Statkraft is exposed to risk throughout the value chain. The most important risks are related to power prices, market operations, financial management, project execution, operating activities and framework conditions. 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.
Statkraft is exposed to significant market risk in relation to the generation and energy trading. Revenues from power production are exposed to volume and power price risk:
- Both power prices and production volumes are impacted by weather and precipitation volumes, while electricity prices depend on production, consumption and transmission conditions in the electricity market.
- Electricity prices are also indirectly influenced by gas, coal, oil and carbon quota prices.
- Gas power production is directly exposed to fluctuations in the electricity, gas and carbon quota 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 inter-relationship 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 the 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. 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 net exposure by ensuring a symmetry between customers and purchases in the wholesale market and by using financial instruments. There is also market risk in the district heating activities as a result of fuel price uncertainty, but prices to customers are related to these prices to limit net exposure.
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 the integration between the Nordic and the continental power markets, the Group's energy trading in EUR and other currencies, financing as well as 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 good 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 could result in injury to the Group's employees, harm to the environment and damage to and loss of production facilities and other assets belonging to the Group itself or third parties.
Statkraft's first priority is to execute development activities and operations in a responsible manner.
Statkraft has insurance cover for all significant types of damage or injury, in part through the Group’s own insurance company.
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 consequences, and to ensure that we can follow up causes and implement the necessary measures.
All projects in Statkraft that exceed a certain size carry out systematic risk assessments. This is done by allocating a project reserve for each project, following up and reporting factors of importance for the implementation of the project, and assessing and planning measures to reduce the risk in the project.
Project risks are assessed according to likelihood and potential consequences. A joint corporate project unit for international hydropower 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, 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. 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 and partner risk. Statkraft considers risk for each country. 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 influences 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. This also means new opportunities within renewable energy.