Slump in Nordic power prices prompts hedging revival

[OSLO] After years of decline, the trading of Nordic power contracts is increasing again as electricity producers seek to protect future earnings from a slump in delivery prices to their lowest in 20 years.

The trading slowdown had raised concerns about the relevance of the Nordic power market with adequate liquidity required to offer reliable price signals.

But so far this year, trading volumes are up 10 per cent on Nasdaq Commodities, the main Nordic power trading hub, while rival exchange EEX set a new monthly record in September of 1.1 terawatt hours (TWh) of traded and cleared Nordic power contracts.

The pick up, which is reviving prospects for the most liberalised power market in Europe, comes after an unusually warm and wet winter in a region dependent on hydropower for electricity generation. Large amounts of snow in the mountains resulted in a sustained hydropower surplus that has weighed on prices.

"I think people are more aware and more scared, you could call it, of the downside risk than they have been for a long time and that creates interest to hedge long term," Georg Aasen, CEO of Nasdaq OMX, which operates Nasdaq Commodities, told Reuters.

TOO MUCH WATER In early October, filling levels of Norway's reservoirs reached a record high of 95 per cent, according to data from Norwegian energy regulator NVE.

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That has contributed to a drop in the Nordic system price, which reflects daily physical power deliveries, to an average of 10.45 euros (S$16.64) per megawatt hour so far this year - about a quarter of the average price for 2019.

And Marius Holm Rennesund, a partner at energy consultancy Thema, warned that Nordic prices could drop as low as 6-7 euros per megawatt hour in future wet and windy years.

When they are in control of inflow and reservoir levels, hydro power operators can choose when to produce electricity, with an option to store the water for times when prices are higher.

But Mr Aasen said that because of the risk of flooding this year, operators had at times been forced to produce irrespective of price.

HEDGING While the system price is traded on the so-called spot market, which has seen steady volumes in recent years, producers and consumers can also trade contracts for several years ahead, locking in forward prices.

Traded volumes of these forward contracts had halved between 2013 and 2019 as collateral costs rose and with a greater shift to bilateral power purchase agreements, often concluded to build wind farms in the Nordics.

Hermund Ulstein, chairman of the Nordic Association of Energy Traders (NAET) attributed the recovery in trading volumes this year to consumers looking to lock in low prices.

"For the producers, the danger that (prices) could go even lower is a good reason to hedge part of their production," he added.

Norway's largest power producer, Statkraft, confirmed this, with CEO Christian Rynning-Toennesen telling Reuters last week that the company had carried out extra hedging at the beginning of the year.

This year's rise in trading volumes was "gratifying", Anders Oestby, vice-president power market at Norway's second-largest hydropower producer, Hafslund Eco, told Reuters, declining to comment on his firm's hedging activity.

"Increased trading and liquidity help all players in the market to exercise sensible risk management," he said.

REUTERS