Risk management

Skilful identification of risks and implementation of preventive mechanisms are the foundations of an organisation's longevity.

PGE Group companies, like other entities from the energy sector, are exposed to risks and threats resulting from the specific nature of their operations and presence in specific market and regulatory & legal surroundings.

PGE S.A., as the Corporate Centre managing the Group, shapes and implements integrated risk management architecture solutions at PGE Group. It especially shapes PGE Group’s risk management policies, standards and practices, develops and expands internal IT tools that support this process, sets global risk appetite and adequate limits and monitors their levels.

PGE’s responsible development requires a multi-dimensional and multi-level risk management system.

Risk management at PGE is exercised based on GRC model (Governance – Risk – Compliance). These solutions make it possible to adapt and integrate the risk management process at all management levels in each area of the Group’s activities.

Having established a Risk Committee at top executive level, which directly reports to the Management Board, supervision over the effectiveness of risk management processes is ensured across the entire Group.

Defining risk management functions within the Risk and Insurance Department makes it possible to independently analyse specific risks (ERM – Enterprise Risk Management, market, financial) and their impact on PGE Group.

Establishing a compliance function guarantees that PGE Group operates in line with legal conditions and ensures the observance of internal norms, strengthens monitoring of the regulatory environment, whilst increasing successful identification of potential gaps.

Risk management also takes into account the three defence lines model, in which the risk counteracting process features the participation of risk owners at the operating level, Department of Risk and Insurance, Risk Committee and Department of Audit through independent periodical evaluations of key risk management system elements.

The PGE Capital Group has consequently developed a comprehensive risk management system. We measure and assess risks in the key companies of the Group. Mechanism allowing identification of areas exposed to risk and risk level measurement methods are constantly verified and developed. Thanks to that, the significant risks concerning various areas of operations are identified and kept within the assumed limits by reducing negative effects of such risks and by taking preventive or corrective measures.

Risk factors and mitigating actions

The main risks and threats of PGE S.A. and the PGE Group are presented below along with their assessment and outlook in the horizon of the next year.

Risk level				Mitigating actions and main tools used for the management of the risk

Risk outlook	decrease	growth	stable
Low level	Risk does not pose a threat and may be tolerated
Medium level	Risk which needs preparation of the proper reaction based on analysis of costs and benefits
High level	Intolerable risk, which needs immediate and active reaction, leading simultaneously to limitation of possible consequences and of probability of occurrence thereof
Market and product risks Related to prices and volumes of offered products and services	Prices of electricity and related products – resulting from a lack of certainty with regard to the future levels and volatility of commodity prices relative to open contract positions – this particularly concerns electricity and associated products (property rights, CO2 emission allowances).			Actions: Using consistent guidance in respect of process organisation in the context of commercial strategy and mid-term planning (strategy for hedging key exposures in the area of electricity and related product trading that correspond to the adopted risk appetite in the mid-term). Establishing position hedging levels with consideration given to the results of analysing pricing risk in respect of electricity and related products, VaR-based. Target hedging levels are specified taking into consideration the Group’s financial standing, including in particular its strategic objectives. Securing margin on sales by purchasing the missing CO₂emission rights. Research, monitoring and analysing the electricity and related products markets in order to optimally use generation and selling capacities. Acquiring new customers – diversification of channels to reach final off-takers and diversification of target groups by maintaining an extensive product portfolio and adapting offering to market. Current clients retention – a diversified portfolio of customer loyalty schemes and client-acquisition activities and special offers dedicated to former clients who moved over to the competitors. Care for a high level of customer service by developing employees’ competences and building relations with business and retail clients. Use of tools to supporting customer relations processes allows the Group better sales planning and organisation of sales.
	Electricity sales volumes – this risk derives from a lack of certainty with regard to the conditions determining the demand and supply of electricity, directly affecting the volume of market sales by PGE Group.
	Tariffs (regulated prices) – resulting from the requirement to approve rates for distribution services and electricity and heat prices for particular groups of entities.

