Business segments

We are Poland’s largest vertically integrated producer and supplier of electricity and largest producer of heat. We operate across the entire value chain: we produce electricity and heat at our conventional and CHP plants, then we sell and supply these to our customers throughout Poland, including households, businesses, institutions and local governments.

This segment includes lignite mining and generation of electricity in conventional sources

* managerial perspective

The main source of revenue in the Conventional Generation segment is revenue from the sale of electricity on the wholesale market, based on electricity prices that are shaped by supply and demand mechanisms, taking into account the variable costs of generation.

Revenue from the Capacity Market, a mechanism introduced to prevent electricity shortages in the NPS, constitutes a significant item in the segment’s revenue in 2021. PGE GiEK S.A.’s power plants receive fees for performing the capacity obligation (a Capacity Market entity being on standby to supply electricity to the system and the obligation to supply specified capacity to the system when the system is under threat). Capacity Market revenue compensated for revenue from ancillary services. The cold intervention reserve and operational capacity reserve services were discontinued, while revenue from capacity reallocation remained.

In the segment of Conventional Generation of PGE Group operates the company PGE GiEK S.A. based   in Bełchatów. In the reporting period, i.e. as at December 31, 2021, the company consisted of 7 branches located on the area of five voivodships.

Conventional Generation segment consists of: 2 lignite mines (Bełchatów and Turów), 5 conventional power plants (Bełchatów, Turów, Opole, Rybnik, Dolna Odra complex). Conventional Generation is the leader of lignite mining (its share in the extraction market of this raw material accounting for approx. 90% of domestic extraction), it is also the largest generator of electricity as it generates approx. 40% of domestic gross electricity production.

The Conventional Power segment includes: 2 lignite mines and 5 conventional power plants. Production is based on lignite coal, extracted from its own mines, and hard coal.

Installed capacity and production in Conventional Generation segment

In the table below are presented lignite resources data as at the end of 2021 and lignite output in 2021.

Table: Lignite resources data as at the end of 2021 and lignite output in 2021.

Key factors affecting the EBITDA result of Conventional Generation segment on y/y basis included:

Capital expenditures incurred in Conventional Generation segment in 2021 and 2020.

Core business of the District Heating segment includes production of electricity and heat from cogeneration sources as well as distribution of heat.

* managerial perspective

As in the case of Conventional Generation, this segment’s significant revenues are revenues from electricity sales, however, they are usually directly related to generation of heat which in turn depends on demand that is highly seasonal and depends on external temperatures. 

Revenues from the sale and distribution of heat are regulated revenues. Energy companies independently set tariffs and present them to the President of the Energy Regulatory Office (the “ERO President”) for approval. Heat production at PGE Group takes place in cogeneration units, which tariffs for heat are calculated using a simplified approach (compared to tariffs based on a full cost structure), based on reference prices, conditioned on average sales prices for heat generated in units with specific fuel other than cogeneration units. They are published each year by the ERO President.

The cost approach is applied in the case of tariffs for heat distribution, which allows to cover justified costs (mainly the costs of heat losses and property tax) and a return on invested capital, in line with guidelines from the ERO President. Distribution tariffs for heat are in place at branches in Gorzów and Zgierz, as well as by Kogeneracja S.A., PGE Toruń and Zielona Góra CHP.

Generation of heat and electricity is directly related to key variable costs of the segment, i.e. the cost of production fuel used (in particular, hard coal and gas) and the cost of fees for CO₂ emissions.

Electricity production in high-efficiency cogeneration is additionally remunerated. Until 2018, CHPs generated revenue from the sale of energy origin certificates, i.e. cogeneration certificates (yellow and red). From 2019, due to a change in support model, they receive support at a level covering increased operating costs related to production. The support mechanism in the form of certificates is in place also for biomass-fired generating assets.

District Heating within PGE Capital Group combines CHP plants separated from the EDF Polska assets acquired on November 14, 2017 and CHP plants separated from PGE GiEK. Since January 2, 2019 the following companies has been included in the segment.: PGE EC S.A., KOGENERACJA S.A., Elektrociepłownia Zielona Góra S.A., PGE Toruń S.A., PGE Gaz Toruń sp. z o.o., PEC Zgierz sp. z o.o. oraz MEGAZEC sp. z o.o. In addition, from July 1, 2021, Szczecin CHP, Pomorzany CHP and the district heating network in Gryfino, recognised until June 30, 2021 as part of the Conventional Generation segment, were included in the structures of the District Heating segment.

