E.ON, RWE energy trading woes set to exacerbate

FRANKFURT/LONDON Thu May 26, 2011 12:57pm BST

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FRANKFURT/LONDON (Reuters) - Energy traders at E.ON (EONGn.DE) and RWE (RWEG.DE) are set to deliver a weak performance this year after being hit by the Japanese nuclear disaster and rising competition from renewable energy.

Traders at Europe's largest and fifth-largest utilities had been expecting power and gas prices to fall when the tsunami hit Japan, causing the worst nuclear disaster in 25 years and prompting the German government to shut several nuclear plants.

The shutdowns forced their owners to buy from competitors in a surging market while fuel prices for their other plants rose in anticipation of Japan buying more.

"Fukushima was an event that caught many trading floors wrong-footed," said Kepler Equities analyst Ingo Becker.

But Germany's coal and nuclear power giants were already struggling to deal with a flood of subsidised solar power on sunny days in Europe's largest power market which has lead to a sharp fall in peak power prices -- hitting the non-subsidised utilities profits hard.

"When our own nuclear, coal and gas units dominated the market, we had a competitive edge in trading, but with the arrival of vast amounts of renewables that edge has been largely wiped out," one trader with a major German utility, who declined to be identified, said.

The solar shadow over other plant operators profits looks like getting longer still, with continental Europe expected to add at least 7 gigawatts in solar capacity this year, according to solar industry group EPIA, further complicating trading for traditional power producers.

"Feeding in solar power into the grids hampers daytime prices so extremely that we are seeing structural changes to power prices," Christian Muehlinghaus, senior analyst at German utility MVV Energie said.

BIG LOSSES

Both companies trade with their own money -- proprietary trading -- and book the results in their trading divisions, which also contain profits from the company's traditional business of selling the electricity they generate.

Both companies' divisions, which have long been their most volatile earnings contributors, posted losses in the first quarter that were much worse than analysts had expected, even after seeing both fall short of expectations last year.

E.ON after the first three months of the year lowered its earnings expectations for its trading division from an EBITDA loss of as much as 300 million euros (261 million pounds) to a loss of as much as 400 million euros.

That increases the challenge to generate profits this year in particular for RWE, as its trading division is burdened by its loss-making natural gas contracts which mean it has to pay above spot market prices for gas from Russia.

E.ON booked a loss of 31 million euros from proprietary trading in the first quarter -- RWE does not disclose results from proprietary trading -- and both companies commented negatively on their trading activities.

E.ON said it was "adversely affected by market developments" in the first quarter after the German government ordered utilities to close several nuclear power plants after the Fukushima accident.

Its German rival said that "unexpected price fluctuations in the aftermath of the events in Japan and North Africa" were unexpected contributing factors towards its trading woes.

In the immediate aftermath of the Japanese tsunami and the shutdown of the Fukushima nuclear plants, German power prices for around the clock delivery in 2012 surged by 10 percent to over 58 euros per megawatt-hour (MWh).

German power prices gained another 2.5 euros per MWh after the shock shutdown order for seven of its oldest nuclear plants, while coal and carbon emissions prices surged as German utilities had to buy more fuel to replace their reactor output and the permits they need to pollute with it.

A global surge in gas prices on expectations that Japan will gobble up much of the oversupply that had swelled up in the market before the March earthquake and tsunami piled further pressure on those who needed to buy gas.

"Fukushima changed a lot," said UniCredit analyst Lueder Schumacher.

RWE faces still more adverse conditions as it relies on coal power and the revenue margins from generating electricity from coal, known as the clean dark spread, have been poor since the start of the financial crisis three years ago.

As a result of RWE's reliance on coal generation, its share price was closely linked to the performance of the clean dark spread.

But just at the time when clean dark spreads saw their biggest rise since early 2010, the Fukushima nuclear accident and resulting German nuclear moratorium put renewed downward pressure on RWE shares.

"It is ironic that RWE's shares were linked to dropping coal power profits, but that the same event that raised those profits through rising power prices should also put utility share prices under pressure because of their nuclear exposure," one German utility trader said.

RWE share & coal margin graph: link.reuters.com/wyt59r

(Writing by Peter Dinkloh; Editing by William Hardy)

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