Risk management

Maintaining our operational sustainability

Philip Decnudde
Chief Risk, Strategy and Sustainability Officer

Global warming affects our environment with changes in average air temperature, increase in sea levels, inconsistent rainfall patterns, droughts and increased frequency of extreme weather events. We are factoring these environmental threats into our risk assessments so that we can manage the potential adverse changes in the operating conditions of our assets as well as lives of our people in our locations.

While doing this, we are also guided by the different climate-related policies enacted by the governments of the countries in which we are present.

Strategically, we are aware that the world’s energy transition towards cleaner sources of energy and the progressive deployment of carbon-free production technologies will shape our future business performance. Our business strategy, which we re-assess every year, clearly defines our key action areas for the reliable and responsible supply of power, desalinated water, and green hydrogen.

In this context, our track record in leading the renewable energy and water desalination with the lowest tariffs over the past decade demonstrates our industry leadership. Going forward, the significant pipeline of regional and global renewable energy projects, and the first at-scale green hydrogen production project of the world in Saudi Arabia are testament to our determination to stay firmly at the forefront of leading this energy transition.

Enterprise Risk Management (ERM)

At ACWA Power, ERM has always been a core and primary business function to proactively identify, assess, and mitigate risks across our business lines. Strategic environmental; operational; legal and compliance; IT/OT/Digital; and financial risks to our businesses, are core elements of our risk management framework, and climate-related risks and its potential impact on our business including disclosure to the investment community is also set to be a part of it.

The Enterprise Risk Management function and the Сompany’s approach to risk management is covered in detail Risk Management Framework of this Annual Report.

Sustainability reporting

Since 2014, we have published a Sustainability Report that highlights our ESG efforts and achievements. We believe it is crucial to act as a sustainability enabler as we are committed to creating a sustainable future.

In this context, we have identified, and prioritised material topics to ensure that the effects of climate change, as well as corporate social and governance responsibilities, are routinely considered in our business and investment decisions.

Further, we have set time-bound interim and end-state targets, based on the reporting principles of the Global Reporting Initiative (GRI) and the Taskforce on Climate-related Financial Disclosures (TCFD).

These targets support ACWA Power’s commitment to reducing the greenhouse gas (GHG) emission intensity of our electricity generation by 50% by 2030 as compared to 2020, and to achieving at overall portfolio level net zero by 2050. The Sustainability section contains comprehensive coverage of our emissions, emissions intensity and overall ESG activities.

Oversight and management of risks

The vast scope of our business that involves developing, owning, operating and funding very capital intensive and high-value long-term critical infrastructure assets in multiple geographies exposes us to a wide range of operational, financial, legal and compliance and market risks that need to be meticulously managed to ensure reliability of supply of life-essential electricity and water and achieve our business objectives.

ACWA Power’s ERM is designed to safeguard the interests of all ACWA Power stakeholders, including our customers, vendors, contractors, our financial partners, employees, and shareholders. It also supports our role as a developer, investor and operator of critical power generation, water desalination and green hydrogen assets.

We are committed to implementing risk management best practice by adopting sound ERM principles. This commitment has been formalised in the Group’s ERM Policy, which has been endorsed by the management and approved by the Board. The Group’s robust and dynamic risk management framework that is depicted in the summary chart across the page aims to continuously identify, communicate, and manage risks.

The Group’s overall risk management programme continuously monitors and reviews the principal risks relating to the Group’s business performance that could materially affect our business, financial performance, and reputation. Risk management practices are embedded throughout the Group to reduce potential risk exposure into an acceptable risk appetite level. These risks are collated in risk profiles and are reported at regional and Group levels.

Risk management framework

Our Board recognises that effective risk management is critical to meet our business objectives and accordingly risk management is embedded and integrated in all business activities and processes of our business units.

The Board has established the control environment, approved the risk appetite statement, risk management policy, and delegated oversight responsibilities under the (ERM) framework to the Board’s Risk Management Committee.

For further details, please refer to the Risk Governance Model section of this Annual report.

The Group’s comprehensive, state-of-the-art approach to risk management follows the principles and methodology of the ISO 31000 guidance standard, depicted in the summary chart below:

Most of the Group’s managed risks are related to the different phases of its business model of developing, investing in, operating and optimising the power generation, water desalination and green hydrogen production assets, encompassing a full life cycle of such assets.

