Integrated annual report 2017 edition

1 Letter from the President

We want to be a transparent and reliable partner to electricity market participants.
Therefore, we are issuing the third social report which is also the first integrated publication that combines financial data with social and environmental indicators.
The key element in preparing the PSE report is the involvement of external stakeholders and our employees in the operation of the company.
Reporting in a process that allows us to improve our activities and raise performance
in running a responsible business.

Letter from the President of the Management Board

Ladies and Gentlemen,

It is my pleasure to share with you the third social report of Polskie Sieci Elektroenergetyczne (PSE), which is our first integrated publication combining a sustainable development report with financial data.

The publication has been released in an interactive version. In creating it, PSE – as the first company of the energy sector – has used the latest version of the Global Reporting Initiative Standards and followed the International Integrated Reporting Council's guidelines.

Energy security is at the core of the correct functioning of states and international systems. Our company is responsible for the operational security of the power system and reliable operation of the electricity market. We take care of the supply of electricity to all areas of the country so as to ensure that the current and expected mid- and long-term electrical energy and power demand is met throughout the national system. Our long-term perspective implies great responsibility to the economy at large, to society, and to the future generations. It commits and motivates us to act to the highest standards and on a basis of a dialogue with our local and European partners.

External factors that have a strong impact on the operation of PSE and the entire electricity market include the Clean Energy for All Europeans package presented by the European Commission. The package has proposed a complete change of thinking about the role of transmission system operators and provides for the transfer of their tasks to regional operational centres (ROCs). While having no sufficient treaty-based authority, and with no accountability defined, including financial accountability, the ROCs would be responsible for a substantial part of the process of preparing and planning the operation of power systems. The implementation of the Commission's package in the proposed form would be unfavourable for the Polish electricity market. For this reason, we feel obliged to develop proposals aimed to secure the good operation of the national power sector. The package also provides for new network codes governing issues as important as tariffs or active load and energy storage management.

An analysis of external factors that determine PSE's operations confirms our belief in the viability of the reform of the existing market that we have embarked on in a joint effort with the Polish generators, the Energy Regulatory Office and the Ministry of Energy, as well as the improvement of the processes related, among other things, to the operational model of the IT networks and systems. This is linked to supporting the long-term security of electricity supply which must be combined with meeting environmental and social requirements. In our view, an opportunity to eliminate the issue of power shortage in the Polish power system in the mid- and long-term will stem from the implementation of the capacity market. This will significantly contribute to the improvement of system operation security, and hence support PSE in the fulfilment of its duties as a transmission system operator, including the current balancing of electricity generation and demand. We expect the implementation of the capacity market to create incentives to invest in controllable generation sources, which will translate into the construction of new units and upgrades of the existing ones that would otherwise be decommissioned.

Coming to the fore amongst PSE's lines for action is also the provision of an efficient transmission capacity calculation for the European Union area, in particular an equal access to resources for all market participants and reduction of unscheduled flows resulting from incorrectly defined bidding zones. This is why we believe that capacity allocation should rely on the flow-based mechanism covering the entire territory of continental Europe. Only such a solution is capable of ensuring that dependencies between flows over individual lines are duly allowed for in a highly interconnected meshed transmission network.

The development of the transmission system must be backed by appropriate investment decisions. Therefore, we plan the construction of power lines and substations where they are really needed. It is our objective to minimise the adverse environmental impact and nuisance to local communities. We want to be a good neighbour and a helpful hand to our regional partners.

Looking towards the future, we have also implemented the Demand Side Response (DSR) service which is designed to prevent situations such as the event of 10 August 2015 when PSE was forced to announce the 20th power rationing level and impose electricity supply restrictions.

In response to the regulatory, technological and economic challenges ahead, we have developed a new PSE Strategy for 2017-2019. The document sets the key lines for action determining the operation of our company. They include both future and economy-related external and internal factors. In the Strategy, we have also placed a strong focus on how human resources are managed. Employees are our company's greatest asset. It is solely thanks to our staff that we can effectively pursue measures promoting the operational security and dependability of the Polish power system and the development of the internal electricity market.

Implementing the strategy for sustainable development is a permanent feature of PSE's management and continuous improvement, and our organisation's value building. In order to balance system security with environmental and social requirements, we have been consistently implementing corporate social responsibility initiatives and projects. The continuity of reporting provides good outcomes. Both those activities and the preparation of forthcoming reports involve an increasing number of contributors. Those looking after the content of this publication included representatives of key stakeholder groups who collaborated with us during the AA1000 SES dialogue session to identify priority topics for discussion. An internal validation workshop, during which issues of key significance to the company were selected, involved PSE's executives and management. The engagement of multiple parties has led to a report containing a unique knowledge on PSE's activities – a publication that testifies to the transparency of our company's operations and responds to the expectations of our social partners.

I extend my sincere thanks to all those involved in the creation of this report that allows us to improve our activities and performance in pursuing a responsible business. I wish you an interesting and knowledge- enhancing read of our publication.

Eryk Kłossowski

President of the Management Board,
Polskie Sieci Elektroenergetyczne S.A.

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