Rises in power hedging rates from RWE and E.ON appear to outweigh drops among other major utilities over H1 compared to the first half of 2014, according to company financial updates, though ICIS analysts said other data suggested the contrary.
Advances in hedging rates could mean the EU power sector scales back its overall carbon buying over the rest of this year but ICIS’ interpretation of a slowdown might be more bullish for EUAs as utilities would need to accelerate hedging in H2.
RWE and E.ON bucked a trend among utilities that have scaled back the percentage of expected electricity output they hedge forward, Carbon Pulse found in the results of six firms representing almost a quarter of EU ETS emissions last year.
RWE and E.ON are the first and third biggest ETS emitters respectively, collectively discharging CO2 amounting to more than 11% of the entire ETS cap last year, and the scale of their hedging increases outweighs more incremental falls seen at the other four utilities: Vattenfall, CEZ, ENBW and Enel.
MISLEADING SIGNS
Yet, ICIS Tschach Solutions analyst Jan Ahrens thinks the RWE figure might be misleading and said there were indications that utilities overall had scaled back hedging in H1.
“When we look into open interest developments and auction purchasing data, we at ICIS see a slowdown of hedging in particular in late February and early March 2015, while EUA buying was stable as of Q2 again,” he said.
Indeed, the company reports indicate there was a pick-up in hedging after the first quarter, with Vattenfall was the only one of those six utilities not to have upped its hedging rate over Q2 compared to Q1 of this year, according to Carbon Pulse estimates.
Over Q1, benchmark front-year EUA prices fell from €7.14 to €6.97, while they rose from €6.97 to €7.46 over Q2, ICE data shows.
ICIS’ Ahrens said that slower hedging in H1 2015 means the utilities will have to do more in the future.
“So while it depressed prices in the past (imagine where EUA prices would be if they hedged as usual!) it is supportive for EUAs in the future,” he added.
INCOMPLETE PICTURE
The reported data only allows limited insight into the hedging patterns of utilities, as absolute power sales also affect their demand for carbon allowances. An increase in hedging ratios may also indicate a decrease in forecast electricity sales for a given period.
ICIS’ Ahrens said this was why RWE’s reported hedging figures alone did not give the full picture.
“If RWE reduces its expectation of generation in the future, but does not increase any hedging, the hedge ratio might still increase,” he explained.
All of the six except Enel reported a decrease in power sales over the half, reflecting lower wholesale electricity prices and an 18% y/y decline in average German baseload clean dark spreads, according to Carbon Pulse estimates.
Also, companies do not disclose all of their hedging data in financial results.
Notably, E.ON only reports its hedging rates for ‘outright’ generation, i.e. its nuclear and hydroelectric output that is less impacted by short-term changes in fuel and carbon costs than ‘spread’ generation (hard coal and gas).
In addition, analysts have said hedging rates may have been artificially low last year as the sector awaited the details of Germany’s plan to tackle coal-fired power emissions, which was outlined last December.
FACTFILE:
- European power generators typically sell most of their expected electricity output well in advance, with some starting three-to-four years before delivery. They buy the required fuel and carbon allowances at the same time to lock in profits.
- Hedging rates are closely watched by market participants because, as the main buyers of EUAs, the purchase patterns of major utilities can have a major bearing on carbon prices.
By Ben Garside – ben@carbon-pulse.com
