3.1 Description of assumptions for the Conventional Generation segment

The impairment tests were performed as at December 31, 2019 with respect to cash-generating units by determining their recoverable amount. Determination of fair value for very large groups of assets for which there is no active market and a small number of comparable transactions is very difficult in practice. In the case of power plants and mines for which a value on the local market should be determined, there are no observable fair values. Therefore, the recoverable amount of the analysed assets was determined based on value in use estimated using the discounted net cash flow method, based on financial projections prepared for the period from January 2020 to the end of their operation. According to the Group, financial projections longer than five years are justified due to significant and long-term effects of projected changes in the regulatory environment. With longer projections, the recoverable amount can be determined in a more reliable manner.

Detailed assumptions regarding the segment

Presented below are the key assumptions having impact on estimates of the value in use of the tested CGU:

• recognition of the following branches as a single CGU:
  • Branch Kopalnia Węgla Brunatnego Bełchatów and Branch Elektrownia Bełchatów (“Bełchatów Complex”),
  • Branch Kopalnia Węgla Brunatnego Turów and Branch Elektrownia Turów (“Turów Complex”),

given the technological and economic links between these branches,

• recognition of Elektrownia Dolna Odra, Elektrownia Szczecin and Elektrownia Pomorzany, forming part of the Branch Zespół Elektrowni Dolna Odra, as three separate CGUs,
• recognition of the Rybnik Branch of PGE Energia Ciepła S.A. (Elektrownia Rybnik) as a separate CGU,
• assumption that in the period after June 2025 there will be support from the capacity market or equivalent only for units that meet the emission criterion of 550 g of CO₂ for electricity produced per kWh, whereby multiannual contracts concluded in auctions for 2021-2024 will be performed in accordance with their term,
• taking into account work cost optimisation resulting from current work plans, among other things,
• maintaining production capacities as a result of replacement-type investments,
• taking into account development investments for which construction works are in progress,

Some important regulatory assumptions made for impairment tests are beyond the control of PGE Group and their materialization in the future is uncertain. This concerns in particular issues related to the shape of the Polish capacity market after July 1, 2025 or the EU climate policy. In these areas, the Group relies on current assumptions about developments in regulations, which are subject to risk. Future changes to these regulations, compared to PGE’s current expectations, may have an impact on the assessment of the recoverable amount of generation assets in the Conventional Generation segment.

Nevertheless, the Group believes that such assumptions are justified in view of the expected changes in the regulatory environment. These assumptions, which have been reflected in cash flows, form, in the Group’s opinion, a realistic scenario and will remain valid in the period they have been made for. However, it cannot be ruled out that the final shape and term of validity of these arrangements may differ significantly from those assumed.

Below are the results of the tests performed for CGUs for which impairment was identified:

Following the test performed as at December 31, 2019, PGE Group has found impairment of generation assets in the total amount of PLN 7,514 million.

Sensitivity analysis

In accordance with IAS 36, the Group performed a sensitivity analysis for generation units in the Conventional Energy segment.

The estimated effect of the change of key assumptions on the amount in impairment loss on assets as at December 31, 2019 for the Conventional Generation segment is presented below.

A 1% decrease in electricity price would increase the impairment loss by PLN 1.0 billion for the Bełchatów and Turów Complexes.

A 0.5 p.p. increase WACC would increase the impairment loss by PLN 0.3 billion for the Bełchatów and Turów Complexes.

A 1% increase in prices of CO₂ emission allowances would increase the impairment loss by PLN 0.4 billion for the Bełchatów and Turów Complexes.