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.
Corporate risk process
Growth and increased internationalisation together with fundamental changes in the energy sector sets stricter requirements to risk management. Risk management is an integrated part of Statkraft’s governance model through a risk-based approach to target setting, prioritisations and follow-up of the business and staff areas. The Group's overall risk profile is concluded by Corporate Management and is reported to the Board. Statkraft has a central Investment Committee that ensures an appropriate quality assessment of risks prior to investment decisions and across the project portfolio.
Market risk in 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 price risk:
- Both power prices and production volumes are impacted by weather conditions and precipitation volumes, while power prices also depend on production and consumption volumes as well as transmission conditions in the electricity market.
- Power prices are also impacted by fuel prices such as gas, coal and oil, in addition to the price of carbon quotas, support schemes and the introduction of new power production technologies.
Statkraft manages market risk in the energy markets by trading physical and financial instruments in multiple markets, as well as entering into bilateral long-term power contracts. 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 typically have a 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 management 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 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 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 markets
- 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 most 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 vis-à-vis individual counterparties are 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 Corporate Management and the Board.
All processes throughout the value chain are exposed to operational risk. The operational risk is highest within implementation of our investment projects and operational activities. This may result in:
- Injury to employees, contractors or third parties
- Harm to the environment
- Compliance breach and weakened reputation
- Damage and losses related to own and third-party production plants and other assets
- Financial loss
Statkraft's first priority is to execute development activities and operations in a responsible manner. Statkraft does not tolerate and works actively against any act of economic crime, and a series of corruption and fraud prevention activities are being implemented to build a strong compliance culture and high ethical standards. Risk management at early stages of the development for an investment project is an important success factor. 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 risks, 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 carry out systematic risk assessments. This takes place through each project:
- Having an allocated project reserve for larger investments
- Implementing follow-up and reporting of factors of importance for project development and execution
- Evaluating and planning measures to manage risk in the project
Major attention is devoted to development of sound systems for learning, establishing barriers and ensuring compliance to avoid delays, cost overruns and undesirable incidents during project planning and execution.
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 the overall risk at Group level.
Regulatory, country and partner risk
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 international involvement, Statkraft is also directly exposed to national framework conditions, tax levels, licence terms and public regulation in other countries. Statkraft therefore greatly emphasises the uncertainty in relation to the future development of these factors 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.
Furthermore, Statkraft is exposed to a significant country risk, especially in emerging countries, as well as 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 the Group’s policy and procedures. The standards have been set out and made available in the Statkraft Way management system. The standards are also communicated to all partners and suppliers.
Climate change, technology development and changed consumer behaviour is of importance for all the risks described above and are important drivers for changes in framework conditions and political decisions. The increased uncertainties of the energy markets represent both threats and opportunities. To exploit these opportunities or avoid the loss of not exploiting them, Statkraft continuously monitor the technology development and identify potential business opportunities or threats. Adaptation of future maintenance investments and operating philosophy to the new risks will be important to enhance the ability of maintaining the value of Statkraft's assets in spite of lower electricity prices. To succeed in developing new business models and future value creation in selected emerging markets, Statkraft seeks to develop agile, cost effective and robust decision making.