OREANDA-NEWS. November 17, 2015. Weak wholesale power prices will put pressure on the cash flows of Nordic hydro and thermal power producers for at least the next two years, Fitch Ratings says. This will reduce rating headroom for Fitch-rated Nordic utilities with exposure to power prices and reinforce the Negative Outlooks on Vattenfall (A-) and Fortum Oyj (A-).

Average spot system power prices in the region fell to their lowest level in 15 years in 3Q15 due to high hydropower production and weak electricity demand. Hydropower production was driven by exceptionally high reservoir levels and we expect production to remain higher than average in 2016. This is because some companies with flexible water storage have scaled back production, but will ramp up again in the coming year. The rising share of wind energy in the production mix, which has priority of dispatch and subsidy-driven remuneration, will also keep prices low.

Electricity futures prices for 2016 and 2017 have also fallen, to around EUR25/MWh in 3Q15 from EUR31/MWh in 3Q14, which will result in weaker expected cash flows in power generation. This cash flow impact will be mitigated by the utilities' forward hedging of electricity, as some volumes were sold a few years ago at higher forward prices.

Producers in Norway and Sweden are most exposed to low prices due to the high share of hydropower generation. Finnish and Danish producers are also exposed, but are less vulnerable to the very low spot prices in Norway and Sweden due to congestion at cross-border interconnectors between the oversupplied zones and those less dependent on hydro production. We expect the congestion to continue for the next few years, but in the longer term possible new interconnectors between Finland and Sweden, and the interconnector between Norway and the UK, which is under construction, may reduce congestion and reduce price spreads within the Nordic region.

For more information on our expectations for the sector, see "Nordic Power Producers Under Cash-Flow Pressure", available at www.fitchratings.com or by clicking the link above.