Bank of England to lend up to £40bn to UK energy companies | Energy industry

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The Bank of England will lend up to £40bn to British energy companies to cope with soaring market prices amid fears of a new wave of energy company collapses.

Prime Minister Liz Truss, on her third day in office, said she wanted to make sure energy companies have the cash they need to buy energy when prices rise. Reports this week said British Gas owner Centrica was in talks with banks for extra cash as Vladimir Putin continues to choke off gas supplies to Europe.

The energy company bailout fund was announced alongside a suspension of the energy price cap, which Truss replaced with an “energy price guarantee” to freeze household energy bills for two years . The government will also offer “equivalent support” for six months to companies – most of which have not received any financial assistance to deal with the energy crisis caused by Russia’s invasion of Ukraine.

Firms using the Bank of England’s Energy Markets Funding Scheme will have to agree to a “wider set of terms”, the Treasury said. During the coronavirus pandemic support programs, some companies have been banned from paying dividends after receiving loans.

Amid warnings energy markets were facing a “Lehman” moment, when a liquidity crunch precipitated the global banking crisis, the government said the program would provide “last resort” funding. The money will essentially ensure that energy suppliers can pay for any electricity they commit to buy on wholesale markets, while allowing them to insure themselves to protect against price hikes.

Soaring prices have caused an explosion in collateral calls for energy transactions, forcing even the largest suppliers to turn to their banks to increase their overdrafts. The Swedish and Finnish governments stepped in with similar measures over the weekend, with Finland’s economy minister saying: “This has had the ingredients for a kind of Lehman Brothers of the energy industry.”

Since the beginning of the energy crisis, more than 30 suppliers have gone bankrupt. This has left energy customers concentrated in larger companies, the collapse of which would likely cost taxpayers billions of pounds. Some analysts estimate that the biggest collapse to date, that of Bulb, could cost more than £4 billion.

Officials are working to work out details of the program, but the government said on Thursday it could only reveal a start date by the end of October. It is understood that further details of the program will be released next week.

Tim Speed, energy specialist at law firm Shakespeare Martineau, said: “A £40 billion liquidity fund provides reassurance to energy suppliers, but support must begin with immediate effect to stabilize the market. Further supplier losses will end up costing consumers more.

In an indication of the rushed design of Truss’s plan, the government said it would also not be able to provide details until next week on how financial support will be delivered to households or businesses. Nonetheless, business leaders hailed the scale of ambition displayed in a package estimated at £100bn in the first year alone.

Rain Newtown-Smith, chief economist at the CBI, the UK’s biggest business lobby group, hailed “bold and decisive action” that “will limit some of the damaging hardships facing families this winter and for the economy in general. “Big spending now needs big plans to return to sustainable economic growth,” she added.

Along with support measures over the next few months, Truss has also promised to rewrite the rules governing how customers buy electricity and gas, casting doubt on the future of regulator Ofgem. These policies included:

  • A review of UK energy regulations that promises to bring ‘fundamental structural and regulatory reforms’

  • An energy supply task force, led by Madelaine McTernan, who currently leads the government’s vaccine task force, which will seek to secure long-term contracts for energy supply at stable prices

  • A review of the UK’s net zero target for 2050 to ensure it ‘does not impose undue burdens on businesses or consumers’

McTernan, a banker who held senior positions at Credit Suisse and Lehman Brothers before entering government in 2017, will also seek better deals with solar, wind and nuclear power producers, who have seen their revenues increase because the price of electricity is indexed to the price of gas. Truss announced that the government would adopt an industry proposal to replace current contracts for renewables with a contracts-for-difference regime, which caps returns and is expected to offer a lower fixed price, over the longer term.

Economists said the package was likely to cushion the impact of the long recession predicted for the UK, with the energy crisis pushing up inflation. The plan is expected to match – and in many cases exceed – the actions of other countries facing similar situations. It was reported on Thursday that Germany plans to give households and businesses discounts on a certain amount of electricity in its 65 billion euro plan.

Martin McTague, national chairman of the Federation of Small Businesses, said the promise of invoice support for the first time during the crisis was “a huge relief for millions of small businesses”. However, he said Truss did not “offer enough information yet for them to plan”.

McTague also warned of a “cliff edge after six months” if, as expected, the government withdraws support for businesses. The government should have a “broad, realistic and fair” definition of “vulnerable” sectors, he said.

Business support should focus on subsidies for wholesale gas prices. The government has promised to keep prices low for all businesses for six months and will consider how to reduce support for certain sectors during a review in three months.

Households will see costs frozen at an average of £2,500 a year, a move that should support consumer spending. The government has said it will also help reduce inflation, cutting the headline rate – which hit 10.1% in July – by four or five percentage points.

Chris O’Shea, chief executive of Centrica, the UK’s largest home energy supplier, said it was a “bold customer support programme” which “will bring immediate relief to households in trouble”.

Paul Dales of Capital Economics, a consultancy, said the package would “reduce inflation and limit the depth of the recession”, but it would also lead to higher interest rates and more debt public.

Energy companies have called on the government to reduce the use of fossil fuels.

Michael Lewis, chief executive of utility E.ON UK, said the UK needed to produce more “cheap, clean electricity” and “reduce our consumption of fossil fuels”. However, he said he was “disappointed not to see a greater commitment to energy efficiency as a long-term solution to the current crisis and a cornerstone of that cleaner, greener future”.

Keith Anderson, chief executive of ScottishPower, called for “a three-pronged attack to tackle the problem at source by weaning the country off fossil fuels, doubling down on cheap, clean renewables and, above all, decoupling gas electricity prices”.

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