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Strategic Risks

Proper functioning of the risk management system and the Group's internal control system is an additional guarantee of Strategy implementation.

The Company controls exposure of strategic goals to risks by breaking down strategic goals to the level of strategic priorities and strategic targets, and by identifying and assessing risks, implementing procedures for internal control and risk management, which ensure achievement of strategic goals.

In July 2020, as part of the updated Inter RAO Development Strategy  until 2025 the Board of Directors identified and approved the list of strategic risks which can cause a decline in the Group's strategic goals. Measures for managing strategic risks are provided for in the new Strategy.

Changes to the regulatory rules on the electric power, capacity, and thermal power markets

At the level of the Russian Ministry of Energy, there is a discussion of a new model of retail electricity market functioning, which provides for increased competition between utility companies and simpler direct relations of buyers with generating companies due to reducing limitations for consumers to become wholesale market players, which may have a considerable impact on the dominance of the supplier of last resort (SLR) and cause a decline in profitability of SLR operation.

The model of retail electricity market functioning may change due to the fact that there will be no separation of grid and utility companies, which may cause a change in the market share of Inter RAO Group, a change in the business model of the Group's retail segment operation, and a decline in the profitability of the Group's sales segment.

Stricter legal requirements for utility companies in terms of financial discipline, quality of services provided to consumers, etc. can cause increased future expenditure of utility companies on ensuring that their operations meet the requirements, and potentially a loss of SLR status in some cases.

Development of legislation in relation to smart meters (SM) poses a threat to utility companies: they can lose points of contact with customers, increased cost of SM maintenance, etc.

Possible changes in the rules for electricity and capacity market functioning, including a change in the methods for calculating necessary capacity reserves in the Unified Energy System, growth of fines for the lack of equipment readiness, a change in the procedure for setting prices for electricity on the day-ahead market, etc. can cause negative consequences for Inter RAO Group.

Regulator may make decisions on "freezing" tariffs, reducing or revising the procedure for forming them.

Risks associated with climate change

Physically, consequences of climate change may be the following: increase in the average air temperature, drought and thawing soil. They may have a negative impact on Inter RAO operations.

When the average annual air temperature increases in the regions where heat-selling companies operate, the heating season will decrease, which will cause a decline in heat output and revenue.

Currently, in Russia and in the world, there has been a trend towards stricter laws regulating greenhouse gas emissions, which is simultaneous with development of renewable energy sources use. This may pose a threat to CHPP operation.

State regulation of greenhouse gas emissions may become stricter, including fees for regulated organizations for exceeding target levels of greenhouse gas emissions, carbon units, due to the fact that Russia joined the Paris agreement.

There is a risk of reduction (to complete stopping) of electricity export due to a carbon tax imposed in the EU.

Reduced demand for electric and thermal power

Further development in terms of optimizing electricity consumption schedules (active energy complexes), industrial consumers developing their own generating facilities (distributed generation), use of energy-saving, environmentally friendly and energy-efficient equipment in industries, and optimized power consumption by consumers (demand aggregators) will reduce the demand for electricity.

Due to implementation of measures for improving the energy efficiency of consumers (including installation of individual heat meters), and factors of further growth of heat cost as part of the centralized system, it is possible that several industrial and individual consumers from apartment blocks will start using their own heat sources. There is a strong trend towards a decrease in productive heat supply as part of the centralized heat supply system.

Launch of the common energy markets (including electricity and gas) of EAEU member countries and the Union State of the Republic of Belarus and the Russian Federation

It is expected that by 2025 the common electricity market in the EAEU will have been formed, which potentially has risks related to unequal conditions for participation of consumers and generating companies of Russia and other EAEU countries, due to which there are the following systemic risks:

  • a decline in the output of electricity at Russian power plants, which causes the decline in GDP of the country in general, and compromises energy security of the Russian Federation;
  • increase in the ultimate price for electricity for Russian consumers due to the start of bilateral relations of the largest and the most solvent Russian consumers with foreign generating companies, due to which the load on the remaining Russian consumers will increase (non-market charges for capacity, cross subsidization), that will increase non-payment and decentralization of UES of Russia;
  • lower demand for exported Russian electricity on traditional foreign markets, which is related to the common gas market. Due to this, enterprises from Belarus gain a competitive advantage and an opportunity to produce cheaper electricity, competing with Russian suppliers on the markets of the Baltic states and Ukraine.

Similar risks related to formation of the common electricity market in the EAEU result from establishment of the common electricity market in the Union State of Belarus and Russia, which is to start functioning in 2021 in accordance with the project road map.

