Risks and uncertainties arising from Snam's ordinary operations

The descriptions of the risk categories are provided below. For each risk category, events related to the ESG (Environmental, Social and Governance) areas that are relevant to Snam are illustrated in table form, with an indication of the main management methods adopted by the Group.

The indication of the capital assets on which the identified risks may have an impact also provides a better understanding of how the risks may impact the Group’s ability to preserve and create value over time.

Strategic risks

Regulatory and legislative risk

Regulatory and legislative risk for Snam is linked to the regulation of activities in the gas sector. The decisions of the Italian Regulatory Authority for Energy, Networks and the Environment (ARERA) and the National Regulatory Authorities of the countries in which the foreign subsidiaries operate, European and national regulations and, more generally, the change in the regulatory reference framework, could have a significant impact on the operations, results and financial stability of the Company.

It is not possible to foresee the effect that future changes in legislative and fiscal policies could have on Snam’s business and on the industrial sector in which it operates.

Considering the specific nature of its business and the context in which Snam operates, changes to the regulatory context regarding the criteria for determining reference tariffs are particularly significant.

Macroeconomic and geo-political risk

Because of the specific nature of the business in which Snam operates, there are also risks associated to political, social and economic instability in natural gas supplier countries, mainly related to the gas transportation sector. A large part of the natural gas transported in the Italian national transportation network is imported or moved through countries in the MENA area (Middle East and North Africa, particularly Algeria, Tunisia, Libya and, in terms of the TANAP-TAP, Turkey along with the states bordering the Eastern Mediterranean) and in the former Soviet bloc (Russian Federation, Ukraine, Azerbaijan and Georgia), nations subject to political, social and economic instability which could evolve into potential crisis scenarios in the future.

In particular, the import and transit of natural gas from/and through these countries are subject to an extensive set of risks, including: terrorism and common crime, changes in political-institutional balances; armed conflict, socio-political and ethno-sectarian tensions; disorder and unrest; inadequate legislation on insolvency and creditor protection; limits on investment and the import and export of goods and services; introduction of and increases in taxes and excises; forced renegotiation of contracts; nationalisation of assets; changes in trade policies and monetary restrictions.

If a shipper using the transportation service via Snam’s networks cannot procure the transportation of natural gas from/or through the aforementioned countries because of said adverse conditions, or in any way suffers from said adverse conditions, to an extent such so as to determine or incentivise the consequential inability to fulfil contractual obligations towards Snam, this could have negative effects on the Snam Group’s operations, results, balance sheet and cash flow.

In addition, Snam is exposed to macro-economic risks deriving from relocation or tension on financial markets or situations deriving from exogenous phenomena, which could have an impact on liquidity and access to financial markets.

Risk of climate change

The achievement of global climate objectives will lead to significant investments in decarbonisation of the energy sector over the next thirty years. In recent years, Snam has repositioned itself to benefit from new mega-trends of the energy transition, thanks to infrastructure that will be crucial for achieving decarbonisation targets, to its presence in energy transition business, to international growth and thanks to a disciplined approach to investments.

Thus Snam is committed to achieving carbon neutrality by 2040, with an intermediate target of reducing Scope 1 and 2 emissions by 50% by 2030 compared to 2018, in line with the target of containing global warming to within 1.5°C set by the Paris Agreement adopted during the Climate Change Conference (COP 21). This objective is also consistent with the UNEP (UN Environment Programme) objectives of reducing CO₂, emissions, with which a protocol has been signed.

With regard to the risks associated with the emissions market, in field of the application of the European Union directives concerning the sale of permits relating to carbon dioxide emissions and the rules on controlling emissions of certain atmospheric pollutants, with the start of the fourth regulatory period (2021-2030) of the European Emissions Trading System (EU – ETS), the updating of the sector regulations has confirmed a constant reduction of the quotas on emissions released free of charge. The allowances will be assigned to each plant on a gradually decreasing basis, so they will no longer be constant, and will also depend on the actual functionality of the plants. The allowances assigned free of charge to Group plants no longer suffice to comply with the regulatory conformity obligations relative to ETS mechanisms, hence Snam will procure the additional allowances required on the market.

By Resolution 114/209/R/gas of 28 March 2019, the ARERA defined the regulatory criteria for the fifth regulatory period (2020-2023) of the natural gas transportation and metering service, providing, among other things, for the recognition of costs related to the Emission Trading System (ETS). Resolutions No. 419/2019/R/gas and No. 474/2019/R/gas also introduced the recognition of ETS-related costs for the storage service (regulatory period 2020-2025) and the regasification service (2020-2023).

The climate change scenarios could cause a change in the choice of energy mixes in various European countries and in the behaviour of the population and could have an impact on the demand for natural gas (and volumes transported), which, on the one hand, could benefit from its greater sustainability compared with other fossil fuels in the short/medium and represent a bridge toward the complete decarbonisation of certain sectors, while on the other policies and individual choices could lead to a gradual decrease in consumption with a resulting impact on the use of infrastructure. Additionally, the tightening of decarbonisation targets could influence the development of the use of alternatives to gas, thereby favouring a greater penetration of low-carbon renewable gases (green hydrogen, blue hydrogen, biomethane, synthetic methane) and the growth of new businesses.