District Heating segment is the largest heat producer in Poland with market share of over 20%. Generation is based mainly on hard coal and gas.

Installed capacity and production in District Heating segment

Key factors affecting the EBITDA result of District Heating segment on y/y basis included:

Capital expenditures incurred in District Heating segment in 2021 and 2020

This segment is involved in the generation of electricity from renewable sources and in pumped storage power plant.

* managerial perspective

The Renewables segment is based mainly on revenues from the sale of electricity, however contrary to production at industrial plants within the Conventional Generation segment, this revenue is subject to a larger degree to changes in weather conditions and prices on the spot market due to the renewables sales model in place. Additionally, some of the generating units receive revenue from the sale of energy certificates of origin (green certificates) obtained from the production of renewable energy. In addition, some generating units receive revenue from the sale of energy certificates of origin (green certificates) obtained for the renewable energy produced.

Installed capacity and production in power plants of Renewables segment.

On the cost side, the most important items include: depreciation of segment assets, use of energy to pump water at pumped-storage plants and third-party services, mainly the repair services. Property tax and employee wages also constitute a significant cost item in this segment.

The PGE Capital Group’s operations in renewable energy are managed by the PGE Energia Odnawialna S.A. Due to the profile of operations, the segment includes PGE Baltica sp. z o.o. This company is responsible for all activities related to off-shore wind farms.

Assets in the segment include:

• 17 wind farms,
• 5 photovoltaic power plants,
• 29 run-of-river hydro power plants,
• 4 pumped-storage power plants, including 2 with natural flow

Installed capacity and production in power plants of Renewables segment.

Key factors affecting the y/y results of Renewables included:

• Increase in revenues from electricity sales results from: higher average electricity sale price by PLN 210/MWh y/y, what translated into increase of revenues by approx. PLN 567 million; lower sales volume by 138 GWh, what caused revenues decrease of approx. PLN 29 million.
• Decreased revenues from sales of certificates resulting mainly from lower generation volume due to end of support for 12 small hydro power plants as from the end of September 2020.
• Lower sales revenues from ancillary services result mainly from change in agreement for provision of services and withdrawal in 2021 of Readiness Interventional Reserve among others.
• Capacity Market, a mechanism, which was not present in the base period.

We are the second largest energy distributor in terms of the number of customers, with approx. 25 percent. share in the Polish energy distribution market. Our distribution area covers almost 40 percent. area of Poland. With the use of over 290 thousand. km of the power grid, we supply electricity to over 5.5 million customers.

Core business of the segment includes supply of electricity to final off-takers through the grid and HV, MV and LV infrastructure.

* managerial perspective.

Segment revenue is based on a tariff for electricity distribution services, which is approved by the ERO President every year at company request and is regulated.

The tariff allow costs related to the distribution system operator’s on-going activities to be transferred. These are both justified operating costs, depreciation, as well as costs related to the necessity to cover grid losses on electricity distribution or the purchase of transmission services from the TSO. At the same time, the tariff reflects the costs transferred in fees such as the RES fee, the transition fee, the co-generation fee and – from 2021 – the capacity fee.

The key element shaping the Distribution segment’s result is return on company’s invested capital. This is based on the Regulatory Asset Base (“RAB”), which is established on the basis of completed investments and taking into account asset depreciation. The Regulatory Asset Base serves as the basis for calculating return on capital, using weighted average cost of capital, which is published by the ERO President in accordance with a set formula and using as the risk free rate the average yield on 10-year State Treasury bonds with the longest maturity during the 36-month period preceding the tariff application submission, quoted on the Treasury BondSpot market. In addition, return on capital depends on the achievement of individual quality targets set by the ERO President for performance indicators including: interruption time, interruption frequency, connection time and (not yet included) time to provide metering and settlement data.

