Power producers call for collateral change to avert ‘Lehman’ moment

European electricity producers are calling for collateral requirements in wholesale power markets to be eased as they urge the EU to help stave off what some experts have warned could be the “energy sector’s version of Lehman Brothers”.

Kristian Ruby, secretary-general of Eurelectric, which represents more than 3,500 European utilities, said the ballooning sums that power producers were required to post as collateral because of extreme price volatility in wholesale energy markets was of “grave concern”. 

He called for the rules to be softened so that generators could consistently put up other financial instruments, such as bank guarantees, at trading exchanges to avoid a liquidity crunch rather than have to rely on cash as collateral.

“There are many other things that hold the value of cash . . . for example bank guarantees. If you could ease those very strict requirements for what counts as collateral, you are not squeezing the companies in the same way,” Ruby told the Financial Times.

Russia’s announcement on Friday that it would indefinitely suspend flows of gas to the EU through the Nord Stream 1 pipeline triggered a fresh round of volatility in European gas markets on Monday.

Dutch TTF gas futures, the benchmark European contract, jumped more than a third to as much as €284 per megawatt hour, rising back towards all-time highs above €340 hit just under two weeks ago.

Finland and Sweden both announced emergency financial liquidity measures for their electricity generators at the weekend to avoid a liquidity crisis from paralysing their power markets and spilling over into the financial sector.

Nasdaq, which operates the main market for Nordic power derivatives, said it welcomed government efforts to support financial stability. “The addition of government liquidity guarantees will add an extra layer of stability to support orderly trading and energy companies,” it said.

However, collateral that can be accepted at clearing houses in Europe as insurance for trading is tightly regulated and authorities permit only a tight range of liquid assets such as cash.

“Nasdaq Clearing and other European clearing houses . . . have a limited ability to significantly adjust the risk models impacting margin requirements on an individual basis,” said Nasdaq in a statement.

Finnish economy minister Mika Lintilä highlighted the potential seriousness of the problem when he warned it had “all the ingredients for the energy sector’s version of Lehman Brothers”, referring to the collapse of the US bank during the 2008 global financial crisis.

Italian utilities’ collateral requirements have increased at least seven-fold over the past few months, according to multiple executives in Rome and Milan.

“We don’t have a liquidity issue at the moment given our business is highly diversified but we have certainly seen an increase in our cash collateral requirements,” Marco Patuano, chair of Milan-based A2A, told the FT on Monday.

“The impact of this doesn’t translate into a loss on our balance sheet but clearly it impacts the amount of available resources . . . this is a systemic issue that needs to be dealt with at a European level.”

Analysts at RBC Capital Markets warned on Monday that “even the strongest utilities are facing huge pressure in terms of collateral payments”.

“With volatility likely to again increase this week on the back of the latest Nord Stream 1 shutdown, this situation remains front and centre in the sector,” they added.

Ruby conceded there might have to be “detailed legal discussions” around easing collateral rules but added: “My key point here is the EU has the emergency powers to do this. If they see the risk of another Lehman Brothers crisis on the horizon, they have the powers and the obligation to act.”

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

Ruby warned that European electricity companies were facing a “perfect storm” owing to the liquidity problems as well as some “dangerous” market interventions by EU member states. He also said companies that owned supply businesses could be squeezed by households and businesses not being able to pay their bills.

Germany on Sunday said it would impose a windfall tax on electricity generators to help fund a €65bn relief package to ease the pressure of soaring energy bills and inflation for households. Romania also last week announced an additional tax on producers’ revenue and a cap on how much they would be paid as part of a support scheme limiting prices for households and small businesses, which its energy companies warned would impose significant financial and economic losses on them.

“I have this plea [to governments in Europe]: be careful that you do not tear these power companies that are supposed to enable this transition [away from Russian gas] apart while you try to deal with this crisis,” Ruby said. “We are really seeing stress from a lot of sides.”

Additional reporting by Silvia Sciorilli Borrelli in Milan