3. Impairment tests for property, plant and equipment, intangible assets, rights to use assets and goodwill
Property, plant and equipment constitute the most important part of the PGE Capital Group’s assets. In view of its changing macroeconomic environment, the PGE Capital Group periodically reviews circumstances indicating a loss of the recoverable value of its assets. In its evaluation of the market situation, the PGE Capital Group uses both its own analytical tools and support provided by independent consulting entities. In previous reporting periods, the PGE Capital Group made significant impairment write-downs of property, plant and equipment in the Conventional Power Generation, Renewable Power Generation and Heat Generation segments. The impairment write-down relating to the Renewable Power Generation segment was also wholly reversed.
In the reporting period, the Group analysed the circumstances and identified the factors that could materially contribute to changes in the value of its assets in the Conventional Power Generation and Railway Power Engineering sectors. On 30 June 2023, asset impairment tests were carried out in the Renewable Power Generation and Heat Generation segments, the companies PGE Gryfino 2050 sp. z o.o., PGE Baltica 2 sp. z o.o. and PGE Baltica 3 sp. z o.o., on the basis of which no grounds for impairment write-downs were found. In the current reporting period, the PGE Capital Group performed an analysis on the basis of which it was found that there were no grounds for asset impairment tests in the Renewable Power Generation and Heat Generation segments as well as the companies PGE Gryfino 2050 sp. z o.o., PGE Baltica 2 sp. z o.o. and PGE Baltica 3 sp. z o.o. as at 31 December 2023.
External circumstances
- The market capitalisation of PGE S.A. continues to be below the net book value of its assets.
- The average electricity price for futures contracts for the following year in 2023 was PLN 642/MWh, 42% lower than in 2022.
- The prices of CO2 emission allowances, after a sharp collapse triggered by the outbreak of the pandemic in mid-March 2020, began to recover until a sharp increase began in November 2021. CO2 prices remained high in 2023, with a weighted average EUA DEC 23 quotation of EUR 83/t, slightly higher (3%) than the average EUA DEC 22 price observed in 2022.
- A 55% reduction in the price of hard coal at ARA ports for monthly follow-on contracts (USD 124/t) compared to 2022 and a 68% reduction in the price of gas (EUR 42/MWh) on European markets and a consequent reduction in the competitiveness of lignite and hard coal generation from domestic extraction.
- In the first half of 2023, the average price of domestic coal (PSMCI-1 index) was PLN 33/GJ and increased by 65% in comparison to the first half of 2022.
- Lignite-based electricity generation in 2023 was 30 TWh, down 25% compared to 2022. In 2023, domestic electricity consumption fell by 6 TWh (3%) compared to 2022.
As a result of the analysis of the aforementioned circumstances, the Group carried out asset impairment tests on 30 November 2023 for the Conventional Power Generation segment and on 31 December 2023 for the Railway Power Engineering segment, to which goodwill and customer relationship assets are allocated. On the basis of the conducted tests, the need for a write-down in the Conventional Power Generation segment was identified.
An analysis of the circumstances showed that there was no basis for impairment tests in the Renewable Power Generation and Heat Generation segments, as well as the companies PGE Gryfino 2050 sp. z o.o., EWB2 and EWB3. Tests of goodwill allocated to the Heat Generation segment and the companies EWB2 and EWB3 were performed on 30 June 2023.
Macroeconomic assumptions
The main price assumptions, i.e. those concerning the prices of electricity, emission allowances, coal, natural gas and the assumptions relating to the majority of the Group’s generating facilities are derived from a study prepared in 2023 by an external independent entity that is a recognised centre of expertise in the energy market (“Advisor”). The said study takes into account the Company’s own estimates for the first two years of the forecast based on the current market situation. In preparing the study, the Advisor used current scenarios for the economic and demographic development of the country and estimates of changes in key market parameters. The Advisor’s forecasts take into account the legal conditions arising from the current energy policy, at both the EU and national levels.
