Decarbonisation:

• Based on the WP regulations, in the long term, i.e. by 2050, the EU plans to transition to a zero-carbon economy – for this purpose, the so-called Energy Road Map for the EU by 2050 is being developed..

Intensive development of renewable energy sources (amendment of the RES Directive, i.e. RED II):

• On 14 June 2018, a memorandum of understanding on long-negotiated provisions was agreed. With regard to the overall binding target for the share of RES in 2030, a 32% target was set with no binding national targets. In addition, a revision of the 2023 target was agreed.
• In the context of state aid, the conditions for eligibility of biomass-fired power plants for financial support were specified. In the case of installations from 50 to 100 MW, the support was made dependent on the fulfilment of efficiency levels in accordance with the reference document BAT LCP (Best Available Techniques). For units with capacity above 100 MW, at least 36% electricity efficiency is required.
• For the transport sector, the RES target for 2030 was set at 14% and by this year the elimination of the use of palm oil was agreed.

Increasing energy efficiency (the draft Energy Efficiency Directive), related to support (transformation, modernisation) in the area of heating and cooling:

• On 20 June 2018, negotiations on the final form of the legislation finished with an increase in the non-binding pan-European energy efficiency target of 32.5% compared to the 2007 energy consumption forecasts.
• For the annual savings of energy sold to end users, the target of 0.80% was set.

Development of and support for electromobility in the EU, primarily in public transport (draft regulations constituting the so-called Clean Mobility Package, published by the European Commission in November 2017);

• Energy Union Management System (EU Governance) – a regulation, the wording of which was agreed on 20 June 2018, regulates, among others:
  - Obligation for each Member State to notify, by the end of 2018, a draft of the first National Integrated Energy and Climate Plan (“NIECP”) for the period 2021 to 2030 - inter alia, the Member State's declared share of RES.
  - Obligation of Member States to evenly spread the growth of RES over 10 years (development trajectory – reaching reference points – 18% of the required growth will be achieved in 2022, 43% in 2025, and 65% in 2027).
  - Lack of clearly defined means of enforcing the objectives from the Member States in the event of failure to meet the set objectives – issuance of non-compulsory recommendations of the European Commission.
• Mandatory development of grid infrastructure (cross-border interconnections); with the target of establishing the EU DSO Entity, new powers and competences of ACER and ENTSO-E at EU level.

In 2018, based on the rules stipulated in:

• Act of 8 December 2017 on the power market,
• Capacity market regulations approved by decision of the President of the Energy Regulatory Office of 30 March 2018,
• Regulation of the Minister of Energy:
  - of 18 July 2018 on the execution of the capacity obligation, its settlement and demonstration, as well as the conclusion of transactions on the secondary market,
  - of 22 August 2018 on the parameters for the main auctions for the delivery years 2021-2023,
  - of 3 September 2018 on financial collateral to be provided by power suppliers and participants in the preliminary auctions

Polskie Sieci Elektroenergetyczne S.A. conducted the following capacity market processes:

• general certification,
• certification for the main auctions for the years 2021-2023,
• main auction for 2021 – on 15 November 2018
• main auction for 2022 – on 5 December 2018,
• main auction for 2023 – on 21 December 2018,
• main auction for 2024 – on 6 December 2019.

ENEA Elektrownia Połaniec S.A. participated in all the aforementioned processes and, as a result, concluded 2 capacity contracts for 5-year delivery periods 2021-2025, for Units 2 and 7. This results from the strategy of ENEA Group approved by decisions of the Management Board of ENEA S.A. before individual main auctions. The remaining units, with the exception of Unit 9, have been notified to participate in the secondary market. By decision of ENEA Group’s Steering Committee on the Capacity Market, a contract will be concluded between ENEA Wytwarzanie and ENEA Elektrownia Połaniec on joint operation on the capacity market and mutual stand-by.

ENEA Wytwarzanie sp. o.o. also participated in all the aforementioned processes and, as a result, concluded:

• Nine capacity contracts for 5-year delivery periods 2021-2025, for Units 1-10 excluding Unit 3,
• One power contract for a 15-year delivery period of 2021-2035 for Unit 11,
• 1-year capacity contracts for delivery years 2021, 2022 and 2023, for three Capacity Market units from the RES Segment (Water) with the total capacity of 37.1 MW

These assumptions resulted from the strategy of ENEA Group approved by decisions of the Management Board of ENEA S.A. prior to individual main auctions. Unit 3 and coal units in Białystok Heat and Power Plant and MEC Piła have been notified to participate in the secondary market.
Units from ENEA Wytwarzanie’s RES Segment and Białystok Heat and Power Plant concluded one-year agreements with the total capacity of 67 MW for the delivery year 2024.

ENEA Ciepło Sp. z o.o. participated in all the aforementioned processes and, as a result, concluded 2 quarterly capacity contracts in delivery year 2021 (first and fourth quarters) for unit 2 and one 1-year capacity contract in delivery year 2024 for unit 3.

This results from the documents entitled: “Strategy for participation of ENEA Ciepło CMU in the main auction of the capacity market for delivery year 2024” and “Strategy for participation of ENEA Group CMU in additional auctions for delivery year 2021” drawn up under the leadership of ENEA Trading Sp. z o.o. and approved by decisions of the Management Board of ENEA Ciepło before the auctions. Unit 3 has been registered for participation in the secondary market for 2021, while units 1, 2 and 4 were registered for 2024

On 8 April 2018, Directive 2018/410 of the European Parliament and of the Council (EU) introducing changes to the CO₂ emission allowance trading scheme entered into force.

The Directive establishes, inter alia, two financial mechanisms:

• Modernisation Fund - for the modernisation of energy systems in low income Member States. It is intended to be financed by proceeds from the auction of allowances in the years 2021 to 2030. The Fund is to be used primarily to support the development of energy efficiency and investments in renewable energy sources.
• Innovation Fund - to provide financial support for RES development, carbon capture and storage and innovative low-emission projects. It is to be supplied with funds from allowances, which otherwise would be allocated free of charge or sold through auctions.
  In addition, the framework for Phase IV of the EU ETS as well as new rules for the Market Stabilisation Mechanism (MSM) have been established. Pursuant to them, since the beginning of 2019, the reduction rate of allowances in circulation has increased from 12% to 24%. Allowances are gradually transferred from the auctioning system to the market stability reserve. Starting from 2024, the rate of 12% will be restored. In Phase IV of the EU ETS, which will start at the beginning of 2021 and last until 2030, the linear reduction factor will also be increased from 1.74% to 2.2%. Both of these elements have an impact on the reduction of supply on the EU ETS market, and thus on the increase in prices of CO₂ emission allowances observed in 2018. At the peak of the increases, prices of CO₂ emission allowances increased more than three times as compared to the beginning of the year. The increased volatility on the CO₂ emission allowances market also had a significant impact on the increased volatility on energy markets throughout Europe, also in Poland.

On 17 June 2019, Regulation (EU) 2019/834 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 648/2012 as regards clearing obligation, suspension of the clearing obligation, reporting requirements, risk mitigation techniques for OTC derivative contracts that are not cleared by a central counterparty, registration and surveillance of trade repositories, and requirements for trade repositories (EMIR Refit) entered into force. As a result of the amendments, an obligation to report OTC derivative transactions has been introduced as a rule (however, an exception to this rule is made for intragroup transactions in derivatives, with the possibility to obtain an appropriate exemption from the reporting obligation).

GREEN

In the area of PMOZE_A (certificates of origin for energy generated from renewable sources) there is a persistent surplus of rights in the market, which resulted in low price levels in 2016 and the first half of 2017. As of 27 April, it is estimated that after the obligation for 2017 is fulfilled, about 25 TWh of active PMOZE_A will remain in the registers. The Regulation of the Minister of Energy of 11 August 2017 setting the level of the obligation for 2018 and 2019 (at 17.5% and 18.5%, respectively) improved the prospects of long-term discharge of the surplus. In addition, the amendment to the RES Act (amendment of 20 July 2017) and the interpretation by the Minister of Energy of the impossibility of paying the substitution fee until the unit replacement fee reaches the maximum level (300.03 PLN/MWh) caused a strong increase in PMOZE_A prices above the level of 70 PLN/MWh and established the current upward trend. In 2019, the PMOZE_A price stabilized at around 130 PLN/MWh and in Q4 2019 rose to about 150 PLN/MWh. Q1 2019, with decreases to around 100 PLN/MWh, was a deviation from the trend which was caused by the announced legislative changes. These changes were to be pro-declining for the PMOZE_A price, however, at the end of Q1 2019, a bill was presented, which finally confirmed that there would be no significant changes for the PMOZE_A system, which caused prices to return to the trend. At the end of 2019, there were about 32 TWh of active PMOZE_A on the registers. In 2019, the price slightly dropped, fluctuating around the value of the unit replacement fee of 300.03 PLN/MWh. The drop was caused by the lowering of the excise duty from 20 to 5 PLN/MWh.

