Annual report - HSE

2.12.2 Operating risks
Market risk
The change in market structure, increasing RES production, constant price fluctuations
of electricity and other primary energy products brought numerous business challenges
as well as control over management of market risks. For the HSE Group, a systematic
recording, valuation and risk control is a key element of professional risk management
which must at the same time enable the sizing of new market opportunities.
The risk management policy is based on rules, strategies, decisions and registers adopted
in the period 2008-2012, and has been designed to ensure an increase in the value of HSE
by assuming risks that fall within the prescribed limits and to enable identification and
exploitation of market opportunities. The risk management process is incorporated in daily
operations of HSE.
Based on the adopted market risk management policy, HSE monitors exposure of
portfolios (groups of transactions with similar purpose) on the level of individual portfolios
as well as overall exposure of all portfolios, for individual trading years as well as for the
whole trading period.
From the analytical perspective, HSE continues with the development of tools for monitoring
influencing factors of market exposures in trade. This predominantly involves monitoring
of price dynamics, volatility and correlations in individual markets in certain periods, and
the company’s position. Parallel to that, improvements and amendments are being made
to the optimisation models and projections of future operation of power plants owned by
the company. In addition, models and mechanisms are being prepared to provide a data
base for new products with which the company may, given the circumstances, trade in the
future.
Market risk associated with market illiquidity
Market risks arising from market illiquidity occur on the markets with lower trading
quantities on the supply or demand side. Such exposure can also arise due to low market
participation of traders or non-conclusion of EFET agreements. The result is inability, or
inappropriate timing, to close a position or closing of a position at unfavourable prices.
In view of operations and risk management of HSE, the illiquid wholesale electricity
markets or countries are those where there is no market organiser or electricity exchange.
In 2012, risks were managed with the following activities and methods:
• Segmentation and prioritisation of markets and partners;
• Design of a margin policy in relation to market liquidity and market conditions;
• Promotion of long-term relations with partners;
• Conclusion of contracts with adequate maturity and sufficient contractual safeguards;
• Daily analysis of the company’s position, trading quantities and product prices in illiquid
markets, and of the coverage used for price fluctuations for transactions aimed at
generating added value or minimising the risk of losses in accordance with the principle
of good management;
• Limitation of trade or open position of the company HSE in illiquid markets;
• Trading with instruments for hedging against price risks;
• Conclusion of EFET agreements.
Market risk associated with non-transparency of the market
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Market risks associated with non-transparency arise from the markets that can be
characterised by conclusion of transactions at unfavourable prices, incorrect valuation
of price curves and, subsequently, incorrect valuation of the HSE’s portfolio. In view of
operations and risk management of the company HSE, the non-transparent wholesale
electricity markets are identical to illiquid markets.