The environment in which the PGE Capital Group operates is characterised by high volatility of macroeconomic, market and regulatory conditions. Changes in these conditions may have a significant impact on the financial position of the PGE Capital Group, therefore, the assumptions used to estimate the value in use of assets are subject to periodic reviews with the knowledge of the independent Advisor.
Electricity price projections assume an average annual price increase of around 29.5% between 2025 and 2026 compared to 2024, a price decrease of 2.1% in 2027 compared to 2026, followed by an average annual increase of around 3.2% between 2028 and 2030 and an average annual increase of around 2.5% between 2031 and 2040.
allowance price projections assume a 40.6% price increase in 2025 compared to 2024, a 1.3% decrease in 2026 compared to 2025, followed by an average annual increase between 2027 and 2030 of around 10.4%, reflecting changes in the parameterisation of the Market Stability Reserve (MSR) mechanism and the itself, introduced following the adoption of the Fit for 55 package and incorporating the effects of the adoption of the EU Repower plan. These changes result in a marked reduction in the supply of allowances in the second half of this decade. After 2030, an average annual increase of around 5.8% is projected until 2040, as a result of the continuation of EU policies leading to climate neutrality in 2050.
Coal price forecasts assume an average annual price increase of around 33.2% between 2025 and 2026 compared to 2024, driven by the anticipated rebound in global fuel prices as the economy improves. Thereafter, a gradual decline in global coal demand is expected due to the implementation of climate policy elements, including in particular the development of RES, resulting in an average annual decline of around 3.8% by 2030. By 2035, hard coal prices are to decrease on average by 2.2% every year. Subsequently, by 2040, they are expected to rise on average by 2.5% every year.
Natural gas price forecasts assume a 25.5% increase in 2025 relative to 2024 prices and a 6.5% increase in 2026 relative to 2025. The increases in the first years of the forecast are due to an expected rebound in global demand for gas, with a tight supply-demand balance. Thereafter, until 2035, natural gas prices are expected to fall annually by around 1.2%, which in the second half of the 2020s is due to an increase in the supply of internationally traded gas, and then after 2030 is expected to be caused by a reduction in the share of gas in the energy mix in favour of hydrogen and RES, combined with the development of energy storage facilities.
Price forecasts for energy origin property rights assume an average annual price increase between 2025 and 2026, followed by an average annual decrease between 2027 and 2031 of around 13.1% relative to 2026, which is related to the decreasing obligation to redeem such rights.
Forecasts of revenue from the capacity market in the years 2024-2028 are based on the results of completed major and additional auctions for these years of supply, taking into account the mechanisms of joint balancing among the companies belonging to the PGE Capital Group. The forecast for the period from the year 2029 was prepared by a team of experts from PGE S.A. on the basis of assumptions concerning future cash flows for power generation units based, among other things, on the results of already completed auctions and forecasts prepared by an external expert. For one-year contracts with delivery from 1 July 2025 and multi-year contracts concluded in the auctions for 2025 onwards, an emission criterion of 550g / (so-called EPS 550) applies, which in practice excludes the participation of all coal-fired units in the Capacity Market. However, according to the adopted amendment to the Capacity Market Act of 23 July 2021, there is a limited possibility to use CMUs that do not meet EPS 550 for concluded contracts.
The availability of power generation units was estimated on the basis of overhaul plans and failure frequency statistics.
Weighted average cost of capital
In 2023, the global economy and financial markets were influenced by the repercussions of the post-pandemic economic rebound, the so-called energy crisis, changes in monetary policies and the military conflicts in Ukraine and the Middle East. As part of the ongoing monetary tightening cycle, one of the fastest on record, a significant number of countries, including Poland, achieved the effects of lowering the level of inflation, although this took place in an environment of reduced economic growth. Consequently, a high level of uncertainty about the macroeconomic outlook persists, which affects the dynamics of the situation on financial markets.
