Principal Risks and Uncertainties

Managing our risks

Centrica, like all businesses, faces a number of risks and uncertainties that could affect the delivery of the Group’s strategic objectives.

Nick Luff, Group Finance Director

We place considerable importance on internal controls and have a robust risk management process (as detailed in the Corporate Governance Report), which is designed to identify, manage and mitigate business risk in order to support the creation of long-term, sustainable returns for shareholders.

Described below are the principal risks and uncertainties the Group can foresee. It is not an exhaustive list; some future risks may be as yet unknown and other risks, currently regarded as immaterial, could turn out to be material.

Global economic conditions

UK demand reduction

Regulatory environment

Description

Government targets to reduce UK greenhouse gas emissions are increasingly shaping energy policy, including plans to expand renewable generation sixfold. The UKís energy infrastructure will require significant amounts of new investment in order to meet these targets while maintaining security of supply, with estimates of around £200 billion required by 2025. This has prompted calls by many, including the regulator, for more fundamental market reform.

Significant reforms to the planning regime have been introduced, nevertheless planning is still likely to have an impact on the deliverability of investment.

Renewables continue to require a supportive policy and regulatory climate in order to deliver the investment needed. The Government is in the process of addressing regulatory and other barriers to new nuclear power. There remain other policy issues, such as the currently low carbon price following the recent Copenhagen climate conference, which resulted in an outcome that did not give business the clear framework it wanted.

Parliament is considering proposals to introduce mandatory social price support for vulnerable customers to replace the successful voluntary approach in place to date and the future framework for delivering and financing energy efficiency remains uncertain.

It is possible that following a general election there may be a Competition Commission inquiry or equivalent review into the energy sector. This would follow the recent investigation by the regulator and would create significant uncertainty in the investment climate.

In Europe, the Commission is considering stricter regulation of over-the-counter (OTC) derivatives, which is also being considered in the US by the Obama Administration.

North American energy markets still have some way to go before there is widespread liberalisation and clear, consistent climate change mitigation policies. Limited action at a federal level means that the progress has mostly taken place at the state and provincial level.

Canadian federal efforts now largely depend on progress in the US. The federal government has dropped its original national target in favour of developing something resembling US federal legislation as and when it emerges. In Ontario, in particular, the regulatory environment remains uncertain.

Impact

A number of factors could cause uncertainties surrounding the Groupís future investment decisions and limit the Groupís ability to meet its long-term growth aspirations. These include: the potential for a Competition Commission inquiry; the delivery of reforms to the planning regime; market conditions that support new nuclear power; and the impact of future OTC derivatives regulation in Europe and the US.

Mandated social price support for vulnerable customers will impact on the development of the Groupís own social initiatives and the outcome of debates about future energy efficiency could impact the long-term growth of our residential business, and our ambition to provide home energy solutions to our customers.

The outcome from Copenhagen means the case for a unilateral UK mechanism to underpin the carbon price may strengthen in order to meet the UKís own more stretching targets. The likelihood and shape of any US cap and trade legislation remains primarily dependent on domestic factors.

Mitigation

Our activity to manage political and regulatory policy developments is ongoing and we are taking a number of steps to address these risks.

Internally, we have established a Policy Group to agree Group-wide positions on each key issue.

Externally, we have been closely engaging with civil servants, politicians and opinion-formers to ensure that the Groupís perspectives are reflected in policy debates.

Media relations and external-facing CR programmes are designed to reinforce our views on policy and to build knowledge and trust in the business among wider stakeholder audiences.

In the US and Canada, we continue to engage with regulators, Government ministers and senior officials through targeted contact programmes.

Competitive retail energy environment

Exposure to movements in commodity prices

New technologies