The Group promotes a strong culture of risk management, combined with an approved risk framework that effectively supports appropriate risk awareness, behaviours, and risk-based decision making. In accordance with the Group’s risk management framework, we have developed specific responsibilities, tools and guidance, and systematically assess, mitigate, and monitor risks at corporate level and during the development, construction, and operation phase of projects to manage all relevant identifiable risks effectively.

Business development

All business development projects go through a gated approval process by the Management Investment Committee and the Board Executive Committee. Project-related market, technical, legal and financial risks are reviewed to give assurance on the required risk adjusted return. The risk management team independently assesses and evaluates the risks, as an additional step being introduced in the approval process for peer risk review. Residual risks are summarised in the form of a risk matrix with potential mitigations. Sensitivities are analysed for critical bid assumptions and related risks. All key risks are quantified, where feasible, in terms of rate of returns, and graphically presented, including potential upsides as well. This provides reasonable assurance on the project’s risk profile and ensures informed decision making by management, the Board Risk Management Committee and the Board. This process is covers all investments (greenfield, brownfield and acquisitions), divestments and changes in offtake agreements, if and when applicable.

Portfolio management

The Group focuses on developing scalable investment platforms and maintaining a portfolio with a technologically and geographically diversified asset base. As our portfolio risk landscape continues to evolve, the risk management function is involved to ensure identifying, assessing and constantly monitoring potential threats and opportunities that we could face to remain resilient on projects under construction as well as assets in operation. For our projects under construction, we remain actively engaged with our EPC contractors and encourage them to assess risks financially (by quantifying the potential risk), potential delays in the schedule, issues with quality of workmanship, health and safety, and reputation. This gives more insight to the portfolio team to understand and act accordingly.

Operations and maintenance

The Group uses centralised expertise via NOMAC, a 100% owned O&M subsidiary of ACWA Power, to optimise the operation and maintenance of our fleet of assets diversified in technology and geography and ensure effective management and mitigation of risks associated with operational safety and reliability of supply.

Contractual risks are managed through an effective contract compliance and tracking mechanism; operational risks through robust operational and maintenance procedures including digitised condition monitoring and prediction; and supply and price risk is managed by a comprehensive and efficient global supply chain management. In addition, the Group also plays a direct role in selecting its partners, contractors and technology for its projects to ensure an optimal solution for the project while reducing the overall exposure (directly or indirectly) to identified risks.

Risk governance model

Risks are proactively identified and managed at each level of the organisation (from project companies up to corporate functions) with the appropriate level of granularity. They are reported on a regular basis to the appropriate management levels and the Board’s Risk Management Committee and the Board. The Risk Management Committee advises the Board on the Company’s risk appetite; monitors the Company’s principal strategic, financial, operational, business, and reputational risks or exposures; advise and recommend actions to minimise such risks; future risk strategy, and provide oversight and guidance as to the overall risk management functions within the Company.

Risks and mitigating actions are reviewed on a regular basis to ensure that risk management is a continuous and iterative process, providing an up-to-date and accurate picture of the risks and mitigating actions of the Group.

Risk universe

The chart across the page shows how risks are approached and managed within the Group. Risk management function assesses risks across the Group and clusters them logically before reporting to support risk-informed decision-making process. ACWA Power risk universe identifies internal (inner circle) and external (outer circle) risks that are categorized into four main risk areas (operational, strategic, financial and political/regulatory) as depicted by the chart. Each risk is marked by its current trend represented by arrows to denote increasing, decreasing or stable risk.

ACWA Power risk universe

The ACWA Power risk universe, shown above, identifies internal and external risks that are categorised into four main risk areas (operational, strategic, financial and political/regulatory). The trend of each risk is marked by an arrow to denote increasing, decreasing or stable risk.

