In keeping with the opening of the final customer market, the growth of wholesale markets and its international development, the EDF group is exposed to price variations on the energy market which can significantly affect its financial statements (see chapter 2.2.2-2C of the Universal Registration Document, “Energy market risks”).
Consequently, the Group has an “energy market” risk policy for all energy commodities, applicable to EDF and entities over which it has operational control.
The purpose of this policy is to:
The Group Risk Division presents an annual report on the implementation of this policy to the Board of Directors’ Audit Committee.
At entities not operationally controlled by EDF, the risk management framework is reviewed by the governance bodies.
The process for controlling energy market risks for entities operationally controlled by the Group is based on:
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 (the risk that the ceiling for volumes made available could be raised to 150TWh under the Energy and Climate law adopted in 2019, and more broadly, uncertainties over the outcome of the current discussions between the French government and the European Commission on changes to price regulations for nuclear power produced by the existing plants). 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. 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 when 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 four 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 18.7 to the 2020 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 are as (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 2020, 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.
None of these limits was exceeded in 2020. The stop-loss has never been triggered since its introduction.
For an analysis of fair value hedges of the Group’s commodities, see note 6 to the 2020 consolidated financial statements. For details of commodity derivatives, see note 18.7.4 to the same consolidated financial statements.
(1) The management framework, approved each year by the Group for each entity exposed to energy market risks, may include acceleration or deceleration schemes authorizing derogations from these defined trajectories in the event of breach of predefined price thresholds. Due to their derogatory nature from the general principle of gradual coverage, the implementation of such schemes is strictly supervised.
(2) EDF Trading evaluates VaR using a “Monte-Carlo” method which is based on volatility and historical correlations estimated from market prices observed over the last 40working days. The VaR limit applies to EDF Trading's overall portfolio.
