11. Impairment in value of non-financial assets

As at 31 December 2020, the Group recognised impairment losses related to property, plant and equipment as a result of impairment tests of assets performed as at 31 December 2020.

The recoverable value of this group of assets corresponds to their useful value. The impairment losses charged own cost of sales.

As at 31 December 2020, impairment tests were performed on property, plant and equipment, taking into account the following indications:

• long-term persistence of the market value of the Company net assets at a level below the net carrying amount of assets;
• changes in global prices of energy resources, energy and CO2 emission allowances;
• significant fluctuations of energy prices on the future/forward market;
• decline in the domestic electricity consumption due to increased temperatures in the winter period and the impact of the COVID-19 pandemic;
• regulatory activities aimed at the limiting of end user price increases;
• increased risks in commercial coal production;
• the effects of the results of the RES auctions to date and the very dynamic development of the prosumer and microinstallation sub-sector in connection with the support programmes launched;
• results of proceeding winter package provisions (including emission standards) adversely affecting the capability of coal-fired units to participate in the capacity market after 1 July 2025;
• tightening of emission standards persisting unfavourable market conditions for the conventional power industry;
• a decrease in the risk-free rate.

The tests conducted as at 31 December 2020 required estimating the value in use of cash generating units, based on their future cash flows discounted subsequently to the present value using a discount rate.

The impairment tests for non-financial non-current assets were carried out at a level of individual companies, except for:

• TAURON Wytwarzanie S.A. and Nowe Jaworzno Grupa TAURON Sp. z o.o., where cash-generating units (“CGU”) were identified at a different level, identifying a cash-generating unit CGU Generation Coal in the area of electricity generation from conventional sources (hard coal) of Nowe Jaworzno Grupa TAURON sp. z o.o. and partially in the area of operations of TAURON Wytwarzanie S.A. Within other areas of activity of TAURON Wytwarzanie S.A., the following cash generating units were identified: CGU Generation Biomass and CGU Generation Photovoltaics. Key indications justifying the inclusion of coal-fired generating units within CGU Generation Coal included: the publication of provisions regarding the new Capacity Market mechanism in 2018, launching a new product: net disposable capacity; the strategy of joining the Capacity Market consisting in the portfolio approach, where maximising the total revenue from the Capacity Market is significant, capacity allocation to suppliers, determining the level of capacity constituting reserve sources for the remaining capacity contracted at the capacity market and high dependence of cash proceeds among generators.
• TAURON Ekoenergia Sp. z o.o., TEC 1 Sp. z o.o. Mogilno I Sp. Komandytowa, TEC 1 Sp. z o.o. Mogilno II Sp. Komandytowa, TEC 1 Sp. z o.o. Mogilno III Sp. Komandytowa, TEC1 Sp. z o.o. Mogilno IV Sp. Komandytowa, TEC 1 Sp. z o.o. Mogilno V Sp. Komandytowa, TEC 1 Sp. z o.o. Mogilno VI Sp. Komandytowa, TEC 1 Sp. z o.o. EW Śniatowo Sp. Komandytowa, TEC 1 Sp. z o.o. EW Dobrzyń Sp. Komandytowa, TEC 1 Sp. z o.o. EW Gołdap Sp. Komandytowa, TEC 1 Sp. z o.o. Ino 1 Sp. Komandytowa, where the test was carried out separately for activities related to electricity generation in hydroelectric power plants within TAURON Ekoenergia Sp. z o.o. – CGU Hydroelectric Power plants, and for the combined activity associated with electricity generation from wind farms within TAURON Ekoenergia Sp. z o.o. and other companies – CGU Wind Farms. Consolidation of windfarms in one CGU resulted mainly from the specific features and nature of the underlying service agreements and technical management of individual wind farms allowing for optimisation of the production process aimed at improving economic indicators of the operated wind farms. Moreover, from the point of view of management analysis, the notion of a group of assets producing power in wind technology is important, rather than a single operation of wind farms. It is also important for the purpose of integrated management of the portfolio of produced volume originating from wind farms and sales of electricity and property rights within the TAURON Group;
• TAURON Nowe Technologie S.A., where activities related to lighting and provision of solutions associated with modern technologies were separated.

Relevant tests were conducted based on the current value of projected cash flows from CGU operations by reference to detailed projections until 2030 and the estimated residual value, excluding power generating and mining units for which detailed projections cover the entire period of their operation.

Operation of mining units until 2049 has been assumed. Compared to the tests carried out as at 31 December 2019, the current projections assume: reduction in the operating period of the ZG Sobieski and ZG Janina (originally 2060, now 2049); reduction in the operating period of the ZG Brzeszcze (originally 2059, now 2040).

