Bringing balance to challenged energy markets

2021 will be remembered as a defining year for energy markets, with unprecedented price volatility and record high energy prices in Q4.

A number of factors contributed to the surge in prices: world economies recovered faster than expected from Covid-19 lockdowns at the beginning of the year, and a cold and long winter stretched all the way into April, driving up demand for energy. At the same time, we saw significantly lower gas storage levels compared to 2020, unplanned outages, low wind production in September, political unrest and underperforming deliveries of natural gas from Russia.

We saw the effect of these market drivers at the end of the year. For example, TTF gas prices were at 19 EUR/MWh in January, peaking at 182 EUR/MWh in December. German day-ahead power prices started the year at 54 EUR/MWh and peaked at 428 EUR/MWh. EUAs started the year at 34 EUR/t and peaked close to 89 EUR/t in December. Similar developments could be seen across commodities and across markets worldwide.

For market participants, the extreme volatility and soaring energy prices increased risk and put immense pressure on liquidity. I am proud to say that Danske Commodities managed to navigate safely through the extreme market conditions and helped bring balance and liquidity to challenged energy markets.

Strong results with Equinor as a catalyst

By combining our broad market access and agile business model with the financial strength and commercial opportunities that come from being part of energy major Equinor, we delivered record adjusted EBIT of EUR 272 million for 2021, up from EUR 44 million in 2020. Adjusted gross profit for the year was EUR 345 million, up from EUR 97 million in 2020, and driven by our scalable platform, we produced a record gross turnover of EUR 32 billion. Equity grew by 94% to EUR 649 million which, together with significant credit facility from Equinor, proves the robustness of our company.

The results for 2021 firmly underline the strength of the cooperation between Danske Commodities and Equinor. Since becoming part of Equinor, we have scaled up our business, and I am proud to say that adjusted EBIT for 2021 constituted more than half of the acquisition price in 2019.

People like no other

Our results are also a testament to the expertise and dedication of the people at Danske Commodities. Reading through the DC Annual, you will meet some of them – from the Treasury team that ensured we had the liquidity to keep our trading engines running, to the tech-driven traders working closely with quantitative analysts and software developers to master the new reality of the increasingly complex markets. Extraordinary efforts have been made across the company and this year, we really saw the value of our diverse skill sets and vast industry experience, as we navigated unprecedented market volatility.

Outlook: volatile market conditions to continue

Looking ahead, we expect the volatile market situation of 2021 to continue in 2022, with significant political unrest as a main driver of energy prices. On a more positive note, we also expect to see a continuation of the heavy investments in renewable energy and new technological solutions within the renewables space as the world takes further steps towards a sustainable energy future. Backed by Equinor, Danske Commodities remains well-positioned to perform our role of bringing liquidity and balance to global energy markets.

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Full annual reports

Danske Commodities Group
Danske Commodities US

Full annual reports

Danske Commodities Group
Danske Commodities US

Energy trading companies such as Danske Commodities play an increasingly important role in the transition towards a greener energy system. Ramping up renewable energy is not only vital for reducing CO2 emissions and achieving Europe’s ambitious climate targets, it is now also an important component in reducing Europe’s dependency on imported energy.

At Danske Commodities, we have built our business on a deep understanding of the energy markets and broad market access. And indeed knowledge and access are exactly what you are looking for if you are an investor or developer putting millions of euros into new renewable energy sources.

Power production from renewable energy sources naturally fluctuates with the weather, but companies like Danske Commodities have specialised in handling fluctuating energy-producing assets, integrating the output into the power grid without wasting energy in the process.

Covering the cost of establishing renewable energy

Though wind and sun provide free fuel for wind turbines and solar panels, building the actual assets requires huge investments. Costs for a possible land lease, development and the purchasing of turbines or solar panels must be met by an income that makes the investment feasible, and the only income an asset owner has is selling the power produced by the farm or park. So, in order to get the bank loans required to build the asset – and to generate a return on the investment – asset owners need to secure a future income stream.

They do that by signing a so-called power purchase agreement (PPA) with an energy trading company like Danske Commodities. A PPA can be as simple as an agreement under which Danske Commodities brings the power produced by a wind farm or solar park to market for a certain period of time – usually several years. But it can also be a more complex agreement under which Danske Commodities helps the asset owners protect themselves from a wide range of short- and long-term risks like balancing risk, volume risk or price risk, to name just a few.

A brighter – and more complex – future

As Power-to-X solutions and large-scale power storage options like batteries gain more ground, the role of Danske Commodities in relation to asset owners is also evolving. Making the most out of the energy produced by wind turbines and solar parks is not only a matter of selling it to the market at the right time and having a big market footprint. Now, asset owners have the added option of using the energy produced to power up a battery – saving the power for later – or turning the power into hydrogen via a Power-to-X plant. Again, a company like Danske Commodities can deliver hybrid solutions, using its market understanding to determine when it makes sense to power up a battery, and when the power should be sold to the grid. This benefits the asset owners, consumers, the climate and society.

About Jens Tang

• Position: Head of European Origination
• Employed since: March 2022
• Educational background: Diploma in Meteorology

About Dirk Kaiser

• Position: Renewables Development Origination Manager
• Employed since: March 2022
• Educational background: Financial Diploma

2022 was by all accounts a year of extremes. The invasion of Ukraine and subsequent European sanctions ignited fears of a looming supply crisis. As we saw deliveries of natural gas go down and energy prices go up, the weather became more important than ever. Weather conditions like heat, cold, wind and precipitation affect both the production and consumption of energy. And when we see extreme weather conditions like heat waves and drought, the impact on energy markets can be equally extreme.

