Alignment of environmentally sustainable activities with EU Taxonomy

Net turnover recognized in accordance with IAS 1 item 82(a), as defined in Article 2(5) of Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013:

’net turnover’ means the amounts derived from the sale of products and the provision of services after deducting sales rebates and value added tax and other taxes directly linked to turnover.

Accordingly, this included consolidated net turnover, including revenue recognized under IFRS 16 (ENEA Group identifies itself as a lessor) and compensation due to the Group under the Act of 27 October 2022 on emergency measures to reduce electricity prices and support certain consumers in 2023. The ENEA Group recognizes that these compensations fall within the definition contained in Directive 2013/34/EU of the European Parliament and the Council.

The relevant amounts can be found in the Group’s Consolidated Financial Statements for 2022, in the Revenue from sales and other income line item (which consists of Net revenue from sales, Compensation and Revenue from leases and operating subleases) and in Note 8 to the Consolidated Statement of Comprehensive Income.

Capital expenditures defined as increases in property, plant and equipment and intangible assets, right-of-use assets and investment properties, including those resulting from business combinations, as defined in the relevant IAS/IFRSs:

1. IAS 16 Property, Plant and Equipment;
2. IAS 38 Intangible Assets;
3. IAS 40 Investment Property;
4. IFRS 16 Leases;

This included consolidated increases in property, plant and equipment, intangible assets and right-of-use assets. In 2022, the ENEA Group did not acquire any investment properties.

The relevant amounts are included in the Group’s Consolidated Financial Statements in the Notes to the Consolidated Statement of Financial Position, similar to the items indicated above:

1. note 14. Property, plant and equipment – row named Additions
2. note 15. Intangible assets and goodwill
   (where goodwill has been omitted for the purposes of the key performance indicator) – row named Additions;
3. note 17. Investment properties (while there were no additions in 2022);
4. note 16. Right-of-use asset – row named Additions.

Operational expenditures understood as one of the five categories of direct, uncapitalized costs:

1. related to research and development work;
2. related to building renovation activities;
3. related to short-term leases;
4. related to maintenance and repair work;
5. any other direct expenditures relating to the day-to-day servicing of assets of property, plant and equipment by the undertaking or third party to whom activities are outsourced that are necessary to ensure the continued and effective functioning of such assets.

This way, the consolidated amounts of costs incurred by the Group in 2022 relating to each of the above categories were taken into account.

As regards the OpEx ratio, given to its specific definition in the EU Taxonomy, it was not possible to make a direct reference to the consolidated financial statements. In this context, it should be noted that the denominator of the OpEx ratio for the purposes of the EU Taxonomy is not equal to the sum of operating expenses incurred by the Group. The denominator of the OpEx ratio calculated for EU Taxonomy purposes was about PLN 648 million, while the Group’s operating expenses were almost PLN 29 billion (as specified in note 9 to the Group’s Consolidated Financial Statements), which means that the basis for calculating the OpEx ratio for EU Taxonomy purposes was only 2.2% of all operating expenses (without taking any other operating activities into account).

The most important operational expenditures (OpEx) in the Group include mainly: repair and maintenance costs (both as consumption of repair and maintenance materials and third-party repair and maintenance services) due to the extensive range of property, plant and equipment owned by the Group, including high-voltage lines, substations, switching stations (owned by ENEA Operator), power units with boilers and auxiliary equipment, including the Green Unit (ENEA Elektrownia Połaniec), mining pits and world-class machinery at LW Bogdanka or lighting assets such as road lighting (ENEA Oświetlenie).

The Group performed an analysis of the various categories included in the definition of operational expenditures, observing the disclosure requirements set forth in the Commission Delegated Regulation (EU) 2021/2178, on the basis of which, within the category of “other expenditures relating to the day-to-day servicing of assets of property, plant and equipment”, it included in the denominator and the numerator, among others, costs from the following categories: fire protection services and other fire prevention measures, cleaning services, mandatory specialized training for employees whose professional duties include solely the maintenance of power poles.

