Innogy's £300m power-trading lift

Innogy, the domestic electricity business which demerged from International Power, can expect a boost of up to 500 million euros (about £300m) over the next three years by exploiting the emerging power-trading business.

The figure is based on calculations by analysts at Schroder Salomon Smith Barney (SSSB), who say utility businesses such as Enron have used the practice in the US market. They say European firms such as Innogy and PowerGen, which is in the process of being bought by E.ON of Germany, could follow Enron's lead.

Power trading is the sale of electricity as a commodity – a market that has developed over the past decade and was given greater impetus in the UK when the New Electricity Trading Arrangements (NETAs) were introduced in March this year. The NETA system is a wholesale market which allows companies to balance their books when they trade power.

Electricity can be bought and sold according to a variety of factors, such as how it is generated and when it is used. Utility companies can use power trading to better manage their price risks, for example by buying gas-generated electricity on the market if the costs of generating their own energy from other sources is too high.

As well as speculating on future prices, companies can generate additional revenues by selling risk-management services to smaller utilities and other firms.

SSSB believes traded volumes of electricity in the UK will eventually be five times the actual consumption of the country. It says Innogy, which owns the retail business npower, is slightly ahead of PowerGen in the power-trading market.

"Companies can use [power trading] as a clever way to add value to their existing assets," said Daniel Martin, a utilities analyst at SSSB. "If they are successful, I can see 500 million euros, potentially more, added to their value." But he said the utility firms will have to be more transparent in telling the City how much they raise from power-trading activities if they want to see the benefits on their stock prices.

Brian Senior, director of trading and asset management at Innogy, said: "[Power trading] is helping us extract maximum value from our asset base, and is also a source of extra revenues.

"We are looking at the possibility of moving into continental Europe."