BLUE

In the area of PMOZE-BIO (certificates of origin for energy from agricultural biogas), the situation has changed dramatically compared to the redemption obligation for 2016. In the first half of 2017, prices reached even 470 PLN/MWh. The valuation of the instrument came close to the level of the unit replacement fee (300.03 PLN/MWh) only after the publication of the first draft amendment to the Renewable Energy Act in June 2017, which conditionally unblocked the payment of the replacement fee. Since then, the prices of the "blue" property rights have remained above the replacement fee, but are closer to it (more than 317 PLN/MWh), taking into account the benefit of the buyer from the possibility to deduct the excise duty (20 PLN/MWh) to fulfil the obligation through the redemption of certificates of origin. The price trend is maintained due to the fulfilment of conditions allowing for the payment of the replacement fee from the beginning of 2018. This state should be maintained as long as the average three-month PMOZE-BIO price is above the level of the unit replacement fee. In 2019, the price dropped slightly, oscillating around the unit replacement fee of 300.03 PLN/MWh. The drop was caused by the reduction of the excise duty from 20 to 5 PLN/MWh.

WHITE

There are three instruments on the market for “white” property rights, which can be used to satisfy the obligation in 2019:

• PMEF – energy efficiency certificates issued on the basis of a system of tenders pursuant to the previous legal basis, subject to expiry as of 30 June 2019;
• PMEF-2019 – energy efficiency certificates issued for completed investments, for applications submitted in 2019 (outside the system of tenders);
• PMEF_F – energy efficiency certificates issued for non-started investments pursuant to the Act of 20 May 2016, without expiry date.

On 20 July 2017, results of the last tender for investments in the field of energy efficiency, announced by the Energy Regulatory Office on 21 September 2016, were published. The projects selected in individual categories amounted in total to nearly 55% of the pool (806.743/toe in total). The growth in the number of PMEF on the market resulted in the fall of prices of the instrument in H2 2017. In the end, however, index prices returned to the average level of PLN 712/toe due to the appearance of information from the Ministry of Energy that if there is a risk that after the obligation for 2018, i.e. after 30 June 2019, unused PMEFs will remain on the registers, then measures may be taken to change the date of their redemption, i.e. extend their validity. The recent amendment to the Act on Energy Efficiency, although it facilitated the process of application for support for activities in favour of energy efficiency, in connection with the failure to initiate a tender procedure, it simultaneously reduced the PMEF_F supply though the limitation of support for a project to the amount of one average annual energy saving. This translated into the valuation of PMEF_F at a level of PLN 1,500/toe (similar to the unit replacement fee). In H1 2019, the price of PMEF, due to the end of product life with its high oversupply, decreased from the low level of about 300 PLN/toe down to even 30 PLN/toe. However, after the decision to extend the life of this product by another two years, its price quickly increased to the level of the unit replacement fee in force, i.e. around 1,650 PLN/toe for 2019.

On 29 August 2019, the Act amending the Act on Renewable Energy Sources and certain other acts entered into force. It replaced the name “prosumer” to “renewable energy prosumer” in the RES Act and in the Energy Law. Currently, a renewable energy prospectus may be any end user who generates electricity exclusively from renewable energy sources for their own needs in a microinstallation (with the installed electric power not exceeding 50 kW or the achievable thermal power in cogeneration not exceeding 150 kW), provided that, in the case of an end user who is not a household customer of electric energy, renewable energy generation is not its core business activity, as defined in accordance with the regulations issued pursuant to Article 40 paragraph 2 of the Act of 29 June 1995 on Public Statistics. The definition and rules of settlements with energy cooperatives have been changed – currently, energy cooperatives will be settled on similar terms as renewable energy prosumers, but using a coefficient of 1:0.6 for the energy introduced into the grid to the energy taken from the grid.

The amendment of the RES Act will enable the public support mechanisms to cover also larger installations. In the auctions conducted in 2019, the support could be extended to renewable energy sources with the capacity up to 3.4 GW - including 2.5 GW for wind power in the wind and photovoltaic basket for projects with a capacity of over 1 MW, and about 0.7 GW for investors planning to submit bids in the wind and photovoltaic basket with a unit capacity of up to 1 MW. The amendment extended the maximum time for launching energy generation from wind power plants supported in this year's auction from 24 to 33 months, and from photovoltaic power plants from 18 to 24 months. In the case of other technologies, the period of 42 months will now be used, rather than 36 months as before the amendment of the RES Act.

The Act imposed an obligation on energy companies to adapt the provisions of agreements concluded with renewable energy prosumers to the amended provisions of the RES Act and agreements concluded with renewable energy prosumers and electricity producers in renewable energy installations to the amended provisions of the Energy Law within 3 months from the date of entry into force of the amending Act, i.e. until 29 November 2019.

On 28 December 2018, the Act on amendment of the act on excise duty and certain other acts (“Act”) was adopted with effect as of 1 January 2019.

This regulation introduced, inter alia, the following:

• a reduction in the excise duty rate for electricity sold to final customers from 20 PLN/MWh to 5 PLN/MWh,
• directions for 2019 prices and fee rates for electricity for final customers to be applied by sellers,
• the opportunity for sellers to seek an amount to cover the difference in revenue for trade of electricity for final customers from Zarządca Rozliczeń S.A. (Settlement Manager) specified in the Act (“Price Difference Amount” / “Financial Compensation”).