PGE Dystrybucja S.A. operates in the area of 129 829 sq. km and delivers electricity to approximately 5.5 million customers.

Volume of distributed energy and number of customers in 2021 and 2020

Key operational data.

Key factors affecting results of Distribution segment y/y included:

• Increased volume of distributed energy by 2.1 TWh resulting mainly from higher demand.
• Decrease in rates in tariff for 2021 by PLN 9.6/MWh compared to the tariff for the previous year, that translated into an decrease in revenues from the sale of distribution services. 
• Lower costs of electricity purchases to cover network losses mainly as a result of a decrease in the electricity purchase price to cover the losses.
• Increase of costs of tax on real estate in connection with an increase of: grid assets value as a result of investments; tax rates on land and buildings.
• Decrease in personnel expenses due to ongoing process to optimise costs.

Capital expenditures incurred in Distribution segment in 2021 and 2020

Supply segment activities include Group’s wholesale and retail trading of electricity.

Wholesale trading includes mainly electricity trading on behalf of and for Conventional Generation segment, District Heating segment and Renewables segment.

As part of retail-market activities, the key source of segment’s revenue is sale of electricity to final customers. This is sale to business and institutional clients.

Electricity sales are matched by the costs to purchase electricity on the wholesale market and costs to redeem certificates as part of the support system for renewable sources and energy efficiency. 

The Supply segment also incurs costs related to the Group’s corporate centre.

Volume of electricity sales to final off-takers and number of customers in 2021 and 2020

Key factors affecting EBITDA of Supply segment y/y included:

• Higher result on electricity, due to lowered base in the sale of tariffed products in previous year – the ERO President set the prices for households at a level which did not cover actual costs of electricity purchase. The last year’s low base was also an effect of lower demand due to COVID-19, what resulted  in re-selling certain volumes on the spot market below purchase prices in forward transactions.
• Increase of revenues from services performed within the Group resulting mainly from higher revenues from the  Agreement  for  Commercial  Management  of  Generation  Capacities as a consequence of increased trading value of electricity under management. 
• Lower result on gas sales, as a result of higher portfolio balancing costs in connection with a significant increase in prices on the wholesale market.
• Higher personel expenses as a result of organisational changes and due to ongoing proces of salaries optimisation.
• Negative impact of balance of provisions for onerous contracts and potential claims from customers resulting from reversal of provision for onerous contracts in 2020, that mainly related to lack of coverage of part of justified operating costs in the tariff for households approved by the ERO President. In turn, in 2021 a provision was created for potential claims from customers in connection with the termination of unfavorable contracts for the supply of electricity and natural gas.

From the beginning of 2021, PGE Group reports a new operating segment – Circular Economy, which includes the following companies: PGE Ekoserwis S.A., EPORE S.A., ZOWER sp. z o.o. The management of combustion by-products at PGE Group turns waste into high-value substances that are used in other branches of economy (cement industry, construction, road-building, mining) and thus reduces the volume of ultimate waste generated.

The activities of the segment include the provision of comprehensive services in the field of management of combustion by-products („UPS”), provision of services in auxiliary areas for electricity and heat producers and the supply of materials based on UPS.

The main revenue source in the Circular Economy segment is revenue from the economic use of combustion by-products, which includes revenue from the sale of products manufactured on the basis of combustion by-products in internal production processes and the sale of services related to the management of combustion by-products. The level of revenue depends on multiple factors, including commercial potential for selling combustion by-products, in processed and unprocessed form, seasonality of industries purchasing combustion by-products, seasonality of suppliers of combustion by-products (power plants, combined heat-and-power plants), volumes collected, efficiency of production infrastructure, capabilities for storing combustion by-products as materials inventories intended for production, as well as market conditions.

Key factors affecting EBITDA of Circular Economy segment included:

• Revenue from sale of combustion by-products: ash, slag, gypsum obtained in the process of hard coal and lignite combustion.
• Revenue from sale of services, concerning services in the field of coal storage site operations and heavy equipment rentals, mainly to PGE Group companies.
• Personnel costs necessary for the proper functioning of the segment.
• Third-party service costs, mainly concerning services in the field of transporting waste from production units.
• Others, including material and energy costs.