E.ON wants to grow in trading electricity, natural gas and coal
E.ON sees growth opportunities in trading power, natural gas and coal in contrast to its struggling European generation business. “Trading is an important part of the business and we want to enforce it. We want to expand it,” Leonhard Birnbaum, member of the German-headquartered utility, said during a press meeting on Tuesday in Berlin.
In addition to trading European power markets, new trading opportunities emerge “around the optimisation of positions,” Birnbaum said.
The utility has power generation assets across European countries and also Russia, Sweden and the US and has entered partnerships in the Turkish and Brazilian power markets. It trades in power, natural gas, hard coal and carbon emission certificates.
But the growth in E.ON’s trading business would still have limits. “No, we will not slaughter the [physical] assets for trading …,” Birnbaum said.
E.ON will remain an asset-based trader with its own power plants and own grid. “In part, we can only be that successful in trading because we are who we are. Our counterparty risk is considered limited because we have a significant substance,” Birnbaum said.
Birnbaum outlined two ways to grow the trading business.
E.ON could give more risk capital to the trading desks and allow them to use that risk capital. “We can say – here, I give you €5m more risk capital and allow you to trade a North American position,” he said.
“Proprietary trading helps liquidity and helps to monetise asset positions. It gives good returns with relatively small risk. That’s why we want to grow in it in a way which is compatible with our risk,” Birnbaum said.
This is true to its new strategy of trying to push earnings but tying up less capital in the process. This is born out of necessity as like many European utilities, E.ON is saddled with billions of debt stemming from previous investments in power plants which are increasingly looking like stranded assets ( see EDEM 8 November 2012 ).
Although, the profits from trading might be comparatively small the margins can also be quite high in trading, Birnbaum said. “If it is possible to earn 100m more [from trading] than I’ll take it,” Birnbaum said.
MiFID II a welcome compromise
European utilities avoided a potential significant rise in their capital requirements for trading after EU decision-makers reached a political agreement to exclude natural gas and electricity forwards from a revised directive on securities, the so-called Markets in Financial Instruments Directive II (MiFID II) ( see EDEM 15 January 2014 ). “There was a risk that hedging would not feasible anymore. That is off the table,” Birnbaum said.
E.ON’s main capital requirements in trading were being used for hedging power positions, according to the chairman. When E.ON sells a power position on the forward market it needs to provide margining every day. The margining is made up of the difference between the forward sale and the actual power price on the market. “MiFID is an acceptable compromise between the [politicians] and the companies and their need to hedge,” he said.
The expansion in trading activity is also happening on an international level as the utility build up a trading desk in Chicago. As E.ON owns 3GW of onshore wind in the US it would make sense to trade US power and natural gas, Birnbaum said.
“If you are in the US power market you are automatically in the US gas market. Cheap shale dominates the gas market and sets in the end a cap on the power price. Gas price times two is the cap on the power price,” Birnbaum said. Martin Degen
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