Strains mount in European power market as UK generators call for help

More governments will need to intervene to relieve the strains on Europe’s power market, officials and industry figures have warned, after Sweden and Finland launched emergency backstops for their energy producers and UK electricity generators called on the British government to help.

The Nordic states this weekend both announced emergency financial liquidity measures for their energy generators, which are facing rapidly mounting calls for collateral as a result of extreme volatility in energy prices.

Russia’s announcement on Friday evening 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 urgency to the pleas for government support.

Electricity producers in Britain are “really concerned about the situation this winter in relation to [financial] liquidity”, warned Adam Berman, deputy director at Energy UK, a trade body that speaks for around 100 energy companies.

“Fundamentally the energy market is not designed to deal with the scale of market volatility that we have seen over recent months,” Berman said as he urged the UK government to urgently investigate and “understand the scale of the challenge that generators” are facing as wholesale prices remain at historically high levels.

Sweden, which sounded the alarm about the problem on Saturday, said on Sunday that it would provide up to $23bn in credit guarantees to Nordic utilities to help them avoid technical defaults.

“This is a problem that is Europe-wide . . . liquidity is probably an issue in many countries. It may be the case that other countries will have to follow suit,” Max Elger, Sweden’s financial markets minister, told the FT.

Finland on Sunday proposed a €10bn loan and guarantee package. Sanna Marin, the prime minister, said it was designed to protect companies that were essential for the functioning of society.

“The nervousness in the market is strong,” Finnish economy minister Mika Lintilä told a press conference. “Here were all the ingredients for the energy sector’s version of Lehman Brothers,” he added, referring to the collapse of the US bank during 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 windfall tax on electricity generators to help fund a €65bn package of support for households and companies grappling with soaring energy bills.

Some energy traders expect gas and power market prices to breach new records in the coming week.

“We’re expecting a significant jump [in prices] on Monday and for the market to test new highs this coming week,” said James Waddell, head of European gas at the consultancy Energy Aspects.

Sweden’s finance minister Mikael Damberg said authorities were forced to act as the expected rise in electricity prices is likely to lead to a big increase in margin calls on Monday, and “we were worried that utilities in the Nordic region would technically default in their relationship with [clearing house] Nasdaq Clearing”.

Deepa Venkateswaran, European utilities analyst at Bernstein, said financial illiquidity wasn’t “just a Swedish issue” and “in general [there were] rising collateral requirements across the board” in Europe.

Traders said existing short-term credit facilities with banks were in danger of becoming tapped out, 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 electricity industry executive warned it would be easy to envisage scenarios where it takes “only a matter of days for not only small but large generators” to topple because of 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 one 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 post with their banks was a “bad idea” because it would “move 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 treat 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 at fault 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 western sanctions have made it more difficult to repair turbines that help pump gas.

“The whole problem is all at their end,” Novak said. “This nearsighted policy is leading to the collapse we see on 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 hard to predict.”

Additional reporting by Max Seddon in Riga and Laura Noonan in London