Big Six may change hedging strategies

Big Six may change hedging strategies

by Big Mac

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Lower profits mean the Big Six are likely to change their long-term hedging strategies.

According to data company ICIS, the decision could follow the announcement of recent results from some firms which showed reduced profits in power generation.

That’s despite a sustained recovery in spark spreads in the last 12 months. Utilities couldn’t benefit from this because their hedging strategies often meant locking in forward costs and income before the increase in sparks occurred.

Utilities, including Centrica and RWE, have reported reduced profits in generation during the first half of the year, despite combined-cycle gas turbines (CCGT) is the dominant plant in their portfolios.

RWE reported a 7% drop in profit margins from its power generation business between January and June. Its profit margins in gas-fired generation also dropped.

Centrica also reported reduced profits of 59% during the first half of the year in its power generation division, which is mostly based on gas-fired generation.

Nick Campbell, Inspired Energy Risk Manager told ICIS: “Utilities, if they want to maximise returns, will have to develop a new hedging strategy which is more prompt and near-curve focused as the volatility is there to drive greater profitability as more and more intermittent generation connects to the grid.

“The need to develop a new hedging strategy is becoming more important given utilities’ margins are being squeezed across the vertical market as higher policy charges impact both retail and generation profitability.”