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 for the year ended 31 December 2022.
Summary: 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 since the end of 2021, the uncertainty regarding the level of the Group’s French nuclear production, the possible increases in the ARENH ceiling (see risk 1A) by the French State, and the institution of a measure termed “tapping the infra-marginal windfall”, give rise to great uncertainty about the Group’s net exposure, and represent a major risk for the Group.
Criticality: ●●● Strong
In conducting its production, distribution and marketing activities, the Group does business in energy markets, primarily in Europe. Accordingly, 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.
The wholesale prices of these various commodities fluctuate with the supply-demand balance worldwide (for oil, coal and gas) or at European and national level (for electricity). These markets can experience significant and unpredictable price fluctuations, in both directions, as well as liquidity crises. As an example, the Ukrainian conflict entails significant risks for the supply of gas at European level, and this knocks on to the prices for gas traded on the various European marketplaces.
These exposures may thus impact the Group’s earnings and all of its financial indicators.
In France, the degree of exposure to market prices for electricity depends in particular 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 the regulatory framework in France and Europe, especially relating to ARENH”.
The French government announced on 13 January 2022, and further elaborated by the decree of 11 March 2022, that EDF should sell an additional 20TWh of ARENH to its competitors over the period from 1 April to 31 December 2022 at a price of €46.2/MWh.
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”), and the government decisions described above concerning the ARENH mechanism and the mechanism for appropriation of the infra-marginal income represent a major risk in terms of financial impact for the Group.
In these circumstances, the Group’s market actions expose it both to sizeable liquidity requirements to meet margin calls, and to increased counterparty risks in the event of default by its trading partners.
Lastly, the Group is exposed to numerous requests for information pursuant to the European regulation relating to wholesale energy market transparency and integrity (1).
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 “Management and control of market risks” for more detailed information on the associated principles and organisational measures). This policy serves to smooth the impact of price changes but cannot negate it. The Group remains subject to the contingencies affecting its production or the consumption of its customers, or to the structural trends of upward or downward movements in the commodity markets (see note 18.6 to the consolidated financial statements for the fiscal year ended 31 December 2022).
The level of hedging sought by the Group entails striking the right balance between reducing uncertainties due to price fluctuations and those due to changes in volume of the EDF portfolio.
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.
Summary: As a result of its activities, the EDF group is exposed to risks related to the financial markets, in particular an equity risk.
Criticality: ●● Intermediate
The Group is exposed to equity risk on securities held primarily as dedicated assets constituted to cover the cost of long-term commitments in relation with the nuclear business, in connection with outsourced pension funds and, to a lesser extent, in connection with its cash assets and investments held directly by the Group.
EDF is exposed to equity risks, interest rate risks and foreign exchange risks through its dedicated asset portfolio.
The market value of the listed equities in EDF’s dedicated asset portfolio was €11,697 million at 31 December 2022. The volatility of the listed equities at the same date was 17.04% based on 52 weekly performances, compared with 10.93% at 31 December 2021. Applying this volatility to the value of listed equity assets at the same date, the Group estimates the annual volatility of the equities portion of dedicated assets at €1,993 million.
(1) EU regulation no. 1227/2011, see section 3.3.2.2.4 “Integrity and transparency of the wholesale energy market (REMIT regulation)”.
