We categorise our risks according to the four types of risk defined by the COSO II model: strategic, operational, reporting and compliance.
We categorise our risks according to the four types of risk defined by the COSO II model: strategic, operational, reporting and compliance. TenneT’s financial risks are presented separately in notes 6.7 of the financial statements.
Based on the strategic risk assessment conducted in October 2017, the table below presents the strategic risks that rated high.
|Strategic goal||Strategic risk||Risk-mitigating actions|
|Blackout caused by TenneT||Operate the system compliant with EU codes and ENTSO-E rules.|
|Ensure sufficient amount of control and grid reserve power.|
|Ensure and monitor grid investments and maintenance.|
|Perform and report on root cause analyses of incidents.|
|Safeguard adequate insurance coverage.|
|Significant delay of certain large infrastructure projects||Continuously improve internal processes.|
|Implement TenneT planning tools.|
|Improve supplier management and communicate future needs.|
|Ensure active stakeholder management to speed up permits and licenses.|
|Major disruptions in the business due to terror attack (physical or cyber)||Implement physical and security measures.|
|Implement business continuity plans.|
|Maintain and update asset protection guideline.|
|Carry out security contingency plans with national authorities.|
|Certification for ISO 27001 (Information Security Management).|
|Failure or malfunctioning of new (high-voltage) technology||Pre-qualify suppliers through standard technical designs, contracts and as-built documentation.|
|Participate in system studies & international working groups.|
|Ensure availability of spare parts and cable repair service level agreements.|
|Conduct simulations and root cause analyses in case of failures.|
|Deliver stakeholder value|
|Lack of sustainable access to equity||Negotiate/discuss sustainable financing solutions with shareholder.|
|Develop alternative sustainable financing solutions.|
|Issue hybrid securities.|
|Adverse changes in NL/DE regulation or changes in regulatory parameters||Lobby with regulators and lawmakers to prevent negative changes in regulatory framework.|
|Invest in relationship with ACER.|
|Pursue legal remedies if and when appropriate.|
Developments in strategic risk position
Our strategic risks are mostly similar to the ones reported in 2016. In terms of high risks in 2017, we can report the following:
Blackout caused by TenneT
Grid performance decreased slightly compared to 2016. The further integration of renewables, combined with international market developments, increased the challenges we face in balancing our grid.
Significant delay of certain large infrastructure projects
Although permit-related challenges improved slightly, these are still having a major impact on the timely realisation of our onshore and offshore infrastructure projects.
Major disruption to the business due to a terrorist attack (physical or cyber)
Threats related to cyber security are on the rise everywhere, also in the TSO playing field. Increased media attention of this type of threat may prompt fraudulent parties to target our company.
Failure or malfunctioning of new (high-voltage) technology
There was a higher number of component failures related to new high-voltage technology in our onshore and offshore projects. This may impact our investment portfolio.
Lack of sustainable access to equity
The structural increase in renewable energy sources will lead to an increase in our investment portfolio. Securing sustainable access to equity to fund this increase remains a challenge.
Adverse changes in NL/GE regulation or changes in regulatory parameters
A substantial part of TenneT's revenues is derived from regulated activities. Changes to regulatory frameworks in the Netherlands and Germany directly affect our activities and financial performance. As such, it is crucial that our activities are supported by adequate, sustainable tariffs and by a solid regulatory framework. Our Corporate Regulatory department monitors regulatory risks and manages mitigating actions.
The table below summarises the regulatory risks.
|Regulatory risk||Risk-mitigating actions|
|At the German-Danish border (D-DK1) the European Commission is making the case that TenneT is favoring producers in Germany over Danish producers by not offering sufficient cross-border transmission capacity. TenneT and the European Commission have entered into talks about how to settle the case without imposing a fine on TenneT.||TenneT is in continuous contact with DG Competition, BMWi, and BNetzA on a possible solution. Currently, it is foreseen that TenneT in its effort to offer as much capacity as possible will offer a minimum transfer capacity at that specific borders. This approach is supported by German and European authorities.|
|TenneT is not able to achieve a reasonable return on its invested capital as the return allowed by the regulator is set at a too low level because of low interest rates.||In general, ACM continued to use the existing approach for the regulatory period of 2017-2021. ACM has, however, differentiated the rate of return for existing and new capital. TenneT has started legal proceedings because it disagrees with certain items of this decision.|
|Inability to meet the regulatory budget on operational expenditures for procuring energy and ancillary services, such as grid losses and redispatch costs.||ACM has amended this part of the regulation, exposing TenneT to the full price and volume risk of this cost element. TenneT started legal proceedings in respect of this decision because it believes that these costs cannot be influenced by TenneT. Moreover, TenneT received confirmation from ACM that it can recover redispatch costs relating to cross border trades from the cross border auction proceeds.|
|ACM has, together with the Council of European Energy Regulators, initiated a new international TSO benchmark exercise to measure the efficiency on capital and operational expenditures of European TSOs. The benchmark exercise is planned for 2018/2019.||TenneT will proactively participate in the benchmark. TenneT will advocate to ACM to prudently apply the benchmark results within the regulatory framework.|
|TenneT is unable to achieve a reasonable rate of return on equity within the regulatory period of 2019-2023.||Although TenneT had intensive dialogues with BNetzA and BMWI to reach a sufficient rate of return on equity, BNetzA determined a value which is below our expectations of a reasonable rate of return. TenneT started court proceedings against the BNetzA determination to reach a higher value.|
|For the regulatory period of 2019-2023 BNetzA introduced a new method to evaluate the efficiency of the German TSOs. BNetzA will now implement a so-called reference grid analysis. As this is a new methodological approach the result and the financial consequences for TenneT are unclear.||In the last years TenneT intensively worked on efficiency improvements for project realization but also for internal processes and cost savings (LEAN initiative). Furthermore, TenneT accompanies BNetzA's development of the new method closely.|
|With the introduction of a law in 2017, the grid fees of he German TSOs will be unified beginning in 2019. As part of this process, the offshore costs will not be reimbursed from the grid fees any more, but from a levy. In this context, BNetzA has also proposed a new approach for determining the costs that enter the levy. This new system is not defined in detail by BNetzA but is not in line with the demand of investors to have a stable regulatory framework.||Towards the ministry and the regulator TenneT is actively lobbying for maintaining the current regulatory regime for offshore as this could lead to severe damages for the reputation of the German regulatory system. If necessary, TenneT will also initiate the appropriate legal proceedings in order to minimize financial effects of the changes.|
The table below details TenneT Holding’s most important operational risks.
