Oil loss to hit power rates

Electricity tariffs look set to rise in January, making up for a loss of €30 million which Enemalta is expected to incur from power generation this year.

In September and October, the corporation had the opportunity to enter into its first oil positions for 2012 after the oil markets hit eight-month lows

The Finance Ministry is, however, reluctant to quantify the increase, insisting it is too early to do so.

“To crystallise the extent of the increase, if required, is too premature, given the volatility in the oil market and more importantly the uncertainty surrounding the current economic climate,” a spokesman said.

However, he said the forecast benchmark oil price of about $80 per barrel, on which the current electricity rates were worked out when they were set last year, was actually 39 per cent higher this year.

The current tariff base has remained unchanged since 2010.

Oil constitutes almost 70 per cent of Enemalta’s costs in electricity generation and under the new tariff regime introduced three years ago the company adopts a full cost recovery method. This means that costs not covered by income generated from electricity tariffs will have to be recouped in the following year.

This alone is expected to lead to higher electricity tariffs in 2012 if approved by the Malta Resources Authority.

In June the company had estimated its losses for this year at €35 million but this was revised downwards by €5 million after new oil hedging agreements were reached in August for the last quarter of the year. Hedging is when the company buys oil in advance by locking its future price. The company may benefit from such a decision if the price of oil keeps rising but it may also lose out if the price drops below the locked price.

The spokesman said Enemalta hedged 66 per cent of its oil requirements in 2011 at an average price of $80.87 per barrel. However, the rest of the oil was bought at spot prices, which increased the corporation’s costs and led to the loss.

According to the spokesman, Brent oil prices ranged from a low of $93.33 per barrel in early January to a 36-month high of $126.65 per barrel in April.

“As at October, Brent prices averaged $111.67 per barrel, a 39 per cent increase compared to last year’s average of $80 per barrel,” he said.

The forecast price of oil is another issue that will have to be factored in when Enemalta reviews its tariffs for 2012.

“Enemalta is constantly vigilant on oil price fluctuations given that markets are often characterised by extreme volatility and, in September and October, the corporation had the opportunity to enter into its first oil positions for 2012 after the oil markets hit eight-month lows,” the spokesman said.

In June oil futures had indicated that bills could have possibly risen by 20 to 30 per cent next year. However, the threat of international recession and uncertainty in the eurozone has contributed to lower growth forecasts pushing down the price of oil. Even so, the price remains above the benchmark of $80 per barrel.

Up they go again

Prices are per unit measured in kilowatt hours. The last tariff revision was in January 2010 and the rates were kept the same for 2011.

Source: Enemalta