The UK government has insisted that a new £40 billion facility to boost the financial liquidity of power producers should only be used as a “last resort” as it is the latest country to announce emergency measures to prevent energy companies from running out of money.
The Treasury and the Bank of England are working on a joint scheme to provide short-term financial support to power generators facing “extraordinary” collateral requirements on futures exchanges where they hedge their delivery contracts.
The £40 billion support will “ensure the resilience of both the energy and financial markets, as well as the economy, and reduce final costs for businesses and consumers”. Treasury said, although he added that it should only be used as a “last resort and will be structured and evaluated accordingly.”
Wholesale gas and electricity producers minimize the risk of losses from market price fluctuations by taking short positions in the futures markets. How prices spiraling higher, they were forced to post additional collateral on the exchanges to cover these contracts.
Full details of the £40bn facility have yet to be released, but the government insists it will only be open to companies operating in the UK “who can demonstrate that they are otherwise in good financial standing”.
Adam Bell, head of policy at consultancy Stonehaven and former head of energy strategy at the Department for Business, Energy and Industrial Strategy, welcomed the £40bn facility, warning there was a “real risk of the sector collapsing” otherwise.
Some UK energy suppliers, which sell to consumers but do not always have their own generating capacity, have privately told the Financial Times that they could face liquidity problems similar to those of producers if wholesale gas and electricity prices suddenly fall sharply. Suppliers also hedge their future energy needs to fulfill contracts with customers.
Intervention is worth a request on Sunday from British energy companies for bailouts as other governments in Europe step in to provide emergency liquidity.
Countries including Denmark, Finland, Sweden and Switzerland announced emergency measures to prevent cash shortages in energy markets, which some experts say could be a “Lehman Brothers” moment in the energy sector, citing the collapse of the US bank in 2008.
The Financial Times also reported this week that British energy group Centrica was in talks with commercial lenders to secure billions in additional loans in case collateral problems arise.
The £40 billion support package was one of several market interventions and reforms announced by Liz Truss on Thursday aimed at stabilizing the energy market and reassuring customers.
The prime minister said the government had begun talks with nuclear and renewable power producers to persuade them to sign new long-term contracts to sell their output at fixed prices well below current wholesale rates.
The proposal, originally developed by scientists at the UK’s Center for Energy Research, has been backed by major renewable energy generators such as SSE, and is partly aimed at weaning some companies off highly profitable old contracts that date back to the early 2000s and pay companies subsidies for top preferred wholesale rates.
It is also seen as a stepping stone to a wider overhaul of energy markets to decouple wholesale electricity from gas prices. Under the current system, the most expensive power plant designed to meet demand sets the price for all generators, even though solar and wind generation are much cheaper. In July, the government began consultations on the decoupling of gas and electricity prices.
Energy UK, a trade body representing around 100 companies, has suggested that fixed-price contracts could cut Britain’s electricity bills by up to £18 billion a year from 2023, although one energy company suggested that most companies that engaged in renewable energy, have already sold 50 percent of their energy. is expected to be released next year, so the total savings could be much less.
The new contracts are expected to be voluntary, but John Musk, an analyst at RBC Capital Markets, said that “optically” it will likely be difficult for renewable energy operators not to participate in this new scheme.
But the idea is not universally popular, as it could result in generators receiving higher prices in the future than they would otherwise if wholesale rates fell.
Ed Miliband, shadow energy secretary, told BBC Radio 4 today to program a scheme that would “lock in huge windfall profits for these power generators”.
“UK Energy has said that we are now accepting slightly lower prices so that we can have much higher prices for the next 15 years,” Miliband added. “It would be a terrible deal for the British people, a terrible deal for the ratepayer.”
The utility also promised to introduce “fundamental reforms” to the oversight of the energy market through a review by regulator Ofgem, although it gave no further details.
Additional reporting by Gil Plimer in London