Europe’s Lehman warnin on ener y prompts flurry of cash aid

FRANKFURT: European governments are patching together emergency measures to support utilities amid fears that companies will buckle under the weight of growing margin calls, worsening an energy crisis that’s sent prices soaring and left the continent short of gas.

Recent days have seen a flurry of news – from Sweden to Switzerland to the United Kingdom – as companies and governments try to get to grips with the situation.

Norway’s Equinor ASA has said that European energy trading risks collapsing under the weight of margin calls amounting to at least US$1.5 trillion (RM6.8 trillion).

Yesterday morning, Finnish utility Fortum Oyj got €2.35bil (Rm10bil) of bridge funding to ensure adequate liquidity.

Switzerland granted Axpo a credit line of up to four billion francs (Rm18bil). The company, which produces and trades renewable energy, asked for the credit line but hasn’t used it yet.

Along with such actions have come dire warnings as wild price moves increase the amount of collateral companies need to maintain hedges.

Finland is warning of an “energy-industry Lehman Brothers” moment, with companies facing sudden cash shortages. It and Sweden announced a Us$33bil (Rm148bil) emergency liquidity facility Sunday to backstop utilities through loans and credit guarantees.

In the UK, Centrica Plc is in talks with banks on the potential extension of credit lines, according to a person familiar with the matter. Centrica declined to comment.

The aid effort is a response to what is a rapidly worsening situation, particularly after Russia cut off gas supplies through the key Nord Stream pipeline.

Power providers and energy traders faced huge margin calls last winter when gas prices jumped to what were then record highs.

Now as those levels are dwarfed after months of price surges, governments are beginning to heed industry warnings that policy support may be needed with prices expected to stay higher for longer.

“Companies have been bleeding cash for a long time because of the margin calls and collateral requirements,” said Kristian Ruby, secretary-general of power industry group Eurelectric.

“This triggers the question – ‘What if things get worse?’ Governments need to be ready to handle such a situation and back up companies with direct credit, otherwise there’s a risk of one falling and dragging down others.”

The European Commission is also examining measures to help with liquidity. These could include credit lines from the European Central Bank, new products as margin collateral, and temporary suspensions of derivatives markets, according to a policy background paper seen by Bloomberg News.

“We now have to do everything we can to secure our power supply,” Swiss Energy Minister Simonetta Sommaruga said yesterday.

“We need to avoid that because of a temporary liquidity bottleneck when a company gets into a tailspin and pulls others with it.”

As wholesale buyers of power and energy, utilities tend to hold majority short hedging positions against their physical contracts, leaving them vulnerable if prices rise sharply and turn those positions into loss making.

When this happens, a company’s broker, bank or exchange may request cash to act as collateral against the position.

Late last month, Fortum said its collateral requirement rose by €1bil to €5bil (Rm4.5bil to Rm22bil) in the space of a week. — Bloomberg