Conventional Generation

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

PGE-grafiki-EN_energet-konwencjonalnaEN_XX-01

*Managerial perspective.
**Including impairment loss of assets in amount of PLN 7.5 billion, that lowers EBIT (see note 3.1 to the consolidated financial statements).

At the same time, the segment’s key cost items, given their size and volatility, and thus their impact on operating results, are the cost of production fuels, mainly hard coal and natural gas, as well as fees for CO₂ emissions. Lignite-based production, which is of key significance for the Group, is based on own mines, therefore its cost is relatively stable and reflected mainly in fixed-cost items, i.e. personnel costs, third-party services and depreciation.

A significant item in the segment’s revenue constitutes revenues from the provision of regulatory system services based on an agreement with PSE S.A. This revenue is in parallel to revenue generated on the electricity market and is related to the need to ensure stable operations for the NPS. Regulatory system services are provided by power plants of PGE GiEK, including Rybnik power plant.

In addition, this segment generates revenues from sales of heat produced both at industrial plants and at the Szczecin CHP plant and Pomorzany CHP plant which form part of ZEDO.

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.

Assets

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, 2019, the company consisted of 7 branches located on the area of five voivodships.

These were 2 lignite mines (Bełchatów and Turów), 4 conventional power plants (Bełchatów, Turów, Opole, Rybnik) and the Dolna Odra Power Plant Complex (a power plant and 2 combined heat and power plants). The Group is a leader in the lignite mining industry (its market share accounts for approx. 90% of domestic production), as well as the largest producer of electricity, with approx. 39% of the national gross electricity production.

Main assets of the Conventional Generation segment with their installed capacity

Conventional Generation segment consists of: 2 lignite mines, 5 conventional power plants and 2 CHP plants.

Conventional Generation is the leader of lignite mining (its share in the extraction market of this raw material accounting for 87%¹ of domestic extraction), it is also the largest generator of electricity as it generates approx. 32%² of domestic gross electricity production. The generation is based on lignite extracted from mines owned by the company as well as hard coal and biomass.

¹Own calculations based on data from ARE.
²Own calculations based on data from PSE S.A.

Installed capacity and production in Conventional Generation segment

xls

Main fuel types	Annual electricity generation (TWh)		Annual heat generation (TJ)		Installed capacity (MWe)	Installed capacity (MWt)
	2019	2018	2019	2018	2019	2019
Hard coal	15.18	16.77	2.42	2.38	6,744	584
Lignite	32.12	38.9	2.65	2.68	6,427	593
Biomass	0.31	0.26	0.54	0.76	76	162
TOTAL	47.61	55.93	5.61	5.82	13,247	1,339

Lignite mining

Lignite deposit reserves are determined based on a reserves inventory maintained in the reserves register for a given year up to February 28 as at December 31 of a preceding year (art. 101 p. 3 of the Geological and Mining Act). The following table presents lignite reserves as of the end of 2019, together with volumes extracted in 2019.

xls

Deposit	Resources – as at the end of 2019 (Mg million)		Output in 2019 (Mg million)
Bełchatów – Field Bełchatów	Industrial	20.02	4.11
Bełchatów – Field Szczerców	Industrial	624.08	34.21
Turów	Industrial	289.2	4.97

Key financial figures

xls

[PLN m]	2019	2018
Revenue from sales:	19,245	12,375
EBIT	-7,109	379
EBITDA	2,880	2,101
Capital expenditures	4,018	4,122

Key factors for the results of the segment

Lower electricity production volume in PGE GiEK by 8.3 TWh due to lower degree of use of units by PSE S.A. resulting from decreased demand in NPS and higher wind generation.
Increase in electricity sales prices.
Higher result on optimisation of electricity portfolio due to higher volume of electricity trading by 17.0 TWh, with higher margin realized on electricity trading.
Higher revenues from ancillary control services, mainly lower revenues from Operational Capacity Reserve (“OCR”) due to higher volume of OCR in Opole power plant and Dolna Odra power plant due to lower trading factor of those power plants.

Higher fuel consumption costs, mainly hard coal, due to higher realised prices of hard coal. The above effect was limited due to lower production based on this fuel. Main changes on different types of fuel are presented on the chart below.
Higher CO₂ costs as a result of higher price of allowances and lower allocation of allowances granted free of charge. The above effect was reduced as a result of lower emissions of CO₂ due to lower electricity production. Main changes are shown in the chart below.
Higher personnel expenses mainly due to ongoing process to optimise salaries.

Capital enpenditures

Capital expenditures incurred in Conventional Generation segment in 2019 and 2018

xls

PLN million	2019	2018	Change %
Investments in generating capacities, including:	3,252	3,601	-10%
Development	1,665	2,159	-23%
Modernisation and replacement	1,587	1,442	10%
Other	179	123	46%
Rybnik power plant, including:	147	129	14%
Development	0	19	–
Modernisation and replacement	146	108	35%
Other	1	2	-50%
TOTAL	3,578	3,853	-7%
Capitalised costs of overburden removal in mines	440	269	64%
TOTAL with capitalized costs of overburden removal	4,018	4,122	-3%

Our business model

District Heating