted for the purpose of impairment tests are beyond the control of the PGE Capital Group and their fulfilment in the future is uncertain. This applies in particular to forecasts concerning prices of energy origin property rights, the uncertainty of which results from the unstable legal and regulatory situation relating to the operation of the energy origin property rights system.

In connection with the commissioning of the wind farms, PGE Klaster sp. z o.o. identified circumstances that could indicate the necessity of reversing the write-down recognised in previous years on the value of incurred expenditures. Therefore, impairment tests of property, plant and equipment were carried out as at December 31, 2020 and its value was verified.  The impairment tests were performed as at December 31, 2020 for the Karnice II and Rybice wind farms by determining their recoverable value. The recoverable value of the analysed assets was determined based on an estimation of their value in use by means of the discounted net cash flow method, on the basis of financial projections prepared for the assumed useful life of the wind farms.

• the assumptions relating to electricity generation were based on the best knowledge of PGE CG,
• the weighted average cost of capital (WACC) over the duration of the auction price support was assumed at 5.5% and over the remainder of the projection period at 7.0%

As a result of the impairment test of property, plant and equipment, the Group concluded that it was necessary to reverse the impairment write-downs on the wind farm assets as at the reporting date.

The table below shows the value of the reversals of the write-downs on the PGE Klaster wind farm assets as at the end of 2020.

In accordance with IAS 36, the Group performed a sensitivity analysis for the wind farms of PGE Klaster sp. z o.o. The impact of the change in WACC on the value in use of the assets as at 31 December 2020 is presented below:

An increase in WACC by 0.5 p.p. would reduce the value in use of the assets by PLN 35.3 million.