Risk management is at the core of everything we do within the Group – the core of the products we supply to our customers and the core of everyday thinking and operations. Without professional risk management in the short and long term, we cannot achieve a sustainable Group which can deliver excellent results now and in the future, as well as good service to our customers and investors. Sustainability depends on good risk management and results in a financially sound and well-functioning Group that is well-equipped for future challenges.
The Energi Danmark Group business model is based on being one of the leading Northern European energy trading companies. Our activities include:
When trading energy products on various markets, Risk Management becomes a very important part of the business model. The Energi Danmark Group is exposed to different kinds of risks including (among others) market risks, liquidity risks, credit risks, volume risks, currency exchange risks, operational risks and interest rate risks.
In order to handle these risks, the parts of the organisation responsible for sales, purchasing and trading have included relevant Risk Management procedures and internal controls in their daily operations.
The responsibility, however, for measuring and evaluating risk exposure levels and monitoring adherence to risk lines sits with the Risk Management department. The Risk Management department is independent of the departments managing the risks.
The Board of Directors has set the lines within which exposure to risk is permitted. The Risk Management department compares actual exposure levels with the lines given by the Board on a daily basis.
In case of a breach, the Board should be informed immediately and exposure is to be reduced to below these lines. All derivative activities for Risk Management purposes are carried out by specialist teams that have the appropriate skills, experience and supervision. The Board of Directors reviews and agrees policies for managing each of these risks, which are summarised below.
The market price for electricity has proven quite volatile and subject to changes and events that cannot be predicted.
The spot price is determined hourly on the physical exchanges and forms the basis for financial trading of electricity on futures and forward contracts.
The price risk from selling electricity with fixed price elements are hedged by buying corresponding financial contracts on the exchange markets thereby securing Energi Danmark the contract margin.
Another market risk is the volume risk when trading electricity based on future prices (with fixed price elements) because the corresponding price hedge needs to match actual customer consumption volumes in order to avoid ineffective hedging positions. Combined customer consumption is monitored on a regular basis in order to predict and adjust the corresponding hedging position.
Being present in multiple countries with different currencies (primarily DKK, NOK, SEK and EUR) also exposes the Group to fluctuations and changes in exchange rates against DKK. Exposure is monitored on a daily basis and the Group enters into FX contracts in order to hedge exposure, thereby minimising the risk.
To manage all of these risks, the Risk Management department is using an ETRM-system (BRADY-ETRM). BRADY-ETRM is the foundation for calculating daily exposure using both VaR-based models and models developed inhouse showing day-to-day risks and MWh-exposure. BRADY-ETRM contains almost all of Energi Danmark’s positions/ contracts, which are used as a basis for calculating the exposure using price curves derived from exchange quotes (where applicable).
In Energi Danmark, many of the working capital requirements from trading activities exist due to funding the purchase of electricity for delivery to our customers. Especially since the Wholesale Model was implemented, the liquidity requirement has increased by the end of each month, but rapidly declines at the beginning of the following month. The increase is due to the fact that Energi Danmark has to pay grid companies/Energinet.dk for customer consumption-related energy taxes, transportation of electricity and PSO before receiving payments from customers.
The liquidity risk is managed and monitored on a daily basis and a cash flow prognosis showing expected future
cash movements is maintained.
When trading electricity on the exchanges, there is usually a requirement for margin calls to be covered by collateral. The amount to be covered is calculated by the exchanges every day and sent to Energi Danmark. Back office receives and monitors the collaterals, always making sure that sufficient collateral is in place.
Energi Danmark has sufficient liquidity and collateral lines to support the business.
When trading electricity, financial contracts, other goods and commodities with customers, counterparts and exchanges, Energi Danmark is exposed to a credit risk.
The credit risk exposure depends on the creditworthiness of the customers and counterparts. The customers are primarily to be found within the public sector, utility sector and across business markets (B2B). Counterparts are typically established companies trading with commodities.
All customers and counterparts are subject to a credit rating before starting to trade. Existing customers and counterparts are also reevaluated on an ongoing basis, especially when new contracts are due to be signed. To do the credit rating Energi Danmark uses a credit rating score model from an external party. If the score is below certain predefined levels a manual credit rating is done as well, either accepting the new contract or asking for additional security before signing. Counterparts are all evaluated and given a line of exposure within which daily exposures are calculated and monitored by the Risk Management department.
It is the credit rating policy not to decline any customer that would like to trade with Energi Danmark; however, when evaluating the credit score and, if necessary, security requirements, the Finance department demands high standards. The necessity of maintaining high standards has become even more relevant since the Wholesale Model was implemented, because losses from customers not paying their energy taxes and the transport of electricity have shifted from grid companies/Energinet.dk to trading companies like Energi Danmark.
Energi Danmark is partly financing its operation with loans from banks. The loans are subject to a variable interest rate. Cash flows and interest rate levels are monitored on a regular basis.
Part of the interest rate risk is hedged using interest rate swaps. The corporate bond interest rate is based on CIBOR + fixed margin.