Eurelectric, which represents more than 3,500 European utilities, warned on Monday that the ballooning payments were of “grave concern” to its members.Įven before August’s further price surge, several big utilities including Germany’s Uniper and France’s EDF had already run into severe difficulties. Most electricity generators hedge their power contracts to some extent, meaning many power producers in Europe risk being exposed to the liquidity squeeze. “Because the numbers are increasing quite significantly, maybe the banking system can’t bear it,” she said. Sweden on Sunday said it would provide up to $23bn in credit guarantees to Nordic utilities to help them avoid technical defaults, while Finland has proposed a €10bn package.ĭeepa Venkateswaran, European utilities analyst at Bernstein, said the intervention by the Swedish and Finnish governments suggested commercial credit lines had been tapped out. RBC Capital Markets on Monday said that even “the strongest utilities” were facing “huge pressure in terms of collateral payments”. In the past 12 months, as prices for gas and power have soared, many utilities have put in place additional liquidity facilities with the same lenders but there are signs that some are reaching the limits of their commercial credit lines. To meet the exchanges’ collateral requirements, large utilities typically rely on established revolving credit facilities with their banks. However, even those bank guarantees are only accepted if they are fully covered by cash. Some exchanges and clearing houses that mainly trade energy, particularly Spain, Sweden, Norway and Poland, accept bank guarantees from end users such as energy companies because the latter do not have a lot of cash or other collateral available compared with banks. Regulations require most margin payments to be made in cash so that the funds are immediately available in the event of a problem. They also run the clearing houses that manage the risks and exposure on open derivatives contracts, calculating payments every day that determine how much margin customers put down. Politicians’ criticisms that the markets are malfunctioning have put the spotlight on the main market operators for energy futures in Europe - Nasdaq in Sweden for electricity, ICE Futures Europe in London for oil and in Amsterdam for gas, and Germany’s EEX for electricity. “Here were all the ingredients for the energy sector’s version of Lehman Brothers,” Finnish economy minister Mika Lintilä said on Sunday, referring to the Wall Street bank that collapsed during the 2008 global financial crisis. While companies such as Centrica and Fortum are likely to make a profit when the related power is eventually sold, the collateral requirements are resulting in a huge liquidity squeeze across the sector that officials and industry officials warn could mean profitable utilities collapse. The positions will normally be profitable once the physical energy is sold but some will not mature for months or years, leaving the companies at risk of exhausting their existing credit lines.Ĭentrica, the owner of British Gas, is seeking billions of pounds in extra credit in case of a further spike in collateral demands, the Financial Times reported on Monday.įinnish utility Fortum, which also owns Germany’s Uniper, said 10 days ago that the collateral it had tied up on the Nasdaq power exchange had increased by €1bn within a week, to approximately €5bn. In normal times, this is accepted trading practice but in recent months the soaring price of electricity has meant the collateral requirements for utilities that have hedged their power sales - often months or years in advance - have ballooned.Īs prices have soared their future positions have often fallen deep into the red, prompting exchanges to request more and more collateral, with larger generators at times facing calls to provide hundreds of millions of pounds or euros overnight. Under current market rules, anyone taking a short position in futures markets is required to post additional collateral - or margin - to the exchange if the price of the underlying asset rises. That way if power prices fall, any losses on the contract will be mitigated by gains from the short position, and if prices rise the additional profit made on the physical delivery should cover the cost of the short. The companies like to de-risk their power sales to households and businesses by taking short positions in futures markets before selling the physical electricity.
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