Environment

We are aware of the fact that our activities, just as any human activity, naturally interfere with the environment. We pursue economic activities in accordance with existing legal regulations and other requirements, including environmental protection norms. We want to be an eco-friendly company operating in full harmony with the environment and promoting sustainable development.

CLEAN AIR, CLEAN NEIGHBOURHOOD

The production of electricity and heat from fossil fuels has an impact on the quality of air, which is why we place strong emphasis on minimising emissions and avoiding the most harmful ones.

Last year, PGE especially focused on district heating, which culminated in the adoption of a strategy for this business line. The development of district heating has a positive impact on air quality improvements and on the environment. District heating is one of the most effective ways of combating smog, which - especially in the autumn and winter - is a problem in many Polish cities. Thermal energy for heating is produced not in household furnaces but instead in high-efficiency CHP plants equipped with efficient systems for denitration, desulphurisation and particulate matter filtering. In addition, the cogeneration process produces electricity, which improves the country's energy security.

Irrespective of the development plans, we are continuously investing in our existing assets and the majority of these investments are directly or indirectly related to improving the quality of air and protecting the natural environment.

PGE GiEK's expenditures on emission-reduction investments over the past two years

	2016-2017
	PLN million
EL. Bełchatów - Comprehensive reconstruction and modernisation of units 7-12	551.3
EL. Bełchatów - Adaptation of units 2-12 and 14 to BAT conclusions	19.8
EL. Turów - Comprehensive modernisation of units 1-3	259.9
EL. Turów - Construction of flue gas desulphurisation system for units 4-6	25.5
ZEDO - Investment programme for Elektrownia Pomorzany plant	53.7
ZEDO - Adaptation of units 5-8 to BAT conclusions	0.5
ZEC Bydgoszcz - Expansion of flue gas desulphurisation system for boilers K-3 and K-4	4.8
ZEC Bydgoszcz - Construction of installation for nitric oxide reduction for boilers K-3 and K-4	1.2
EC Gorzów - Construction of new gas-and-steam unit	275.8
Total	1,192.5

Consistent investment in our generation assets results in their environmental footprint being minimised. By using best available technologies, we strive for further improvement. In 1989-2017, the Group's power plants: Bełchatów, Opole, Turów and Dolna Odra, reduced emissions as follows: SO2 by 93%, NOx by 59 %, particulate matter by 99%:

Chart: NO_x, SO₂ and particulate matter emissions (in kg/MWh) at PGE GiEK S.A.'s key units

* Emissions data covers the following plants: Bełchatów, Opole, Turów and Dolna Odra.

PGE's installations operate in compliance with IED Directive emission standards or use derogation mechanisms. Derogation is intended to give existing installations additional time to technically adapt to the more rigorous emission requirements specified in the IED or exempt them from the requirement to observe these if modernising such a facility would be unjustified due to a limited expected life-cycle. Nonetheless, regardless of the permissible norms, we strive to meet these higher standards. We also began an adaptation programme for BAT standards, taking into account the best available technologies.

Our on-going investments in modern generation capacities in Opole and Turów are yet another leap towards a better quality of air. They are being constructed to world-class technological standards and they will be cleaner.

Estimated environmental effects of our new power units in comparison with units currently in operation

Maximum values guaranteed in contractor agreements were used for the new units.

GREENHOUSE GAS EMISSIONS

We are aware of climate change. All development projects included in our 2020 strategy will translate into lower CO₂ emissions. Our priority is ensuring energy security whilst reducing environmental footprint. Our sustainable approach to development takes into account Poland's geography and natural resources.

We are carefully evolving towards a greater diversification of our production mix, while limiting our CO₂ emissions. Thanks to this we are reducing our exposure to the cost of CO₂ allowances. Key impact on the dynamics of change comes from the regulatory environment, which shapes the economics of investments, taking into account aspects such as energy independence, supply security and the social and economic situation.

Reductions in average emissions over the past several years were achieved thanks to improvements in the efficiency of energy generation, start-up of gas-fired CHPs and launch of approx. 250 MW in wind farms. Average emissions were reduced despite a limited use of biomass due to regulatory constraints. The acquisition of EDF's assets in Poland will also have a positive impact on the Group's average emissions in the coming years, largely due to the high efficiency of cogeneration processes.