The operation of TAURON Wytwarzanie S.A. generation units until 2035 was assumed. In relation to the tests carried out as at 31 December 2019, the current projections assume: early withdrawal one of the units in Jaworzno III Unit with total capacity of 225 MWe (originally 2029, now 2025) and taking over production by two units in Jaworzno III Unit with total capacity of 445 MWe; early withdrawal of two units in Jaworzno III Unit with total capacity of 445 MWe (originally 2029, now 2028); early withdrawal of two units in Jaworzno II Unit with total capacity of 140 MWe (originally 2038, now 2030); early withdrawal of one unit in Lagisza Unit with total capacity of 460 MWe (originally 2042, now 2035). The operation of the Nowe Jaworzno Grupa TAURON Sp. z o.o. generation unit was assumed until 2060. The forecast for hydroelectric power plants covers the period up to 2066 while for wind farms – up to 2040.

The reliance on projections covering a period longer than 5 years results mainly from the fact that investment processes in the power industry are time-consuming. The macroeconomic and sector-oriented assumptions underlying the projections are updated as frequently as any indications for their modification are observed on the market. The projections also take into account changes in the regulatory environment known as at the date of the test.

At the Court of Justice of the European Union, the decision of the European Commission is being appealed against in terms of the compliance of the Capacity Market Act with European law. In the opinion of the Management Board, the risk of a settlement resulting in the inability of the Capacity Market to function in Poland is low, even in the event of a temporary suspension of the Capacity Market, therefore the implementation of the Capacity Market mechanism was taken into account in accordance with the adopted and notified Capacity Market Act and the Capacity Market Regulations.

The need to write down the assets of the Mining CGU and the Generation-Coal CGU resulted in particular from:

• an increase in the prices of CO2 emission allowances resulting from a change in the nature of the market, the reform of the EU ETS system as well as the climate policy of the European Union strongly targeted at accelerating the pace of decarbonisation in pursuit of the climate neutrality of Europe, as the manifestation of the European Green New Deal,
• the projected decline in market margins in the short to mid-term perspective. Decrease is as a result of growing prices of CO2 emission allowances and an increasing share of renewable energy sources and new, more effective conventional sources in the domestic energy mix, which negatively affects the forecasted electricity prices,
• reduced projected demand for power coal as a result of progressive decarbonisation in Europe and limiting the period of operation of hard coal mines in connection with the adjustment to the energy policy of Poland,
• changes in the assumed cash flow generation periods of these CGUs, as described in detail above.

Sensitivity analysis for Mining and Generation assets

A sensitivity analysis performed for each CGU revealed that the value in use of the tested assets was mainly affected by the forecast electricity prices, CO2 emission allowances prices, discount rates adopted and hard coal prices. The estimated changes in impairment losses on Mining and Generation assets as at 31 December 2020 as a result of changes in the key assumptions, are presented below.

Sensitivity analysis for the Distribution segment

The carrying amount of CGU Distribution subject to testing was PLN 19,032 million. The sensitivity analysis was performed for a change in the discount rate and a change in the WACC level adopted for the calculation of regulated income in the years 2022-2025 and in the residual period. The table below presents the estimated inflows to the recoverable amount of Distribution CGU as at 31 December 2020.

Impairment of the carrying amount of goodwill

The test was performed for the net assets increased by goodwill in Distribution segment and for other activities. The recoverable amount in each company was determined based on the value in use.

The test was performed based on the current value of projected cash flows from operations. The calculations were based on detailed projections up to 2030 and the estimated residual value, while for the mining units the forecasts cover the entire period of their operation. Reliance on projections covering a period longer than 5 years results mainly from the fact that investment processes in the power industry are time-consuming. The macroeconomic and sector-oriented assumptions underlying the projections are updated as frequently as any indications for their modification are observed on the market. The projections also take into account changes in the regulatory environment known as at the date of the test.

The weighted average cost of capital (WACC) during the projection period for individual CGUs, as used in the calculations, ranges from 6.1% – 7.38% in nominal terms before tax, taking into account the risk free rate determined by reference to the yield on 10-year Treasury bonds (at a level of 1.6%) and the risk premium for operations appropriate for the power industry (6.75%). The growth rate used for extrapolation of projected cash flows going beyond the detailed planning period has been adopted at a level of 2.5% and corresponds to the estimated long-term inflation rate. The level of WACC as at 31 December 2020 decreased compared to the level as at 30 June 2020 due to a decline in the risk-free rate.

The key assumptions affecting the estimated value in use and the discount rates applied during tests: