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. 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. The risk management is an integrated part of other governance through a risk-based system for the corporate management’s follow-up of the business areas. The Group’s overall risk profile is concluded by the Group management and is reported to the Board.
Market risk in energy markets
Statkraft is exposed to significant market risk in relation to production 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 power prices depend on production, consumption and transmission conditions in the electricity market
- Power prices are also indirectly impacted by gas, coal and oil prices, the price of carbon quotas, support regimes and introduction of new power production technology
- Gas power production is directly exposed to fluctuations in the gas, oil and carbon quota prices.
Statkraft manages market risk in the energy markets in part 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.
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 typically have a short lifetime compared with other activities before profitability is reduced as a result of competition 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. Net exposure is limited by securing symmetry in the exposure between the customers and purchases in the wholesale market, and by using financial instruments.
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 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 most important instruments in this management. 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 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. This particularly applies to implementation of investment projects and operational activities in the form of injury to the Group’s employees, contractors or third parties, harm to the environment, damage to production facilities and other assets as well as damage to reputation. Statkraft has insurance schemes that cover all significant damage types, for example through the Group’s own insurance company, and all projects in Statkraft implement systematic risk assessments.
The most critical aspects are in connection with development of Statkraft’s international activities. Major attention is devoted to development of sound systems and learning, establishing barriers and ensuring compliance to avoid delays, cost overruns and undesirable incidents. A joint project unit was established in International hydropower for Statkraft and SN Power in order to further reduce the risk associated with project implementation, and this was strengthened in 2014.
Estimates of the possible financial consequences of the total operational risk, as well as significant individual risks that are central drivers to the Group’s overall risk profile, are included in the reporting of overall risk at Group level.
Statkraft’s activities are impacted by framework conditions such as taxes, fees, regulations, grid regulations, changes regarding the required minimum water level, as well as general terms and requirements stipulated for the power industry in both Norway and other countries. The uncertainty in relation to the future development of these is highly emphasised in investment decisions.
Statkraft’s international investments involve both heightened country 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.
Climate change can present both threats and opportunities, and is of importance for all the risks described above. Significant changes to temperature and precipitation will have consequences for power prices and production, and 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.