25.4 Climate risk
The PGE Capital Group is aware of the impact of its activities on the climate, as well as the risks of climate change to the Group’s operations. This interdependence generates both risks and opportunities for growth. Stakeholders’ expectations regarding the reporting of the environmental impact of its activities are therefore understood, thus recognising climate risk management as a key element of strategic management, with a direct impact on financial aspects.
Accordingly, the PGE Group focuses not only on risks but also on opportunities to ensure resilience to risks and to increase the Group’s sustainable revenue. During the course of the year, the PGE Capital Group took a number of actions aimed at achieving climate neutrality in 2050, as indicated in the PGE Group Strategy to 2030, and continues to work on the implementation of the PGE Group ESG Strategy, focusing on the following four 4 areas:
- Competitiveness in the financial market;
- Being the leader of green transformation;
- A corporate culture that supports sustainable development;
- Active communication on sustainability with all stakeholders.
The Group also stepped up its efforts to meet regulatory requirements, both national and European. This mainly relates to the EU Environmental Taxonomy[1], the preparation for meeting the requirements arising from the Corporate Sustainability Reporting Directive (CSRD) as well as the expectations of financial institutions, investors and customers.
As part of meeting the requirements of the new regulations, work on aligning the PGE Capital Group with the CSRD Directive of 14 December 2022 and building a new ESRS reporting system, including ESG risks and climate risks started in 2023 and is currently underway to make robust disclosures with the support of an external advisor.
Issues related to the climate risk are subject to rigorous requirements and guidelines resulting from the corporate risk management process. The body responsible for overseeing the PGE Group’s corporate risk management process, including the climate risk, is the Risk Committee. The establishment of the Risk Committee reporting directly to the Management Board ensures the supervision over the effectiveness of the risk management processes in the Group. This positioning of the risk function allows for an independent assessment of individual risks, their impact on the PGE Group, as well as the mitigation and control of significant risks through dedicated instruments.
The assessment of climate and environmental risks is carried out on the basis of the General Procedure for Corporate Risk Management. In the PGE Group, climate-related risks are analysed both in the context of the impact of climate change on business and the impact of business on climate change. The identification and analysis of climate-related risks and continuous improvement of pro-environmental solutions as well as control tools allow for effective management and minimisation of climate impact, while taking care of the PGE Group’s financial performance. Solutions developed by the PGE Group aim to ensure its development and sustainable transformation in line with climate requirements and interests of all stakeholders.
Climate issues are assessed centrally in PGE S.A., taking into account all activities of Group entities. This means that the result of the assessment is reported at the PGE Capital Group level.
The approach to the issue of climate risks is inspired by the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD); however, the method adopted for the inventory and assessment of risks is an internal PGE S.A. concept.
In 2023, the PGE Group once again participated in an international study on the environmental impact of the PGE Capital Group’s activities, i.e. the Carbon Disclosure Project – CDP (https://www.cdp.net/en). The Group responded to queries from global investors on the impact of its activities on the climate and water resources, and also identified both risks and opportunities. There is an interdependence between climate-related risks and opportunities for business. Any business is affected by two types of climate risks:
- physical risks, related to the physical impacts of climate change i.e. real threats in the form of extreme weather events, drought, flooding;
- risks related to transition (i.e. transformation/transition risks) towards a low-carbon and climate-resilient economy; these relate to meeting regulatory requirements, implementing new technologies or the impact on the Group’s reputation.
At the same time, the changing climate and climate change mitigation activities aimed at mitigating and adapting to its effects provide new opportunities and chances for business development. Therefore, the PGE Group focuses on not only risks but also opportunities to ensure that it is resilient to risks and increases sustainable profit. Climate-related opportunities in the PGE Group primarily relate to the following:
- effective resources management, e.g. in the form of work on waste management solutions and recovery of valuable products from wind turbine blades;
- new sources of electricity through investments in offshore and onshore wind farms and photovoltaic farms, construction of an electricity storage facility;
- new products such as the expansion of the product portfolio with PRO EKO initiatives – products compatible with low-carbon heating systems, development of products/offers promoting low-carbon activities, following changes in consumer preferences or development of insurance solutions for offshore wind farms;
- increased resilience to climate change, for example in the form of developing competences in the offshore wind power industry as part of PGE S.A.’s cooperation with secondary schools and universities in Poland, establishing scientific and research cooperation between PGE S.A. and institutes from the offshore wind power industry or underground cabling.
Within the PGE Capital Group, the climate risk was defined in the following areas:
- difficulties in obtaining aid funds and investment incentives – related to the increasing impact of climate requirements relevant to the allocation of aid funds and investment incentives in national regulations,
- requirements related to international regulations – related to EU legislation in the field of energy and climate policies, in particular under the pending Fit for 55 package,
- CO2 emissions – related to the rising cost of emission allowances, which may adversely affect the profitability of generating units or lead to the suspension of production at these units,
- operations – relating to extreme weather phenomena or changes in climate conditions that may adversely affect the assets and operations of the PGE Capital Group, investments – relating to the PGE Group’s potential failure to meet its investment commitments aimed at green transformation, at the EU, national and strategic goals level.
Each area of climate risks described above is assessed in the short, medium and long terms. The adopted time horizons result from analogy with ongoing external studies.
