Power prices are increasing, and that’s turning into a problem for Germany’s huge Mittelstand sector of small and medium-sized companies, many of whom haven’t hedged themselves with futures contracts.
A megawatt hour is currently trading at just over €40 ($46.70) on the futures market of the Leipzig Energy Exchange EEX, well up from below €20 at its lowest point in February 2016 and following sharp rises in world prices for oil, coal and gas.
Big companies had locked in low prices for a number of years with futures contracts but many of those contracts are due to expire next year or in 2020 — and scores of Mittelstand firms are now facing the full brunt of the price hikes.
“I’m getting queries from a lot of companies whose contracts expire next year and who are shocked by their future energy bills,” said Wolfgang Hahn, director of Energie Consulting GmbH (ECG), which advises firms on their power purchases.
One metalworking company in the western industrial state of North Rhine-Westphalia secured a price of €20-25 per megawatt hour until 2019 and will have to pay over €40 with its next contract. That will increase its annual power bill by almost €100,000. This is a major burden given that its earnings are already under pressure from a decline in demand for the wind turbines it manufactures.
“Electricity prices have doubled over the last two years,” Mr. Hahn said. “It’s very painful for a lot of our customers.” Large companies are best-equipped to cope because they can afford energy procurement departments that know their way around the futures market. But even they aren’t always fully hedged.
“I have customers that locked in the low prices until 2021 or even 2022,” Mr. Hahn said. “But even well-versed electricity customers have to purchase additional tranches now.” Firms tend to be tight-lipped about their energy costs because they don’t want to give their rivals inside information.
Power is a particularly big cost factor in industries like steel, aluminum and chemicals. It accounts for around a third of the production costs of chlorine, which is used in nearly 70 percent of all chemical products. Covestro, a listed chemicals group based in Leverkusen, complained that power prices in Germany are not predictable enough and that its power costs were far higher at home than at its US plant in Baytown, a city near Houston, Texas.
Power traders said the surge in wholesale power prices has been so strong recently that it can't just be blamed on fuel price increases — speculators have also played a part. “In the last 10 weeks alone the future for 2019 has increased by €7,” said one trader, adding that the rise wasn’t justified by fundamentals. “Many hedge funds have come into the market recently and they’ve been driving up prices.”
Experts say there’s little prospect of a change in the upward trend. “Even at current prices I’m advising my customers to lock in big tranches long-term to 2021, 22 or even 23,” Mr. Hahn said. Though prices have doubled, they’re still modest in a long-term comparison and well below the peak of over €90 reached a decade ago. “There are no signs that power prices will fall again. On the contrary, there’s a high probability that they’ll keep on rising,” he said.
He makes a valid point. The chief financial officer of energy giant RWE, Markus Krebber, told Bloomberg this month that the German government plans to shut down the most heavily polluting coal-fired power stations on top of the phase-out of nuclear plants would force utilities to plug the gap with renewable power, which is more expensive.
Jürgen Flauger covers energy for Handelsblatt. To contact the author: [email protected].