In order to sell its output, the Group is exposed, directly or indirectly, to the prices of the European wholesale energy markets and capacity markets, the levels of which impact its financial position.
In conducting its production and marketing activities, the Group does business in energy markets, primarily in Europe. As such, the Group is exposed to changes in wholesale market prices: electricity – energy prices and prices of capacity guarantees for the countries concerned -, gas, coal, petroleum products, CO2 emission quotas(see section 5.1.2 “Economic environment” for information on recent changes in these prices). A connexion exists between these markets: a fall in the prices of gas, coal, oil products or CO2 leads to a fall in electricity prices. In view of the dominant position of nuclear generation in the EDF fleet, which requires neither gas nor coal and does not emit CO2, the fall in the price of these commodities has a very limited positive impact for the Group compared to the negative impact of the resulting drop in electricity prices.
Various factors, over which the Group has no control, influence these price levels: commodity prices on world markets, the balance between supply and demand, but also pricing and tax policies or subsidies allocated to certain means of production. As a result, these markets can experience significant and unpredictable price increases and decreases, as well as liquidity crises.
This exposure thus impacts the Group’s revenue and all of its financial indicators. In particular, persistently low electricity prices may affect the profitability of the Group’s generating units and, more broadly, the value of its assets, as well as the conditions for their maintenance, their life expectancy and any renewal projects.
In France, the degree of exposure to market prices for electricity depends on the level of sales under the ARENH system currently applicable until the end of 2025, which in turn depends on the level of market prices and potential regulatory changes. The risks related to possible changes in the ARENH system are described in Risk 1B “Changes in the regulatory framework”.
The Group manages its exposure to energy markets through a specific energy market risk policy, which is essentially aimed at gradually reducing uncertainties regarding the level of its financial results in the coming years (see section 5.1.6.2 “Management and control of energy market risks” for more detailed information on the associated principles and organisations). This policy serves to mitigate the impact of price changes but cannot be used to negate them: the Group remains subject to the structural trends of upward or downward movements in these markets (see Note 18.6 “Market and counter party risk management” of the appendix to the consolidated financial statements for the year ended 31 December 2020).
In addition, a Group REMIT Directive defines the expectations for ensuring that Group entities comply with the European regulation n° 1227/2011 on the transparency and integrity of wholesale energy markets (see section 3.3.2.2.4 “Compliance with theREMIT regulation”). However, there is a risk that it may not be possible to ensure compliance with this regulation.
Due to the diversity of its activities and their geographical distribution, the Group is exposed to the risks of fluctuations in foreign exchange rates, which may impact currency translation adjustments, balance sheet items and the Group’s financial expenses, equity and financial position.
Due to the diversification of its activities and geographical locations, the Group is exposed to the risk of exchange rate fluctuations, which may have an impact on the translation differences affecting balance sheet items, Group financial expenses, equity, net income and project internal rate of return (IRR).
As the Group is involved in long-term contracts, an unfavourable currency fluctuation could have consequences on project profitability. In the absence of hedging, currency fluctuations between the euro and the currencies of the various international markets in which the Group operates can therefore significantly affect the Group’s results and make it difficult to compare performance levels from year to year. If the euro appreciates (or depreciates) against another currency, the euro value of the assets, liabilities, income and expenses initially recognised in that other currency will decline(or increase). Moreover, insofar as the Group is likely to incur expenses in a currency other than that in which the corresponding sales are made, fluctuations in exchange rates could result in an increase in expenses, expressed as a percentage of turnover, which could affect the Group’s profitability and income.
To limit exposure to foreign exchange risk, the Group has introduced the following management principles:
Like all economic operators, the Group is exposed to possible default by certain counter parties (partners, subcontractors, service providers, suppliers or customers).
A default by these counter parties may impact the Group financially (loss of receivables, additional costs, in particular if EDF is required to find satisfactory alternatives or take over the relevant activities or pay contractual penalties).
The Covid crisis may lead to a risk of some of the Group’s counter parties defaulting. The Group remains vigilant, particularly with regard to industrial counter parties that could be weakened by this downturn in the economic situation. To date, there has not been any discernible material impact on the Group’s commercial counterparties.
The risk may be hedged by the use of margin calls.
Furthermore, the Group has a counterparty risk management policy which applies to EDF and all operationally controlled subsidiaries. This policy sets out the governance associated with monitoring for this type of risk, and organisation of the counterparty risk management and monitoring. The policy also involves quaterly consolidation of the Group’s exposures. The CRFI (Financial Risks Control) Department closely monitors Group counterparties (daily review of alerts, special cautionary measures for certain counterparties).
At 30 September 2020, 92% of the Group’s exposure concerns investment grade counterparties, mainly as a result of the predominance of exposures generated by the cash and asset management activity, as most short-term investments concern low-risk assets.
