Are Axpo and Alpiq “speculators”?

The federal rescue package is intended to secure the Swiss electricity supply. HSG professor Karl Frauendorfer and industry representatives are now accusing the heavyweights Axpo and Alpiq of turning too big a wheel in energy trading. They defend themselves against criticism.

Is there something brewing? The planned bailout is dividing the electricity industry.

Laurent Darbellay / Keystone

There is fire in the roof of the electricity industry. The rescue package that the federal government is putting up for the industry is welcomed by the Alpiq electricity company. The Chairman of the Board of Directors, Johannes Teyssen, recently told the “Finanz und Wirtschaft” that the smart thing about the law is the compulsory subordination of the big three, i.e. Axpo, Alpiq and BKW. However, the smaller BKW sees things differently. At most, the rescue package protects electricity companies that do not have their trading positions under control, the BKW head of communications recently tweeted from his account.

Karl Frauendorfer, Professor of Operations Research at the University of St. Gallen, provides additional tinder. In two studies from May, the mathematician accuses Alpiq and Axpo of “gradually building up speculative proprietary trading positions”.

Hedging or speculation?

Energy markets have been shaken up since last fall. First of all, wholesale electricity prices rose sharply in December due to low gas supplies, poor availability of French nuclear power plants and months with little wind in Germany.

The electricity exchanges have therefore greatly increased the liquidity requirements for market participants so that they are not suddenly left without electricity if a producer fails. In Switzerland, therefore, shortly before Christmas, the electricity company Alpiq was on the mat with the federal government. In the end, however, the owners helped out with money. The next price surge followed in February after Russia’s invasion of Ukraine.

The companies usually sell their electricity two or three years in advance, either on the exchange or over the counter (“over the counter” or OTC) directly to buyers. This enables them to better plan investments and offer customers longer-term contracts. But is it really “only” about securing your own electricity production, or do you also take “speculative” positions in energy trading?

For Karl Frauendorfer it is clear: The trading units of the electricity companies have a very large scope of discretion to declare trading positions that are speculative in nature as hedges. He has to do this in May Investigations into the Axpo and to the Alpiq submitted. According to his research, the actual level of hedging of electricity production deviates greatly from what one would expect if there were no speculative elements in trading.

Balance sheets have recently grown enormously due to a bloat in energy derivatives. The equity ratios at Alpiq and Axpo have therefore halved in 2021 compared to the previous year, at BKW the decline was less. This also has to do with the fact that BKW is less exposed to the electricity market than the other two because it has alternative sources of income with the local distribution network, the supply of consumers who are “trapped” in the monopoly and engineering services.

Narrow-chested power companies

Equity ratio, in percent

The gross value of the energy derivatives of the electricity companies has exploded – it has increased more than tenfold and in the case of Axpo amounts to 46 billion Swiss francs. Frauendorfer writes that this extreme increase cannot be explained by the price increase on the energy markets, but by the Establishment of speculative proprietary trading positions.

In statements, Alpiq and Axpo object to the studies by Frauendorfer. The increase in energy derivatives can be explained by the extreme price increases in the electricity market by a factor of ten, says Alpiq on request. Due to the extreme development on the stock exchanges, practically the entire business has shifted to over-the-counter trading. And in contrast to stock exchange transactions, these OTC transactions are listed under derivatives in the annual report. However, the relocation was able to significantly reduce the liquidity requirement.

The derivative positions explode

Energy derivatives gross, in billions of Swiss francs

The HSG researcher also estimated for the three corporations how they with pure energy trading – in addition to production and sales – since 2009 drove. For Axpo, he comes up with a loss from energy trading over 13 years of 8.5 billion francs, for Alpiq 6.5 billion and for BKW 1.1 billion.

Axpo reacted sharply: Frauendorfer had been trying to discredit the energy trading business of the electricity companies for years. He uses inappropriate, non-transparent and impractical model calculations. A diversified trading strategy is being pursued with the marketing and securing of Swiss electricity production and business with customers and counterparties at home and abroad. These activities would have supported Axpo in the years when electricity prices were low.

Axpo and Alpiq also say almost word for word that trading would hardly continue if, as von Frauendorfer assumed, it had been a loss-making business for many years. This in turn calls on the boards of directors of the companies to critically question the respective business model.

Alpiq admits that the shift to OTC trading has reduced the liquidity risk. It arises from the fact that with rising and strongly fluctuating prices you always have to provide new collateral. At the same time, however, the credit risk increases because the counterparty in bilateral trade could fail. This is not a desirable development, but it is inevitable.

BKW, on the other hand, emphasizes that when in doubt, it prefers to use the stock exchange rather than OTC trading. According to CFO Ronald Trächsel, his company almost exclusively covers domestic production. One has been in the market with the handbrake on for a long time. Trading and international business have been reduced in order to conserve liquidity.

contingency plans in progress

What does the supervisory authority Elcom say about the dispute? There has recently been an exchange with Frauendorfer, it is said on request. However, it was not possible for the authority to understand his numbers. Conversely, Elcom also has no comprehensive insight into the trading activities of the market players. Futures trading transactions with the place of delivery in Switzerland are not subject to any statutory information obligation. The statements by Elcom thus show a starting point for a reform so that the authority can better assess the risks in the industry.

What does that mean for the discussion about the rescue package? The energy companies have different business models. The risks taken can hardly be assessed from the outside, as the dispute between the companies and the professor illustrates.

With the rescue package, all three will be hit over the same bar – and other companies are to join if the Council of States has its way. Basically, the question arises as to why the public should be responsible for risks that companies have taken in their trading business.

Rather, it is crucial for Switzerland that the kilowatt hours produced domestically are available on the market even in a crisis. This requires emergency plans for Swiss power plants so that it is clear who will market the electricity if an operator fails.

This is already regulated for large partner plants such as the Leibstadt nuclear power plant, but not for plants that only have one owner. Proposals can be expected from the industry in June. Once such solutions have been found, the rescue parachute exercise could perhaps be stopped altogether.

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