The base of three monetary quantities (turnover, capital expenditures (CapEx) and operational expenditures (OpEx)) established in such a manner was further analyzed for Taxonomy eligibility and then for Taxonomy alignment. Accordingly, the KPIs have the following numerators:

• for the turnover KPI: the net revenues that are included in the denominator and that are associated with Taxonomy-aligned activities, including enabling activities pursuant to Article 11(1)(b) of Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020;
• for the CapEx KPI: the capital expenditures that are included in the denominator and that are associated with assets or processes related to Taxonomy-aligned economic activities;
• for the OpEx KPI: the operational expenditures that are included in the denominator and that are associated with assets or processes related to Taxonomy-aligned economic activities, including training and other needs related to the adaptation of human resources and direct uncapitalized costs of research and development.

The economic activities that contribute to the KPIs, both in their numerators and in their denominators, are stated in the consolidated form, i.e. including transactions carried out exclusively with entities from outside of the Group. Additionally, all the activities treated as Taxonomy-aligned were matched to only one of the two announced environmental objectives, i.e. Climate Change Mitigation or Climate Change Adaptation. In other words, no economic activities were identified that would contribute to several environmental objectives at the same time. This ensures that double counting at any stage was avoided when the monetary values were calculated for the KPIs.

Mandatory disclosures for the EU Taxonomy are applicable to companies that meet the criteria set forth in Article 19a or Article 29a of Directive 2013/34/EU of the European Parliament and of the Council. The ENEA Group, as an entity subject to the obligations arising under the above Directive, which prepares the Statement on Non-Financial Information in accordance with the amended Accounting Act, is obligated to make Taxonomy-related disclosures for 2022. The Group’s Taxonomy-related reporting is compliant with Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 and Commission Delegated Regulation (EU) 2021/2139 and Commission Delegated Regulation (EU) 2021/2178, because it meets the regulator’s requirements for non-financial corporations regarding key performance indicators and accompanying information as defined within Annex I, II and XII of Commission Delegated Regulation (EU) 2021/2178.

In the process of assessing its activities for Taxonomy alignment, the ENEA Group used its experience acquired during the preparation of last year’s Management Board Activity Report. For its last year’s Statement, the Group was obliged to make eligibility disclosures in accordance with Article 10 of Commission Delegated Regulation (EU) 2021/2178. For the ENEA Group, these were disclosures for the period from 1 January to 31 December 2021. At that time, simplified rules for reviewing activities in terms of disclosure requirements for non-financial companies were in effect, and only with respect to EU Taxonomy eligibility; these disclosure activities were carried out by the Group’s Controlling Department.

In order to fulfill the obligations under Commission Delegated Regulation (EU) 2021/2178 with respect to the 2022 disclosures, all ENEA Group entities were engaged in the process of evaluating their business activities. A number of internal training workshops and consultations were conducted to familiarize representatives of the companies with the applicable regulatory requirements, to make sure that they are able to analyze in depth their companies’ activities to assess their Taxonomy alignment.

Data for specific companies for the purpose of the 2022 disclosures were analyzed by the departments and business units responsible for reporting data by activity types within the Group entities. Industry experts were also involved to support the analysis of the technical classification criteria and “do no significant harm” principles. The Group’s Controlling Department was responsible for the collection and aggregation of data.

The analysis of the technical classification criteria and the “do no significant harm” principles was carried out by the departments and business units responsible for reporting data of those companies in the ENEA Group that, in a preliminary analysis, established Taxonomy eligibility of their economic activities. We have engaged industry experts responsible for technical aspects related to revenue-generating infrastructure, our investments or expenses to confirm the requirements set forth in Commission Delegated Regulation (EU) 2021/2139 and Commission Delegated Regulation (EU) 2022/1214.

