3. Test for impairment of property, plant and equipment, intangible asstes and goodwill

Property, plant and equipment is PGE Group’s most significant group of assets. Due to the changing macroeconomic and regulatory environment, PGE Group verifies regularly the premises that may indicate that its assets may be impaired. In assessing the market situation, PGE Group uses both its own analytical tools and the support of independent analytical institutions. In previous reporting periods, PGE Group recognised significant impairment allowances on non-current assets in the Conventional Generation segment and the Renewables segment.

In the current reporting period, PGE Group analysed indications and identified drivers that could have substantial impact on changes in the value of assets in the aforesaid segments.

External indications

• Market capitalisation of PGE Polska Grupa Energetyczna S.A. remaining below the net carrying amount of assets.
• Decrease in prices of futures contracts for electricity: the prices of annual futures contracts for the BASE and PEAK profiles fell by 12-20% in 2019.
• High energy imports and low demand in the National Power System: low prices on spot markets in Germany and Scandinavia result in high competitiveness of energy imports to Poland, which results in lower utilisation of Generation Units. An additional adverse factor is a decrease in demand in the National Power System and an increase in RES generation. In the opinion of the PGE Group, this situation will continue until the end of 2021.
• Increase in planned reclamation costs: according to the most recent report on the assessment of the costs of open-pit mine decommissioning after the end of operation of Kopalnia Turów, prepared by an external expert, the scope of work will need to be significantly larger than previously assumed. As a result, the projected cost of reclamation also increases significantly.
• Increase in hard coal prices in Poland: rising hard coal prices translate into rising costs in hard coal-fired power plants which, in the context of falling electricity prices, translates into weaker financial performance of these entities.
• Increase in the overall level of prices and wages in Poland: the rapid growth of prices and wages in Poland, observed recently and expected in the near future, will translate to some extent into an increase in fixed costs and capital expenditure. In particular, this applies to the cost of salaries and third-party services, and indirectly to the cost of materials.
• Approaching depletion of lignite resources: the lifetime of lignite-fired power plants is limited due to the quantity of available lignite resources. Therefore, over time, the remaining service period, as well as the benefits and value in use, becomes shorter.
• Continuing high prices of energy origin rights (TGEozea index)
• The price of green energy origin rights increased between Q1 and Q4 2018 from 63 PLN/MWh to 149 PLN/MWh and then remained high in 2019 to reach 143 PLN/MWh in Q4 2019.

Following the analysis of the aforementioned indications, the Group performed an impairment test of assets as at November 30, 2019 for the District Heating segment, to which goodwill is allocated, and performed impairment tests of assets as at December 31, 2019 for the Conventional Generation and Renewables segments.

Macroeconomic assumptions

The key price assumptions, i.e. the prices of electricity, CO₂ emission allowances, hard coal, gas, and assumptions related to production at most of the Group’s installations were derived from a study prepared by an independent expert, taking into account own estimates, based on the current market situation for the first two years of the projection.

Electricity price projections assume a slight increase in prices in 2020 as compared to 2019, followed by growths in subsequent years.

Price projections for CO₂ emission allowances assume dynamic market price growth in successive years of the projection.

Hard coal price projections expect a decline in prices until 2023, as compared to 2019, followed by several-percent growth in subsequent years.

Gas price projections assume a decline in 2020 as compared to 2019, average annual growth in the period to 2025 at approx. 8% and growth of approx. 3% annually in the years thereafter.

Projections for prices of energy origin rights provide for an average annual decrease of about 7% between 2022 and 2031, which is related to the declining obligation to redeem.

Capacity-market revenue projection for 2021-2024 is based on the results of main auctions for these delivery periods, taking into account the mechanisms of the agreement to re-allocate revenue within PGE Group companies. The projection after 2025 was developed by a team of experts at PGE S.A., based on assumptions concerning estimated future cash flows for generation units, on the basis of, among others, completed auctions and projections prepared by a third-party expert. As of July 1, 2025, removed from the Capacity Market are units that fail to meet the emission criterion of 550 g CO₂ per kWh, except for units covered by multiannual contracts executed in main auctions for years 2021-2024.

Revenue from regulatory system services was based on existing bilateral agreements with PSE S.A.

Unit availability was estimated based on repair plans, taking into account statistical failure rates.