Statkraft's revenues
Statkraft's revenues come from spot sales (sale of own production in spot markets), contract sales to the industry, financial trading and grid activities, as well as district heating and power sales to end-users. The fundamental factors in Statkraft's income are power price and production.
Power prices
The most important individual factor for Statkraft's profitability is the power prices in the Nordic and German energy market. Power prices are driven by hydrological conditions, commodity prices, CO2 prices, exchange rates and the relationship between supply and demand. In the energy market, the marginal cost of the last produced unit decides the market price at any given time. Power prices will therefore vary with which energy carrier is currently used to produce the volume the market demands. With the predominance of hydropower in Statkraft's production portfolio, the company's profitability is influenced positively by the difference between own costs and marginal cost for the energy carrier which at any given time determines the market price. Both Nordic and German power prices plummeted in 2008, with a decline of 22 and 41 per cent, respectively, measured in EUR/MWh. This resulted in the income not increasing in line with the increased production capacity gained from the asset swap with E.ON AG and the consolidation of SN Power. However, prices in 2008 were high. Compared with an average for the period 2004-2008, the average system price in 2009 was 2 per cent lower in the Nordic region, while its was 15 per cent lower in Germany.
See graph System price Nord Pool
Production
Statkraft's production is determined by capacity, access to resources (hydrological balance, wind and gas) and power optimisation. In 2009, the Group's production capacity increased significantly as a result of new power plants from the asset swap with E.ON AG and the consolidation of SN Power. At the end of 2009, the total installed capacity was 15 806 MW, of which 2433 MW is in connection with asset swap with E.ON AG and 621 MW is in connection with the consolidation of SN Power.
Access to resources is not something Statkraft can influence to any particular degree, but it is an important factor in the power optimisation, where the objective is to maximise income in the short and long term through optimal utilisation of water resources. The demand for power varies through the day and through the year. As a result of these fluctuations in demand, the power market is dependent upon capacity that can be adjusted through the day. Statkraft's large percentage of flexible production capacity, in combination with the analysis apparatus, is an advantage that contributes to the Group's ability to achieve generally good price margins and results.
See graph Change in production
Overview of Statkraft's power and district heating plants (pdf)
Sales revenues
Statkraft's energy trading is based on the physical power production from own power plants. The power production is mainly sold on the spot market and through long-term commercial industry contracts, but the Group also delivers power at terms stipulated by the authorities (concessionary and industrial power). The continuous hydropower production is optimised within the terms and conditions of the licenses and the flexibility of the plants. Through the company's power optimisation we strive to produce the maximum amount of power when the highest market prices are expected. Contractual obligations are covered through own production or through buying market power when this is more profitable. Statkraft's gas power plants produce when power and gas prices indicate that this is profitable, while wind power plants produce when the wind conditions allow.
See graph Sales revenues (24.7 bn.)
Concessionary and industrial power at statutory prices
Statkraft is required to hand over a share of the power production to the district where the power is produced, so-called concessionary power. The price for this power corresponds to the average production cost, which is substantially lower than the power market price.
Statkraft is a major supplier to the energy-intensive industry, and some of this power is sold at terms stipulated by the authorities. The average prices for these contracts are substantially lower than the market price and the cash flow and result are therefore lower than if the power had been sold on the market. The current statutory contracts expire successively up to 2011. As these contracts expire, the commercial energy-intensive industry contract portfolio will grow. The state subsidy rules in the EEA Agreement set strict limitations as regards the entering into of power agreements with the energy-intensive industry and national schemes which provide this industry with benefits of significance.
Dynamic hedging
To mitigate risk related to uncertainty in future price and production volumes, as well as to increase the long-term revenues, the company engages in dynamic hedging of production revenue through financial power trading. As power prices are influenced by other commodity prices such as coal, oil, gas and CO2, and as these prices can both be input factors in gas power production (gas and CO2), and price adjustment factors in contracts, Statkraft also engages in financial trading with these commodities. The share of hedged production is dynamic, i.e. in constant change, and is determined by the prevailing market development expectation.
Statkraft's analysis activities occupy a key position for the trading. The analysis activities are based on collection and processing of hydrological data and other market data. These data are used to estimate market prices and optimise the flexible production. High expertise and good analysis tools in this area have provided Statkraft with a competitive advantage which has resulted in good financial results. On average, the dynamic hedging trading has yielded a gain of NOK 1.2 billion annually for the last five years.
Trading and origination
Statkraft is also engaged in relatively short-term positioning with financial standard contracts (Trading) and trading with structured Products and customised agreements for industry and business activities (origination). The income from these activities was particularly high in 2009 as a result of significant realisation of EUA and CER contracts in Germany. On average, trading and origination has generated income exceeding NOK 700 million annually in the period 2005-2009.
Downstream activities
The downstream activities in Statkraft consist of grid operations, district heating and power sales to end users. This part of the business contributes a substantial part of the Group's total sales revenues, but has significantly lower margins than the rest of the business.
