Germany’s Largest Utilities Take Diverging Views on Power Prices

Germany’s two largest generators appear to have radically different views about where power prices are going after a record slump.

EON SE hedged 100 percent of its 2016 power production as of September, while RWE AG, the country’s biggest generator, hedged only about 40 percent, according to company data compiled by Bloomberg Intelligence.

“EON apparently assumes that power prices will continue to drop while RWE expects a recovery,” Heino Hammann, an analyst at Norddeutsche Landesbank, said Tuesday by phone from Hanover.

Both utilities are struggling with a record four-year slide in prices after Chancellor Angela Merkel’s move toward subsidized renewables created a boom in wind and solar amid slowing demand. German power prices for the year ahead, a European benchmark, dropped to 31.15 euros a megawatt-hour on Jan. 7, a 10-year low, according to data from European Energy Exchange AG.

EON may have earned 1.6 billion euros ($1.9 billion) through early hedging of its output, according to BI. Electricity prices have fallen 11 percent in the past year, leaving RWE more volume to sell in the market at what will probably be a lower price.

“It is obvious that a certain amount of our 2016 power generation isn’t sold yet,” RWE Chief Financial Officer Bernhard Guenther said Wednesday in an interview in Essen. “Having sold these volumes at higher prices would have been preferable.”

Next-year power in Europe’s biggest economy will probably fall below 30 euros, a level not seen since October 2003, according to trading companies from Mainova AG in Frankfurt to CF Partners U.K. LLP in London. The contract closed at 31.94 on EEX yesterday.

Cost Cuts

EON and RWE are contending with the impact of declining prices on earnings. EON announced plans on Nov. 30 to spin off its fossil-fuel plants while RWE is seeking $1.2 billion of savings at its generation unit, according to people familiar with the plan.

EON’s early hedging may give its generation revenue a 14 percent boost compared with peers, said Elchin Mammadov, a BI analyst.

“RWE has a disadvantage compared to EON when power prices drop significantly as we see it currently” Stephan Wulf, an analyst at Warburg Research GmbH, said Tuesday by phone from Hamburg. The company has to act more cautiously regarding hedging because selling large volumes of its conventional generation capacity can drive down prices, he said.

Capacity Offline

“2016 is still far away and some operators may be wondering whether to keep capacity online or close it, and lower hedging may reflect the uncertainty,” Bruno Brunetti, a senior director of electricity at Pira Energy Group, said by phone from New York on Jan. 12. “RWE did mention that they have a number of plants under review.”

Germany has 18 gigawatts of unprofitable power plants, according to Sanford C Bernstein Ltd. RWE plans to halt 8,940 megawatts by the first quarter of 2017 compared with 7,741 megawatts for EON from 2013 through this year, according to the latest company figures.

EON spokesman Adrian Schaffranietz declined to comment when reached by phone Wednesday.

Copyright 2014 Bloomberg

Lead image: Transmission lines via Shutterstock

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