Statkraft is exposed to risk throughout the value chain. The most important risks are related to market operations, financial management, project execution, operating activities and framework conditions.
Integrated corporate risk management
Growth and increased internationalisation set stricter requirements for risk management in the investment portfolio. Statkraft has a central investment committee to improve risk handling in relation to individual investments and across the project portfolio.
Market risk in energy markets
Statkraft is exposed to significant market risk in relation to the generation and energy trading. Revenues from power generation are exposed to volume and power price risk:
- Both power prices and production volumes are impacted by weather and precipitation volumes, power prices also depend on transmission conditions in the electricity market.
- Power prices are also indirectly influenced by gas, coal and oil prices, as well as the price of carbon quotas.
- Gas power production is directly exposed to fluctuations in the gas, oil and carbon prices.
Statkraft manages market risk in the energy markets by trading physical and financial instruments in multiple markets. Increased integration of the energy markets is having a significant impact on business models and risk management. Consequently, Statkraft places significant emphasis on the interrelationship between the various markets. The group's hedging strategies are regulated by limits on the positions’ volume and value, and by criteria for evaluating new contracts against expected revenues and downside risk. The portfolio is constantly adjusted in relation to our current perceptions of future prices and the company’s own production capacity.
Statkraft's activities in energy trading and services consist of both trading with standard products on energy exchanges and sale of services or products adapted to the individual customer. New products and services have a typical short lifetime compared with other activities before profitability is reduced as a result of competition from other players or regulatory amendments. Risk is handled through mandates covering raw materials, geographical areas and duration. An independent risk handling function ensures objectivity in the assessment and handling of risk.
Sales activities are exposed to uncertainty in the sales price to retail customers and companies, as well as the purchase price in the wholesale market. Statkraft limits the net exposure by securing a symmetry between customers and purchases in the wholesale market and by using financial instruments. District heating operations are also exposed to market risk through uncertain fuel prices (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.
The central treasury department coordinates and manages the financial risk associated with foreign currencies, interest rates and liquidity, including refinancing and new borrowing. Statkraft is exposed to interest risk through external financing and distribution grid revenues. The Group is exposed to currency risk through:
- integration between the Nordic and the Continental power market
- the Group's energy trading in EUR
- other cash flows related to foreign subsidiaries and associated companies
Currency and interest risk are regulated by means of mandates. Forward currency contracts, interest rate swaps and forward interest rate agreements are the main important instruments. The liquidity risk in Statkraft is related to the deviation between the maturity profile of financial liabilities and the cash flows generated by the assets. The liquidity risk can mainly be handled through flexibility in borrowing sources, credit facilities and minimum requirements for the Group's cash and cash equivalents.
Statkraft is exposed to credit and counterparty risk through energy trading and investment of surplus liquidity. The credit rating of all counterparties is evaluated before contracts are signed, and exposure to individual counterparties is limited by mandates based on their credit rating. Market risk in the energy markets and other financial risk, as well as exposure in connection with the issued mandates, are followed up by independent middle office functions and regularly reported to the Group management and the board.
All processes in the value chain are exposed to operational risk. Project execution and operating activities have the greatest exposure to operational risk. This may result in:
- injury to the Group's employees
- harm to the environment
- damage and losses for own and third-party production plants and other assets
Statkraft's first priority is to execute development activities and operations in a responsible manner.
Statkraft has insurance coverage for all significant types of damage or injury, in part through the Group’s own insurance company Statkraft Forsikring AS.
Statkraft manages operational risk through detailed procedures for activities in all operational units and various types of contingency plans. Furthermore, Statkraft has a comprehensive system for registering and reporting hazardous conditions, undesirable incidents and damage and injuries. Such cases are analysed continuously to prevent and limit any negative consequences, and to ensure that we can follow up causes and implement the necessary measures.
For projects in Statkraft that exceed a certain size, systematic risk assessments are carried out. This is followed up on in all projects by:
- having an allocated project reserve
- implementing follow-up and reporting of conditions of importance for the implementation of the project
- evaluating and planning measures to mitigate risk in the project
Project risks are assessed according to likelihood and potential consequences. A joint corporate project unit has been established to further reduce risk in relation to project execution.
Estimates relating to possible financial consequences of the overall operational risk are assessed and included in the total risk reporting at group level.
Statkraft's activities in Norway are influenced by framework conditions such as taxes, fees, regulations, grid regulations, changes in mandatory minimum water level and other requirements stipulated by the Norwegian Water Resources and Energy Directorate (NVE), as well as general terms and conditions stipulated for the energy industry. These framework conditions can influence Statkraft's production, costs and revenues. The framework conditions in the individual countries in Europe are a result of international processes that will be important for Norwegian power plants. With its increasing international involvement, Statkraft is also directly exposed to national framework conditions, tax levels, licence terms and government regulations in other countries. Statkraft therefore greatly emphasises the uncertainty in relation to the future development of these conditions when making investment decisions. Possible changes in the political landscape are considered continuously, and maintaining an open dialogue and establishing good relationships with decision-makers in all relevant arenas are emphasised.
Statkraft's international investments involve both heightened country risk and partner risk. Statkraft assesses risk for each country individually and compares countries in each region. Partner risk is assessed at an early stage in order to confirm the necessary integrity and management structure. Statkraft is committed to ensuring that all parts of the Group comply with Group standards within HSE and ethics. The standards have been set out and made available in the Group's Code of Conduct. The standards are also communicated to all partners and suppliers.
Climate change can present both threats and opportunities, and is of importance for all the risks described above. Establishment of new carbon quota markets has already influenced 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 to and degradation of plants, and could have consequences for employees and third parties. Climate risk is also an important driver of changes in framework conditions and political decisions.