21.09.2022 | Why energy has no future without trading
Many are now asking what energy trading actually is. Politics and the media paint varying pictures. Here are some answers to your most important questions.
Production without trading would be inconceivable. It is not enough to simply start up a power plant, feed energy into the grid and then hope that somebody will be able to use the electricity. Trading is the sales channel for our product: electricity. Production without trading would be like a conveyor belt going nowhere. Trading is a marketplace for producers.
At Axpo, trading is split into three divisions.
Marketing for our own production, also referred to as asset-backed trading. Axpo and other European electricity companies hedge their own production for several years in advance. This is an internationally recognised and widely adopted hedging strategy. Axpo applies a conservative form of this and hedges the energy from its Swiss power plants several years in advance. This minimises the price risk for the company itself and its customers.
Tailored customer business, also referred to as ‘origination’. This is composed primarily of supply and acceptance agreements with producers and customers both overseas and here in Switzerland. For example, Axpo serves as an interface between a wind farm in the north of Germany and an energy-intensive local company, acting almost like a broker and delivering the contract for both parties. Producers and consumers alike use these ‘power purchase agreements’ (PPAs) to hedge themselves. PPAs help advance the energy transition because they provide an incentive for investors to invest in the field of renewable energies. At the same time, many companies have ambitious sustainability goals, use renewable electricity and want long-term planning certainty. PPAs make this possible.
The smallest division is that of proprietary trading. Proprietary trading, like energy trading as a whole, is subject to strict international regulations and is always capped internally with strict limits. This division handles our liquefied natural gas (LNG) business, for instance. It is thanks to this division that we have been able to get numerous LNG deliveries to Europe via Spain over the past few months, thereby supporting supply on the continent. Switzerland benefits from this too, given that it does not have any gas storage facilities itself.
Quite the opposite, in fact. By hedging our Swiss electricity production, we arranged fixed prices with customers years ago – not speculation at all. Now, due to the historic energy crisis, the securities (a sort of rental deposit) that have to be paid for this conservative hedging are higher than ever. If Axpo had intended to speculate, it would not have sold its production years in advance, but instead betted on rising prices and thereby earned a lot of money in the present circumstances. Security payments are also made in other trading activities (origination/customer business). These have an offsetting effect and, accordingly, have reduced the required liquidity in Swiss production marketing (asset-backed trading). In this very challenging environment, Axpo therefore benefits from its broad diversification in terms of geographic markets and business areas.
More on the role of security payments
In a world marked increasingly by more widely distributed decentralised production with renewables scattered across Europe, trading will become even more important in future. This is also due to the fact that certain regions are better suited to certain technologies because of their geography. With its strong international presence, Axpo is optimally positioned for this – something Switzerland as a whole also benefits from. Without trading, energy has no future.
Axpo relies on accepted standards and various internal control mechanisms such as risk management in the divisions and within the Group, its Internal Auditing department, external auditors and experienced management. Over recent years, this expertise has enabled the company to run its trading business successfully, as testified to in its annual reports.
Axpo’s strategy is diversified to take into account its regions and fields of business. This strategy reduces risks and makes Axpo less dependent on volatile energy prices. If Axpo did not engage in trading, it would be confronted with far greater challenges in the current energy crisis. That is because liquidity is flowing into the trading business but out of Swiss business. It’s a paradox: the long-term prospects of Axpo are positive; in the short term, however, we are seeing ourselves confronted with the challenges of this historic energy crisis.
Since the market liberalisation in 2009, Axpo has not had a supply mandate for Switzerland. But as the largest Swiss energy producer, it still makes a substantial contribution to Switzerland’s security of supply with its power stations. No one company alone can ensure supply security. That is neither technically, economically nor legally possible. It is down to politics to create the framework conditions that allow the energy economy to produce optimally. Power stations with end customers or energy-intensive companies can buy electricity from Axpo, but they don’t have to.
Axpo customers, such as Swiss distribution network operators with numerous end customers, large industrial corporations and SMEs, benefit from predictable prices by means of long-term energy supply agreements for a guaranteed energy supply. In circumstances such as the current situation, such customers enjoy comparatively low and stable prices and do not need to buy in electricity at the current exorbitant prices. In addition, there are customers who, through Axpo’s brokerage, have concluded a PPA and, under this, either sell their own green electricity or buy green electricity from elsewhere. Denner, for instance, can obtain electricity from our Alpine solar plant on the Muttsee for years at a time at a predictable rate.
No. The expansion of the balance sheet and associated lower equity ratio are linked directly to the heavily inflated energy prices as a result of this energy crisis. As soon as the prices fall again, the equity ratio will rise again automatically.
Axpo adheres to all the relevant regulations in the markets and countries in which it operates as a matter of course. That includes the EU regulations MiFID and EMIR as well as their Swiss counterpart, FinMIA (the Swiss Financial Market Infrastructure Act).
You can find out more about the federal government’s credit facility for Axpo here.