Bank to lend power companies £40bn to cope with rising costs

THE Bank of England will hand cashstarved energy companies up to £40bn of Covid-style loans as suppliers struggle to protect themselves from soaring prices.

Liz Truss announced a joint scheme between the Bank and the Treasury to provide emergency short-term help in an intervention that ministers hope can slash energy costs.

Surging prices mean energy providers are having to provide more capital when buying energy to effectively insure against price swings. The huge capital requirements are stretching balance sheets in the sector.

The Energy Markets Financing Scheme will help suppliers meet the “extraordinary” cash requirements they face in the wholesale gas and electricity markets, amid concerns of a cash crunch that has been compared to a “Lehman Brothers moment” for energy suppliers.

The Government said the scheme is intended as a “last resort” for suppliers and will help to reduce costs and stabilise energy markets.

It is expected to be similar to a scheme used in the Covid crisis, which allowed the Bank to buy short-term debt from companies, giving them a cash boost to help them survive the pandemic. The Covid Corporate Financing Facility lent more than £37bn through the scheme.

Ms Truss said the measures will help prevent the need for supplier support down the line and “ensure that firms operating in the wholesale energy market have the liquidity they need to manage price volatility”.

On announcing the energy package, Ms Truss said: “This will stabilise the market and decrease the likelihood that energy retailers need our support like they did last winter. By increasing supply, boosting the economy and increasing liquidity in the market. We will significantly reduce the cost to government of this intervention.”

‘This will stabilise the market and decrease the likelihood that energy retailers need our support’

The Treasury said the opening date of the scheme will be announced by the end of October.

Andrew Bailey, Governor of the Bank, warned on Tuesday that cash problems for suppliers are a “concern”, adding that “markets [are] becoming very thin”. There have been concerns suppliers are facing a “Lehman Brothers” moment as they are having to stump up huge sums to post as collateral to hedge in the gas market.

“The margin calls that are having to be made for hedging have risen hugely,” Mr Bailey said.

Norwegian energy giant Equinor highlighted the problem for suppliers on Monday, warning they need at least €1.5 trillion (£1.3 trillion) to cover the cost of their exposure to rocketing energy prices. The support could help reduce the cost of energy in the UK.