Due to the type of PGE Group company’s business activities, they are exposed to change of cash flows and financial results due to price changes of the following risk factors:

• electricity;
• hard coal, gas, biomass and other fuels;
• CO₂ emission rights;
• energy origin rights.

The PGE Group owns lignite mines that deliver production fuel to two power plants operating within the PGE Group. Due to this fact, the Group’s exposure to price risk in this area is not significant.

The main objective of market risk management is to shape the optimal relations of the profit generated to the level of risk incurred and acceptable by the Group within its commercial activities. The defined objective is realized by reducing potential changes of financial result and the level of cash flows resulting from market prices fluctuations of electricity and related products.

The PGE Group has implemented the internal rules for market risk management including above others the determination of the global risk appetite, risk limits measured “at risk” as well as the management of consolidated exposure to the price risk of commodities and mechanisms hedging the risk levels in excess of the acceptable level, with the leading role of PGE S.A. in this process. This allows to create hedging strategies in the area of electricity and related products taking into account the risk borne by the PGE Group in relation to the expected return on assets.

The market risk management policies stipulate uniform assumptions for the organization of that process in the context of commercial strategies and medium-term planning, including among others:

• division of responsibility of individual units;
• specification of accepted products, markets and strategies of operation;
• rules for the calculation of open contract position for particular scopes of commercial activity;
• level of accepted risk with the principles of allocation and management of the capital at risk;
• applicable risk limits;
• risk quantification methodology (including, inter alia, nominal measures, VaR, PaR, scenario analyses, stress tests);
• data and reporting circulation in the risk management process (specifically in the area of application of limits and implementation of hedging strategies).

The management of the consolidated exposure to the market risk in the area of commercial operations of the PGE Group and material risk factors includes the global measurement of the market risk, calculation of aggregated risk measures based on, among others, a concept of value at risk (including VaR and PaR), maintaining the level of risk borne within acceptable limits as well as hedging of the risk exceeding that level and regular reporting of the global exposure level with respect to the risk limits.

The PGE Group executes strategies to secure the key exposures in the area of trading in electricity and related products equivalent to the risk appetite at medium-term (up to 5 years, with the assumption of availability of required markets liquidity). The level of securing the position is determined taking into account the results of measurement of the risk of electricity and related products prices. The results of the risk measurement show the level of potential deviations from the expected achievable results in particular years. The PGE Group assesses the results of the price risk measurement in the context of its risk appetite and the possibilities of hedging the risk of prices of electricity and related products, taking into account liquidity of individual markets. Furthermore, while setting out the target hedge ratios, the PGE Group considers its financial situation, including in particular the assumed goals resulting from the strategy adopted by the Group.

The Group’s exposure to price risk of commodities (in relation to raw materials) reflects the volume of external purchases of particular resources which is presented in the table below: