German power firm faces elevated op risks in Russia

OpRisk North America: clusters of risks cause problems for Uniper

Novera Khan
Novera Khan, Uniper

Electricity generator Uniper faces a concentration of operational risk in one of its key markets, Russia, amid political wrangling over a flagship pipeline project. The problems typify the broad range of op risks afflicting the power sector and their dangerous degree of interconnection, the firm’s chief risk officer warns.

Uniper is part of the five-member financing consortium behind the planned Nord Stream 2 gas pipeline connecting Russian gas fields with European markets. US authorities have threatened sanctions against any parties involved in the project.

Uniper’s chief risk officer, Novera Khan, described the risk of sanctions as “not an acceptable risk, but it is also not one that can be insured away. It’s a prime example of a political risk as well as a regulatory risk, and I’ve combined them because the two topics often co-mingle for our industry.”

Khan, who was speaking at the OpRisk North America conference in New York on March 21, suggested that any US sanctions could jeopardise the firm’s continued involvement in the Nord Stream 2 project.

“We don’t want to continue with the project if the sanctions are going to be a real threat for us. So it’s one that we constantly monitor… and we have a very fluid conversation with the board all the time, especially before we extend further payments on the [project],” she said.

Khan’s remarks followed a joint statement from the chiefs of Uniper and two other consortium members, Wintershall and OMV, on February 26 warning against Europe’s energy provision becoming “a plaything for American energy, economic, security and geopolitics”.

A previous incidence of operational risk affected Uniper’s Russian operations in February 2016, when a fire crippled the Berezovskaya power plant in Siberia, only a few months after the plant opened. The cause of the fire is still unknown, the company says. The aftermath forced Uniper to deal not only with the “devastating outcome” of the fire itself, but also with the business interruption and increased regulatory scrutiny: Russian electricity authorities wanted to be assured that the company reported the outage properly and that its repair or reconstruction efforts would comply with local regulations.

“So, there were many things at risk because of that event,” Khan said.

A central insurance team reports to the risk management function at Uniper, in order to work closely with risk management on using insurance for risk transfer where possible – and the €400 million ($492 million) insurance payout that the company received for the Berezovskaya plant was critical in allowing reconstruction to go ahead quickly.

Beryozovskaya power plant
Image: Wikipedia
Berezovskaya power plant

The combination of sanctions, political risk, process safety, and reputational risk make Russia a nexus of operational risk for Uniper – but it’s also a key source of energy for Europe, and Uniper must balance these risks with its role in ensuring a continuity of supply of Russian gas to Europe. “If you back away from nuclear and coal, this is a tough challenge for us as an industry,” Khan pointed out. “If there’s a blackout, god forbid, this is a disaster. This is Germany – people aren’t used to intermittent supply for heating.”

Khan said Uniper has revamped its op risk management framework since the formation of the company in January 2016, when it was split off from former parent E.on. “We inherited an approach to risk management [from E.on] that was definitely not holistic,” she said. “We used to have a very ‘risk register’ approach – it was a real mix of topics, but everyone was happy as long as everything was on the list.” In fact, she continued, it was only two years ago that Uniper drew up its first risk strategy, aimed at ensuring that operational risks were consciously understood, and the risk function had determined whether they were quantifiable and acceptable.

Risk management for a large hydroelectric dam, for example, goes well beyond “an issue of process safety”; Uniper must also take into account its potential liability for damage to others in the event of a failure, its effects on local industry, and even the effect on tourism (if the lake behind the dam is used for recreational activities, for example).

“It goes to show that a firm like Uniper has to be on top of its process safety, even if the outcome is very remote; we have to be thinking about these outcomes and also the interconnectivity of these risks,” Khan said.

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