Climate change could also increase the severity of extreme weather events (floods, droughts, extreme temperature fluctuations), worsening natural and hydro-geological conditions in some areas with a possible impact on the quality and continuity of the service provided by Snam as well as on Italian and European gas demand. With reference to the effects of the change in the gas demand on the balance sheet, income statement and financial position of the Snam Group, see next paragraph “Market risk”.

Lastly, Snam has signed the Methane Guiding Principles, which commit the company to further reducing methane emissions deriving from its activities in natural gas infrastructure. In adhering to these principles, Snam has also committed to encouraging other players across the entire gas supply chain – from the producer to end consumer – to pursue the same objective.

Commodity risk associated with changes in the price of gas

Through resolution no. 114/2019/R/gas, under the scope of the process for revising the criteria for calculating the revenues recognised for the natural gas transportation and metering service for the fifth regulatory period (2020-2023), the criteria for recognising Unaccounted For Gas (UFG) were also defined. On the basis of these criteria, from 2020, the recognition of quantities of fuel gas, network leaks and UFG will take place in monetary terms instead of recognition in kind by shippers. However, the change in the price of natural gas will continue not to represent a significant risk factor for Snam, since there is a hedging mechanism for the risk associated with differences between the price recognised for fuel gas, network leaks and UFG volumes and the effective procurement price. With reference to the quantities recognised, said resolution confirmed the current criterion relative to fuel gas and network leaks, whereas for UFG, the level admitted will be updated once a year and will equal the average of the quantities effectively recorded in the last four years available.

In July 2020, with resolution no. 291/2020/R/gas, it concluded its investigation, recognising an additional volume of UFG for the years 2018-2019 totalling 182 million cubic metres, equal to a total value of about 42 million euros, which will be recognised, net of the amount already received on account for the year 2018, by the CSEA. In addition, it started a procedure, which concluded at the end of 2020 with the publication on 22 December 2020 of the 569/2020/R/gas resolution, to refine the UFG recognition criteria for the fifth regulatory period (2020-2023), aimed at strengthening the consistency of the mechanism’s operation and its stability, providing that the incentive of the mechanism is in any case determined on the basis of predefined unit fees proportionate to the remuneration of the metering service, rather than the price of gas. This change results in a substantial reduction risk compared to the potential impacts of the original provision.

Specifically, the Authority, while keeping the current criterion for recognising and valuing UFG quantities for tariff purposes and the functioning of the neutrality mechanism set forth in the IBT (Integrated Balance Text), which regulate the balance of gas systems within the Nation grid, in terms of recognised value, introduced an incentive mechanism based on the difference between the recognised UFG and the actual amount for the same year.

Generally speaking, the change in the regulatory framework with regard to the recognition of natural gas quantities to cover fuel gas, network leaks and UFG could have negative effects on the Snam Group’s operations, result balance sheet and cash flow.

Market risk

With reference to the risk associated with gas demand, based on the tariff system currently applied by ARERA to natural gas transportation activities, Snam’s revenue, via the directly controlled transport companies, is partly correlated to volumes withdrawn. The ARERA, however, confirmed for the fifth regulatory period (2020-2023), with resolution no. 114/2019/R/gas, the guarantee mechanism with respect to the share of revenues related to volumes withdrawn already introduced in the fourth regulatory period on transported volumes. This mechanism provides for the reconciliation of major or minor revenues, exceeding ± 4% of the reference revenues related to the volumes withdrawn. Under this mechanism, approximately 99.5% of total revenues from transportation activities are guaranteed.

Based on the tariff system currently applied by the ARERA to natural gas storage activities, Snam’s revenues, via Stogit, related to infrastructure usage. However, the ARERA has introduced a mechanism to guarantee reference revenue that allows companies to cover a significant portion of revenues recorded. Until the fourth regulatory period (2015-2019), the minimum guaranteed level of recognised revenues was approximately 97%, while for the fifth regulatory period (2020-2025) resolution no. 419/2019/R/gas extended the level of guarantee to all recognised revenues (100%). The same resolution also introduced an enhanced incentive mechanism (defined by subsequent resolution no. 232/2020/R/gas) with voluntary participation that provides for an increase in profit-sharing of revenues from short-term services from 50% to 75% against a reduction in the portion of recognised revenue subject to a hedging factor.

Finally, with reference to the tariff regulation criteria for the LNG regasification service for the fifth regulatory period (2020-2023), resolution no. 474/2019/R/gas confirmed the mechanism to cover reference revenues at a guaranteed minimum level of 64%.

In general, the change to the regulatory framework in force could have negative effects on the Snam Group’s operations, results, balance sheet and cash flow.

Abroad, protection from market risk is offered by the French and Greek regulatory authorities (Terēga’) and (DESFA), from the TAP and Austria long-term contracts (different expiry dates for TAG and Gas Connect from 2023) and for the ADNOC Gas Pipeline (20 years tariff-based). In Austria and the United Kingdom (Interconnector UK) regulation does not guarantee hedging for the volume risk.

The table below provides a focused look at the main categories of climate change-related opportunities identified by the Group, which are represented in line with TCFD recommendations.