Chart: PGE Group's average emissions (tonnes CO2/MWh, taking into account heat production)

Development activities intended to further reduce PGE's emission levels

We are the renewable energy leader in Poland and we wish to retain this position. PGE is constantly analysing opportunities to further develop renewable energy. By 2030, we plan to have a 25% share of the domestic renewables market. We are developing this business responsibly in respect of our shareholders - taking into account economic considerations.

One investment being prepared by us is a 1 GW offshore wind farm project, which could be put into service half way through the next decade. We also see potential to further develop wind energy, which would strengthen our top position in Poland (approx. 550 MW of installed capacities). At the same time, we are taking into consideration PGE's more extensive involvement in photovoltaics, especially given the rising demand for capacity during the summer months.

PGE Group's existing renewables generation potential is 1 GW, which constitutes 12% of installed renewables capacities in Poland. Our installations produced approx. 9% of domestic electricity from renewable sources in 2017.

PGE's installed renewables capacities

Type		Installed capacity (MW)
Wind assets	14	549.9
Hydro assets	29	95.8
Pumped storage assets with natural in-flow	2	286.7
Biomass assets	2	75.2
PV	1	0.6
Total renewables		1,008.2

According to our District Heating Strategy (LINK - District Heating Strategy), we plan to develop our cogeneration activities. This has a twofold impact on the Group's emissions. Given the efficient use of chemical fuel's energy, at around 80-85%, CO2 emissions are reduced in comparison with the separate generation of heat and electricity. On the other hand, the development of district heating is heading towards zero- and low-emission fuels. One of the objectives in our District Heating Strategy is to increase the use of these fuels to 50% by 2030. We believe that, taking into account the natural environment and economy, it is important to use local fuel resources.

PGE Energia Ciepła's share in the fuel mix

In the context of low-emission technologies, a gas-based generation capacity project at Elektrownia Dolna Odra should also be mentioned. Preliminary results of a feasibility study are optimistic enough for us to consider a project with double the capacity we had initially planned, which would mean the construction of two new 500 MW gas-fired units. Moreover, we are analysing the construction of another 500 MW gas-fired unit at one of our existing locations.

Regardless of our plans, PGE's flagship investments (construction of two 900 MW units in Opole and a 490 MW unit in Turów) will also improve fuel efficiency, which will also reduce the Group's average emission levels. Estimated emissions at these installations shall be 25% lower than at the existing units in these power plants.

The modernisation of our existing assets is also targeting higher generation efficiency and thus lower CO₂ emissions. In 2016, we completed a comprehensive modernisation of Elektrownia Bełchatów. The next step will be a comprehensive modernisation of Elektrownia Turów.

Energy efficiency initiatives intended to reduce CO₂ emissions:

Increase the energy efficiency of production assets.
Decrease own energy consumption.
Modernise production assets.
Reduce grid losses in electricity distribution.
Reduce grid losses in district heating networks.

Energy storage

We consider energy storage as an exceptionally important element of respecting the natural environment. This has particular meaning in the era of developing renewables. Renewables production is dependent on weather conditions. Capturing this energy and making it available during periods of higher demand is currently the largest challenge. We believe that the commercialisation of economically effective energy storages will be a gamechanger for the power industry. PGE Energia Odnawialna is planning to build an energy storage intended to ensure the stability of energy supplies to end users at the South-Western Energy Cluster, formed with PGE's participation.

Meanwhile, we are using available technologies such as pumped-storage plants. We own most of the pumped-storage capacities in Poland. Our four pumped-storage plants total over 1.5 GW in installed capacity. They warehouse energy in their upper water reservoirs. And they make it possible to quickly make this energy available in the national power system when demand for electricity significantly increases.

ENVIRONMENTAL POLICY

Striving to improve the quality of the natural environment, we initiate, support and participate in initiatives intended to retain biodiversity and improve the state of the environment, the quality of which we monitor.

PGE Group's Environmental Protection Policy is a document that defines our attitude towards protecting the environment. It is in place at PGE Group's key companies (PGE GiEK, PGE EC, PGE Dystrybucja, PGE EJ 1, PGE EO).

