In the spring and summer, the financial power market, where power for future delivery is traded, skyrocketed. During the summer, Nordic power for this winter was being traded at the highest at 550 EUR/MWh (Q1-2023). In the financial energy market, risks for sudden events are typically priced in. With the geopolitical situation as it was, there were some quite extreme scenarios and risks priced in, which meant that the market prices for the coming winter and this year rose a lot higher than many energy companies could handle.
This is why the collateral issue was so urgent in the summer. Collaterals are required by the clearing of exchanges to mitigate and remove counterparty risks. Collaterals consist of several components (initial margin, variation margin etc.), and their amount changes daily based on the changes in the market prices. What’s noteworthy about this is that even if the company doesn’t do new trades, an increase or decrease in market prices will increase or decrease the collateral requirements of previously made trades for future delivery. When the trade goes to delivery, it is settled against the spot price and the initial margin is returned to the company.
Public support for the collaterals made an impact!
In late summer and early fall, there was intense public debate on national decisions to give liquidity support to energy companies in Europe, who were struggling with phenomenally high collateral requirements. However, the financial markets stabilised, and traders could see the immediate pressure ease up after the launch of liquidity support programmes, and now, as we are approaching spring, financial market prices have dropped considerably.
Some may claim that the liquidity support measures were unnecessary because the prices are now going down. In the autumn, we did not know that, and there was a real concern about the potential outcome at the European level if any of the larger market participants would have failed to meet the increased collateral requirement. The public support reduced these concerns significantly.
All of Europe in the same boat
An important aspect to note is that when energy companies struggled with liquidity, it was not just a Finnish or even a Nordic problem, but a European one. If Finland alone had supported its energy companies with credit guarantees or similar mechanisms, it would not have been enough to stabilise the market. Measures to ensure liquidity were needed everywhere.
It is well known that Fortum too needed access to cash liquidity. However, if Fortum alone had been supported, other energy industry players might have run out of money and ended up in technical default due to missing payments to exchange clearings. This could have had spreading effects on other sectors. From our point of view, it was important that help was available for all players in the market, not just to support Fortum.
The price issue reached customers in late autumn and winter, although the liquidity problem had already been resolved. The historically high consumer prices were understandably shocking to many. I believe that for a lot of people, the most difficult part to understand was – and still is – how electricity prices are formed. Consumer prices are based on the market prices, and individual energy companies have no way of impacting the latter.
In any case, I am relieved to see the prices now coming down. The prices of electricity and gas have decreased, there is a significant inflow of LNG to replace Russian gas in Europe, and France is increasing its nuclear production and winter in Europe has been a mild one. In Finland, the OL3 nuclear reactor is expected to ramp up during 2023.
As a long-distance runner, I see parallels between the power market and my sport. The market last year was a challenging combination of speed and obstacles, much like sprint hurdles. In the coming months and years, I still anticipate some ups and downs. However, like in a long-distance run, endurance is important for reaching the long-term targets. For Fortum, it is about always helping customers and societies to get CO2-free and affordable electricity.
