Link between strategy and risks

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 [pagina]. 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.

KPI 4: in 2013, 20% of the total retail supply portfolio is sustainably produced electricity

Risk

Explanation

Mitigating actions

Slower development of sustainable strategy due to government policy such as changing subsidy systems and structurally low CO2 prices.

The price of these certificates is low due to the large number of CO2 certificates that have been issued. 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 convince government bodies in various ways of the importance of creating a stable investment and financing climate with a level playing field between the different technologies (sustainable and fossil fuel).

Lower sustainable energy production due to less wind force and/or sunshine.

When our wind turbines and solar panels produce less energy as a result of unfavourable weather conditions, our sustainable electricity production decreases.

We use weather trend analyses to determine the optimal locations for investing in new wind and solar power production facilities.

KPI 6: In 2013, the average duration of interruptions of the energy supply is 14.7 minutes or lower (for electricity, gas and heating)

Risk

Explanation

Mitigating actions

Temporary interruption of energy supply due to faults in networks.

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Each year, we make substantial investments in the reliability of our networks. Fault indicators in the networks reduce the duration of interruptions. We develop self-healing grids. We have a certified asset management programme. In the spring of 2012, a campaign was launched to prevent damage to our networks resulting from excavations by third parties.

KPI 7: In 2013, 20% of the retail electricity supply portfolio is dark green electricity

Risk

Explanation

Mitigating actions

Decrease in dark green electricity sales due to strong price competition from alternative forms of energy generation.

In recent years, there was a strong increase in price competition in the Dutch electricity market. Dark green electricity only has a small market share and is not always the cheapest alternative.

Continuous price comparison with other suppliers. Further expansion of distinctive image, products and services. Emphasise the social importance of sustainable energy.

KPI 9: In 2013, LTIR is 1.6 or lower

Risk

Explanation

Mitigating actions

Safety incidents due to insufficient safety during 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, the growth in the area of sustainable production leads to new safety risks.

Eneco has an adequate safety policy and safety organisation. The safety policy applies for all our employees, materials and contractors. Our management stimulates safe conduct. We have an incident reporting system, carry out risk analyses, give training and carry out workplace inspections.

KPI 12: The credit rating of the Eneco group is at least A-

Risk

Explanation

Mitigating actions

Lower credit status, for example due to forced unbundling or inadequate financial results.

A forced unbundling of the Eneco organisation leads to a less solid financial basis and the loss of the many benefits resulting from collaboration between the different disciplines. Unbundling of the company poses a threat to our sustainability strategy.

Start legal proceedings against forced unbundling.

Tools that are used to monitor the financial performance include scenario analyses and stress tests.

Risk

Explanation

Mitigating actions

Counter party risk in large investment projects.

We will invest approximately € 900 million in the reliability of our networks and energy production in 2013.

Complex projects are assessed by a team of experts. Realised investments are carefully evaluated. We take into account the mix of realised investments and new development investments that do not yet generate result.

Risk

Explanation

Mitigating actions

Profitability of gas plants and bio-fermentation installations decreases due to higher gas and biomass prices and/or lower electricity price.

Due to the economic recession, the price of electricity has dropped. The gas price is linked to the continuously high oil price, while the price of coal was significantly lower. The price of biomass is volatile, because this is usually purchased locally.

Hedging policy: In accordance with the specified trading mandates, gas is purchased (in advance) and/or electricity is sold when the prices are relatively good. However, this is not a solution for structurally low prices.

Risk

Explanation

Mitigating actions

Operational performance is unsatisfactory, for example due to interruptions in ICT systems.

With respect to customers, interruptions in ICT systems can result in incorrect invoices which leads to reputational damage. Interruptions in ICT systems used for trading purposes can result in significant financial damages.

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.

The maximum rate that we, as the grid administrator, are allowed to charge is insufficient to finance all the costs and investments required for a reliable network (regulated domain pricing).

Grid administration activities relate to the long term and require adequate and predictable pricing. Unexpected deviations result in an uncertain investment climate.

We participate in benchmarks for controlling internal costs. Management proactively participates in consultation bodies and communicates with government bodies to achieve proper pricing.

Counterparty risk with banks relating to lease-and-lease-back transactions.

Eneco has positions with five banks in the form of deposits relating to lease-and-lease-back transactions to an amount of USD 1.8 billion at 31 December 2012 (2011: 2 billion). Eneco is exposed to the related counterparty risk.

All five banks have a Standard & Poor’s and/or Moody’s in the 'investment grade' segment. The counterparty risk is assessed frequently. We apply an active policy with regard to settling the current transactions. This resulted in the settling of three of these contracts in 2012.

A detailed explanation of the way in which we have organised risk management is included in the chapter on Governance, under Risk management. This chapter also contains more information on risk tolerance.