Strong results as markets stabilise

Following a turbulent 2022 dominated by the supply crisis in Europe, energy prices and volatility moved closer to pre-crisis levels during 2023.

This normalisation was mainly driven by reduced energy demand, high gas storage levels and a mild European winter. Price and volatility levels continued to decline throughout the year.

Under these market conditions, Danske Commodities delivered adjusted earnings before tax (EBT) of EUR 359 million, underlining that we have built a stronger and broader business. In recent years, we have increased our global market presence and our portfolio of renewables and flexible assets, and this growth continued in 2023.

Growing portfolio of renewables and flexible assets

In 2023, we grew our portfolio of renewables and flexible assets under contract by 20%, from 10 GW in 2022 to 12 GW.

Strategic progress in our asset-backed trading business was among my personal highlights of the year. This includes the growth in our wind and solar portfolio across multiple geographies and the signing of our first battery storage asset in the UK. With the onboarding of the UK battery storage asset, our portfolio of flexible assets has now reached a volume of 1.7 GW across Denmark, Sweden, Norway and the UK.

I am also pleased to see that our collaboration with our parent company Equinor once again produced measurable results within the renewables space. To share a few examples, Danske Commodities will risk manage the 800 MW asset portfolio of leading Brazilian renewables developer Rio Energy and the power produced by Polish onshore wind farm Wilko, both acquired by Equinor in 2023.

To support our growing asset portfolio, we have invested in weather analysis infrastructure, our algorithmic trading setup, flexibility in power production, the implementation of a new deal capture system in our gas business, and, not least, in our people.

Our global journey continues

We have unlocked new opportunities for our business model through increasing market liberalisation and green ambitions around the world. In 2023, we took another important step in our global journey as we completed our first trades in the Brazilian power market from our newly established office in São Paulo.

It was also the year when we prepared the company to enter the Japanese power market. The market entry was completed in January 2024 from our trading desk in Singapore.

With these market entries, we now have activities on five continents, underlining our position as a global energy trading company.

Ready to handle the complexities of tomorrow

The market stabilisation in 2023 led to declining energy prices and decreasing market volatility throughout the year. The downward trend in prices and volatility is expected to continue even further in 2024. Navigating a new normal for energy markets that is still being defined, we expect earnings before tax (EBT) for 2024 to be in the EUR 150-350 million range.

Looking further ahead, we expect the energy landscape will become greener, but also more complex, with the build-out of renewable energy sources and the introduction of new flexible technologies such as batteries and power-to-X. The need for companies like Danske Commodities to optimise energy markets and bring balance on a global scale will only increase in the coming years. With a growing asset portfolio, global expansion efforts and continuous investments in our trading and technological setup, Danske Commodities is well-positioned to do our part in the energy transition.

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This was not a year without challenges for the renewable energy sector. Projects faced obstacles like increasing production costs, rising interest rates and higher inflation, causing major projects all over the world to be shelved. Towards the end of the year, there was finally some good news.

One rotation can power a home for two days

The British offshore wind farm Dogger Bank produced power for the first time in October 2023. As the first 13 MW turbine started turning, electricity from the wind farm began flowing to the UK’s national grid, powering British homes and businesses. Each rotation of the 107-metre blades can produce enough energy to power an average British home for two days.

Dogger Bank is a joint venture between Equinor (40%), SSE Renewables (40%) and Vårgrønn (20%). Located 130 km off the coast of Yorkshire in the UK, the wind farm will occupy an area almost as large as Greater London and nearly twice as big as New York City. When fully complete, its 3.6 GW capacity will comprise 277 offshore turbines capable of producing enough energy to power the equivalent of six million British homes annually.

The project consists of three phases; Dogger Bank A, Dogger Bank B and Dogger Bank C. Each phase accounts for 1.2 GW of the farm’s total capacity of 3.6 GW. In August 2020, Danske Commodities signed two 15-year balancing PPAs for 240 MW each with Dogger Bank A and B. In November 2021, we signed a 15-year balancing PPA for 480 MW from Dogger Bank C, bringing our total offtake from the wind farm to 960 MW.

Managing the uncontrollable

Since winds can’t be controlled, how can you plan power production from a wind turbine? This is where balance responsible parties like Danske Commodities come in the picture. As offshore wind projects like Dogger Bank are placed in open waters, there is plenty of wind to be harvested, but the strength of the winds makes balancing the assets tricky. If wind gusts exceed 28 mph, it is no longer safe for the turbines to operate, and they will shut down. So, power production can go from peak output to producing 0 megawatts within a very short time frame.

In other words, the power production from wind turbines is variable and output will fluctuate with changing weather conditions. To help transmission system operators match production and consumption in the grid, we forecast the expected production on a continuous basis. Every day, we look at our forecasts and trade the majority of the wind production in the day-ahead market the day before delivery. On the day of delivery, we will look at the newest forecast, adjust our position accordingly in close to real time and trade the remaining production in the intraday market, down to 15 minutes before physical delivery.

By combining forecasting and weather analysis capabilities with strong algorithmic trading skills in a 24/7 setup, we help manage something as uncontrollable as the wind, ultimately bringing balance to energy systems and value to assets owners.

The future is green – and bright

There are still challenges for the renewables sector to overcome. As an energy trading company, we can help by making the projects commercially viable through our trading capabilities and by supporting security of supply through our portfolio of dispatchable energy production assets.

