The basic principle for hedging is:
On the French electricity market, EDF is exposed to very high uncertainty over its net exposure due to the fact that the ARENH mechanism is optional and uncertainty regarding possible changes to the relevant regulations (in particular, the risk that the ceiling for volumes made available could be raised to 150TWh under the Energy and Climate law adopted in 2019). Since the volumes subscribed are only known shortly before the delivery period, EDF is obliged to use assumptions for ARENH subscriptions, which include prudence margins. In addition, suppliers have the possibility to revise upwards or downwards their Arenh subscription request at each half-yearly gate, subject to compliance with Article R336-16 of the Energy Code, which prohibits them from making requests in the opposite direction at the next half-yearly gate. For example, if a supplier brings its request to zero at one half-yearly gate, it cannot make an Arenh request at the next gate. EDF thus remains subject to risks that the assumptions may not correspond to reality, such that during the year it could find itself obliged to sell reserved volumes that in the end were not actually subscribed, or conversely to purchase volumes sold before the ARENH bids took place on the assumption that there would be no subscriptions. This risk is particularly high as the energy + capacity price on the wholesale market is close to the ARENH price (€42/MWh).
Given its close interaction with the decisions made in the generation, supply and trading activities, the energy risk management process involves Group management and is based on a risk indicator and measurement system incorporating escalation procedures in the event risk limits are exceeded.
The Group’s exposure to energy market risks through operationally controlled entities is reported three times a year to the Executive Committee. The control processes are regularly evaluated and audited.
The principles for operational management and control of energy market risks for the Group’s operationally controlled entities are based on strict segregation of responsibilities for managing those risks, distinguishing between management of assets (generation and supply) and trading.
The operators of generation and supply assets are responsible for implementing a risk management strategy that smoothes the impact of energy market risks on the variability of their financial statements (the accounting classifications of the hedges used are described in note 44 to the 2019 consolidated financial statements, “Derivatives and Hedge accounting”). However, they are still exposed to structural price trends to the extent of volumes that are not yet hedged, and uncertainties over volumes (relating to the ARENH system, generation plant availability, and customer consumption).
For operationally controlled entities in the Group, positions on the energy markets are taken predominantly by EDF Trading, the Group’s trading entity, which operates on the markets on behalf of other Group entities and for the purposes of its own trading activity associated with the Group’s industrial assets. Consequently, EDF Trading is subject to a strict governance and control framework, particularly the European regulations on trading companies.
EDF Trading trades on organised or OTC markets in derivatives such as futures, forwards, swaps and options (regardless of the accounting classification applied at Group level). Its exposure on the energy markets is strictly controlled through daily limit monitoring overseen by the subsidiary’s management and by the division in charge of energy market risk control at Group level. Automatic escalation procedures also exist to inform members of EDF Trading’s Board of Directors of any breach of risk limits (value at risk limit) or losses (stop-loss limits). Value at Risk (VaR) is a statistical measure of the potential maximum loss in market value on a portfolio in the event of unfavourable market movements, over a given time horizon and with a given confidence interval(2). Specific Capital at Risk (CaR) limits are also used in certain areas (operations on illiquid markets, long-term contracts and structured contracts) where VaR is difficult to apply. The stop-loss limit stipulates the acceptable risk for the trading business, setting a maximum level of loss over a rolling three-month period. If these limits are exceeded, EDF Trading’s Board of Directors takes appropriate action, which may include closing certain positions.
In 2019, EDF Trading’s commitment on the markets was subject to a VaR limit of €35 million, a CaR limit for long-term contracts and a CaR limit for operations on illiquid markets of €250 million each, and a stop-loss limit of €180 million.
Only the CaR limit for operations on illiquid markets was exceeded in 2019, temporarily and by a very small amount. The stop-loss has never been triggered since its introduction.
For an analysis of fair value hedges of the Group’s commodities, see note 44.5 to the 2019 consolidated financial statements. For details of commodity derivatives not classified as hedges by the Group, see note 45.3 to the same consolidated financial statements.
(1) The risk management frameworks, which are approved annually by the Group for each entity with exposure to energy market risks, may include acceleration or deceleration plans allowing departures from these trajectories if predefined price thresholds are exceeded. Since these plans do not comply with the general principle of gradual hedging, they can only be applied under strict conditions.
(2) EDF Trading estimates the VaR by the “Monte Carlo” method, which is based on volatilities and historical correlations measured using observed market prices over the 40 most recent business days. The VaR limit applies to the total EDF Trading portfolio.
