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EDP Renewables 2013 Annual Report

Internal Control and Risk Management III

6. OPERATIONS

I.VII.3. WIND TURBINE PERFORMANCE RISK

Wind farm output depends upon the operating availability of the turbines and the operating performance of the equipment, mainly the components of wind turbines and transformers.

MANAGEMENT OF WIND TURBINE PERFORMANCE RISK

EDPR mitigates this risk by using a mix of turbine suppliers which minimizes technological risk, avoiding exposure to a unique manufacturer.

EDPR also engages wind turbine suppliers through medium-term full-scope maintenance agreements to ensure alignment in minimizing technology risk. Finally, EDPR has created an O&M program with adequate preventive and scheduled maintenance program.

Most recently, EDPR is externalizing non-core technical O&M activities of its wind farms, while primary and value added activities continue controlled by EDPR.

I.VII.4. CURTAILMENT RISK

Curtailment occurs when the production of a wind farm is stopped by the TSO (Transmission System Operators) for external reasons to the Company. Examples of cases of curtailment are upgrades in transmission lines, high level of renewable generation production with low demand (very exceptional).

MANAGEMENT OF WIND TURBINE PERFORMANCE RISK

Curtailment risk is managed ex-ante. For every new investment, EDPR factors the effect that expected curtailment will have on the output of the wind farm. Curtailment analysis is done considering the existing situation and potential upgrades of the transmission system in the location of the wind farm.
Curtailment of EDPR’s wind farm is constantly monitored by asset managers.

I.VII.5. COUNTERPARTY OPERATIONAL RISK

Counterparty operational risk is defined as the risk that the counterparty to a transaction could default before the final settlement of the contract implying no direct economic loss to EDPR, but a replacement cost. Despite no exposure to the counterparty at the time of default, the replacement of the counterparty could imply a cost to EDPR due to potential delays, higher contract value with a new counterparty, etc.

Construction and O&M subcontractors are counterparties to which EDPR is exposed from an operational point of view.

MANAGEMENT OF COUNTERPARTY OPERATIONAL RISK

To minimize the probability of incurring in potential replacement costs with counterparties, EDPR ́s policy concerning counterparty operational risk is managed by an analysis of the technical capacity, competitiveness, credit notation and replacement cost of the counterparty.

54. RISK FUNCTIONS AND FRAMEWORK

Risk Management at EDPR is supported by three distinct organizational functions, each one with a different role: Strategy (Risk Profiler), Management (Risk Manager) and Controlling (Risk Controller).

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These three Risk Functions work together following EDPR’s risk framework, through which major strategic questions of the Executive Committee are translated into specific guidelines or policies, to be used by managers in their day-to-day decisions. The Risk Committee is the forum where the different Risk Functions discuss the policies to be implemented and control the risk exposure of the Company.

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RISK COMMITTEE

EDPR’s Risk Committee integrates and coordinates all Risk Functions and assures the link between corporate’s risk appetite and defined strategy and the operations of the Company.

In order to separate discussions on business decisions from new analyses and the definition of new policies, EDPR has created two distinct meetings of the Risk Committee with different periodicity:

  • Restricted Risk Committee: Held every month, it covers the risk of new transactions such as new power purchase agreements, new investments, energy price and FX hedges along with pipeline status and the EBITDA at Risk. It helps to control the implementation of defined policies and the exposure to most important risk factors.
  • Risk Committee: Held every quarter, it is the forum where new analyses are discussed and newly defined policies are proposed in order to send to the Executive Committee for approval. Additionally, EDPR ́s overall risk position is reviewed.

55. RISK POLICIES

With the purpose of not only controlling risks, but also managing them ex-ante, EDPR has created Global Risk policies that are enforceable at a Global Level. These policies are proposed and discussed in the Risk Committee and approved by the Executive Committee.

During 2013, EDPR defined or reviewed four Global Risk Policies, which are already implemented or in the process to be implemented throughout 2014:

  • Energy Price Hedging Policy
  • Counterparty Credit Risk Policy
  • Country Risk Policy
  • FX Risk Policy

Compliance with Global Risk policies is verified every month in the Restricted Risk Committee.