Property risk Related to development and maintenance of the assets	Failures and damage to property – connected with the operation and degradation over time of energy equipment and facilities and protection of energy equipment and facilities against destructive external factors ( including fire, effects of weather phenomena, intentional damage).			Actions: Active pursuing of a strategy for building up and modernization of the production capacities. Performing maintenance repairs in line with the highest sector standards. Diversification of the current structure of the production sources due to energy generation technology. Our main generation assets were insured against failure and damage to property. Assets are insured based on an analysis of insurance costs, capabilities of insurance markets for particular risks or for particular types of assets, costs related to asset replacement and potential lost revenue. The reliability of the power supply to the end users has been systematically improved through modernization of the distribution grid.
	Investment and development – connected with strategic plans for expanding the generation, distribution and sales potential as well as on-going investments.

Operational risk Related to pursuing of ongoing economic processes	Electricity and heat production – connected with production planning and impact of the factors that determine production capacities.			Actions: Optimisation of costs inter alia through monitoring of fuel prices and reserves and securing supply through long-term contracts with suppliers and through price fixing formulas. Optimisation of equipment lifecycles and the availability of key assets. Inspections, repairs and modernisation of the existing assets. PGE’s active participation in internship programmes and cooperation with educational institutions in order to secure a pipeline of qualified personnel. Assessment and training of personnel in order to make optimal use of it within the Group’s structures. Conducting an intensive and effective dialogue in order to avoid escalation of potential disputes with the social partners and to work out the most favourable solutions with regard to employment and employment costs within PGE Capital Group connected therewith.
	Fuel management – connected with uncertainty regarding the costs, quality, timeliness and volumes of fuel supply (mainly coal) and production raw material as well as the effectiveness of inventory management processes.
	Human Resources – pertaining to provision of personnel with the relevant experience, competences and ability to perform specific tasks.
	Social dialogue – connected with a failure in achieving agreement between the Group’s management and employees, what could lead to strikes/collective labour disputes.

Regulatory and legal risk Related to compliance with external and internal legal provisions	Legal changes in support systems – connected with uncertainty as to the future shape of the support system for production of certified energy.			Actions: Monitoring of the changes being introduced or proposed provides that our operations in key business segments are carried in compliance with the law and that PGE Capital Group has solutions which take into account potential changes in the legal environment Active participation of PGE S.A. as the member of the Polish Electricity Committee that opened its office in Brussels. Through the Committee’s operations, the Company actively influences proceeding and shaping of EU law and engages a dialogue with the EU institutions. Adaptation of internal regulations and practices to make sure that the activities are in compliance with the power sector regulations and binding law. Improvement of activities aimed at protecting and improving the state of the environment by implementing technological and organisational solutions ensuring efficient and effective management in this area.
	Environmental protection – resulting from industry regulations specifying which „environmental” requirements energy installations should meet and what the principles for using the natural environment are. The future environmental regulations and uncertainty concerning their final shape (in particular with regard to the revision of BAT / BREF) may translate into a change in the level of capital expenditures of the PGE Group.
	Concessions – resulting from the statutory requirement to hold concessions with regard to conducted operations.
	Taxes – related to uncertainty surrounding the future shape of tax regulations and their interpretation.