|Operational risk||Risk mitigating actions|
|Not realising planned portfolio|
|Gap between planned and realised maintenance and preservation. Risk of deterioration of the condition of the grid in the long term.||Risk-based maintenance and preservation planning in alignment with the commissioning dates for large projects.|
|Substation driven replacement strategy.|
|Insufficient availability of capable resources.||Strategic personnel planning.|
|Tactical procurement planning.|
|SHE incidents and accidents|
|Work-related incidents and accidents that may harm the health and well-being of our own employees and the employees of contractors, that work for TenneT.||Implementation Life Saving Rules and improved approach on incident investigation.|
|Introduction of and certification on the Safety Culture Ladder.|
|Integrate SHE requirements in contract management.|
|Electricity market risks|
|Risk of not realizing efficiency targets set by regulator.||Development of a procurement strategy reflecting the regulatory framework.|
|Unavailability of ancillary services due to mothballing of conventional power.||Development of standards for the market integration of renewable energies and (pools of) small generation plants.|
|Development of crowd balancing opportunities.|
|Application at the regulator to veto the decommissioning of system-relevant power plants in Germany.|
The table below presents TenneT Holding’s most important reporting risks.
|Reporting risk||Risk-mitigating actions|
|Financial statements do not give a true and fair view of the company's financial position, financial performance and cash flows. Financial statements are not compliant with applicable laws and regulations.||Internal control framework, including control self-assessments and Letter of Representation procedure.|
|Incorrect (regulatory) reports or information to BNetzA, ACM and/or tax authorities.||Internal and external audit reviews and follow-up on findings.|
|Use of internal accounting manuals.|
|Intensive monitoring of internal activities by the Regulatory department.|
The table below presents compliance risks and mitigating actions, grouped according to three areas.
|Compliance risk||Risk-mitigating actions|
|Non-compliance with European or national laws and regulations, e.g. regarding health, safety and environment, labour, tendering and energy markets.||Actively involve experts from Legal Affairs, Procurement, Human Resources, Safety & Security, Regulation, etc. Monitoring by Compliance via the LOR procedure.|
|Risk of fraud and/or conflict of interest.||Corporate Gifts & Hospitalities policy.|
|Increase cultural awareness via internal communication messages and face-to-face training sessions.|
|Non-Compliance with Code of Conduct.||Content of the Code of Conduct is confirmed by all (new) employees via written consent.|
|Compliance Experts explain the principles in the Code of Conduct via training sessions.|
|Non-compliance with bilateral agreements between TenneT and other TSOs, suppliers, customers, etc.||Ensure adequate registration of decisions and contracts by Legal Affairs and other departments involved.|
|Non-compliance with permits and licenses.||Provide training and awareness programmes.|
|Non-compliance with financial and tax laws and legislation, e.g. IFRS, local GAAP, the Dutch Corporate Governance Code, the German Control and Transparency in Business Act, the German Accounting Law Reform Act, etc.||Actively involve experts from Finance & Control, Treasury, Tax and Legal departments. Monitoring by Compliance via the internal LOR procedure.|
|Ensure availability of accounting manuals, treasury statute, etc.|
|Use internal and external experts as advisors, if and when necessary.|
|Non-compliance with financing agreements.||Frequent knowledge update by means of training, external audit/expert reviews, etc.|
|Non-compliance with electricity laws and technical codes, ENTSO-E operational handbook, electrical safety regulations and standards, etc.||Actively involve experts from Asset Management, System Operations. Assessments by the technical compliance officer.|
|Cooperate with regulatory authorities through the Corporate Asset Owner department.|
|Involve authorised electrical safety experts and technical strategists.|