The electricity sector is facing a “perfect storm”with very high gas prices hitting the margins of European electricity companies at a time when more than 100 billion euros of investments are needed each year to ensure the ecological transition, according to the sector.
Soaring gas prices are not only hurting households’ purchasing power, they are also subjecting electricity companies to a “unprecedented pressure on liquidity”which triggers “extreme margin calls”said Kristian Ruby, Secretary General of Eurelectric, the European electricity industry association.
“If the price increases by a factor of 10, you suddenly need a huge amount of cash to cover your guarantees. And it’s not something you can escape”he told EURACTIV.
Utility companies sell most of their electricity several years in advance to guarantee a certain price, under an agreement that requires them to file a “minimum margin” on an account as a safety net in the event of default before the electricity is produced and actually enters the market.
A margin call occurs if the funds in the account fall below the minimum margin required for a trade, causing the company to back it up with more cash.
Electricity prices on the wholesale market jumped 532% between January 2021 and August 2022 due to the drop in gas supply, according to the barometer of electricity from Eurelectric, unveiled on Wednesday 7 September.
“And that triggers a proportional increase in the need for guarantees”Mr. Ruby said.
He refused to quantify the amount of the guarantees thus obtained, affirming that the companies concerned preferred to keep these figures confidential. But according to the large Norwegian energy group Equinor, the amount of capital needed to cover these transactions would reach at least 1.5 billion dollars.
Another indicator is the amount of liquidity in the futures markets, which has fallen 40%, according to Ruby. “And what does that mean?” This means that these huge collaterals scare investors away. No one has the capacity to meet these huge collateral demands. »
Lack of cash is not just a problem for companies in the energy sector. It also risks derail the EU’s ecological transitionwhich relies on the rapid electrification of end uses such as transport and heating.
To meet the decarbonisation targets set by the EU, annual investment in new clean electricity generation facilities will need to reach 98 billion euros between 2030 and 2050, according to Eurelectric. And an additional 34 to 39 billion euros will be needed for new electricity distribution networks, adds the association.
“It is for this reason that it is essential to strengthen investor confidence through a reliable and business-friendly investment framework”said Eurelectric, which urged governments to “stop and think before pursuing market interventions that damage investor confidence”.
Un moment Lehman Brothers?
The lack of liquidity has already hit some large European electricity companies, which have been pushed into bankruptcy.
Over the weekend, Finland and Sweden announced plans to offer billions of euros in liquidity guarantees to power companies that are crumbling under the pressure of rising gas prices.
“The conditions are ripe for a Lehman Brothers form of the energy sector”Finnish Economic Affairs Minister Mika Lintila said in reference to the collapse of the US investment bank, which triggered the global financial crisis in 2008.
Other European companies had to be bailed out due to liquidity problems, notably the German company Uniper and the Austrian company Wien Energie, while in the United Kingdom, the bank of England will make £40 billion available to struggling energy companies.
On Friday (9 September), EU energy ministers met in Brussels to examine options to curb soaring energy prices, including gas price caps and emergency credit lines for energy market participants.
Among the options considered are measures to increase market liquidity, such as a “immediate line of credit” for energy companies in difficulty, “for example through the European Central Bank”or a “ temporary suspension of European electricity derivatives markets”according to a document released by the Czech EU Presidency.
In Brussels, the European Commission said it was well aware of the need for safeguards in the electricity sector.
“And that requires helping companies to stabilize this situation”a senior European Commission official said during a press briefing on Wednesday (7 September).
In March, the European Commission amended its provisional aid rules in times of crisis, giving national governments more leeway to support war-affected businesses in Ukraine.
“There is a specific provision for the provision of liquidity support, which until now only specified the possibility of loans, and we will extend it with a procedure for guaranteessaid the official.“We are going to make this even easier by modifying the temporary framework.”
Fortum, a Finnish energy company that is itself struggling with cash flow, said in a policy recommendation document that its aim now was to get changes to the European Market Infrastructure Regulation (EMIR) adopted by the EU ten years ago.
“While EMIR legislation was enacted following the collapse of Lehman Brothers in an effort to prevent a similar financial crisis from happening again, ironically the high restrictions in the regulation pose serious risks on trading in derivatives, on energy commodities, with the threat of another form of default payment”Fortum said in the document.