In the case of the economic activities assessed for their substantial contribution to climate change mitigation, we had to conduct an assessment of climate risk and exposure to that risk in order to satisfy the “do no significant harm” requirement. In the case of economic activities assessed for their substantial contribution to climate change adaptation, the condition for satisfying the significant contribution condition is to conduct an assessment of climate risk and exposure to that risk.

The risk and exposure assessment was carried out by the departments and business units responsible for data reporting in the following entities: ENEA S.A., ENEA Elektrownia Połaniec, ENEA Nowa Energia, ENEA Pomiary, LW Bogdanka Group, PEC Oborniki, ENEA Operator and ENEA Serwis. Other ENEA Group companies did not report Taxonomy-aligned economic activities. Each of the economic activities reviewed in terms of Taxonomy alignment for climate change mitigation as well as climate change adaptation goals, was assessed in the context of the twenty-eight physical climate-related hazards listed in the classification in Appendix A to Commission Delegated Regulation (EU) 2021/2139. In the first step of our climate risk assessment, we excluded those climate-related hazards that have no effect on the activity subject to the review since the hazards do not exist in the locations where the activities are conducted, or since there is no causal link between the harmful effects and the activities subject to the assessment. After the initial analysis of climate-related hazards, we produced a list of risks identified as relevant to the activities subject to the assessment. In the second stage of the risk and exposure assessment process, the companies assessed the effects if each relevant risk materializes, for the economic activities subject to the assessment. The analysis of the identified risks was performed for two time horizons required by the Regulation: up to 10 years and from 10 to 30 years. In the analysis process, no risks were assessed as “high” or significant. The majority of risks were assessed as “low”, with few risks with a “medium” rating.

In the case of ENEA Nowa Energia, activity 7.2 Renovation of existing buildings, which was identified as making a substantial contribution to climate change adaptation, climate risk and exposure to climate risk was assessed similarly as in the case of the “do no significant harm” analysis, and adaptation solutions to mitigate the identified risks by adjusting the damming built in the past for hydroelectric power plants in such a way as to ensure that these plants operate safely and do not generate risks have already been implemented in accordance with the requirements of substantial contribution to climate change adaptation.

All other activities considered to be Taxonomy-aligned have demonstrated a substantial contribution to the environmental objective of climate change mitigation. In their case, as mentioned earlier, the assessment of climate risk and exposure to this risk was limited to “do no significant harm” requirements.

We have also carried out an analysis of compliance of economic activities carried out in 2022 with the minimum safeguards as defined in Article 18 of Regulation (EU) 2020/852. This assessment was overseen by the Group’s Controlling Department. For the analysis, we used Article 18 of Regulation (EU) 2020/852 of the European Parliament and of the Council as a starting point, while relying on the explanations provided in the Platform on Sustainable Finance (Final Report on Minimum Safeguards), the OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles for Business and Human Rights.

Following the assessment, we concluded that the ENEA Group conducted its activity in 2022 in accordance with the minimum safeguards.

