UK electricity companies warn of cash crunch risk

Electricity companies are urging the UK government to boost access to a £40bn state-backed liquidity support scheme, as continued price volatility in wholesale power markets reignites fears that some suppliers and generators might run out of cash.

The Treasury and Bank of England in October set up an emergency liquidity facility to tackle the margin requirements faced by power generators and suppliers that hedge their sales or energy purchases in the futures market.

Collateral requirements for energy companies across Europe have ballooned as Russia’s invasion of Ukraine has triggered extreme volatility in wholesale energy markets.

The UK has followed a series of other European governments in offering liquidity support to the sector. Finnish economy minister Mika Lintilä in September warned the problem had all the ingredients to create a “Lehman Brothers” moment in the energy sector, referring to the collapse of the US bank during the 2008-09 financial crisis.

Trade body Energy UK told the Financial Times it remained “very concerned” about financial liquidity across the UK power industry “over the coming months” and warned the conditions attached to the government’s £40bn facility meant it was not available to companies that may need it most.

The £40bn “energy markets financing scheme”, which opened to applications in mid-October, is on offer only to companies that are of “good credit quality” and which make a “material” contribution to UK electricity and gas markets. Suppliers, for example, need to have more than 750,000 customers to qualify.

Any company that makes use of the scheme will be blocked from paying dividends or bonuses to executives.

Analysts say smaller suppliers and generation companies that are not part of large, diversified companies are at greatest risk of running out of cash this winter as cold weather has sparked further volatility in power prices.

Energy UK and individual suppliers have raised the matter in meetings with the government since the scheme’s launch, according to people familiar with the situation.

Chris O’Shea, the chief executive of British Gas owner Centrica, has said he believes many rival suppliers are “struggling for cash” and could go bust in a repeat of the market turmoil of 2021, which saw more than 30 energy retailers collapse.

Energy UK’s deputy director Adam Berman said the sector “remains very concerned about financial liquidity over the coming months”.

“While the government has put the energy markets financing scheme in place to address this problem, it will have to go further to ensure this facility is available to companies across the sector,” he said.

Generators and suppliers face extremely challenging conditions due to the ongoing [energy] marketvolatility. An enhanced government-backed liquidity program is the best way of safeguarding the financial resilience of the sector,” Berman added.

Philippe Commaret, managing director for customers at EDF Energy, one of Britain’s top six suppliers, told the FT that liquidity problems in forward energy markets were also pushing up prices for households and businesses.

Fewer electricity generators were trading their output in forward markets because of ballooning collateral requirements and were instead selling in spot or day-ahead markets where they did not face the same cash demands. As a result, prices in forward markets have increased, he warned.

“If we were able to find a way to crack this issue of illiquidity on the forward market, it would have a big impact on the prices for customers,” Commaret said.

The Treasury said it had “a duty to protect the taxpayer and as such, the energy markets finance scheme should only be used by energy firms if absolutely needed, and this has been reflected in the structure and pricing”.

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