Financial risks Related to finance management	Credit risk – connected with the counterparty default, partial and/or late payment of receivables or a different type of breach of contractual conditions (for example failure to deliver/collect goods or failure to pay for any associated damages or contractual penalties).			Actions: Prior to executing a transaction, a counterparty assessment is carried out and forms a base for applying credit limits, that are regularly updated and monitored. Exposures that exceed established limits are hedged in accordance with the Group’s credit risk management policy. The level of utilisation of limits is monitored on a regular basis, payment of receivables is monitored on an ongoing basis and early recovery procedures are in place. Applying a central financing model, which assumes – as a rule – that external capital is raised by PGE S.A. PGE Group subsidiaries use a variety of intra-group financing sources and liquidity risk is monitored using periodic planning for operating, investing and financing activities. As regards currency risk and interest rate risk, PGE Group has implemented internal management procedures. PGE Group companies execute derivative transactions involving interest rate- and/or currency-based instruments (IRS, CCIRS) only in order to hedge identified risk exposures. Regulations in force at the PGE Group do not allow, with regard to derivative transactions based on interest rates and currencies, to enter into speculative transactions, i.e. transactions which would be aimed at generating additional gains resulting from changes in the level of interest rates and changes in exchange rates, while exposing the Company to the risk of incurring a potential loss on this account.
	Liquidity risk – connected with the possibility of losing the ability to meet current liabilities and obtaining financing sources for business operations.
	Interest rate risk – resulting in particular from the negative impact of changes in market interest rates on PGE Group’s cash flows generated by floating-rate financial assets and liabilities.
	Foreign exchange risk – understood in particular as risk that PGE Group’s cash flows denominated in currencies other than the functional currency are exposed to due to negative exchange rate movements.

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Strategic risks

PGE Group does not focus exclusively on risks concerning on-going activities. Risks that may have an impact on the Group’s functioning in a longer timeframe (approx. 10 years) are also subject to identification, assessment and analysis. Assessment of impact on the Group’s objectives, image and business continuity is performed at the top management level. This allows us to prepare for arising challenges and ensure the Group’s development in the long term.

Unlike threats to PGE’s day-to-day business and results, strategic risks might have an impact on strategy implementation and the future of the entire organisation. Their identification is the key to ensuring PGE Group’s sustainability.

Presented below are the key identified strategic risks along with their assessment.

Wpływ
	very low	low	medium	high	very high
	Cybersecurity Risk associated with intentional disruption of generation and distribution assets and IT systems used at PGE Group.
	Forces of nature Risk associated with more frequent extreme weather events having impact on ability to generate and distribute electricity, as well as prices of generation and distribution costs of electricity and heat.
	Legal Risk associated with the changes of national legislation governing PGE Group’s activities and an increase in the volume and scope of EU regulations having impact on the Group.
	Environmental restrictions Risk connected with stricter environmental restrictions applicable to PGE Group’s electricity and heat production and mining activities.
	Energy policy Risk associated with changes in the concept for the energy sector in Poland and PGE Group’s role in it.
	Human resources Risk associated with restricted availability of employees who are of key importance to PGE Group’s processes.
	Employee and client safety Risk associated with unexpected events connected with use of PGE Group’s assets that generate irreversible material losses and heavy injuries or deaths.
	Competition Risk associated with the development by competition of a product offering that would decrease PGE Group’s share of the energy market.
	Technological revolution Risk of technological change causing a limited competitiveness of electricity and heat production in baseload assets owned by the Group and their distribution using grid assets owned by PGE Group.
	Macroeconomics and geopolitics Risk associated with changes in economic and geopolitical situation, causing swings in macroeconomic indicators and commodity prices that have impact on PGE Group’s activities.

In analysing these risks as threats for PGE, the Company tries at the same time to identify any opportunities that such changes might bring about. Countering risks becomes an opportunity for the Group’s development if we manage to adapt to a changing world in advance.

Strategic opportunities

When analysing the risks in terms of threats for PGE, we also try to identify opportunities provided by the on-going changes. Early preparation for incoming changes provides an advantage towards competitors and allows for the Group’s development. In this context, we are especially monitoring the technological processes by becoming their active participants. Effective implementation of technological solutions should contribute to a more effective administration of the group’s resources in the entire value chain. In this scope, the progressing digitalisation will lead to PGE’s offering of products and services that are more adapted to the customers’ needs, which can be reflected in the entire value creation chain.

Thanks to dedicated investment support aimed at developing specific production sources (such as RES or co-generation), PGE can effectively change electricity or heat energy production technologies, in terms of investment expenses, and thus reduce the level of exposure to such factors as prices of emission allowances or fuel.