Link between strategy and risks

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Eneco has a number of important objectives which it pursues, its key performance indicators (KPIs). An overview of these KPIs can be found in the section Strategic KPIs.

The table below describes the main strategic risks and the corresponding measures to manage these risks. Subsequently, we describe a number of general risk in the form of market and regulation risks and financial and operational risks. Because the most important risks form the basis for this overview, it does not include strategic KPIs that are not related to these risks. A detailed description of the setup of risk management at Eneco is described in the chapter Governance, under the section Risk management that also describes our risk tolerance in more detail.

KPI 7: Share of sustainable electricity production in total supply portfolio (in %)

Risk

Explanation

Risk reduction

Low CO2 prices and changes in subsidy regimes

Implementation of the sustainability strategy is delayed as a result of government policy, such as changing subsidy schemes and continuously low CO2 prices. The price of CO2 certificates is low because too many certificates have been issued at a European level. Investments in wind energy, biomass and geothermal energy have long project development periods. Frequent changes in subsidy regimes lead to additional uncertainty. Both of these factors slow down the development of and investment in sustainable energy.

We strive to influence government bodies in various ways, with the aim to create a stable investment and financing climate and a level playing field between the different (sustainable and fossil fuel) technologies. In addition, Eneco spreads its sustainable investments across multiple countries and subsidy regimes.

KPI 10: Average energy supply interruption (in minutes)

Risk

Explanation

Risk reduction

Operational integrity of networks

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The energy supply is temporarily interrupted due to network faults.

Avoiding supply interruptions in the electricity and gas networks have the highest priority. We use technology to identify weak links and avoid interruptions. Examples include improvement of station automation, replacement of fault-sensitive components and preventing damages resulting from excavation. Fault indicators are used to identify defects quickly. These measures lead to shorter interruption durations. Old, fragile gas pipes are replaced. Special attention is paid to parts that are no longer available and to safety in public lighting networks.

KPI 13: LTIR group

Risk

Explanation

Risk reduction

Safety in connection with the construction and operation of production facilities and energy infrastructure.

We have extensive experience in the area of safety with respect to (working on) energy infrastructure and technical installations. However, investments in new forms of sustainable production, such as biomass installations or offshore wind farms leads to new safety risks.

We attach great importance to a good safety policy and put a lot of effort into our safety organisation. Proactive audits of our safety procedures are carried out on a continuing basis. Our contractors and subcontractors are also subject to these regulations and audits. Recently, we have developed Leading Parameters in addition to the Lagging Parameters. These parameters help us to identify and analyse safety incidents at an early stage. The Board and management carry out workplace inspections. Safety is at the top of the agenda at all regular meetings.

KPI 17: Credit rating

Risk

Explanation

Risk reduction

Independent Network Management Act and forced unbundling

On 22 October 2013, the European Court of Justice ruled that group prohibition for network managers and energy companies, the prohibition on ancillary activities and the privatisation prohibition limit the free movement of capital and can only be justified under certain conditions. The Court states that any limitations must be appropriate means for the Dutch State to achieve its objectives and may not go beyond what is necessary to achieve the objectives pursued. This must be assessed by a Dutch court.

The development of sustainable (decentralised) production of energy and smart energy networks (which are necessary for feeding back energy) are closely connected. From within the integrated Eneco Group, we can control these factors, both of which are necessary to increase the sustainability of energy. A forced unbundling will delay the development of a sustainable energy supply.

Eneco's preference scenario is the reversal of the unbundling process and the legal provisions with respect to forced unbundling (which are currently not applicable based on a previous ruling of the Court of The Hague) to become and remain ineffective. This is why Eneco continues the lawsuit. In connection with social challenges to keep energy clean, reliable and affordable, Eneco pleads with politicians to reconsider the grounds that led to the decision for this legislation years ago.  We simulate the effects of possible unbundling in the financial framework, in order to be able to anticipate possible consequences. It is important for the company to grow, to ensure that two sound companies remain after a possible unbundling.

Other top risks

Market and regulation risks

Risk

Explanation

Risk reduction

Development of production margins

The recession and the supply and demand situation in the energy markets have led to undesirable production margins. In particular, the spark spreads for gas-fired power stations are at such a low level that these plants cannot be employed profitably at present.

For the long term, the gas-fired energy plant is a necessary addition to our wind and solar energy capacity because of its production flexibility. In its investment strategy, Eneco has opted for the most flexible gas-fired power plant, which will be the first to be able to profit from increasing demand for production capacity that is capable of balancing fluctuations in wind energy supply and customer demand. For the short term, we expect that the deployment of the plant will be limited. This is why we have temporarily reduced the capacity by 50% by transferring one of the generators until a new one will be installed.

Chinese walls between the energy company and the network company

According to the Independent Network Management Act, grid administrators are obliged to maintain confidentiality with regard to customer data. If a grid administrator makes use of the services of an external party for processing customer data, such as a shared service centre, so-called 'Chinese walls' must be set up to ensure that the network manager’s customer data cannot be accessed by other parties.

Stedin and Eneco make use of a shared service centre. In this case, attention is constantly paid to the control measures that are to ensure an adequate protection of customer data. These measures are checked periodically by an independent party. The events at the fined energy companies were cause for us to re-examine our procedures, whereby the recently applied standards framework of the Authority for Consumers and Markets (ACM) was used as the point of reference. The results of this examination were shared with the ACM at our initiative.

Since then, a number of items have been improved. It has been agreed that progress with respect to further improvements suggested by us shall be shared with the ACM.

Financial and operational risks

Risk

Explanation

Risk reduction

Business Continuity

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For customers, interruptions in ICT systems can result in incorrect invoices or a lower level of service resulting from unavailability of buildings or employees. This could lead to reputational damage. Furthermore, interruptions in ICT systems used for trading purposes could result in financial damages.

We carry out assurance activities, such as audits and certification. Energy trade related activities are run on a separate, duplicated ICT platform. The Cyber Security Task Force monitors the adequacy of ICT security. In addition, as part of the safety aspect, all ICT security incidents are discussed with other grid operators to gain insight into our own cost level.  

Regulations and operational integrity of assets

The maximum rate that we, as the grid operator, are allowed to charge, is insufficient to finance all the costs and investments required for a reliable network (regulated domain pricing). Grid operation activities relate to the long term and require adequate and predictable pricing. Unexpected deviations result in an uncertain investment climate.

We participate in benchmarks. Management proactively participates in consultation bodies and communicates with government bodies to realise proper pricing for the necessary expenditures and investments.

Counterparty risk on banks relating to lease-and-lease-back transactions

In connection with its lease-and-leaseback transactions, Eneco has positions with three European banks in the form of deposits. At the balance sheet date this concerned an amount of $575 million (2012: $1.8 billion). Eneco is exposed to the related counterparty risk.

All parties involved have a Standard & Poor’s and/or Moody’s rating in the 'investment grade' segment. The counterparty risk is assessed frequently. Where possible, cross border lease transactions are terminated. In of 2013, eight transactions have been terminated prematurely. As a result, we have reduced counterparty risk on banks by $1.2 billion.

Creditworthiness of counterparties

Eneco is alert to financial losses stemming from the non-fulfilment of obligations by trading partners, producers and customers.

Limited mandates have been specified in the authority manual for each type of transaction. Counterparty credit checks are carried out up front. Open positions are evaluated regularly.