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Fuel prices much lower.
Pressure from demand on world energy markets has dissipated due to the weak economy. As a result, commodity Glossary prices are currently far below last year’s average. In light of the unfavourable economic outlook for 2009, we do not anticipate that they will recover quickly. At the end of January 2009, a one-month Brent crude forward cost between US$46 (delivery in March) and US$55 (delivery in December). The price curve indicates that market participants are counting on a recovery. Nevertheless, it is unlikely that 2009 Brent quotations will match the 2008 average (US$97). The same applies to gas prices which track developments on the oil market. From our current perspective, hard coal will probably also be cheaper than in 2008. In Rotterdam spot trading at the end of January, a metric ton cost US$74 (including freight and insurance to Rotterdam). This was far below the 2008 average (US$148). German BAFA Glossary prices are also expected to record a substantial decline.
Economic crisis affects CO2 emissions trading: low need for certificates expected.
We anticipate that prices in European CO2 emissions certificate trading will be significantly down on 2008. Certificates for the current year sold for only €12 per metric ton of CO2 at the end of January. Market participants expect reduced production from energy-intensive facilities to bring a large number of additional certificates onto the market. At the end of January, certificates from CO2-reducing activities in developing and emerging countries, known as “Certified Emission Reductions” (CERs), cost €10 per metric ton of CO2. In light of the low price level, barely any such projects are being initiated at present.
Effects of commodity slump on 2009 procurement costs.
The significant decrease in commodity prices will cause RWE Dea’s gas and oil production revenue to drop in 2009. However, our electricity generation will not be affected significantly until 2010. RWE Power and RWE npower have sold forward nearly all of their generation output for 2009. In principle, when concluding forward contracts, we hedge the volume and price of the required fuel at the time the contract is signed. This also applies to the purchase of CO2 certificates. As a result, costs incurred to purchase gas, hard coal and emissions allowances have largely been influenced by price peaks on forward markets in the past, as has our electricity revenue. We have no fuel price risk exposure from lignite since we produce this fuel in our own opencast mines. Uranium required to run our nuclear power stations has been secured via long-term purchase agreements. In the nuclear power generation sector, fuel procurement costs typically account for a small portion of total generation costs.
Our ability to forecast procurement costs is limited by the fact that fuel used by our power plants depends on their load factors. This is in part determined by the development of spot prices on electricity and fuel markets, and power plant outages can also occur. We believe that savings can again be realized when purchasing materials and services in 2009.
Collapse of prices for fuel and emissions allowances drives development on electricity market.
The low level of prices for hard coal, power plant gas and CO2 certificates is reflected in declining electricity prices. As explained earlier, since we sold generation forward early on, this will not have a material effect on our earnings for 2009. We have also sold forward most of our 2010 electricity production (already more than 70 % in Germany). Therefore, we will only partially be affected by the current commodity Glossary price trends next year. We believe that prices paid for raw materials–and with them electricity prices–will recover over the medium term. Market signals indicate this as well. At the end of January, the forward price for 2010 base-load Glossary electricity deliveries in German wholesale trading was €51 per MWh. The same contract for the following years traded at €54 (2011), €58 (2012) and €64 (2013).