A summer of records

In the first half of the year, market volatility was mainly driven by political unrest and concerns about whether there would be enough gas in European storages to get us through winter. While the winter was the cause of our concern, the summer was what initially challenged energy markets with extreme weather conditions, further escalating the nascent supply crunch in Europe.

The heat came and it came early. Warm weather usually enters the mix in August, but in 2022, temperatures started rising in June. And after that, the records started coming in. In July, the UK recorded its hottest day ever at 40.3 degrees Celsius on 20 July. It was also the driest July in 87 years. Across Europe, temperatures were between 1.5 and 2 degrees warmer than average. The warm and dry weather meant a decrease in the production of hydro energy and low river levels across Europe, which were a challenge for the production of nuclear energy, as cooling nuclear reactors proved difficult. In France, we even saw the maximum temperature of cooling water raised from 28 degrees to 31 degrees to keep nuclear plants up and running. By the end of the summer, the extreme weather conditions had intensified the supply crunch, causing the day-ahead power price to spike on 26 August at 699 EUR/MWh – the highest price recorded in 2022.

The winter that never came

As energy prices peaked, so too did concerns of a cold winter. But the cold never came. With the exception of the Netherlands, no country in Europe recorded a temperature average that was colder than usual. The usual average temperate for winter is 3.6 degrees, and in 2022 the average temperature across Europe came in at 3.8 degrees, meaning we saw a milder winter than expected.

Together with high price levels, the mild weather conditions resulted in the necessary demand reduction that ultimately ensured we had enough gas to see us through.

Going forward, the weather will remain a determining factor in energy trading

Energy trading companies like Danske Commodities need to excel at weather forecasting and analysis. Because the weather affects energy production and consumption, we as energy traders need weather analyses to position us correctly in the market on both the short term and the long term.

The impact of the weather was more evident than ever in 2022. Over the course of the year, we saw the weather turn from villain – as a warm and dry summer escalated the energy crunch – to hero, as a mild winter helped ensure gas supplies were sufficient. And given the influx of renewable energy expected in the coming years, the weather will remain a determining factor in energy trading.

About Kim Bentzen

• Position: Head of Meteorology
• Employed since: September 2013
• Educational background: BSc. Meteorology

For decades, European gas infrastructure has been a vital component of the continent’s energy supply. A complex network of pipelines has allowed natural gas to be transported from production sites in countries such Russia and Norway to millions of households, businesses and industries, while storage facilities across Europe are used to store gas during periods of low demand and release it when demand is high. This helps ensure a reliable supply of gas to consumers even during periods of peak demand or supply disruption.

However, when the flow of natural gas from Russia to Europe came to an almost complete stop following Russia’s invasion of Ukraine, Europe was not only faced with the issue of replacing the 35-40% of its gas supply that previously came from Russia – it also faced challenges inherent in the gas infrastructure itself.

From the east to the west to the east

To ensure security of supply while decreasing its dependency on Russia, Europe sought to replace the inflow of Russian gas with liquified natural gas (LNG) bought on the global markets and imported from the US, the Middle East and Australia. But there were substantial physical limitations standing in the way, as LNG can only be imported into Europe through LNG terminals at harbours primarily located in Western Europe in countries such as Spain, France, Italy and Belgium. Moreover, the entire gas infrastructure was built to move gas from east to west – to the extent that some critical pipelines can physically only flow gas in that direction. In other words, it was impossible to flow the gas to the regions where it was needed most. Solving Europe’s supply crisis meant the gas infrastructure had to be modified to flow gas in the opposite direction.

A specific example of this issue – and how it was partly resolved – can be found with the pipeline connecting Germany and France at the border village of Obergailbach. The pipeline was designed to send gas from Germany into France, but after months of modification, the flow was reversed and on 13 October France supplied Germany with natural gas for the first time. Other pipelines – like the one connecting Belgium with Germany – went from insignificant flows of natural gas prior to the crisis to suddenly playing a critical role and thereby causing a bottleneck in the system.

Optimising the flow

In the gas ecosystem, all participants play a vital part in ensuring that the flow of gas is as efficient as possible under the given circumstances. While French gas system operator GRTGaz is responsible for the modifications that allowed the German-French pipeline to flow gas in the opposite direction, energy traders like Danske Commodities optimise the flow and distribution of gas through trading, thereby minimising the effects of bottlenecks and ensuring that Europe got the most out of the gas available. Apart from trading and moving gas to where it is needed most, Danske Commodities also manages a significant gas storage portfolio and as per the guidelines laid down by the EU, we used these storages to ensure security of supply across Europe.

A sudden drop of 35-40% in the supply of gas to Europe was bound to have a substantial impact on prices – that would be true for any commodity. However, we can also safely say that without the efforts of energy market participants, the effect on prices would have been even more dramatic.

About Nikolaj Ebbesen

• Position: Head of Short Term Gas Trading & Optimisation
• Employed since: June 2018
• Educational background: Master’s in Finance and International Business

About Patrick Kristensen

• Position: Head of Short Term Gas Trading & Optimisation
• Employed since: February 2019
• Educational background: Master’s in Finance and International Business