Trading
The value chain element Trading relates to proprietary trading activities involving electricity, gas, emission allowances and other certificates. It maximises Alpiq’s profit by leveraging the balance sheet, taking unhedged market risks and providing market access.
Spotlight: “The purpose of energy trading is to mitigate risk”
Switzerland is long in summer and short in winter. That is, we produce more electricity than we can use in summer and less than we need in winter. As electricity is not easy to store, it makes sense to sell the excess electricity in summer and buy the electricity we lack in winter. In other words, electricity trading is necessary to ensure security of power supply in Switzerland. Swiss utility companies participate in the energy markets, e.g. via the EEX, where they buy and sell electricity to balance their portfolios. There is no specific marketplace in Switzerland. Such a market would be too small to be “liquid”.
Marketplaces have been introduced in Europe to increase transparency and provide security to the market participants. Electricity can be bought and sold in advance (forward) as well as on the spot market (day ahead, intraday). It is common for market participants to buy and sell electricity several years in advance in order to hedge against potential falls (producers) or rises (consumers) in price. However, trading is often viewed negatively by some sections of society and by many politicians. Some voices on the political spectrum call it pure speculation, saying that it will cause economic crisis or result in the sell-off of Swiss electricity on the European wholesale market. Navin Parasram, Head Trading at Alpiq and Member of the Executive Board, sheds more light on the topic of energy trading.
Navin, why do we need trading?
We have different needs in society. We have consumers of energy and producers of energy, and we need to get energy efficiently from one to the other. We can do this via one big company that produces, supplies and feeds energy through the entire system. But this involves a large centralised construct. A more efficient approach is to have a third party. This can be a company acting as an intermediary between producers and consumers while optimising production to meet demand and cover shortfalls. However, the best approach is to have trading exchanges that transfer the risk from producer to consumer as efficiently as possible, with minimum infrastructure needed, and minimum loss along the way.
Trading is often considered risky. Why is that so?
We often start with risk in life. As an energy consumer, I have to take the risks. What will the price of my electricity be next year? Is electricity going to be available? Will there be enough gas in Europe to generate power. These are questions that we all have to ask. And what we do as traders is to try and mitigate these risks. Trading helps us to get closer to the best possible market conditions. We can reduce risk further and further. But there is always some uncertainty left. We cannot guarantee all outcomes. We try to balance the mismatches in the system, and to supply from one party to the other, even if electricity needs to be sourced across the border. There is always that ultimate goal of trying to deliver efficiency and security of supply to the customer.
Energy trading is sometimes associated with speculation. Where exactly is the speculative element?
It’s a human desire to want certainty. For us we are really focused on hedging and securing supply, securing revenue for our business, and supplying our customers. Sometimes, doing these things requires us taking a risk. If there is a slight uncertainty regarding next year’s electricity production, I need to make an estimate of how much production there will be. And this, by definition, is a somewhat speculative thing to do. But our motivation is not to bet on being right – or otherwise lose everything if we are wrong. We can never be certain how much it will rain or snow, so we need our technology and expertise to manage the risk as best as possible. As a company, we are not interested in being speculative per se. This is not our purpose.
Why don’t we keep all our energy in the Swiss market?
Electricity is not storable, and it is the end commodity that we need. Here in Switzerland, we generate surplus electricity in summer but have an electricity deficit in winter. And we need to manage this somehow. Two options are open to us: participating in the European energy market and being connected to the grid so that we can fill shortfalls and get rid of our excess. Or building more capacity. Or we can do a combination of both. Ultimately, this is a very business-centric, cross-border approach. Ensuring effective electricity supply throughout Europe is a collaborative effort.
Navin Parasram
Head Trading/Member of the Executive Board