More governments will need to step in to ease the strain on Europe’s electricity market, officials and industry insiders have warned, after Sweden and Finland launched emergency shutdowns for their power producers and British power generators called on the British government to help.
The Nordic states both announced over the weekend financial liquidity emergencies for their energy producers, which are facing rapidly increasing demands for collateral as a result of extreme volatility in energy prices.
Russia’s announcement on Friday night that it would no longer supply gas through the Nord Stream 1 pipeline is expected to trigger a sharp rise in energy prices when markets open on Monday morning, adding to urgent requests for government aid.
Electricity producers in the UK are “really concerned about the situation this winter in terms of [financial] liquidity”, warned Adam Berman, deputy director at Energy UK, a trade body that represents around 100 energy companies.
“Fundamentally, the energy market is not designed to deal with the scale of market volatility that we have seen in recent months,” Berman said as he called on the UK government to urgently investigate and “understand the scale of the challenge that generators” face for. wholesale prices remain at historically high levels.
Sweden, which sounded the alarm about 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 defaults.
“This is a problem that is Europe-wide…Liquidity is probably a problem in many countries. It may be the case that other countries will have to follow suit,” Max Elger, Sweden’s financial market minister, told the FT.
Explainer: The European energy market’s big problem
On Sunday, Finland warned that the energy sector faces a potential “Lehman Brothers” moment if governments do not provide emergency funding to help providers meet rising collateral requirements caused by soaring wholesale prices.
But on the same day, Germany announced an unexpected tax on many of the same electricity generators, saying those that did not rely on burning gas to create power were enjoying “excessive profits”.
How can companies both earn large profits and require government-backed financing at the same time?
The answer lies in the scale of the energy crisis engulfing Europe after Russia cut gas supplies following its invasion of Ukraine.
The short-term problem is around trading – and specifically hedging.
Electricity producers often hedge their sales to households and businesses by taking short positions in future markets prior to selling the physical electricity. In normal times, 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 the market moves in recent weeks means that many of their hedges – often for electricity sold months or years in advance – are deeply underwater, requiring them to post more and more money to exchanges, even if the positions ultimately becomes profitable once the power is sold.
Companies are struggling to increase their short-term borrowing facilities fast enough to fund the cash calls.
Jakob Magnussen, chief credit analyst at Danske Bank, said on Saturday that “margin calls are really exploding right now”.
“It’s especially a problem for smaller utilities,” Magnussen said. “When the contracts expire and the utilities sell the power, 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 so quickly to the sector.”
Many European energy companies are profiting hugely from the increase in wholesale gas and electricity prices, but there are large discrepancies across the sector.
Even the strongest companies have begun to struggle with short-term financing linked to the huge volatility of wholesale prices, which requires them to tie up billions of euros in security with exchanges – trading that is often crucial to managing the flow of energy to households and businesses.
If these markets catch on or a smaller utility implodes, there are fears of a domino effect across the sector as banks withdraw funding – ultimately posing a threat to the stability of energy supplies.
“The amount of cash you need to participate in these markets is reaching impossible levels,” a European trader said on Sunday.
Companies that produce gas or produce electricity using renewable energy or nuclear power – where input costs have not risen – should eventually realize large profits of the kind that Germany plans to tax.
But those who rely on burning gas for power generation are more likely to struggle – especially if they once depended on Russian supplies. Germany has already provided billions of euros in aid to help companies such as Uniper – once the biggest German buyer of Russian gas – to continue operating.
Finland proposed a loan and guarantee package of 10 billion euros on Sunday. Sanna Marin, the prime minister, said it was designed to protect businesses vital to the functioning of society.
“The nervousness in the market is strong,” Finnish Economy Minister Mika Lintilä said at a press conference. “Here were all the ingredients for the energy sector’s version of Lehman Brothers,” he added, referring to the US bank’s collapse during the 2008 global financial crisis.
Germany – which has already provided access to state-backed financing for energy companies – said on Sunday it would impose a windfall tax on electricity generators to help finance a 65 billion euro aid package for households and businesses struggling with skyrocketing energy bills.
Some energy traders expect gas and electricity market prices to break new records in the coming week.
“We expect a significant jump [in prices] on Monday and for the market to test new highs in the coming week,” says James Waddell, head of European gas at consultancy Energy Aspects.
Sweden’s Finance Minister Mikael Damberg said the authorities were forced to act as the expected rise in electricity prices is likely to lead to a large increase in margin calls on Monday and “we were concerned that utilities in the Nordics would technically default on 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] increasing requirements for collateral across the board” in Europe.
Traders said existing short-term credit facilities with banks were at risk of being tapped, while lenders are hesitant to increase their exposure to the energy sector by tens of billions of euros without additional government guarantees or support.
One power industry executive warned that it would be easy to imagine scenarios where it “takes only a matter of days for not only small but large generators” to collapse due to liquidity problems.
EU energy ministers will consider taking bloc-wide steps at an emergency meeting on Friday, according to two officials briefed on the discussions.
But a European official said some countries opposed EU action because it could encourage energy companies to make speculative bets on future prices.
Supporting energy companies by lowering the amount of collateral they had to provide to their banks was a “bad idea” because it would “shift the credit risk from the energy industry to the financial industry”, the official added.
Marin called on the EU to act. “With this solution we are treating the symptoms, but we have to see this in this crisis, it is the system that is a problem,” she said.
Alexander Novak, Russia’s top energy official, said the EU was to blame for the dramatic cuts in gas supplies and warned that prices could continue to rise if the EU did not roll back sanctions. Russia claims that Western sanctions have made it harder to repair turbines that help pump gas.
“The whole problem is on their end,” Novak said. “This myopic policy is leading to the collapse we are seeing in the European energy markets. This is not even the end, because we are still in the warm part of the year. Winter is coming and many things are difficult to predict.”
Additional reporting by Max Seddon in Riga and Laura Noonan in London