In view of these conditions, for the purposes of impairment testing, the PGE Group applies a weighted average cost of capital path, which takes into account current market parameters and characteristics (including elevated levels of market interest rates), and in subsequent periods gradually approaches levels representing the long-term average, based on the full business cycle and fundamental economic relationships. In the PGE Group’s view, this approach avoids undue influence of short-term volatility on the valuation of long-term assets.
Climate issues
In July 2021, the European Commission published the Fit for 55 legislative package, aiming, among other things, to achieve a 55% (previously 40%) reduction in EU greenhouse gas emissions by 2030 compared to 1990. As expected by market participants, the reform of the system included in the package should result in a significant increase in the level of CO2 emission allowance prices, which in practice already occurred in 2021. The high level of emission allowance prices was also maintained throughout 2023. The changes introduced may negatively affect the margins earned by carbon-intensive power generation units, particularly to the extent that the increase in the price of allowances is not passed on in the price at which these units sell electricity or heat they produce. In December 2022, the Council and the EU Parliament reached important agreements on the ’Fit for 55’ package proposal, the EU’s plan to increase the target of reducing greenhouse gas emissions below 55% by 2030 compared to 1990 levels. Another important element of the package was to increase the target for the share of RES in the European Union’s energy mix to 42.5% in 2030 (previously 32%). The establishment of this target in agreement with the Council was voted through in the European Parliament in September 2023.
On 15 December 2022, the Decarbonisation Plan to 2050 was adopted for the Heat Generation segment within the PGE Capital Group. The Plan was updated on 5 October 2023. The objective of the Decarbonisation Plan is to meet the regulatory requirements for the power industry and to maintain the current generation potential in the long term in order to meet customer needs. The Decarbonisation Plan constitutes an operationalisation of the objectives set out directly in the PGE Capital Group’s strategy and in the strategy implementation plan for the Heat Generation segment. The plan defines locations where the transformation of generation assets will be carried out, a timetable for the main activities, planned expenditure and expected effects. The transformation of generation capacities through the use of new low- or zero-carbon power generation units is planned for the period until 2030 and the achievement of climate neutrality by 2050.
Accordingly, the Heat Generation segment is gradually replacing old coal-fired sources with new renewable and low-carbon sources. It is planned that, by 2030, most of the locations where PGE Capital Group’s coal-fired district heating assets are located will have commissioned new installations, which will result in a complete or significant shift away from the coal fuel. Natural gas, geothermal technology, , waste heat, large-scale heat pumps and electrode boilers will be used to generate heat in the new and upgraded district heating units. The decarbonisation plan was taken into account when estimating the value in use of the Heat Generation segment’s production assets.
The changes described above mean that a reduction in the volume of generation from conventional sources is anticipated, with a consequent reduction in expenditure (CAPEX and OPEX) on maintenance tasks of coal assets, which further affects the anticipated decline in profitability through the gradual deterioration of the availability of these units. At the same time, the aforementioned legislative and market changes favour the development of zero- and low-carbon sources, which, when the Group invests in these particular technologies, positively translates into the value in use of the assets under tests. It should also be borne in mind that fossil fuel-based generation facilities, in the face of the uncertainty of RES generation (driven by environmental factors: water, wind, solar), are still needed in the electricity system to balance it.
Significant changes in the regulatory environment, both domestic and foreign, that affect or will affect PGE Capital Group’s operations are described in note 4.6. The regulatory environment to the Management Board’s Report on the activities of the PGE Group for the year 2023 ended 31 December 2023.
Climate issues are included in the assumptions used for impairment testing to the best of the Group’s knowledge, with the support of an external independent expert. The PGE Capital Group adopts assumptions developed by an independent think tank and taking into account the current regulatory and market situation. Future developments in the electricity market may differ from the currently adopted assumptions, which may lead to significant changes in the financial position and results of the PGE Group. These will be included in future financial statements.