More governments will need to step in to ease tensions in Europe’s electricity market, officials and industry figures have warned, after Sweden and Finland launched emergency support packages for their power producers. energy and British electricity producers have called on the British government for help.
The Nordic states both announced emergency financial liquidity measures over the weekend for their energy producers, which are facing a rapid increase in collateral calls due to the extreme volatility of energy prices. .
Russia’s announcement on Friday evening that it would no longer supply gas via the Nord Stream 1 pipeline is expected to trigger a sharp rise in energy prices when markets open on Monday morning, adding urgency to calls for government support.
Power producers in Britain are “really concerned about the situation this winter compared to [financial] liquidity,” warned Adam Berman, deputy director of Energy UK, a trade body that speaks on behalf of around 100 energy companies.
“Fundamentally, the energy market is not designed to cope with the scale of market volatility that we have seen in recent months,” Berman said as he urged the UK government to urgently investigate and “understand the magnitude of the challenge that generators” face. wholesale prices remain at historically high levels.
A UK government spokesman said it was working with regulators to “closely monitor” the functioning of energy markets.
Sweden, which sounded the alarm over the problem on Saturday, said on Sunday it would provide up to $23 billion in credit guarantees to Nordic utilities to help them avoid technical failures.
“This is a problem that concerns all of Europe. . . liquidity is probably an issue in many countries. Other countries may have to follow suit,” Max Elger, Sweden’s minister for financial markets, told the FT.
Explanation: the big problem of the European energy market
Finland on Sunday warned that the energy sector faces a potential ‘Lehman Brothers’ moment if governments do not provide emergency funding to help suppliers meet growing collateral demands caused by the soaring wholesale prices.
But on the same day, Germany announced a windfall tax on many of the same electricity producers, saying those who did not depend on burning gas to create electricity were enjoying “excess profits”.
How can companies both make huge profits and need government-backed funding?
The answer lies in the scale of the energy crisis that engulfed Europe after Russia cut its gas supplies following its invasion of Ukraine.
The short-term problem concerns trading – and more specifically hedging.
Electricity producers often hedge their sales to households and businesses by taking short positions in future markets before selling the physical electricity. Normally, if electricity prices rise, the money they lose on their paper positions is offset by their gains in the physical market, and vice versa.
But the sheer scale of market moves in recent weeks means that many of their hedges – often for electricity sold months or years in advance – are deep underwater, forcing them to release more and more money on the exchanges, even if the positions eventually become profitable once. electricity is sold.
Companies are struggling to increase their short-term borrowing facilities fast enough to fund cash calls.
Jakob Magnussen, chief credit analyst at Danske Bank, said on Saturday that “margin calls are really blowing up right now.”
“This is especially a problem for smaller utilities,” Magnussen said. “Once the contracts expire and the utilities sell the electricity, they will get their money back, but there is a huge need for additional short-term funding in the meantime and many banks may be reluctant to increase their exposure to the sector so quickly.”
Many European energy companies are profiting hugely from rising wholesale gas and electricity prices, but there are wide disparities across the sector.
Even the strongest companies are beginning to struggle with short-term funding tied to huge wholesale price volatility, forcing them to tie up billions of euros of collateral with exchanges – the trade that is often essential to manage the flow of energy to households and businesses.
If these markets crash or a small utility implodes, there are fears a domino effect across the sector as banks withdraw funding, ultimately threatening the stability of energy supply.
“The amount of money you need to participate in these markets is reaching impossible levels,” a European trader said on Sunday.
Companies that produce gas or generate electricity using renewable or nuclear energy – where input costs have not increased – should eventually make large profits of the kind that Germany plans to make. tax.
But those who depend on burning gas for power generation are more likely to face difficulties, especially if they once relied on Russian supplies. Germany has already provided billions of euros in support to help companies like Uniper – once Germany’s biggest buyer of Russian gas – keep operating.
Finland offered a 10 billion euro loan and guarantee package on Sunday. Sanna Marin, the Prime Minister, said it was designed to protect businesses essential to the functioning of society.
“The nervousness of the market is strong,” Finnish Economy Minister Mika Lintilä told a news conference. “There were all the ingredients for Lehman Brothers’ version of the energy sector,” he added, referring to the US bank’s collapse in the 2008 global financial crisis.
Germany – which has already provided access to government-backed funding for energy companies – said on Sunday it would impose a one-off tax on power producers to help fund a €65 billion package of support for households and businesses struggling with rising energy bills.
Some energy traders expect gas and power market prices to break new records in the coming week.
“We expect a significant jump [in prices] Monday and the market is testing new highs next week,” said James Waddell, head of European gas at consultancy Energy Aspects.
Swedish Finance Minister Mikael Damberg said the authorities were forced to act because the expected rise in electricity prices would likely lead to a sharp increase in margin calls on Monday, and “we are concerned that the utilities in the Nordic region are technically lacking in their relationship with [clearing house] Nasdaq Clearing”.
Deepa Venkateswaran, European utilities analyst at Bernstein, said financial illiquidity was not “just a Swedish problem” and “in general [there were] increase in guarantee requirements at all levels” in Europe.
Traders said existing short-term credit facilities with banks were at risk of being exhausted, while lenders are reluctant to increase their exposure to the energy sector by tens of billions of euros without additional government guarantees or support. .
A power industry executive warned that it would be easy to envision scenarios in which it would take “not only small but also large generators a few days” to collapse due to power problems. liquidity.
EU energy ministers will consider taking bloc-wide action at an emergency meeting on Friday, according to two officials briefed on the talks.
The Czech Republic, which holds the rotating EU presidency, has prepared a wide range of options which will be presented for discussion, including support for the pan-European credit line, modification of margin rules or even temporary suspensions of European electricity derivatives markets.
The preparatory document, seen by the Financial Times, also suggests temporarily separating electricity generation from gas for pricing and coordinated reductions in electricity consumption, among other measures. So far, officials in Brussels have been more supportive of the need for price caps and bloc-wide demand cuts, but say there is less appetite for support at EU-wide for electricity markets.
A European official said some countries opposed the EU action because it could encourage energy companies to make speculative bets on future prices.
Supporting energy companies by reducing the amount of collateral they had to post with their banks was a “bad idea” as it would “shift credit risk from the energy sector to the financial sector”, the official added.
Marin called on the EU to act. “With this solution, we treat the symptoms, but you have to see that in this crisis, it’s the system that is the problem,” she said.
Alexander Novak, Russia’s top energy official, said the EU was responsible for the dramatic gas supply cuts and warned that prices could continue to rise unless the EU lifts sanctions. Russia says Western sanctions have made it harder to repair turbines that help pump gas.
“The whole problem is at their end,” Novak said. “This short-sighted policy is leading to the collapse we are seeing in European energy markets. It’s not even the end, because we are still in the warm part of the year. Winter is coming and many things are hard to predict.
Additional reporting by Max Seddon in Riga, Alice Hancock in Brussels and Laura Noonan in London