07.12.2022 | Business model combines strengths in production and trading
Axpo’s integrated business model combines strengths in production and trading to add value for the company, its customers and Switzerland as a whole. It also strengthens expansion in renewables and energy supply security.
A company that generates electricity needs to have a buyer for the quantity of electricity it produces at any given moment. This means that Axpo must at all times be able to sell the entire output of its more than 100 Swiss power plants as well as that covered by long-term power purchase agreements. Since it only has captive customers via CKW, it has to trade the bulk of this output on the wholesale market.
The wholesale price is set by the market in line with supply and demand. These are both subject to constant change, so the price changes as well – sometimes quickly, for example when the wind picks up after a lull and starts turning wind turbines again, or when a plant suddenly goes offline. It can also be influenced by long-term factors such as economic cycles, nuclear plants being decommissioned with no viable replacement, electricity consumption rising sharply as a result of decarbonisation or government investment and market interventions promoting massive expansion in alternative energies. On top of this, political decisions can cause large fluctuations, as the world has seen over the past few months.
Axpo takes all of these factors into account in marketing its electricity (asset-backed trading). If it were to sell the electricity at the market price at all times, it would be exposed to a high level of market risk. When prices fall below the cost of generation, as they did between 2013 and 2016, the company makes a loss. This is why Axpo sells a large proportion of the electricity it produces forward for a fixed price – a common approach in the industry. This ensures a profit margin and safeguards against selling below cost. Since sufficient demand does not exist in Switzerland for buying such large quantities three years in advance, much of the electricity is sold via the European Energy Exchange in Germany in the interests of market liquidity, even though almost all of it is eventually supplied to customers in Switzerland. Axpo manages this portfolio of electricity contracts continually in line with market trends and, in accordance with market practices and regulations, up to a quarter of an hour in advance. In the year under review, the gross margin from trading electricity generated by Axpo’s own power plants amounted to CHF 1,313 million.
Axpo’s trading expertise and outstanding knowledge of the market also allow it to help companies and major consumers throughout Switzerland and Europe with their electricity purchasing (origination). This is becoming ever more challenging as the growing proportion of weather-dependent generation leads to higher price volatility. As a result, long-term power purchase agreements (PPAs), and thus also trading in general, are becoming increasingly important. There are many examples that reflect this. For instance, when Axpo signed a 20-year PPA concerning electricity from AlpinSolar with the supermarket chain Denner, this was handled by its trading unit – as was the five-year PPA with Nestlé for electricity from the Mauvoisin hydro plant. The trading unit also helped a wind farm in Evora, Portugal to sell ten years’ output at guaranteed prices, which meant thatit did not need to be subsidised.
Axpo makes sure that its customers have access to all the energy they need all year round at fixed prices, even when Switzerland cannot count on sufficient domestic production during the winter. This aspect of the trading business not only supports the energy transition and increases energy supply security, it also constitutes an additional revenue stream for Axpo and diversifies its cash flow. This business posted a gross margin of CHF 885 million in the reporting period, covering part of the high liquidity requirement for hedging Swiss electricity production.
Proprietary trading is subject to strict limits, but it contributes to risk diversification, has delivered a substantial share of revenue in recent years, and provides an important pool of know-how for Axpo’s other business areas. Proprietary energy trading mainly entails analysing supply and demand to calculate the future price and thus identify market inefficiencies. Axpo has a number of market analysts working in this area, who supply very valuable data to other business areas. Axpo is among the leading trading partners in a variety of fields and markets, which opens up additional opportunities and helps it to grow in other areas of business. For example, the knowledge gained from proprietary trading with respect to the transport, storage and trading of natural gas and LNG allows it to support the Swiss Federal Office of Energy’s Winter 2022/23 Energy Supply Task Force in its search for energy supply security solutions. Axpo has played a key role in Switzerland’s gas supply in this respect. Proprietary trading has consistently returned a profit in recent years, posting a gross margin of CHF 89 million in the fiscal year just ended.
Production and trading thus go hand in hand: when electricity is generated, it must be traded. At the same time, the trading business is also important for risk diversification. While production is heavily dependent on the electricity price and suffers when prices fall, this is not the case with trading as it generates income independently of the electricity price and can add value in any price situation. Production and trading are both essential components of a balanced, diversified portfolio.