Risk management as an integral part of corporate governance
Statkraft is exposed to risk in a number of areas and across its entire value chain. The key risk factors are connected to market operations, financial management, operating activities and framework conditions.
Market risk in the energy markets
Statkraft is exposed to significant market risk in relation to the generation and trading of power. Revenues from power generation are exposed to volume and electricity price risk:
Both electricity prices and production volume are impacted by weather and precipitation volumes, while electricity prices depend on production, consumption and transmission conditions in the electricity market.
Electricity prices are further indirectly influenced by gas, coal and oil prices and carbon quota prices.
Gas power production is directly exposed to gas, oil and carbon quotas.
Statkraft manages market risk in the energy markets by trading physical and financial instruments in several markets. Closer integration of the energy markets is having a significant impact on business models and risk management. Consequently, significant emphasis is placed on the interrelationship between the various markets. Hedging strategies are regulated by limits on the positions’ volume and value, and by specific criteria for evaluating the respective new contracts’ impact on expected revenues and downside risk. The portfolio is constantly adjusted in relation to current perceptions of future prices and the company’s own production capacity.
Statkraft holds trading and origination portfolios where the taking of risks is also regulated by mandates. The trading portfolio comprises limited, short-term positions within financial power derivatives. The structured products portfolio contains customised, bilateral contracts for customers with special requirements, where the agreements are hedged as far as possible using standard financial contracts.
Downstream activities are exposed to uncertainty with regard to sales prices to private customers and businesses and purchase prices on the wholesale market. However, net exposure is limited as far as possible by securing a balance between exposure to customers and purchases on the wholesale market, and via financial instruments. District heating operations are also exposed to market risk through uncertain fuel prices (including waste, oil, gas, electricity prices and others) and prices to customers. However, the fact that prices to customers are linked to fuel prices means that net exposure to price changes is limited.
Financial risk
The Group’s central treasury department coordinates and manages the financial risk associated with foreign currencies, interest rates and liquidity. Statkraft is exposed to interest rate risk through external borrowing and distribution grid revenues. The Group is exposed to currency risk through
the integration between the Nordic and the continental power market,
the Group's power trading in euros,
financing and
other cash flows related to foreign subsidiaries and associated companies.
Foreign exchange and interest rate risk are regulated through mandates. Forward currency contracts, interest rate swaps and forward interest rate agreements are the most important instruments used. Statkraft’s liquidity risk derives from discrepancies between the term of the financial obligations incurred and the cash flows generated by the assets and is primarily managed through good borrowing opportunities, drawdown facilities and a minimum requirement with respect to the Group’s cash reserves.
Statkraft assumes counterparty risk through its power trading activities and the investment of its surplus liquidity. The creditworthiness of all counterparties is evaluated before contracts are signed, and exposure to individual counterparties is limited by mandates based on their credit rating. Both market risk on the power markets and financial risk, as well as exposure connected to the issued mandates, are followed up by independent middle office functions, and are regularly reported to Group management and the board.
Operational risk
All processes in the value chain are exposed to operational risk. This could result in
injury to the Group's employees
harm to the environment
damage to and loss of production facilities and other assets belonging to the Group itself or third parties.
Insurance cover has been arranged for all types of material damage or injury, partly through the Group’s own insurance company Statkraft Forsikring AS.
Operational risk is managed by means of detailed procedures for activities in all operational units and various types of contingency plans. A comprehensive system for registering and reporting hazardous conditions, undesired incidents and damage and injuries has been established. These are analysed on an ongoing basis in order to limit their possible consequences and secure the follow-up of cause-and-effect relationships and the implementation of the necessary measures.
Estimates relating to possible financial consequences of the overall operational risk are assessed and included in reporting of the total risk at Group level.
Other risk
Changes in the regulatory framework and political decisions affect the Group’s room to manoeuvre and represent a substantial factor in Statkraft’s overall risk picture. Statkraft is, for example, exposed to support schemes connected to the development of clean energy in a series of markets. Uncertainty related to the future development of these is therefore accorded significant importance in investment decisions. The Group maintains a constant watch on changes in the political landscape and places great emphasis on pursuing an open dialogue and establishing good relationships with decision-makers in all relevant arenas.
Statkraft’s international focus involves both heightened country risk and partner risk. Country risk is evaluated for each country and in comparison with other countries in the same region. Partner risk is assessed at an early stage in order to confirm the integrity and management structures of all prospective partners. Statkraft is committed to ensuring that all parts of the Group comply with Group standards within HSE and ethics. These standards are included and made available in the Group’s Code of Conduct, and there is a strong focus on ensuring that all employees are familiar and comply with these standards.
Climate changes can present both threats and opportunities, and are of importance for all the risks described above. The establishment of new markets for carbon quotas has already affected the energy markets, while significant changes in temperatures and precipitation levels will have consequences for both electricity prices and production. In addition, flooding and bad weather could result in increased damage and wear to plant, as well as have consequences for employees and third parties. Climate risk is also an important driver of changes in framework conditions and political decisions.