Furthermore, the crisis brought a liquidity challenge for certain electricity retailers, with smaller retailers being more vulnerable than larger and more established retailers. The working capital requirements associated with many electricity retailers’ operations increased substantially. This was due to how many electricity retailers took out loans, purchased and paid for electricity, and covered the costs for customers for up to a month or more before customers settled their invoices. As electricity prices and interest rates rose, the amounts that the retailers needed to borrow increased. Many electricity retailers found themselves facing loan terms resembling consumer loans rather than standard corporate financing arrangements. This was due to how the conditions in the financial sector changed due to the high exposure many institutions in the Nordic region had in the electricity sector, leading to substantial uncertainty regarding their ability to meet payment obligations.
Some respondents also stated that this challenge was more pronounced for the smaller electricity retailers because they often lacked the same financial backbone as larger electricity retailers; this resulted in established electricity retailers receiving an increased number of enquiries about acquiring customer portfolios from these smaller suppliers.
A few respondents also expressed the need for a guarantee programme during the energy crisis, where the state would provide loans with lower credit costs to electricity retailers, resulting in lower costs for customers. However, such a scheme was never introduced. To address the liquidity issue, some electricity retailers transitioned from post-payment to pre-payment models, while others opted to establish bilateral agreements with electricity producers to ensure access to more affordable credit.
Availability of fixed-price contracts, or contracts with fixed-price elements
The available contract types are the same for households and SMEs: spot-price, fixed-price, and variable-price. However, for SMEs, it is also common to have a power agreement that combines spot pricing and fixed pricing.
For households
Fixed-price contracts were available to household customers both before and at the beginning of the energy crisis, but demand for these agreements was low. Statistics show that the share of households who had a fixed-price agreement was 5% in June 2022, and very few entered fixed-price agreements as they were very expensive due to the high risk premium during this period. Most Norwegian households have traditionally had spot-price contracts due to stable and low energy prices, and these contracts have been actively promoted, for instance by Forbrukerrådet, due to the spot contracts having the lowest average costs over time. There is also a small percentage of households that have variable-price agreements. Forbrukerrådet has actively warned households over these contracts, and their share has declined significantly due to high electricity prices. Before the energy crisis, around 20% of households had these contracts; as prices rose and the electricity support scheme was introduced, this figure reduced to around 5%.
There were also household customers who had entered into fixed-price contracts before the crisis. These contracts allowed customers to secure electricity at low rates compared to the spot price during the crisis, which was advantageous for consumers but proved to be catastrophic for the electricity retailers. In some cases, electricity retailers attempted to buy customers out of their favourable fixed-price contracts in exchange for a lump sum, an offer accepted by some household customers. In addition, some electricity retailers sold parts of their customer portfolios to different electricity retailers to avoid bankruptcy.
Fixed-price contracts were also available to household customers during the energy crisis to customers until the electricity support scheme was introduced, but these tended to be relatively expensive due to high and rising electricity prices. While there would have been considerable demand for low-cost fixed-price contracts when market prices were high, these were not readily available. Some electricity retailers described demand for fixed-price contracts during the early stages of the energy crisis; the fixed-price contracts they sold to households were secured against the system prices, but as the difference between the area price and system price increased, it eventually became difficult to offer such contracts. Some electricity retailers expressed that the change in the resource rent tax – making the tax based on the actual income of the power producer through the fixed price from the standardized contracts, rather than the spot-market price – should include contracts sold to households as well, not just businesses, thus enabling the electricity retailers to provide fixed-price contracts to households. The proposal originally included contracts for household consumers, but they were not included in the final proposal. The argument was that it was not seen as appropriate that household consumers entered into such long-term fixed-price contracts, given the high risks and large opt-out fees. Moreover, the introduction of the electricity support scheme, which created an electricity price cap for households, made it irrational for customers to purchase fixed-price contracts and thus almost completely removed the demand for these type of contracts.
For SMEs
Combination agreements are the most common contract type for SMEs, although fixed-price agreements exist and are used to some extent. These agreements often include a mix of fixed-price and spot-price components. These provide price hedging for a portion of the volume the customer purchases, while the remaining part of the electricity is purchased at spot price. There are also commercial customers who have chosen not to hedge their exposure to electricity prices and use spot agreements. These are typically businesses with low consumption, meaning that the cost of electricity has not been a determining factor for the company. There are, however, also some large customers who have relied on pure spot-price agreements.
For those customers with spot-price contracts, their electricity costs increased significantly in 2022. The Norwegian government introduced a temporary and limited electricity support scheme for businesses that was only available in 2022. Those SMEs that received electricity support were not allowed to distribute dividends and had a cap on how much money they could receive.
The government plan to help those businesses in an electricity market with volatile prices was to facilitate electricity retailers offering standardized fixed-price contracts to businesses, with contract periods of three, five, and seven years. This was achieved by introducing a contract exemption for electricity sold through these standardized fixed-price contracts, in which electricity is valued at the contract price instead of the spot price. Additionally, many electricity retailers offer these contracts with different profiles, such as seasonal and base load profiles, which some electricity retailers say have effectively addressed the majority of SMEs’ concerns.
To offer these fixed-price agreements to SMEs, electricity retailers establish agreements with power producers and act as intermediaries between the customers and the producers. The hedging agreements are with the power producers due to the non-liquid financial market. In these agreements, the SMEs take on the volume risk, while the power producer sets the price. To supply fixed-price contracts at a large scale to SMEs is challenging. First, it involves a substantial uncertainty premium in the price. For power production companies, managing numerous bilateral agreements with a multitude of electricity retailers requires a large amount of administrative work and is a barrier to the supply of fixed-price contracts.
Thus far, there has been limited demand for these contracts, and their effectiveness remains uncertain. Some market players express that the 3-5-7 years fixed-price contracts are too long and inflexible, which may not align with the needs of some businesses. Other electricity retailers express that there have been no complaints regarding their fixed-price contracts, and that the retailers can adjust the contracts to the business’s electricity usage profile. However, many SMEs are hesitant to enter a fixed-price arrangement due to their lack of understanding of the terms and conditions in fixed-price contracts. Moreover, with the current low prices in some areas, their willingness to enter into a fixed-price agreement is limited. Nonetheless, many businesses did secure themselves against system prices in 2021. Assessing how well the 3-5-7 years contracts have functioned will be easier once these contracts against system prices expire by the end of 2023 and these electricity retailers must enter into new contracts.
Some electricity retailers expect an increase in demand for fixed-price contracts because they believe businesses want predictability in budgeting, as opposed to taking bets in the market. This approach has traditionally been a focus for larger companies, especially those with higher exposure to energy prices. SMEs have typically considered spot prices or combination agreements as their best option. However, as the market expects increased volatility and high prices in the future, there are some expectations that businesses want to explore possibilities to reduce their risk exposure to the electricity market.