Increased competition on the retail electricity market from digital service providers

Due to increased competition from banks/telecommunication companies and development of digital platforms (digital transformation of retail), the profitability/ share of the Group's electricity sales segment may decline.

Decreased reliability of power supplies and increased likelihood of accidents due to the ageing rate of fixed assets exceeding the renovation rate

Ageing of generating equipment increases the probability of emergencies, non-optimal load on generating capacities, the decline in equipment performance, environmental and energy efficiency, due to which the cost of electricity generation grows.

A high degree of wear of heating network and fixed assets at TPPs increases the probability of emergencies in autumn and winter, and is the reason for poor performance of heat generation in the country.

Increase in the scope and scale of the consequences of information security breaches

Due to digitization and increased use of IT in company operations and everyday life, crime related to compromising information security rises. The Group dependence on smooth operation of automated process control systems and IT systems, security of processed information and efficient functioning of the information security system.

Changes in the cost of energy resources

In case of liberalization of the gas market in Russia, it is possible that gas prices will become volatile depending on demand and supply fluctuations, and change in tariffs for transportation when cross subsidization between regions decreases.

The scenario of equalizing prices for gas for all EAEU members may also be a consequence of forming the single EAEU market, and may have an impact on gas prices.

Growth in uncontrolled overdue debt

Currently, there is growth of overdue receivables in several subjects in the North Caucasus on the wholesale electricity market. This situation may persist or also occur in other regions. Besides, there is growth of overdue receivables for heat and electricity supply to security and law enforcement agencies, which is related to the lack of mechanisms for dealing with non-payment. If no effective mechanisms for debt repayment are provided for in laws in the future, it is possible that the Group will receive a much smaller amount of money from heat and electricity sales.

Lack of qualified human resources

The employees at power plants are aging. Young applicants often expect higher salaries and do not want to get the available jobs. Besides, being a technical specialist has become less prestigious, and due to this the quality of their training has declined. These trends can cause the problem that there will be not enough employees at power plants, or the staff will not be sufficiently qualified. This poses a threat of considerable failures and emergencies.

Failure to fulfill the conditions for the implementation of the capacity modernization program

The lack of production capacities of energy equipment manufacturers, and the lack of qualified construction and installation companies in the regions of operation may impact the time frame of implementing KOMMod. If the deadlines for KOMMod implementation are not met, this may cause considerable fines imposed by regulators. The existing rules for estimating the degree of equipment localization are imperfect, so there is an additional threat of fines.

Satisfaction of counterclaims by contractors in foreign projects

As part of international commercial arbitration in relation to recovering losses connected with termination of the Agreement for electricity and hydromechanical work, there was a counterclaim from the U.S. to PJSC Inter RAO from the customer CELEC EP, the state-owned holding company  from Ecuador. The hearing is expected in 2021.

Emergence of a new pandemic

Considering the formation of the single transnational space, and development of biotechnology, and new forms of chemical and biological impact (including bioterrorism), new global threats are possible, including the pandemic, and outbreak of highly virulent and lethal viruses. These factors may cause catastrophic epidemic scenarios with huge impact on the social sphere and economy, lockdowns at national levels, which will lad to a decline in business activity and limited access to the Group's resources, and a decline in the herd immunity of the Group employees and increased incidence of a disease when there is a lack of medical care. Due to this, stricter requirements are needed in terms of epidemic preparedness, retaining the number of employees, protection of human resources and interchangeability of staff to ensure business continuity.

Increased social tension in the regions of operation

Economic recession, the growth of unemployment, including resulting from the COVID-19 pandemic and related restrictive measures may lead to social crisis phenomena and to an increase in protest activity in the regions where the Group's companies operate. These phenomena can adversely affect the business processes stability, labor functions performance, cause the implementation of risks related to the "human factor" (accidents, etc.), as well as mass protests of employees up to the shutdown of production processes in key segments, which may lead to large-scale reputational risks of forming a negative image of Inter RAO.

Tightening of environmental standards

Possible tightening of environmental legislation and industry technological standards related to ecology may have an impact on the strategy and volume of the generating companies' main equipment upgrade. Changes in the regulations aimed at reducing emissions/discharges, solving the problems of ash and slag dumps, etc., can lead to significant financial costs.

Intensification of geopolitical differences between the Russian Federation and Western countries and pressure from sanctions

Limiting the development of the Group's international assets, possible prohibition of using imported equipment and software.