Main risk areas Key risks Mitigants
Country and geopolitical
  1. Novel regulatory regimes and commercial environments
  2. Geopolitical tensions in any of the jurisdictions where the Group has presence or seeks prospects
  1. Careful selection of new markets, diversified portfolio in 12 countries is a strong mitigating factor which spreads such risk against individual country or regional economic risks.
  2. Further, we undertake initial due diligence to identify, analyse broad spectrum of risks at local, regional and group level to promptly manage its exposure and related compliances.
  3. Systematic security assessments and continuous monitoring of geopolitical developments at countries where we operate to ensure the Group is well placed to respond to changes in political environments.
Project development
  1. Business expansion / growth
  2. New technologies – Green H2
  3. Competition and pricing
  4. Integrity and creditworthiness of equity partners
  5. Poor performance of main suppliers (EPC, OEM)
  1. Identify and limit key risks during the project selection and bid development process.
  2. Regionalised construction supervision and asset management activities providing management bandwidth to integrate new projects.
  3. Allocation of management resources with responsibilities to successfully manage unforeseen challenges and associated risks.
  4. Multi-technology capability and track record for successfully managing diversified portfolio. The Group co-invests in all its projects with a view to maintaining technical and operational control over the project performance.
  5. In-house technology department with strong expertise and reference for main equipment, tested in successful commercial operation with certification from third party.
  6. The Company carries out a thorough vetting process for all its equity partners.
  7. The Company seeks to employ experienced and leading original equipment manufacturers (OEMs), as well as reputable EPC contractors that provide turnkey solutions.
  8. Build out a strong development team around the new market of green hydrogen.
Project financing
  1. Material delays in achieving, or achieving at all, the financial close of a given project
  2. Exposure of development bond and any initial development costs, costs for early works in case of not achieving financial close
  3. Increased costs (commodities)
  4. Existing and future leverage
  1. Comprehensive project finance expertise, supported by strong relationships with lenders and financial institutions (including regional, European, U.S. and Chinese institutions) together with access to competitive cost debt and equity capital.
  2. All projects / transactions are financed on non-recourse or limited recourse basis in a manner to make projects bankable.
  3. A large part of costs is shared with co-investors and the development cost (both internal and external) is typically reimbursed at financial close from the project.
Financial (market risks and other macroeconomic factors)
  1. Exposure to interest rate volatility
  2. Inflation
  3. Currency movements
  4. Liquidity to meet liabilities
  1. Interest rates of a large part of the project finance loans are fixed through long tenor hedges at the outset. The Company continuously monitors unhedged portion (financial liabilities) to ensure the exposure remains within acceptable limits to mitigate all asset-liability mismatch risk where possible.
  2. Embedded inflation protection in the long-term offtake contracts.
  3. Contracts and equity returns predominantly indexed to USD or “hard” currencies, which provides us with a natural hedge against currency movements.
  4. Multiple sources of funding facilities have been arranged through bank loans, revolving corporate facilities, bonds, sukuks and private placements to help ensure that the Group is able to manage liquidity requirements.
  5. Leverage ratios are assessed for various growth scenarios to ensure close monitoring of such ratios and to manage funding gaps.
Construction
  1. Project delays, cost overruns and quality of workmanship issues
  2. Unforeseen site or commissioning issues and associated risks
  3. Financial difficulties or bankruptcy of EPC contractor or its subcontractor
  4. Underperformance of asset vs warrantied specifications
  1. Construction is systematically contracted on a lump sum turnkey basis (fixed price and scope) and define timelines for certain contracting approach with EPC contractor.
  2. Maximum amount of risk passed on to EPC contractor through back-to-back contracts implying liability of payment of liquidated damages by the EPC contractor for any under-performance (i.e. delays, technology, quality, functioning, fit for purpose – reliability, dispatch capacity and fuel consumption).
  3. Investment-grade EPC contractor and its consortium partners with joint and several liability to considerably reduce the EPC contractor default risk.
  4. Force majeure protection in offtake agreements and comprehensive insurance policies.
  5. Robust EPC oversight, plant commissioning and handover processes and procedures are in place to ensure quality and performance of the plants.
Health and safety
  1. Health and safety hazards
  2. Violations of health, safety and security standards
  3. Breaches may lead to regulatory actions, legal liabilities, increased cost, disruptions to business, harm to reputation
  1. The Board, its committees, and senior management are fully committed to creating a safety culture throughout the Group.
  2. Stringent health and safety standards, guidelines, audits, and investigations are in place to implement measures aimed at eliminating future incidents on assets in operation and projects under construction, enforced by dedicated in-house HSE department.
  3. Continually reviewing environmental regulatory risks.
  4. NOMAC’s integrated HSE and quality management system has been independently certified under the ISO 9001:2015 and ISO 14001:2015.
Environmental
  1. Exceedance of environmental limits
  2. New legislation tackling climate change
  3. Breaches may lead to regulatory actions, legal liabilities, increased cost, disruptions to business, harm to reputation
  1. Strong social and environmental impact mitigation and management, as part of sustainability framework and strategy.
  2. Integrated O&M HSE and quality management system has been independently certified under ISO 45001:2018 setting out requirements for an environmental management system to enhance its environmental performance.
People
  1. Recruitment (volume, adequacy, and quality)
  2. Nationalisation targets
  3. Loss of key personnel
  4. Retention of staff
  1. Dedicated recruitment-oriented resources to cope with high-growth demands and nationalisation efforts by the organisation to meet targets.
  2. Talent and leadership development schemes to limit turnover and manage scarce skills.
  3. Succession planning for critical roles in the organisation and key people management processes in place as part of our talent management process.
  4. Performance-based evaluation process to enhance internal talent growth.
  5. Values-based organisation culture that promotes respect, inclusiveness, and diversity.
Legal and regulatory
  1. Increased number of laws and regulations, including monitoring change in law or new legislation and other evolving practices
  2. Managing obligations of local, regional, and global laws and regulations across different jurisdictions
  3. Legal proceedings (commercial claims or tax disputes)
  4. Event of default or impact on the Company’s reputation
