Forward power sales are not paying off this year; Czech ČEZ hedged better than rivals

Major European energy companies have largely hedged through forward electricity sales for the next few years at prices slightly below 30 EUR/MWh. The strategy, which significantly helped some energy companies during periods of falling electricity prices, is now depriving them of profits. Contracts for the coming years are currently trading above the average prices at which energy companies have forward-sold their electricity.

Forward-selling electricity is standard practice for energy companies. The volume of electricity sold forward for the following year is usually only several percentage points below estimated electricity generation. While this strategy is beneficial for securing future profits, its advantages are significantly reduced in light of the current rise in electricity prices.

The disadvantage of early sales is also demonstrated by forward electricity sales made in the recent period. Both Czech ČEZ and Germany's Uniper had sold less electricity forward by the end of the third quarter than they had in the same period of the previous year.

For example, ČEZ has sold 81 % of its expected electricity generation for next year, whereas 10 % more electricity had been sold as of the same date last year. Moreover, during this year's third quarter, ČEZ sold forward only 1 % for the following year, while last year it increased the volume of forward-sold electricity from 86 % by a further 5 %.

This indicates the caution of energy companies, which are seeking to increase the average price of electricity sold for the following year by slowing their forward sales, as contracts for electricity sales on wholesale markets are currently trading noticeably higher than the average price at which they will sell electricity next year.

Waiting paid off this year

Specifically this year, it has therefore been advantageous for energy companies not to rush their forward sales. Higher prices can help them achieve higher profits in the coming years. When comparing utilities in the region, it should be noted that Czech ČEZ is relatively well positioned compared with its competitors.

Among ČEZ's competitors, a sceptical view of further electricity price growth on wholesale markets has apparently had a significant impact. For example, RWE announced after the third quarter as part of its regular investor reporting that it had sold most of the planned electricity generation from its nuclear and lignite power plants.

Specifically, RWE has sold forward more than 90 % of its electricity generation from nuclear and coal for both 2018 and 2019, at a price of around 27 EUR/MWh. For 2020, it has sold approximately 70 % of its generation volume at approximately 30 EUR/MWh.

In view of current electricity prices, these decisions are perceived rather negatively, but it should be recalled that RWE is not the only company to have hedged in this way. Germany's Uniper is in a similar position, having disclosed information on forward electricity sales for the coming years in Germany and Sweden when presenting its third-quarter results.

While ČEZ achieved an average electricity price for the following year of 30 EUR/MWh according to the latest data, Uniper has sold forward more than 80 % of its generation for the following year at a price ranging from 25-29 EUR/MWh. Particularly noteworthy is that Uniper has already sold forward 75 % of expected generation in Germany for 2019, at a price even below 25 EUR/MWh.

In contrast, ČEZ has sold only 57 % for 2019 at a price just below 30 EUR/MWh. However, given current electricity prices, average selling prices can be expected to rise for all energy companies, as they seek to increase their future revenues.