Vattenfall Boosts Power Hedging to Offset Price Slump

Vattenfall AB’s sales of future power production rose to the highest in five years as the Nordic region’s biggest utility sought to offset a slump in prices.

All of the company’s electricity production in Germany and the Netherlands for the current year was sold by end-March, compared with a five-year average of 94 percent, according to Bloomberg Industries. German next-year power, a regional benchmark, has dropped 21 percent over the past 12 months to near its lowest level in eight years as the longest recession in the euro area curbed energy use.

Prices in Germany and the Nordic area will probably remain near current levels for the next five years, according to Vattenfall Chief Executive Officer Oeystein Loeseth. Generators from Germany’s EON SE to Italy’s Enel SpA have changed their hedging pattern and are selling more power in advance to protect themselves from further price drops, Sven Diermeier, an analyst at Independent Research GmbH in Frankfurt, said May 22.

“If market prices were very high, we could live with a 50 percent hedging ratio, and sell the rest on the spot market,” Stefan Dohler, head of asset optimization and trading at Vattenfall, said in a May 29 interview in Stockholm. “However, prices are low, and if we want to secure a certain absolute revenue, we need to push out more volume to the market.”

German power for next-year delivery fell to an eight-year low of 38.35 euros a megawatt-hour on May 13, according to Marex Spectron Group Ltd. data compiled by Bloomberg. The contract traded at at 38.80 euros at 12:01 p.m. Berlin time today.

EON Hedges

Vattenfall’s sales of 2014 power in Germany and the Netherlands were at 84 percent at the end of March, compared with an average of 60 percent over the previous five years, Chris Rogers, an analyst at Bloomberg Industries in London, said by e-mail on May 22.

EON, Germany’s biggest utility, accelerated its forward power sales in the first quarter. By the end of March, the company had sold all its output for the current year, compared with 90 percent a year earlier, the Dusseldorf-based company said in its first-quarter report. RWE AG, the nation’s second biggest utility, kept forward power sales for the current year stable at more than 90 percent by the end of March.

The higher hedging ratios do not reflect any expectation on Vattenfall’s part for lower power prices in the future, Loeseth said in a May 29 interview in Stockholm.

Financial Targets

The state-owned company bases its hedging on its financial targets for profitability set by the government, including capital structure and dividend payments, for a five- to seven-year period, he said. The company had a 5.7 percent return on average capital in the first quarter, falling short of a target for 9 percent, according to its website.

“Hedging is not linked to power prices on the wholesale market, which is much more of a lottery,” Loeseth said. “Instead, we follow concrete financial targets. Hedging is all about reducing risks, and so it shall remain.”

Vattenfall’s hedging rates for the Nordic market were lower than in central Europe, at 76 percent for 2013 and 54 percent for 2014, also above the company’s five-year average, according to its earnings report.

“For us, a Nordic hedging ratio of 70 percent means we are fully hedged in practice,” Dohler said. “If we decided to hedge what is theoretically a normal annual production, and then the weather turns out very dry, it gets very expensive to buy the missing volume back from the market.”

The Nordic area meets half of its power needs by running water through turbines, with annual variations in output of 50 to 70 terawatt-hours, depending on fickle weather conditions. That compares with Denmark’s annual power use of 35 terawatt-hours.

“If less rain than what was expected is delivered, you may soon face a situation where you have hedged too much, and vice versa,” Loeseth said.