Düsseldorf (energate) - The supply market is currently navigating through turbulent waters. While many suppliers are still struggling with the price turbulence, the task now is to implement the political price brake in organisational terms. energate spoke to Oliver Hummel, CEO of green electricity supplier Naturstrom, about the consequences of the electricity price brake on competition and the challenges in the current market environment.
energate: Mr Hummel, while the market is still struggling with the implementation of the electricity price brake, trading prices are currently falling so sharply that the first suppliers are now offering prices for new customers below the price brake. Would we not have needed the price brake in the end?
Hummel: The electricity price brake is still justified. At the moment, traders can buy volumes more cheaply than in the past. But most market participants have already stocked up for the current year. The short-term drop in prices therefore does not benefit these suppliers and, above all, their existing customers in terms of pricing. In general, the price development of retail tariffs is currently much more uneven than in the pre-crisis period. In parallel with some price reductions, some suppliers are continuing to raise prices in the current market environment, as the increased costs of last year's forward transactions are only passed on to customers with a time lag. Without the price brake, the huge increases in market prices would be passed on in full to existing customers - the majority of all customers. So they are very much benefiting from the price brake.
energate: Is Naturstrom now offering new customer tariffs below the price brake, like some of its competitors?
Hummel: We will lower the prices on 1 April. Then the level of the price brake will be within reach. But we will not go below it. I expect it to be similar for a large number of suppliers.
energate: The price brake is a big challenge for the industry, especially because of the short implementation period. How have you coped with this?
Hummel: The implementation was indeed very stressful for everyone involved, especially at the turn of the year. The law was only passed in mid-December. But we would have had to write to customers in November to inform them in time, which was impossible. According to the law, we have to inform customers again at the end of February. We have to bear in mind that there are different groups of customers who need to be written to differently. In addition, we supply customers with electricity, gas and also heat, so the price brakes have different tasks for each area. This is extremely demanding in terms of implementation. But we have learnt a lot in the last twelve months and have become much quicker at adjusting prices and communicating with customers. Today we can say that it worked on our side with the customer letters, but the stress factor was immense.
energate: How much do you agree with the content of the price brake?
Hummel: Like many others in the industry, I would have found it more sensible to design the revenue absorption component as a tax. This would have had the decisive advantage that the state would have been able to skim off the profits, which are indeed high for many electricity producers, much better and more efficiently from 2022 onwards. The legislator has needlessly missed this opportunity. What they have created instead is a very complex regulation that interferes with the procurement of traders and causes a high implementation and documentation effort.
energate: As a Naturstrom company, you are particularly hard hit by the skimming off of profits, because you rely on your own generation and want to expand it further. Do these plans still make sense?
Hummel: We will continue to expand our own generation portfolio. The price brake is limited in time, wind and solar farms are designed to run for 20 years or more - I don't see any serious conflict there. Last year, we were able to generate around 25 per cent of the electricity we supplied to customers from our own assets. And that was always the plan: one of the main purposes of our own generation is to make us less dependent on market prices. Unfortunately, this is exactly what is no longer possible in the short term due to the skimming of profits, as we cannot pass on the financial advantage of our own generation to our customers.
energate: What do you mean by that?
Hummel: We can still use the electricity volumes from our existing portfolio, but the internal procurement contracts between the operating companies and our trading company are not taken into account in the revenue absorption. Instead, the revenues of the operating companies are skimmed off on the basis of the monthly market value. This means that we cannot internally pass on any electricity volumes below the market price level from our plants to our trading company - to the detriment of our customers. Ironically, the electricity price brake does not reduce electricity prices at this point. We drew attention to this fact during the legislative process in order to prevent such a regulation, but were initially unsuccessful. The debate continues.
energate: With the price brake, price - until now the most important criterion for choosing a supplier - is disappearing as a differentiating factor. What are the implications for you and your competitors?
Hummel: This is mainly an issue for the aggressive low-cost suppliers in the market, which we are not. I don't see it as a problem for us. I think the price brake is the right thing to do, given the big price differences between existing and new customers. But it is clear that the electricity price brake weakens competition. Without a price brake, new customer tariffs could soon become much cheaper than existing contracts again, if the current trend of falling wholesale prices continues. The huge discrepancy that could result could lead to a real wave of switching in the market, with no systemic benefit. The price brake is counteracting this, and that is probably a good thing, so that the dubious discounters who cancelled their customers' contracts at the beginning of the crisis do not suddenly come out of the woodwork, sensing a new business opportunity.
energate: Overall, however, it can be said that the sales business has lost some of its appeal recently. Are you worried about your bread and butter business?
Hummel: We expect the market to recover. But it is also clear that the uncertainties in the sales business are increasing and the importance of risk provisioning is growing. We are currently facing a major challenge with margin calls. The figures show that in January less than half the volume was traded on the derivatives market than a year earlier. Many market participants are now unable to trade because they no longer have the means to provide the necessary collateral. In this situation, they have no choice but to sell energy in order to reduce their security deposits. This leads to a shift in procurement from the forward market to the spot market. This means that market participants have to take on the full risk. As a result, short-term fluctuations in the energy market are passed on to end customers much more strongly than before, and the risk of individual suppliers becoming insolvent increases. All in all, nobody can want that.
energate: How can this be remedied?
Hummel: Many in the market have already expressed their opinion and suggested that the German government should introduce a guarantee programme to cover this risk. That seems reasonable to me. There is no great risk of default here. It is more a question of preserving the established market structures in times of price turbulence. We must not forget that: The electricity market is not used to the huge price swings we have seen recently. Accordingly, the hedging instruments between trading partners are not designed for this.
energate: Against this background, do you think there will be another market shakeout?
Hummel: I can certainly imagine it, especially if the price level continues to fall. This will mainly affect smaller providers with customer numbers in the four-digit range. For companies of this size, the entire administrative handling of the price brakes and the customer letters that are currently pending is an immense challenge. I wouldn't be surprised to see one or two smaller players pull out and sell their customer base.
The interview was conducted by Philip Akoto and Rouben Bathke.
