Negative Power Prices? It's Not Actually That Bad, RWE CFO Says

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(Bloomberg) -- Nothing has upended the old utility model and the European power markets more than the renewable energy revolution.

And nowhere is that clearer than in Germany -- the biggest trading market and where the penetration of solar and wind power has had the biggest impact as solar capacity alone has surged more than tenfold in the past decade.

On some days, such as Christmas and other national holidays or even the odd Sunday, there’s so much supply of electricity that it outstrips the nation’s demand. The result in the market is a price below zero and factories can then potentially earn money for taking the surplus off the hands of producers.

And it’s posing questions for utility executives. Do they shut down their plants for what can be a few hours, or keep them online with no chance of making any money?

“When power prices are negative you don’t earn any money from running conventional power generation, and that is totally obvious,” Markus Krebber, chief financial officer at RWE AG, said on the utility’s earnings call with analysts on Tuesday. “You have to shut for the time being.”

To listen to the conference call, click here

But generators can still make money. And here’s how Krebber explained it on the call:

  • It’s never clear in the forward market what hours will actually be negative. You have a “blended” power price for a day or a week. The generator sells that contract to lock in a tiny margin and you will never make a lot of money from the hedging.
  • “But then you see the daily volatility and in those hours when the power price is negative you shut down your own power plant and you buy the power from the market or even getting money.”
  • “In the other hours, where prices are higher, you bring on additional capacity from which you earn additional money.”
  • “The higher the volatility in the market is, the more we can actually make.”

The development toward more periods of negative prices is still problematic for generators such as RWE, which are cutting running hours of conventional plants.

RWE is addressing that through changes to its generation mix by adding renewable assets in its deal with EON, Krebber said.

Buying and selling power, sometimes with just a few minutes’ notice, is always a gamble, though. RWE’s Supply and Trading unit lost 24 million euros ($28 million) compared with earnings of 145 million euros a year ago. The company still expects full-year earnings from the division to be between 100 million and 300 million euros.

©2018 Bloomberg L.P.

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