Electricity bills may rise by 20 to 30 per cent next year if the state-owned energy company buys its oil requirements at current future prices, according to the Finance Ministry.
The situation may become more acute if Enemalta’s losses for this year, currently estimated at €35 million, are recouped from next year’s tariffs.
A spokesman for the Finance Ministry said oil prices have increased substantially over the benchmark on which this year’s tariffs were based.
He added that Enemalta has held back from hedging its fuel requirements for 2012 in the hope that future oil prices start to drop as analysts are predicting.
Enemalta has kept utility tariffs stable for the whole of 2011 as it did last year but the corporation only managed to lock 63 per cent of its oil purchases, with the rest being bought at spot market prices.
Asked why the corporation only hedged part of its oil purchases when it intended to keep tariffs unchanged, the spokesman defended Enemalta’s actions.
“There was no decision to ‘only’ hedge 63 per cent of 2011 oil requirements. Rather, market prices did not give Enemalta the right opportunity to hedge the total amount required since future prices were consistently higher than the targeted amount,” he said, explaining that hedging agreements for 2011 were reached last year.
This has resulted in an estimated loss of €35 million, which, however, the government hopes could be cut down if oil prices for the rest of the year drop.
The oil market has remained volatile, and during the past week prices fell nearly five per cent after the International Energy Agency said it will release 60 million barrels of oil from its reserves to make up for a loss of Libyan exports in global oil markets.
It is this downward trend that Enemalta is looking out for, but today’s prices are still higher than the $79 per barrel on which the tariffs had been worked out.
Hedging oil requirements for 2012 at this stage would still lead to substantially higher utility tariffs since futures (the future price of oil that is locked since companies also buy an insurance premium) are still around 30 per cent higher than the prices on which this year’s tariffs were based.
“The decision not to hedge for 2012 is not a gamble but a serious consideration that if taken now would require an increase in next year’s tariffs by 20 to 30 per cent,” the spokesman said.
He said that Enemalta’s risk management committee was being “prudent” and heeding the advice of international experts, who in the past weeks said there were indications that oil prices “may start to drop due to the sluggish US economy, the prolonged crisis in the EU and the end of quantitive easing (when central banks release more cash onto the markets) in the US”.
A decision to raise utility tariffs would have to be sanctioned by the Malta Resources Authority and consumers are currently paying the highest ever rates for water and electricity consumption.
The high bills have contributed to the erosion of household disposable income and are a major source of concern for families.
Last year, the government mitigated the high tariffs with a one-off bonus that cost the country some €10 million.
This was not repeated this year despite calls by the unions for families to be compensated for rising fuel and gas costs over and above the high utility tariffs.
The government is committed to seek stability in utility prices, even though this does not necessarily mean lower bills. According to the spokesman this can only be achieved if there is an underlying hedging arrangement.
“It is for this reason that the interconnector project is so important, as this will allow us to reduce a significant part of our dependence on the price of oil and purchase energy directly from the market,” he said.
The interconnector project is expected to come on stream in 2013 and will connect Malta to Sicily via an underwater electricity cable.
What is hedging?
Hedging is basically an insurance to lock future oil prices. Enemalta cannot purchase future fuels on spot prices, which reflect the current oil price.
The hedge is taken on the futures, but market volatility means that a hedge can turn out to be either beneficial or detrimental. If oil prices fall lower than the hedge price, Enemalta will have to pay to the bank the difference it could have saved.
What hedging definitely does is keep the price of oil purchases stable so that utility tariffs can be maintained at the same rate.
ksansone@timesofmalta.com