Its objectives include:

Defining general rules, authorisations and responsibilities in PGE Group's environmental protection area.
Defining PGE Group's processes and activities having key meaning for environmental protection.
Assigning key roles in the process of managing environmental protection to appropriate levels in PGE Group's management organisational structure.
Identifying environmental processes within business lines, taking into account their specifics.
Continuously increasing PGE Group employees' awareness of environmental protection.

Aside from the environmental protection policy, all branches of PGE GIEK and PGE EC have an Integrated Management System. This covers an Environmental Management System, established and implemented in accordance with the standard PN-EN ISO 14001. The main task of the Environmental Management System is to support environmental protection and prevention of pollution in a way that takes into account social and economic considerations.

Moreover, in 2016 a declaration by the Management Board of PGE S.A. regarding environmental protection was adopted, in which this company's leadership committed to continuous improvement of efforts aimed at protecting and improving the state of the environment and at preventing pollution - implementing high, economically justified technological standards.

Environment and ethics

All employees are committed to the rational use of natural resources. Managing environmental impact is also addressed in PGE Group's Code of Ethics. The section "We care for the natural environment" describes the company's attitude towards standards for emissions into the air, water and ground.

In line with this rule, we undertake the following activities:

We regularly monitor and reduce the negative impact of our operations on the environment. We continuously strive to reduce environmental footprint both in the area of technologies applied in operations and during our every-day responsibilities.
We effectively use natural resources. We reduce our environmental footprint and promote the sustainable use of essential natural resources. We set environmental objectives for our supply chain. Our initiatives cover activities aimed at the sustainable development of electricity generation and transmission technologies, afforestation, reducing water and energy consumption and recycling. Every year, we publish information on our progress in this domain.
We are championing innovations. We support innovative solutions that contribute to reducing the environmental impact of our products and services.

We are certain that by acting in a sustainable manner we bring benefits to both our shareholders and the society.

Management of waste and by-products

Waste is mainly produced directly in combustion processes or in ancillary processes to the generation of electricity and heat. Waste from lignite firing is deposited in landfills. Another way to manage ashes from lignite combustion is to store them in unused transformed land. Waste from hard coal firing is used in the cement, building and road construction industries.

Management of water and waste water

The terms for managing water and wastewater are specified in relevant permits, including mainly integrated permits and water-law permits. Monitoring of the quantity and quality of water abstraction and wastewater discharge is on-going.

PGE Group's hydroelectricity assets, which have their own reservoirs, play a very important role in flood control and during droughts. By supplying additional water to rivers, they support local fauna and flora. In addition, the operation of turbines adds oxygen to the water, which has a positive impact on the entire ecosystem. All hydro-power assets in the Renewables segment have modernised installations that have no adverse effect on water levels. Companies in the Renewables segment are implementing investments that focus on maintaining riverbeds, participating in the costs being incurred by river administrators and participating in the costs of restocking. PGE Group works with the Environment Ministry, Regional Water Management Authorities, National Environment Protection Fund and other entities involved in water management, environmental protection and "clean energy." These programmes make it possible to more effectively utilise waterways' energy potential and they reduce the negative impact of water management structures.

Rehabilitation of adversely affected land

Rehabilitation projects are mainly being implemented at the open-pit mines KWB Turów and KWB Bełchatów. Rehabilitation consists of returning useful and natural values of land. Years of experience and the implementation of innovative and effective eco-friendly technological solutions allows to significantly mitigate the effects of lignite mining. Rehabilitations conducted thus far have given rise to vast forest and water complexes where many animal and plant species are present.

Mitigation of noise emissions

Noise emission measurements taken in 2017 at PGE GiEK branches (Gorzów CHP, Lublin-Wrotków CHP, Kielce CHP, Turów power plant) and at the Toruń CHP (PGE Toruń – subsidiary of PGE Energia Ciepła S.A.) did not show breaches of permissible noise emission levels (PGE Energia Ciepła S.A. measured noise emission in all its locations in 2016 – no emission levels were breached.). Breaches of noise emission limits were recorded from the area of Bełchatów lignite mine. In order to reduce noise emissions, steel idlers are being replaced with silent idlers.

PROTECTION OF BIODIVERSITY

Analysis of surroundings and the natural environment is an integral part of all our investments.

Elektrownia Bełchatów has been conducting forest monitoring in its impact areas for over a dozen years. In the course of research conducted as part of a project to modernise units it was concluded that the on-going exploitation activities have marginal impact on the biodiversity of terrains surrounding the plant and that the planned installations will further limit the impact on flora and fauna. Researchers working at Elektrownia Turów came to similar conclusions.