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Flexibility is key for the energy system. On a global scale, flexibility means that power is produced by wind turbines and solar panels when the weather allows it, while power plants take over as soon as the wind stops blowing and in cloudy weather. Increasingly, flexible assets like batteries and power-to-X provides us with even more options to store, produce and consume energy in the most efficient way.

But flexibility isn’t just a macro-trend. In an increasingly flexible and complex landscape, the ability to adapt to changing market conditions becomes more important, and some producers of energy become microcosms of the greater energy landscape.

Combining different energy sources

That is the case for Grenaa Varmeværk – a district heating company in Denmark providing heat to 5,000 households and businesses in the Danish town of Grenaa. Owned by the consumers, the heating company has a vision of becoming a green energy producer able to adapt to changing market conditions and customer needs. To achieve this, they have invested in a flexible energy setup that combines different sources of energy to optimise their production and consumption.

Grenaa Varmeværk's flexible energy setup consists of a wood chip boiler, solar thermal panels, and solar photovoltaic panels. The wood chip boiler is the main source of heat for the district heating network, running on locally sourced biomass to reduce CO2-emissions and support a circular economy. The solar thermal panels installed on the fields surrounding the boiler house supplement the heat production on sunny days, while the solar photovoltaic panels located on the adjacent field produce electricity that Grenaa Varmeværk can either use for its wood chip boiler and its heating pump or sell to the grid. In this way, Grenaa Varmeværk becomes a microcosm of the world-wide flexible energy system.

Optimisation and cooperation

To make the most of its flexible energy setup, Grenaa Varmeværk needs to plan its production and consumption in advance and react to the changing market prices and weather conditions. This is where Danske Commodities comes in. We have signed an agreement with Grenaa Varmeværk to provide them with forecasting, optimisation, and balancing services. At Danske Commodities, we use our expertise and data analysis to help Grenaa Varmeværk decide when to run the wood chip boiler, when to use or sell solar power, and when to buy or sell heat or electricity on the market. By doing so, we help Grenaa Varmeværk improve their environmental performance and secure the lowest possible prices for its customers.

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Coming down from unprecedented high price levels and heightened supply concerns, gas market participants had to adjust quickly to a new reality in 2023. The main headlines for the new market reality were declining commodity prices and decreased consumption, which tasked energy traders with identifying new trading strategies to ensure efficient markets.

From scarcity to stability

In 2022, gas markets were disrupted by geopolitical conflict and supply concerns due to a significant drop in the supply of Russian natural gas. Concerns about a cold winter and gas scarcity sent energy prices through the roof and put market liquidity severely under pressure. In the end, Europe managed to overcome the crisis by increasing LNG imports from the US and Qatar and by successfully reducing gas consumption.

This meant that the market paradigm shifted from scarcity to stability. One of the main signs of the market stabilising in 2023 was the decline of the record high prices seen in 2022. During the period from June 2023 to August 2023, TTF front-month gas prices had dropped by more than 80% compared to prices in the same period in 2022.

Looking at supply, reports show that Russian pipeline gas flows decreased by 56% from 64 bcm in 2022 to 28 bcm in 2023. This was offset by an increase in LNG imports. In 2023, the US was the largest LNG supplier to the EU, representing almost 50% of total LNG imports. In 2023, comparing to 2021, imports from the US almost tripled.

Lastly, market stability was also driven by decreased gas consumption. From January to August 2023, European gas consumption dropped by 11% compared to the same period in 2022. The decrease was supported by a relatively mild winter, which also contributed to high filling levels across European gas storages, along with a 90% target filling level by November set in the Storage Regulation.

Efficient trading supports security of supply

For traders navigating this new market reality, adaptability was key. In a matter of months, market volatility fell significantly below the volatility levels seen in 2022, which called for adaptation to the new market conditions.

At Danske Commodities, our main focus was on optimising the flexibility under our management to balance supply and demand efficiently through data-driven trading and sophisticated analytical models. During 2023, we managed the largest gas storage portfolio in Danske Commodities’ history, which enabled us to support the European energy system with the flexibility available to us.

Managing gas storages not only requires a highly sophisticated analytical setup, it also takes substantial capital. The combination of high interest rates and commodity prices still above historical levels posed challenges for market participants in 2023. For Danske Commodities, the financial requirements emphasised the importance of being part of global energy major Equinor, which helped us perform our role of strengthening security of supply through efficient trading.

New reality calls for new solutions

2023 was in many ways about adjusting to a new market reality. Prices moved closer to pre-crisis levels and filling levels across European gas storages were high, but the work to make sure Europe can overcome extreme weather conditions or unforeseen market events continues. To ensure future security of supply, LNG imports to the EU are expected to grow in the coming years, with some projections indicating that LNG will surpass pipeline gas sourcing by the end of the decade.

Regulatory measures are also being introduced to ensure security of supply. Increased filling requirements have been introduced by several member states, one example being in Germany where it is now required for storages to enter the winter season with a minimum of 85% filling by the end of October and a minimum of 40% filling in the start of February.

In addition, the market is looking to green alternatives like biomethane as a supplement to natural gas and LNG. The future of European gas markets is still evolving, but what remains certain is that the world will need flexible energy sources, and Danske Commodities is committed to providing the needed flexibility through our wide portfolio of energy assets.

Go to DC Annual 2023