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 of current hedging policy is:
For electricity generated in France, EDF is exposed to very high uncertainty over its net exposure due to the fact that the ARENH scheme 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). Since the volumes subscribed are only known shortly before the delivery period, EDF is obliged to use assumptions for ARENH subscriptions. 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. Also, on 13 January 2022 the French government announced that EDF would have to sell an additional 20TWh to competitors under the ARENH scheme for the period 1 April to 31 December 2022 at the price of €46.2/MWh. The practicalities of its implementation remain to be defined in detail, but this decision exposes EDF to a risk of loss equivalent to the difference between the market price of volumes purchased on the wholesale markets and the price of €46.2/MWh.
The energy risk control 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 quarterly 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 2021 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). In view of the controls of the nuclear fleet announced on 13 January 2022, and announcements of additional ARENH volumes, the volume risk in France is particularly high for 2022.
For operationally controlled entities in the Group, positions on the energy markets are taken predominantly by EDF Trading, which as the Group’s trading entity executes most of the Group’s purchase/sale orders on the wholesale markets. 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 in relation to the trading margin 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 2021, EDF Trading’s commitment on the markets was subject to a VaR limit of €35 million from 1 January to 31 October, then €70 million from 1 November, a CaR limit for long-term contracts and a CaR limit for operations on illiquid markets of €250 million each throughout the year, and a stop-loss limit of €180 million from 1 January to 31 October, then €210 million from 1 November.
In an extremely volatile market environment, the VaR and stop-loss limits were exceeded during the second half of 2021, triggering the procedures defined for such situations. Both indicators had returned below their limits at 31 December 2021.
For an analysis of fair value hedges of the Group’s commodities, see note 6 to the 2021 consolidated financial statements. For details of commodity derivatives, see note 18.7.4 to the 2021 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 a “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.
