Written by 9:28 pm European Union

European Union energy market crisis rises

A UK government spokesman said it was working with regulators to
“monitor closely” the functioning of energy markets.

Sweden sounds alarm

Sweden, which sounded the alarm about the problem on Saturday, said on
Sunday that it would provide up to $US23 billion ($34 billion) in credit guarantees to Nordic utilities to help them avoid technical defaults.

“This is a problem that is Europe-wide … liquidity is probably an issue in
many countries. It may be the case that other countries will have to follow
suit,” said Max Elger, Sweden’s Financial Markets Minister.

On Sunday, Finland proposed a €10 billion ($14.6 billion) loan and guarantee package. Prime Minister Sanna Marin said it was designed to protect companies that were essential for the functioning of society.

“The nervousness in the market is strong,” Finnish Economy Minister Mika
Lintila said. “Here were all the ingredients for the
energy sector’s version of Lehman Brothers,” he added, referring to the
collapse of the US bank during the global financial crisis.

Germany – which has already provided access to government-backed
funding for energy companies – said on Sunday it would
impose a windfall tax on electricity generators to help fund a €65 billion package of support for households and companies grappling with soaring energy bills.

New price records coming

Some energy traders expect gas and power market prices to breach new
records this week.

“We’re expecting a significant jump [in prices] on Monday and for the market to test new highs,” said James Waddell, head of European gas at consultancy Energy Aspects.

Sweden’s Finance Minister, Mikael Damberg, said authorities were forced to
act as the expected rise in electricity prices would likely lead to a big increase in margin calls, and they “were worried that utilities in the Nordic region would technically default in their relationship with [clearing house] Nasdaq Clearing”.

Deepa Venkateswaran, European utilities analyst at Bernstein, said financial
illiquidity wasn’t “just a Swedish issue” and “in general, [there were] rising
collateral requirements across the board” in Europe.

Traders said existing short-term credit facilities with banks were in danger of becoming tapped out, while lenders are hesitant to increase their exposure to the energy sector by tens of billions of euros without additional government guarantees or support.

One electricity industry executive warned it would be easy to envisage
scenarios where it takes “only a matter of days for not only small but large
generators” to topple because of liquidity problems.

EU energy ministers will consider taking bloc-wide steps at an emergency
meeting on Friday, according to two officials briefed on the discussions.

The Czech Republic, which holds the rotating EU presidency, has prepared
a wide-ranging series of options which will be presented for consideration,
including pan-European credit line support, modifying rules around
margining, or even temporary suspensions of European power derivatives
markets.

Germany said it would impose a windfall tax on electricity generators to help fund a €65 billion package of support for households and companies.  AP

The preparatory document also suggested temporarily splitting electricity production from gas for price setting and co-ordinated cuts to electricity consumption, among other measures.

So far, officials in Brussels have been more supportive of the need for price caps and demand cuts at a bloc-wide level, but say there is less appetite for EU-wide support for electricity markets.

One European official said some countries opposed EU action because it
could encourage energy companies to make speculative bets on future
prices.

Supporting energy companies by lowering the amount of collateral they had
to post with their banks was a “bad idea” because it would “move the credit
risk from the energy industry to the financial industry”, the official added.

Ms Marin called on the EU to act. “With this solution, we treat the symptoms, but we have to see this in this crisis – it is the system that is a problem.”

Alexander Novak, Russia’s top energy official, said the EU was at fault for
the dramatic cuts in gas supplies and warned that prices could continue to
rise if the EU did not roll back sanctions.

Russia claims Western sanctions have made it more difficult to repair turbines that help pump gas.

“The whole problem is all at their end,” he said. “This near-sighted
policy is leading to the collapse we see on European energy markets. This is
not even the end because we are still in the warm part of the year. Winter
is coming, and many things are hard to predict.”

Financial Times

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