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Tuesday, January 10, 2012
The electricity market in 2011

The architecture of the European energy market has been fundamentally transformed in 2011.Two significant factors impacted the energy market in such a dramatic manner - the tragic accident at the Fukushima nuclear power plant in Japan in March, and one of the driest periods on record during the last three quarters of the year. 

The Fukushima accident had dramatic consequences worldwide, beyond the immediate local risks posed to health. Acting as a catalyst for anti-nuclear sentiment and a populist drive towards renewable energy sources, protests against nuclear energy emerged in many locations. For Europe, the most significant was the protest by more than 200,000 people in March. This was the month in which key local elections in Germany were timed, and Chancellor Angela Merkel fronted the announcement of a heavily politically charged program of change for the German nuclear industry. The eight oldest German nuclear plants were taken off line within days of the Fukushima incident, leaving nine reactors in operation. By June, the German parliament had approved legislation to phase these out of operation on an accelerated timetable, commencing in 2015.  



Two huge consequences emerged: first, the immediate sharp spike in spot prices caused vast immediate losses on the books of most market participants. Secondly, market participants had to unwind long-term forward positions which depended on German nuclear production. The knock-on effect of these two direct market shocks was a fundamental realignment of European energy markets, and in the wake of this we have seen successive announcements of large losses and corporate restructurings from many large European energy firms. 

“The first half of 2011. has been the worst period in the history of our company” EON CEO Johannes Thyssen said at a press conference presenting the German giants results for the year. Only in the second quarter of 2011 EON posted a EUR 395 million loss, recording a staggering 71% drop in year on year net income for the first half of 2011. The other German giant, RWE recorded a EUR 598 million loss in the first half of the year. ENbW, the third German electricity producer fared similarly – it recorded EUR 552 loss in the period January September 2011. 

The situation is the same across the board in Europe. Statkraft, the Norwegian power utility has posted a EUR 204 million loss in Q3, while the Czech power utility CEZ announced year on year net income slump of 34%. ALPIQ, the Swiss utility has also announced that it will close the year with a loss, as will a number of other utilities in Austria, Greece and across south-east Europe. 

Just about the time the first financial results for the year started coming though (third quarter, the south-east and central Europe region entered one of the driest periods on record. The region is highly dependant on hydrology, circa 30% of all energy produced in SEE comes from hydro units. Serbia, Romania, Montenergo, Bosnia and Herzegovina and especially Albania are dependant on production from their large hydro power plants.



 

  • 2011 figures
  • 2007 figures (poor hydrology)
  • 2010 figures (record hydrology)
  • Mean production during 15 year period

Hidroelectrica, Romania’s operator of hydro power plants called a force-majeure in the fourth quarter, which severely impacted Romania’s exports of energy. This triggered a major change in the regional electricity market, as Romania is the region’s leading exporter of energy. Bosnia and Herzegovina, also one of the region’s major exporters of energy followed suit – in the fourth quarter its utilities were importing energy. By the fourth quarter Albania also became a net importer of energy, more than 90% of its energy comes from hydro units. Croatia, Serbia and Montenegro were also affected. 

These developments were reflected by the market prices, both of energy and cross border capacities (CBC’s). The cost of transferring energy from Germany to the region reached the EUR 50/MWh mark, while energy easily surpassed the EUR 100/MWh mark. This came against the backdrop in which energy was sold for most of the year in the region of EUR 55-60/MWh. 

But the unexpected u-turn of the German political elite in respect of nuclear energy does not fully explain the poorer results of European energy companies in 2011. After all, losses were recorded by companies which are in no way reliant on nuclear energy in the energy mix. By the third quarter of 2011 it became clear that the main cause of concern among energy community is the acknowledgement that investment banks and hedge funds look like they have hijacked the market. 

Since their [banks and hedge funds] full scale entry into the electricity market, the volume of electricity traded has grown exponentially. The size of trading positions taken up by banks and hedge funds, the size of funds at their disposal, their propensity to take higher risks, skill and aggressiveness have lead to a major shift in the energy markets. The traditional power brokers in the markets, the large utilities, are no longer able to exert the same level of influence on price and market developments simply by tweaking their production portfolios. And this is making them very nervous. It seems that for all the cost cutting and restructuring efforts, the immediate future of large power utilities will be determined by their ability to innovate and find new sources of value.


 

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