Cheaper electricity brought about by mild winter fails to translate into lower consumer prices

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Finland's largest electricity producers are not planning to cut the retail price of electricity, despite the fact that the wholesale price has been reduced by half in the Nordic electricity market since the beginning of the year.
      Consumer prices are set to remain high, because the prices of electricity derivatives indicate that the market expects the price of electricity to rise again towards the end of the year.
      This is the message communicated by the representatives of the country's four largest electricity retailers, Fortum, Helsinki Energy, Vattenfall, and Energiapolar.
      Certain electricity retailers, such as Vantaa Energy and Tampere Power Utility, are even raising their prices.
     
The real-time market price of electricity has declined in recent months for two reasons. "The winter has been mild, and from the hydropower point of view there has been a sufficient supply of water in the Nordic region", explains director Jukka Niemi from Helsinki Energy.
      But there are signs that the price of electricity will go up towards the end of the year, Niemi adds.
      "Fuel prices are running at record high levels while emission rights prices are high as well", Niemi says.
      The rise in price of fuel, namely coal, as well as the emission rights,primarily affect the price of coal condensation power.
      Though the proportion of electricity produced in this way is relatively low, the price of coal condensation power tends to dictate the wholesale electricity price level, especially in the winter.
      This is because in the wholesale market the price is determined by the most expensive production method. This is usually coal condensation power.
      Customer Manager Timo Liiri, of Fortum Market, agrees with Niemi: no price reductions are in sight.
     
Fortum has around 500,000 electricity retail clients. Of them, 400,000, or 80 percent, have signed a so-called Fortum Kesto contract which is in effect continually.
      The The open-ended Kesto contract prices came down in April last year, then increased again in October, and in some cases in January.
      Those clients, with a Fortum Tarkka contract instead, which follows the wholesale prices, have benefitted from the drop in the wholesale price, Liiri explains.
      In the Tarkka contract the retail price is tied directly to the monthly average price of the wholesale market.
      For example Helsinki Energy and Vattenfall also offer similar products to their customers.
      Such contracts benefit customers whenever there is a reduction in the wholesale price. On the other hand, price peaks also translate to consumer prices in full.
     
The wholesale price of electricity does not necessarily correlate with the real production cost.
      In cases of hydroelectric and nuclear power, a rise in the cost of fuel or emission rights has no bearing on the production cost of electricity.
      Rather, they increase the producer's profit margin, when the market price is determined by costly coal condensation power.
      For example Fortum, the largest electricity retailer in Finland, produced 86 percent of its electricity through hydro and nuclear power last year, while amassing a net gain of EUR 1.2 billion.


Previously in HS International Edition:
  Warm weather reduces wholesale, but not retail price of electricity (19.1.2007)

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