Sogn og Fjordane Energi produces electric power in a region with low electricity prices, but has secured its prices in a market that follows high electricity prices in the Nordic countries. This resulted in the existence of a millionaire, and they are now leaving the market.
Sogn og Fjordane Energi (SFE) incurred a loss of NOK 200 million last year, after their hedging contracts ceased operations.
E24 on Tuesday discussed how the financial energy market, which is supposed to give players predictability, could lead to major problems for Norwegian energy producers with today’s high electricity prices.
Future energy can be bought or sold on the NASDAQ market. Many energy producers have hedge their energy sales at a certain price level in the future, in order to see approximately how much revenue they will get from their power.
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Hedging should work like this: if energy prices are higher than the price at which they are hedged, the company will make money from energy production, even if they get expenses from hedging. If the price of electricity is lower than the level secured by the company, the energy producer will benefit from the contract, even if they do not receive the same amount of income from energy production.
For SFE, this protection failed.
SFE produces electricity in the NO3 price range. This area covers large parts of the area north of Sognefjord, and the whole of Trøndelag. Electricity prices in this area were significantly lower last year than in the rest of southern Norway.
SFE has locked in its price. But most insurance contracts, including for small and medium-sized enterprises, are based on the so-called system price.
The system price is a price that is calculated by Nord Pool Energy Exchange, and it is assumed that it is not jams The throttling is a limitation in the transmission capacity between the different price ranges.between different price ranges. The price of the system is popular in the whole Nordic region.
System price and area price in NO3 have traditionally not deviated significantly from each other.
That changed in 2021, explains Martin Holvik, Executive Vice President of Economics and Finance at SFE:
– Traditionally, like many other manufacturers, we have a guaranteed price for a share of our production versus the order price. This served us well, until 2021. What happened is that the relationship between the area price and the system price got a lot weaker and partially disappeared, he says.
This means that the price of the system has gone up significantly, while the SFE did not produce electricity in a price range where it was paying well for its power. Holvik says:
– So, we almost spent. NOK 200 million in 2021 related to financial strength contracts for delivery in 2022 and beyond.
This loss becomes even greater in 2022, Holvik says.
May affect the dividends of state and municipality
When the safeguards ceased to operate, the SFE also ceased to hedge against the price of the system.
– We see that it is difficult to have predictability with respect to future income from energy production, especially in NO3. There is no longer a good financial market for pricing future production.
The company has concluded some contracts that directly target the area where it produces electricity.
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System price hedging has been a good hedging tool until 2020, and has been a good tool for several decades. Now it’s not a tool we can use, Holvik says.
This gives us much less opportunity to create predictability and stability.
– Will this also affect the ability to provide stable and stable profits to the owners?
It will affect the stability and expectation of dividend owners and the lenders’ desire for stability.
Sogn og Fjordane Energi is owned by the county municipality of Vestland, a number of municipalities in the old county of Sogn og Fjordane and the energy company Eviny.
Norwegian help request
Holvik believes the fault lies with the transfer ability between price ranges.
Internet restriction is an important reason here. The lack of transfer ability between different price ranges means that in some price ranges you don’t really get all the power there is, which is what we tested. With better transmission capacity, it will remedy the situation in southern Norway and make the price differentials lower, he says.
– Large quantities of water were lost north of the price gap at the same time that southern Norway and the continent demand electricity and prices in the south rose sharply.
He wants Norway to also come in with market help, as Finland and Sweden did at the weekend, when they came with a liquidity guarantee for the energy sector.
We have recorded that the Swedish and Finnish governments came to the scene at the weekend and wanted to defend Nasdaq. We welcome that and think it would be great if Norway could help secure the Nasdaq here. Despite the region’s price differences, it is important for the Nasdaq to be a price protection trading platform for producers and consumers.
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