The process of defining the Group’s strategies is accompanied by an accurate analysis of the risks and opportunities connected with those strategies.
Identifying those risks and opportunities within the Enel Group’s strategic and industrial planning process is designed to span the horizon of the Plan in an integrated manner.
Although the strategy underlying the Plan, as described above, envisages a phase of careful analysis and verification of the strategic risk factors and variables, it retains scenario assumptions regarding future events that will not necessarily occur, as they depend on variables that cannot be controlled by management. Upside and downside developments may occur as time unfolds.
Before being able to approve the Strategic Plan, a quantitative analysis of the risks and opportunities associated with the Group’s strategic positioning is presented annually to the Control and Risk Committee appointed by the Board of Directors. In particular, risk factors such as exchange rates, inflation, prices and volumes, regulatory developments, industrial growth,customer portfolio and efficiency, weather and climate events and risks connected with the competition are identified.
Based on the nature of the risk and opportunity drivers, the analytical approach that best represents their volatility is selected. In practice, we perform probabilistic analysis for all those variables whose market time series provide a robust foundation to estimate levels of correlation and representative volatility for future risk, and a deterministic analysis(1) based on what-ifs and expert judgments of the possible evolution of the business with respect to the main risk factors for the execution of the Business Plan.
The validity of the results is also monitored with ex-post analyses by risk cluster. In 2019, most of the actual upside and downside events fell well within the limits estimated by the risk models of the Strategic Plan presented at the end of 2018. Focusing on the stochastic risk analysis for the Strategic Plan, exchange rates and the volatility of energy and commodity prices represent almost all the volatility of the drivers. In particular, in addition to the dollar the most impacting currencies are the Argentine peso, the Colombian peso and the Brazilian real.
Nevertheless, the Group’s very structure ensures that the volatility of the South American currencies has only a negligible impact on net income, as demonstrated in the presentation at the Capital Markets Day. Italy and Spain represent more than half of the Group’s risk in terms of the impact of the volatility of energy prices and commodity price fluctuations on margins. Examining the other risk factors, we can see that geographical diversification significantly reduces the exposure to the risk associated with renewable resources – a highly positive factor considering the Group’s positioning and the steady expansion of renewable generation – while macroeconomic risks such as inflation and electricity demand are less significant than the others. In general, the Group can rely on a number of implicit correlations between risk factors to create diversification effects that significantly mitigate total exposures. These include our geographical diversification, or developments in exchange rates and inflation rates, or those in commodity prices and their impact on generation costs and revenue.
With regard to the risk factors estimated deterministically, note:
- the monitoring of all possible regulatory issues, including those connected with climate legislation, is crucial for assessing any upside or downside impact on the Group;
- the estimates based on stress testing of the drivers of industrial growth (mainly renewables and grids);
- the estimates of the impact of not achieving the customer portfolio (retail markets and Enel X).
(1)Stochastic analysis conducted with the Monte Carlo method.