Assessment of the impact of physical climate risks on the PGE Group’s operations
Global warming, changing precipitation patterns, rising sea levels and extreme weather events are increasingly posing serious challenges to the resilience of electricity systems, thus increasing the likelihood of disruptions. Climate change directly affects every segment of the electricity system:
- generation potential and capacity,
- demand for heating and cooling,
- resilience of transmission and distribution networks,
- demand patterns.
The PGE Group, being aware of the risks posed by climate change, as part of the first stage of the climate risk management process, in 2023 once again conducted an assessment of the relevant physical (material) climate risks that could have a negative impact on its operations, consequently supporting adaptation to climate change and increasing resilience to climate risks.
The assessment covered climatic factors in the form of primarily temperature, precipitation and wind as well as their negative impact on the key activities of the Group. The assessment of climate risks related to physical hazards in the PGE Group in 2022 was carried out on an ongoing basis and a long-term basis, using scientific models describing possible climate scenarios, i.e.:
- RCP 4.5 – the optimistic scenario, which assumes the introduction of new technologies to achieve a higher reduction in greenhouse gas emissions than today, assuming that the increase in average global temperature will be around 2.5°C at the end of the 21st century relative to the pre-industrial era;
- RCP 8.5- the pessimistic scenario, which assumes a continuation of the current rate of increase in greenhouse gas emissions, on a business-as-usual basis, assuming that, by the end of the 21st century, the average global temperature will have risen by 4.5°C compared to the pre-industrial era.
The performed assessment showed a low to medium impact of risks related to physical climate hazards on the key activities of the PGE Capital Group. According to the adopted criterion, risks whose assessment showed a high impact were tested. An important role in the impact assessment process is played, among other things, by the implementation of adaptation measures developed in the PGE Group that increase the stability of the power systems through the use of solutions that are more resistant to weather conditions, e.g. the cable programme (replacement of overhead transmission power lines with cables placed in the ground), preventive management of the key elements of the infrastructure affecting the continuity of operations, insurance against events related to weather phenomena or precise analyses of land for new investments.
Impact of transformational climate risks on the PGE Group’s operations
Transformational climate risks in the PGE Capital Group mainly concern areas affecting the change towards achieving planned climate neutrality by 2050, i.e. requirements and regulations applicable to existing products and services (area: policy and law), replacement of existing products and services with their low-carbon counterparts (area: technology) and stakeholder concerns/negative opinions (area: reputation).
Examples of risks from the above areas by category:
Policy and law
Existing climate regulations have a direct impact on energy companies. PGE Capital Group companies, like other entities in the energy sector, are exposed to risks and threats resulting from the nature of their operations and functioning in a specific market as well as regulatory and legal environment. The PGE Capital Group operates in an environment characterised by a significant impact of domestic and foreign regulations. The risk of current regulations is particularly significant in the context of obtaining capital, subsidies and support from aid funds.
The PGE Group undertakes a number of activities related to monitoring available sources of support, preparing solid application documentation and using expert know-how. The PGE Group has extensive experience in obtaining preferential support and has the knowledge and staff to successfully implement this process.
Emerging regulations
Emerging regulations are important for implementing the Strategy and for supporting an effective transition to low- and zero-carbon technologies. The PGE Group seeks to take full advantage of available financing options for green investments. Emerging regulatory changes, such as EU infrastructure support to stimulate sustainable investments, consideration of financing shortfalls, penalties for climate negative transactions, may give rise to significant risks. These changes will have an impact on the credit risk and may affect cash flows generated by the PGE Group’s assets and thus affect their income value.
The risk of increasing costs of emission allowances, including a reduction in the limit of free emission allowances for district heating, results in a decrease in the ability to finance low- and zero-emission investments.
The PGE Capital Group systematically undertakes measures to reduce greenhouse gas emissions. The decarbonisation of generation assets will intensify in parallel with the implementation of the PGE Capital Group Strategy. As a result, the Group’s contribution to avoiding emissions is expected to be 120 million tonnes by 2030. At the same time, pro-environmental investments constitute the core of the PGE Capital Group’s investment activities. Furthermore, the Group invests in asset modernisation and development projects, including the optimisation of combustion processes and the introduction of solutions aimed at improving generation efficiency, higher fuel and raw material consumption efficiency and reducing the energy intensity of generation processes and internal needs.
Technology
A sustainable reduction in emissions intensity is to be achieved in the PGE Group by changing generation technologies, investing in new technologies, expanding the portfolio of renewable energy sources, developing the and enabling customers to participate in the energy transition. The technology risk also includes the selection of optimal and efficient new technologies, the utilisation of potential by the PGE Capital Group. By 2030, the share of low- and zero-carbon sources in the Group’s generation portfolio is expected to reach 85% and renewable energy sources will account for 50% of generated energy. The PGE Capital Group aims to achieve climate neutrality by 2050.
Reputation
The reputational risk for the PGE Group is very significant as the power sector plays an important role in supporting an effective transition to a low-carbon and ultimately zero-carbon economy. As the leader of the energy transition, the PGE Group is focusing on reducing its environmental impact. A sustainable reduction in emissions intensity is to be achieved by changing generation technologies, expanding the renewable portfolio and enabling customers to participate in the energy transition by offering them attractive products.
[1]The PGE Group is obliged to disclose the extent to which its activities can be considered environmentally sustainable in accordance with Regulation 2020/852 of 18 June 2020 on the establishment of a framework to facilitate sustainable investments, amending Regulation 2019/2088 and the Delegated Regulations on the establishment of a framework to facilitate sustainable investments.