  1. Systematic contractual protection against changes in laws and regulations in most of the assets.
  2. Consolidation on compliance with laws and regulations, and regular monitoring for changes to regulations across portfolio to ensure that the effect of any changes is minimised, and compliance is continually managed.
  3. Engagement of top law and tax firms to assess our positions and recognising provisions where required.
  4. Strong corporate governance and reinforcing policy and procedures to ensure full compliance with all legal, regulatory and tax requirements.
  5. Establishment of a comprehensive Compliance Framework that protects the Company’s reputation and credibility, serves shareholders’ interests, ensures customer satisfaction and reduces risk of litigation.
Revenue
  1. Volume and price risk (excluding foreign exchange, covered above)
  2. Assets are exposed to performance risk
  3. Renewable assets are exposed to decrease in supply of solar or wind resources and performance risks
  1. Long-term offtake contract to protect us against demand or price risk. The substantial majority of the offtakers are government-related entities with direct government credit support or with other contractual protection.
  2. EPC performance guarantees in place to protect newly built facility against any performance shortfall.
  3. BU O&M has implemented a reliability of supply framework along with in-house developed plant simulation and optimisation tool to address and enhance reliability of supply in a systematic and proactive way.
  4. Wind and solar resource studies are carried out for renewable assets based on long-term historical average.
  5. Insurance solutions to protect our assets against unforeseeable and/or residual risks or unexpected business interruptions with agreed deductible periods and minimum deductible amount.
Operations and maintenance
  1. O&M cost overruns
  2. Plant under-performance or lack of reliability during the operation period
  1. To minimise operational risks, the Company generally entrusts the BU O&M, its wholly owned and best-in-class O&M subsidiary to operate and maintain its assets for the full tenor of the offtake agreements.
  2. BU O&M’s contracts cover the offtake agreement term and are indexed for inflation and indexation. The applicable penalties are capped in the contracts.
  3. BU O&M continues to deploy monitoring and prediction digital platforms for critical equipment by using big data and advanced pattern recognition capabilities to enhance overall performance.
  4. BU O&M has extensive capabilities as an O&M contractor and implements a standardised management and operational model to ensure superior control and understanding of operating assets through the life cycle, provide stable long-term income and super senior cash flows.
  5. BU O&M has a reliable supply framework to ensure high reliability of assets.
  6. BU O&M’s Maintenance Energy Services (NMES), a wholly owned subsidiary, provides turnkey and specialised maintenance services, including major overhauls for the entire fleet of steam turbines, combustion turbines, generators, large pumps and other rotating equipment.
Fuel supply and consumption
  1. Significant increase in the price or the interruption in the provision of fuel
  2. Fuel cost under recovery
  1. Most of our fossil fuel-based plants are contracted on tolling arrangements whereby fuel supply and cost risks are borne by the offtaker.
  2. Whenever tolling arrangements are not there, the fuel supply and price risk are passed to the offtaker.
  3. Ongoing plant efficiency optimisation as part of value proposition when needed to reduce or eliminate under recovery exposures.
Termination and extension
  1. Early termination of an offtake agreement for a reason attributable to the offtaker
  2. Early termination of an offtake agreement for a reason attributable to the project company (material underperformance)
  3. Non-renewal of offtake agreements at the end of their term (asset retirement obligation)
  1. If the cause of termination is attributable to the offtaker, the project company will receive termination payments which in most projects cover outstanding debt repayment and equity (including a return on equity).
  2. These termination payments by the offtaker benefit from direct government credit support or other forms of contractual protection.
  3. Selection of the right technology, quality construction and reliable operations to manage performance requirements of the offtake agreement.
  4. The estimated future costs of decommissioning are reviewed annually and adjusted as appropriate.
  5. Align plants’ existing useful life to its assessed economic life and timely pursue discussions with offtaker to seek extension for assets nearing expiry as part of value creation initiatives.
Information technology Infrastructure
  1. Cyber-attacks/crimes
  2. Reliability of the Group’s IT infrastructure (to support remote working, uninterrupted operations)
  1. Defence-in-depth strategy around IT systems (servers, network, end-user machines, etc.) to prevent cyberattacks, in compliance with the ISO standards at the corporate level.
  2. Regularly review, update and evaluate all software, applications, systems, infrastructure and security which includes regular vulnerability assessment and penetration testing.
  3. Proven disaster (natural or man-made) recovery plans.
  4. IT security assessments and periodic IT audits conducted by skilled IT auditors to ensure effectiveness of controls on IT systems.
  5. ACWA Power has been certified under the ISO/IEC 27001.
Environmental, Social and Corporate Governance (ESG) ESG targets not met fully, partially, or timely
  1. Establishing a robust framework to evaluate the impact of climate-related risks.
  2. Set time-bound interim and end-state targets based on the reporting principles of the Global Reporting Initiative (GRI) and the Taskforce on Climate-related Financial Disclosures (TCFD).
  3. Identified, selected, and prioritised material topics to ensure that the effects of climate change, as well as corporate social and governance responsibilities, are routinely considered in our business and investment decisions
  4. No new investment in high carbon emitting coal or oil projects thus increasing the share of our portfolio dedicated to cleaner technologies.
  5. Initiatives put in place on leadership in low-carbon energy sourcing, water management, health and safety, and corporate governance.
Governance and management
  1. Non-adherence to or non-compliance with prescribed organisation policies and processes or laws and regulations
  2. Improper conduct of employees or business partners
  3. Inappropriate governance and systems
  1. “Tone at the top” established by the Board of Directors, Board committees, and senior management.
  2. Internal controls, systems and procedures in conformity with the relevant sanctions, anti-bribery, anti-money laundering and anti-terrorism laws.
  3. Governance framework supported by ad-hoc control by Board committees with significant independent member participation in each Committee.
  4. Independent internal audit function reporting to Board Audit Committee.
  5. Whistleblowing programme and process to ensure a recognised, industry-leading ethics and compliance culture.
  6. An integrated and comprehensive, technology-based governance, risk management, internal control and compliance tool being implemented for better alignment and reporting to reduce risks, costs, and duplication of efforts.

