16.5.1.2. Risk of changes in CO2 emission allowances prices
PKN ORLEN is centrally managing risk related to settlement cost of CO2 emission in the Group in line with the assumptions set forth in the adopted Market Risk Hedging Policy approved by the PKN ORLEN Management Board. Under realized strategy PKN ORLEN purchases allowances for its own needs as well as in order to secure estimated volume and costs of purchase of CO2 emission rights for Group companies. Deficit of CO2 allowances is estimated on the basis of, among others, current balance of possessed emission allowances, executed transactions for purchase of emission allowances with future delivery, realized and estimated emission in future periods from particular installations in ORLEN Group and forecasts of free emission allowances allocation.
Considering the assumptions of new strategy of ORLEN Group until 2030 which also impact the strategy of hedging the risk of CO2 emission settlement cost as well as the Group’s liquidity risk management activities focused on optimizing cash flows and debt levels and requirements of IFRS regarding the recognition and valuation of financial instruments, the Group made a decision to separate two portfolios under concluded contracts for purchase of CO2 emission allowances:
- CO2 „own-use” portfolio – concerning contracts which will be used for the purpose of fulfillment of the redemption obligation by PKN ORLEN and Group entities – these contracts will not be measured at fair value, in accordance with the exemption included in IFRS 9
- CO2 „transaction” portfolio – concerning contracts which, in accordance with executed new strategy of hedging the risk of CO2 emission costs, will be subject to settlement in cash or by exchanging financial instrument at later dates, and therefore will be recognized as derivatives not designated for hedge accounting purposes and classified as financial assets/liabilities measured at fair value through profit or loss in accordance with IFRS 9.
Open futures contracts for the purchase of CO2 emission allowances:
| Settlement period | Number of allowances in tonnes |
Settlement period | Number of allowances in tonnes |
|
|
2021 |
2020 |
|||
| CO2 „transaction” portfolio | III 2022, XII 2022, III 2023, XII 2023 |
20 716 000 | III 2021, XII 2021, XII 2022 | 12 224 000 |
| CO2 'own’ portfolio | III 2022, XII 2022 | 2 300 000 | III 2021 | 7 423 000 |
The effect of the valuation of CO2 futures contracts was recognized in Other Operating Income in position Settlement and valuation of derivative financial instruments relating to operational exposure. Additional information is presented in note 13.9 and 13.10.
Sensitivity analysis for changes in prices of CO2 emission allowances
Analysis of the influence of changes in the carrying amount of financial instruments on result before tax to a hypothetical change in prices of CO2 emission allowances.
| Assumed variations | Influence on result before tax | Assumed variations | Influence on result before tax | |||
| 2021 | 2021
increase in prices |
2020 | 2020
increase in prices |
|||
| CO2 „transaction” portfolio | 44% | 3 396 | 16% | 297 | ||
At the same percentage interest rates decrease, the sensitive analysis presents variations of the same value as in the above table but with the opposite sign.
Applied for the sensitivity analysis for changes in prices of CO2 emission allowances, prices were calculated based on their historical volatility in 2021.
The net carrying amount of commodity risk hedging instruments described in note 16.5.1.1 and 16.5.1.2 as at 31 December 2021 and as at 31 December 2020 amounted to PLN 728 million and PLN 164 million, respectively.