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The development of prices on commodity Glossary markets is of central importance to our earnings situation, especially in the field of electricity generation. For example, decreasing electricity prices or rising fuel costs may lead to a decline in generation margin contributions. However, opportunities arise from counteracting price trends. In our upstream business, changes in the market price of oil and gas can influence our earnings. Another area exposed to risk is the supply business. This is in part because it is possible that increasing procurement costs may not be fully passed through to end-customer prices, or because changes in temperature may lead to unexpected fluctuation in demand. We assess the price risks to which we are exposed on the procurement and supply markets taking account of current forward prices and expected price volatility. Commodity risks faced by generation and supply companies are managed by following hedging rules established by RWE AG. In the generation business, we limit risks by selling most of our electricity early on, via forward contracts and hedging the price of fuels and emissions certificates needed for this output.
RWE Supply & Trading plays a central role when it comes to hedging commodity price risks. The company is the RWE Group’s interface to the world’s wholesale markets for energy and energy commodities, while serving as an internal transaction partner for hedging commodity Glossary risks. It markets large portions of the Group’s generation position and purchases the fossil fuels and CO2 emissions certificates needed to produce electricity. Through its role as internal transaction partner, it limits the earnings risks stemming from price swings on energy markets for the generation and supply businesses and creates a stable basis of calculation. RWE Supply & Trading thus pools the risk and value added from commodity transactions for the Group and pools the expertise for these transactions centrally. RWE Supply & Trading also uses commodity derivatives based on contracts that are settled physically (delivery) and financially (cash settlement) to minimize risk in the procurement and sales businesses. The trading activities are not exclusively oriented towards limiting risks. RWE Supply & Trading undertakes proprietary trading in adherence with limits, in order to make use of changes in prices on energy markets.
The RWE Group’s integrated trading and risk management system for energy trading is firmly aligned with best practice as applied to the trading business. Transactions are concluded with third parties only if certain credit risk limits can be complied with. Groupwide guidelines provide structures and processes for the treatment of commodity risks and associated credit risks in respect to third parties and within the Group. The commodity price risks in our generation and supply companies are constantly monitored and reported to the responsible bodies, including the Risk Committee of RWE AG. Furthermore, the Executive Board of RWE AG is kept informed of our consolidated risk positions in the field of commodities by way of quarterly reports.
The upper risk limits in the energy trading business are set and constantly monitored by the Executive Board of RWE AG. Among other things, we calculate the Value at Risk (VaR) to quantify price risks. The central risk controlling parameter is the Global VaR, which limits trading activities of RWE Supply & Trading and may not exceed €40 million. The VaR figures within the RWE Group are based on a confidence Glossary interval of 95 % and a holding period of one day. This means that, with a probability of 95 %, the maximum daily loss does not exceed the Global VaR. In fiscal 2008, RWE Supply & Trading’s Global VaR averaged €12 million, and the daily maximum was €17 million. However, our risk analysis is not only based on the amount of VaR. We also factor in extreme scenarios, determine the influence they can have on liquidity and earnings, and take suitable measures if necessary.