We are also undertaking activities intended to protect birds from electrocution. We build isolated lines and special structures on suspension towers.

An example of our care for biodiversity is a project by PGE Dystrybucja aiming to protect the white stork. Metal structures are built in areas where the company operates to raise nests above energy lines. So far, we have installed over 21,000 such structures. According to our experience, these efforts are effective - birds nest on these platforms in over 90% of the cases.

PGE Energia Odnawialna conducts monitoring of birds and bats at its wind farms. The aim is to determine the actual impact of turbines on these animals. For this purpose we use special structures on towers and wind turbines that allow building nests. We also use special marking on the ends of the blades, making it possible for birds to see them.

The "Forest full of energy" project is an example of ideas for revitalising terrains in which we operate. This project is PGE Dystrybucja's own ecological campaign, being implemented in cooperation with Regional Directorates of National Forests. The initiative is intended to offset necessary tree logging conducted during works on energy networks.

In accordance with environmental protection requirements, fish passes are installed at newly-built and existing facilities so that fish can migrate.

PROMOTION OF RESPONSIBLE ATTITUDES AMONGST CLIENTS

In 2017, PGE Obrót S.A. continued to sell ecological packages for the segment of large corporates and local government units. This offering included the sale of electricity generated from renewable sources along with an obligation to provide to the end user guarantees of origin for electricity derived from renewable sources in the Origin Guarantee Register maintained by the power exchange TGE.

In the SME segment, the company continued to market its "Save on light for small business" offering, which is a solution piloted in the first half of 2017. This deal includes electricity sales together with an additional product - a package of LED bulbs / lamps dedicated to the small business segment in the C1x tariff group in the legacy market area. A similar offer named "Save on light" is addressed to customers in the household segment.

Being aware of the national energy policy concerning reductions in pollution related to household emissions, at the end of January 2018 PGE Obrót S.A. introduced two promotional offers for electricity sales: "Anti-Smog Offering" and "Anti-Smog Offering. Extended”. These offers are directed to those customers who either already use or will use electricity for heating purposes as well as those who charge electric vehicles using their electric installation.

PENALTIES FOR IMPACT ON ENVIRONMENT

Our responsible approach to environmental protection is expressed by the minimal, given PGE's scale, level of penalties imposed on our Group for breaching legal norms.

Table: Monetary value of significant fines and total number of non-monetary sanctions for non-compliance with environmental laws and regulations at companies that have the biggest impact on the surroundings

PGE GIEK	2017	Additional information
Amount of cash penalties imposed and paid in given year for violations of environmental protection laws and regulations	PLN 1 370.00	Penalty for noise level violations at KWB Bełchatów.
Amount of cash penalties not yet imposed but estimated for non-compliance with environmental protection laws and regulations	PLN 28 020.51	Administrative penalties will also be imposed for exceeding emission levels (noise emissions and emissions into the air) that occurred in 2017. Relevant decisions imposing administrative penalties will be issued in 2018: administrative cash penalty estimated at PLN 22 941 for noise level violations at KWB Bełchatów, administrative cash penalty estimated at PLN 5 078 for a single violation of daily concentration of SO2 at Elektrociepłownia Bydgoszcz installations. Once a decision imposing an administrative penalty is issued, the company takes action intended to decrease the penalty by the amount of own funds spent on activities that will remove the reason for the penalty.

PGE Dystrybucja	2017	Additional information
Amount of cash penalties imposed and paid in given year for violations of environmental protection laws and regulations	PLN 3 733.00	Penalty for PGE Dystrybucja's branch Łódź-Teren for exceeding water-law permit conditions, imposed through an administrative decision of the Łódź Voivodship Inspectorate for Environmental Protection in Łodź

In 2017, PGE GiEK and PGE Dystrybucja did not receive non-financial, administrative or court sanctions for violating environmental protection laws, including: international declarations/conventions/treaties as well as national, regional and local provisions, together with voluntary agreements concerning environmental protection with regulatory organs, considered as binding and developed in order to replace existing regulations.

At the other key companies, no cash penalties and sanctions for failure to observe environmental protection laws were imposed.

Annual report 2017