A handful of privately owned Danish energy trading companies are upending European energy markets. Companies employing automated trading desks – the industry term for computers that run trades based on complex algorithms – are buying and selling huge volumes of energy contracts based on weather conditions impacting electricity consumption on one end and renewable energy production on the other. And they’re getting filthy rich in the process.
This type of energy trading is considered to be an important part of the new energy landscape emerging as part of the global decarbonization movement. According to the scientific paper “Energy trading solution: The capable leverage for a renewable-dominant future,” published last year by Elsevier’s Academic Press, “developing multi-energy trading mechanisms is an urgent action in response to ensuring the reliability of multi-energy supply in the system with a large number of stochastic producers.”
In layman’s terms, these energy trading firms are performing an important service in the markets in which they operate by helping to balance out supply and demand on the grid. This means that those traders in Denmark are helping to keep the lights on for Europeans. The importance of this service, and the lucrative nature of it, is due to the rise of renewable energies across the continent.
Wind and solar power are variable, meaning that unlike baseload powers such as natural gas or nuclear fission, production waxes and wanes according to factors far outside our control. In an economy powered by fossil fuels, we can simply burn more resources to make more power when demand spikes, and burn less when it sags. But the atmospheric conditions determining the relative output of solar panels and wind turbines are not so easily manipulated.
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This is where the traders come in. They keep a sharp eye on what’s happening in weather systems across the continent, and buy and sell short-term energy contracts according to price variation. “It’s ridiculous the amount of money they are making,” Mogens P. Sorensen, a former power trader turned consultant, recently told Bloomberg. “There are billions being made trading electricity in Europe.”
But there is cause for concern about who is winning and who is losing out in this equation. While traders get rich off of energy price fluctuations, that money is often coming out of consumers’ pockets. “with governments spending billions on energy subsidies, essentially propping up demand and traders’ business, there’s a real danger of privatizing the gains and socializing the losses — though the industry denies this,” the recent Bloomberg op-ed stated.
This is a real cause for concern, as energy poverty remains a pressing issue across the European continent. Millions of Europeans fell into energy poverty during the energy crisis brought on by Russia’s war in Ukraine and retaliatory sanctions on the Russian natural gas that was powering half of Europe. The European Commision defines energy poverty as what “occurs when a household must reduce its energy consumption to a degree that negatively impacts the inhabitants’ health and wellbeing.” While the European Commission and the European Union have introduced a number of measures to address ballooning rates of energy poverty across the bloc, many Europeans have been slow to recover from the hardship of 2022.
A brief from the European Union cites “volatile energy prices” as one of the factors fuelling energy poverty in Europe, which is exactly the same factor that is causing energy trading firms to go gangbusters. According to that same EU brief, more than 41 million Europeans were unable to keep their homes adequately warm in 2022. In the same year, the top Danish energy trading firms produced about $5 billion in combined profits. These diametrically opposed interests could pose a real threat to energy consumers already struggling to make ends meet.
By Haley Zaremba for Oilprice.com