Climate-Related Financial Disclosure

TCFD alignment

We seek to provide investors and other stakeholders with information enabling them to assess the adequacy of our approach to climate change and our ability to manage the associated risks and opportunities.

This is the first year we have reported using the recommendations of the Financial Stability Board Taskforce on Climate-related Financial Disclosures (TCFD) and looking forward to perfect it along the way.

TCFD alignment progress
Theme Recommended TCFD disclosure Status Plan
2022 2023 2024
Governance Disclose the company’s governance around climate-related risks and opportunities. ▶
Strategy Disclose the actual and potential impacts of climate-related risks and opportunities on the company’s businesses, strategy, and financial planning where such information is material. ▶
Risk management Disclose how the company identifies, assesses, and manages climate-related risks ▶
Metrics and targets Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material. ▶

▶ Commence

Risk Identification

In 2022, we conducted a qualitative exercise to identify risk and opportunity that might arise over the next 30 years based on the current policy environment scenario.

This exercise leveraged all the internal and external experience and knowledge including the internal experts, IPCC reports and peers.

The table here shows the initial map of the climate risks:

Climate risk matrix (threats)
Technology / activity
Renewables Desalination Thermal power
Climate change elements PV CSP tower CSP parabolic Wind Thermal Membrane Steam generator CCGT
Heat & cold
Wet & dry
Wind
Snow & ice
Coastal
Oceanic
Additional risksAir pollution weather, atmospheric CO2 at surface, level of lakes, radiation at surface, relative humidity.
Climate risk matrix (opportunities)
Technology / activity
Renewables Desalination Thermal power
Climate change elements PV CSP tower CSP parabolic Wind Thermal Membrane Steam generator CCGT
Heat & cold
Wet & dry
Wind
Snow & ice
Coastal
Oceanic
Additional risksAir pollution weather, radiation at surface, air pressure.