• After analyzing all activities described in the EU Taxonomy, we concluded that Taxonomy-eligible but not Taxonomy-aligned turnover represented 0.88% (PLN 265 million), while Taxonomy-aligned turnover represented 11.80% (PLN 3,554 million) of all turnover from the Group’s activities in FY 2022. Accordingly, Taxonomy non-eligible turnover represents 87.32% (PLN 26,299 million) of all turnover from the Group’s activities in FY 2022.
• Taxonomy-eligible but not Taxonomy-aligned turnover is derived from the following activities:
  • 4.8. Electricity generation from bioenergy
  • 4.9. Transmission and distribution of electricity
  • 4.15. District heating/cooling distribution
  • 4.30. High-efficiency cogeneration of heat/cooling energy and electricity from fossil gases
  • 5.1. Construction, extension and operation of water collection, treatment and supply systems
  • 5.3. Construction, extension and operation of waste water collection and treatment
  • 6.2. Freight rail transport
  • 6.5. Transport by motorbikes, passenger cars and commercial vehicles
  • 7.2. Renovation of existing buildings
  • 7.3. Installation, maintenance and repair of energy efficiency equipment
  • 7.7. Acquisition and ownership of buildings
• Taxonomy-aligned turnover is derived from the following activities:
  • 4.1. Electricity generation using solar photovoltaic technology
  • 4.3. Electricity generation from wind power
  • 4.5. Electricity generation from hydropower
  • 4.8. Electricity generation from bioenergy
  • 4.9. Transmission and distribution of electricity
  • 7.4. Installation, maintenance and repair of electric vehicle charging stations in buildings (and in car parks near buildings)
• The most important Taxonomy-aligned activity is activity 4.9. Transmission and distribution of electricity, which accounts for 96% of the numerator of the turnover KPI. ENEA Operator, having carried out a comprehensive analysis, determined Taxonomy alignment of revenue from licensed activities, i.e. sales of distribution services to end users and revenue from grid connection fees. These are revenues originating from the grid assets held and are recognized for the most part under IFRS 15, where the main groups of contracts are contracts for distribution services. In these contracts, the service is provided on a continuous basis and the amount of turnover depends on the amount of distribution fees calculated in accordance with the DSO’s tariff. ENEA Serwis makes a certain small contribution to this amount, as it is engaged in the execution of high, medium and low-voltage electricity networks or maintenance services on existing, active electricity networks and equipment.
• Another significant activity, accounting for 3% of the numerator of the turnover KPI, is activity 4.8. Electricity generation from bioenergy. ENEA Elektrownia Połaniec, following a comprehensive analysis, determined Taxonomy alignment of revenue from activities related to the operation of the Green Unit at the Połaniec Power Plant. Given that the activities related to the Green Unit consist of the electricity generation and sales to wholesale and other customers, including Regulatory System Services, revenues in this respect were also recognized in accordance with IFRS 15.
• The denominator of the turnover ratio is PLN 30,118 million.

• An analysis of all capital expenditures (CapEx) shows that Taxonomy-eligible but not Taxonomy-aligned expenditures represent 4.69% (PLN 124 million), while Taxonomy-aligned CapEx represent 54.54% (PLN 1,439 million) of the Group’s total CapEx in FY 2022. Accordingly, Taxonomy non-eligible CapEx represent 40.77% (PLN 1,076 million) of the Group’s total CapEx in FY 2022.
• Taxonomy-eligible but not Taxonomy-aligned Capital expenditures (CapEx) are incurred in the following activities:
  • 3.1. Manufacture of renewable energy technologies
  • 3.5. Manufacture of energy efficiency equipment for buildings
  • 4.8. Electricity generation from bioenergy
  • 4.10. Storage of electricity
  • 4.15. District heating/cooling distribution
  • 4.29. Electricity generation from fossil gaseous fuels
  • 5.2. Renewal of water collection, treatment and supply systems
  • 6.5. Transport by motorbikes, passenger cars and commercial vehicles
  • 6.6. Road freight transport services
  • 7.1. Construction of new buildings
  • 7.2. Renovation of existing buildings
  • 7.3. Installation, maintenance and repair of energy efficiency equipment
  • 7.7. Acquisition and ownership of buildings
  • 9.2. Research, development and innovation for direct air capture of CO₂
• Taxonomy-aligned capital expenditures (CapEx) are incurred in the following activities:
  • 3.1. Manufacture of renewable energy technologies
  • 4.1. Electricity generation using solar photovoltaic technology
  • 4.3. Electricity generation from wind power
  • 4.5. Electricity generation from hydropower
  • 4.8. Electricity generation from bioenergy
  • 4.9. Transmission and distribution of electricity
  • 7.2. Renovation of existing buildings
  • 7.3. Installation, maintenance and repair of energy efficiency equipment
  • 7.4. Installation, maintenance and repair of electric vehicle charging stations in buildings (and in car parks near buildings)
  • 7.6. Installation, maintenance and repair of renewable energy technology systems
• The most important Taxonomy-aligned activity is activity 4.9. Transmission and distribution of electricity, which accounts for 96% of the numerator of the CapEx KPI. ENEA Operator has determined Taxonomy alignment of grid investments, which include, among others: connection of new customers, new sources and the associated construction of new networks, the upgrading and rehabilitation of existing assets, meters and metering systems, as well as ICT infrastructure forming an integral part of the distribution grid operated by ENEA Operator. The vast majority of capital expenditures incurred in this way have been accounted for in accordance with IAS 16 Property, Plant and Equipment.
• Another significant activity, accounting for 3% of the numerator of the CapEx KPI, is activity 4.8. Electricity generation from bioenergy. ENEA Elektrownia Połaniec, following a comprehensive analysis, determined Taxonomy alignment of capital expenditures related to the operation of the Green Unit at the Połaniec Power Plant, including its adaptation to BAT conclusions. The investments mentioned above, which are related to the Generation and Distribution areas, are described in greater detail, including investment projects that were not classified Taxonomy-aligned, in the section of the Statement of Non-Financial Information entitled Actions and investments pursued. The vast majority of capital expenditures considered to be Taxonomy-aligned was classified as additions within the meaning of IAS 16 Property, Plant and Equipment.

