EDF maintains a close dialogue with the French State authorities on the issue of financing public energy service obligations in order to implement and secure the compensation mechanism, particularly with respect to working capital requirements, so as to secure payment by the French State at the end of the year and avoid year-on-year arbitration by the French State.
The EDF group, through its varied activities, is exposed to numerous financial and market risks. This section describes these various risks by addressing interest rate risk, financial market risk, energy market risk, foreign exchange risk, counterparty risk and liquidity risk. All of these risks could affect the Group’s ability to finance its investments. Financial and market risks are also discussed in the activity report (see section 5.1.6) and the appendices to the consolidated financial statements.
Résumé : 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 particular, the very high volatility of the energy markets, which are positioned at a very high level at the beginning of 2022, the drop in the Group’s French nuclear production, the optionality of the ARENH system and the possible increases in the ceiling (see risk 1A) by the State, as well as the Ukrainian conflict, give rise to considerable uncertainty about the Group’s net exposure and represent a major risk for the Group.
Criticality : ●●● Strong
a) Context : 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 connection exists between these markets: a fall in the prices of gas, coal, petroleum products or CO2 leads to a fall in electricity prices.
Various factors influence these price levels: commodity prices on world markets, the balance between supply and demand, and 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. For example, the Ukrainian conflict poses significant risks to the liquidity of energy markets.
This exposure may impact the Group’s turnover 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 associated with possible changes to the ARENH system are described in risk 1A “Changes in public policies and in the regulatory framework in France and Europe”.
The general framework of the Arenh system, due to its free optional nature, gives suppliers opportunities to arbitrate between the Arenh price and market prices, to EDF’s prejudice, and exposes EDF to major uncertainties that negatively impact the efficiency of its energy market risk management: the positive impact of increases in wholesale electricity market prices is limited when their total level (energy+ capacity) is above the ARENH price.
In addition, the French government announced on 13 January 2022 that EDF should sell an additional 20TWh of ARENH to its competitors over the period from1 April to 31 December 2022 at a price of €46.2/MWh. This decision, exposes EDF to a loss risk between the buy-back price of these volumes as defined by regulation and €46.2/MWh.
Finally, given the production difficulties of the French nuclear fleet following the discovery of stress corrosion phenomena (see risk 5A), EDF will be structurally a minimum buyer in 2022 in a context of low market liquidity and strong upward price pressure
Thus, the very high prices and highly volatile markets, combined with a significant drop in nuclear production for 2022 and 2023 (see risk 5A below – & Non-compliance with operating and/or activity continuation targets of nuclear plants (France and United Kingdom)") and the government decisions described above concerning the ARENH mechanism represent a major risk in terms of financial impact for the Group.
Finally, the Group is exposed to a risk of non-compliance with the EU Regulation on the transparency and integrity of the wholesale energy markets (EU Regulation No. 1227/2011, see section 3.3.2.2.4 “Integrity and transparency of the wholesale energy market (REMIT Regulation)”).
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 negate it: the Group remains subject to the structural trends of upward or downward movements in these markets (see note 18.6 “Market and counterparty risk management” of the appendix to the consolidated financial statements for the year ended 31 December 2021).
In addition, the hedging of the price risk inherently leads to a higher exposure to volume risk: the risk of having to buy back hedges at a higher price than when they were taken out, in case of lower availability of assets/higher customer sales than expected at the time of setting up these hedges. This risk is even greater given that the delivery prices are high in relation to the prices of the hedges put in place.
In addition, a Group REMIT Directive defines the expectations for ensuring that Group entities comply with the European regulation No. 1227/2011 on the transparency and integrity of wholesale energy markets.