It follows from the wording of the Act and its rationale that the legislator assumes a balancing of the interests of electricity consumers and energy companies, which makes it possible to conclude that, as a rule, revenues lost as a result of price reductions should be returned to energy sellers.

The Act was amended later in 2019 and the key change (published on 28 June 2019) concerned the narrowing in H2 2019 of the group of end customers to customers from the G tariff group and micro-entrepreneurs, small entrepreneurs, hospitals, units of the public finance sector, and state organisational units without legal personality, as defined in detail in the Act.

Under the amended Act, on 23 July 2019 the Regulation of the Minister of Energy on the method of calculation of the Price Difference Amount and Financial Compensation and on the method of determination of reference prices (“the Regulation”) was published.

As a result of the Act and the publication of the Regulation, at the end of 2018,

the Company analysed the issue with a view to updating provisions and recognising any reimbursements in the context of IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”. According to reporting regulations, if a given contract or group of contracts generate a loss, then the company should recognise an appropriate provision in the period in which the loss became unavoidable unless it is unable to reliably determine the amount of this provision while contingent assets are recognised when they are virtually certain in the amount not higher than the recognised provisions.

The Company valued the provision only with respect to sales made on the basis of the tariff regulated by the President of the Energy Regulatory Office for customers in G tariff groups. The valuation included the current legal status as of a given moment. By accepting the prices binding in 2018 for the customers from G tariff groups in the tariff regulated by the President of the Energy Regulatory Office, the Company estimated the so-called loss on the contract at the level of PLN 79 million. This loss results from the adoption of model costs of electricity purchase in 2019. (costs of electricity and property rights and the excise tax rate at the level defined as justified by the ERO President in the tariff process for 2019) and the simultaneous application of sales prices from 2018. This provision was used (released) during 2019.

Pursuant to the provisions of the Act and the Regulation, the Company applied to the Settlement Manager for payment of the Price Difference Amount for the first half of 2019 and applications for Financial Compensation for the months from July to December 2019 for the total amount of PLN 597.2 million. The amounts of the Price Difference and the Financial Compensation constitute the Company's revenue and were recognised in the “Financial compensations” item in the “Statement of comprehensive income”. As at 31.12.2019. The Company received PLN 545.0 million in return for the amounts of the price difference and the Financial Compensation. The remaining part of the amount of PLN 597.2 million, i.e. PLN 52.2 million, is recognized in the item “Trade and other receivables” in the “Statement of financial position. As at the date of preparing this report, the Company received on account of the reimbursement of the Price Difference Amount and of the Financial Compensation the amount of PLN 597.2 million.

Pursuant to Article 9 of the Act, the Company, having obtained confirmation from distribution system operators of the volume of electricity sold and consumed for the period from 1 January to 31 December 2019, will adjust the received Price Difference Amount and Financial Compensation. The correction application will be submitted to the Settlement Manager once by September 30, 2020.

Impact on subsequent reporting periods

Determination of the provision for onerous contracts as at 31 December 2019

On 30 December 2019, the President of the Energy Regulatory Office (“ERO President”) decided to approve the electricity tariff for the group of G tariff groups for the period from 14 January to 31 March 2020 (“Tariff”).

The President of the Energy Regulatory Office approved the electricity sales price for the consumers in G tariff groups for ENEA S.A. at the level not covering the costs incurred by the Company.

According to reporting regulations, if a given contract or group of contracts generate a loss, then the company should recognise an appropriate provision in the period in which the loss became unavoidable unless it is unable to reliably determine the amount of this provision while contingent assets are recognised when they are virtually certain in the amount not higher than the recognised provisions.

Taking into account the above and acting in accordance with IAS 37, the Company identified the need to create in Q4 2019 a provision for onerous contracts in the trading segment.

As at 31 December 2019, as a result of adopting the above assumptions, the following was established:
1) by adopting the prices binding in the first quarter of 2020 for the clients from G tariff groups in the tariff regulated by the President of the Energy Regulatory Office, the Company estimated the so-called contract loss. This loss results from the adoption of model electricity purchase costs in 2020. (costs of electricity and property rights and the excise tax rate at the level deemed justified in market conditions by the Company in the tariff process for 2020) and the simultaneous application of sales prices approved by the ERO President in the Tariff for Q1 2020.
2) additionally taking into account that during the first 13 days of 2020 the sales prices from 2019 (de facto 2018 prices) were in force.
3) the sales volume results from the planned level of sales to customers in the G tariff for 2020.

As a result, the provision was estimated at PLN 68.6 million.

The Company plans to apply to the President of the ERO for approval of the tariff for the period from 1 April to 31 December 2020.