The denominator of the CapEx ratio is PLN 2,639 million.

• An analysis of all operational expenditures (OpEx) shows that Taxonomy-eligible but not Taxonomy-aligned expenditures represent 11.10% (PLN 72 million), while Taxonomy-aligned operational expenditures represent 37.41% (PLN 243 million) of the Group’s total OpEx in FY 2022. Taxonomy non-eligible OpEx therefore represented 51.49% (PLN 334 million) of the Group’s total OpEx in FY 2022.
• Taxonomy-eligible but not Taxonomy-aligned operational expenditures were incurred in the following activities:
  • 4.8. Electricity generation from bioenergy
  • 4.15. District heating/cooling distribution
  • 4.20. Cogeneration of heat/cooling energy and electricity from bioenergy
  • 4.30. High-efficiency cogeneration of heat/cooling energy and electricity from fossil gases
  • 4.31. Production of heating/cooling energy from gaseous fossil fuels in an efficient heating and cooling system
  • 6.5. Transport by motorbikes, passenger cars and commercial vehicles
  • 6.6. Road freight transport services
  • 7.2. Renovation of existing buildings
  • 7.3. Installation, maintenance and repair of energy efficiency equipment
  • 7.7. Acquisition and ownership of buildings
• Taxonomy-aligned operational expenditures (OpEx) were incurred in the following activities:
  • 1. Electricity generation using solar photovoltaic technology
  • 3. Electricity generation from wind power
  • 5. Electricity generation from hydropower
  • 8. Electricity generation from bioenergy
  • 9. Transmission and distribution of electricity
  • 5. Transport by motorbikes, passenger cars and commercial vehicles
  • 2. Renovation of existing buildings
• The most important Taxonomy-aligned activity is activity 4.9. Transmission and distribution of electricity, which accounts for 83% of the numerator of the OpEx KPI. ENEA Operator has determined Taxonomy alignment of the costs of maintenance work on its grid assets, costs of in-house work and related costs indispensable for the operation. The most important category among these costs are without a doubt staff costs (payroll fund, social security contributions, charges for the Company Social Benefit Fund) linked to maintenance and repair workers.
• Another significant activity, accounting for 9% of the numerator of the OpEx KPI, is activity 4.8. Electricity generation from bioenergy. ENEA Elektrownia Połaniec, following a comprehensive analysis, determined Taxonomy alignment of operational expenditures (OpEx) related to the operation of the Green Unit at the Połaniec Power Plant. These expenditures are associated with repairs and maintenance mainly at the biomass installation department, they also pertain to boilers or auxiliary equipment (they include direct repair materials but also costs of external service providers incurred for this purpose).
• The denominator of the OpEx ratio is PLN 648 million.