Sweden will provide emergency liquidity support to power producers after its prime minister warned that Russia’s decision to halt gas supplies to Europe could put a strain on its financial system.
Magdalena Andersson said on Saturday the government would offer hundreds of billions of crowns in financing to power producers, who have seen the amount of collateral they have to post with exchanges swell in response to soaring gas and electricity prices. electricity and increasing volatility.
EU energy ministers will also consider taking steps to ease the cash crunch of energy companies across the bloc at an emergency meeting on Friday, according to two officials briefed on the talks.
Andersson warned that, if left unchecked, growing demands for guarantees for power generators could spill over into the main Nasdaq clearing market in Stockholm and, in the worst case scenario, trigger a financial crisis.
His remarks came after Russia said on Friday it would no longer supply gas through the Nordstream 1 pipeline. The announcement came after energy markets closed for the weekend.
“Yesterday’s announcement not only risks leading to a ‘winter of war,’ but also threatens our financial stability,” Andersson said, alongside Sweden’s financial regulator, central bank governor and finance minister. during an emergency press conference on Saturday.
Finnish Finance Minister Annika Saarikko said on Twitter that her country would also act. “The concern is shared. Similar preparations are already well advanced in Finland,” Saarikko tweeted.
The dramatic actions underscored the gravity of the situation Europe faces as it scrambles to get enough power ahead of winter and tries to avoid the spread of distress among power producers.
After hitting a record high eight days ago, gas and power prices have cooled slightly this week, with European benchmark contracts for German gas and power both down by around a third, although they remain around 10 times above historical levels. But the prolonged shutdown of Nord Stream 1 could increase volatility and push prices higher when trading reopens on Monday.
Officials in Brussels are working on several possible ways to help energy companies, including emergency cash support, the two officials said. Margin calls were getting “far too big” for power producers to afford, one said.
Other measures could include electricity or gas price caps and ways to decouple gas and electricity markets ahead of longer-term reform. “The Russians will play with us and we are not well equipped to deal with that,” the second official said.
The big problem of the European energy market
Many European energy companies are profiting from higher prices, but there are wide disparities across the industry.
Those producing gas or generating electricity from renewables or nuclear – where input costs have not increased – stand to reap significant profits. But those dependent on burning gas for power generation are more likely to face difficulties, especially if they have been cut off from Russian supplies.
The need for companies to post additional collateral does not mean that transactions or hedging are unprofitable, but their positions – often related to the supply of gas or electricity to households and businesses – have quickly become much more expensive. to finance.
Companies are struggling to increase their short-term borrowing facilities quickly enough, risking running out of cash.
Jakob Magnussen, chief credit analyst at Danske Bank, said the big issue for power producers was the need for additional short-term financing.
To hedge their sales, generators will normally sell electricity futures up to the time they actually generate and sell the electricity in the market, which will help secure the price they will receive.
But electricity prices have risen so rapidly in recent weeks that paper losses on futures have soared, requiring huge amounts of additional collateral to be deposited with exchanges.
“Margin calls are really exploding right now, that’s especially a problem for smaller utilities,” Magnussen said. “Once the contracts expire and the utilities sell the electricity, they will get their money back, but there is a huge need for additional short-term funding in the meantime and many banks may be reluctant to increase their exposure to the sector so quickly.”
“We are not afraid of Putin’s decisions, we ask Putin to respect their contracts, but if they do not respect their contracts, we are ready to react,” said Paolo Gentiloni, European Commissioner for the Economy, to reporters on Saturday in comments reported by news wires.
Eurozone policymakers believe decisions should be made at the national level, according to a person familiar with their discussions.
Jean Francois Lambert, founder of Lambert Commodities and former head of commodity trade finance at HSBC, said other countries were likely to intervene in their energy markets.
“The crisis is taking the next step. If one of the major energy companies collapses, there is a fear that there will be a domino effect,” he said. “The call for liquidity is so huge that maybe one day we will have a problem that could harm the whole market.”
While the threat of contagion to the broader financial sector was limited, governments needed to act to prevent energy markets from “freezing up”, he added.
Andersson said Sweden’s support would apply to all Nordic and Baltic players and would require approval by the Swedish parliament’s finance committee on Monday.
“We need to isolate this in one market so that it doesn’t infect the financial sector,” said Stefan Ingves, governor of the Riksbank, Sweden’s central bank.
Swedish authorities said they saw no immediate risk to financial stability, but feared that otherwise solvent companies could struggle to find enough cash, which could have ripple effects.
“Russia is waging an energy war against Europe to divide us. But we won’t let Putin succeed,” Andersson said.
Andersson’s comments come a week before Sweden’s general election, with polls indicating a close result. She said her centre-left government was ready to act, just as it did during the Covid-19 pandemic.
Erik Thedéen, head of the Swedish Financial Supervisory Authority, said electricity prices in Sweden had risen 11 times over the past year, leading to an increase in claims for guarantees.
He added that without liquidity support, power producers could face bankruptcies and large losses that could “jitter” the clearing house. “He is under very severe stress,” he said.
Lambert said the situation was not yet a financial crisis. “The big banks in Germany, France, Italy and Spain should be able to handle this. But if one of their big customers trapped them in a cash crunch, you could see all the banks pull out,” he said.
In July, the German government agreed to a €15 billion bailout for Uniper, Europe’s biggest buyer of Russian gas, and said it would take a 30% stake in the company. It had been losing tens of millions of euros a day since Gazprom first cut gas supplies to Germany via Nord Stream earlier this year.
At the end of last month, Uniper asked for an additional 4 billion euros as soaring gas prices depleted its cash reserves. Uniper, majority-owned by Finland’s Fortum, said it had already drawn a €9 billion line of credit from state-owned development bank KfW.
Fortum warned on Monday that its collateral requirements had risen from €1bn to €5bn the previous week, and that a default by a smaller player would cause “serious disruption to the Nordic power system”. .
Additional reporting by Guy Chazan in Berlin and Martin Arnold in Frankfurt