Europe fears turbulence in the energy market after the suspension of Russian gas

The governments of Sweden and Finland offered billions of dollars in guarantees to utilities to prevent a collapse in energy trading when markets opened on Monday after Russia halted natural gas flows through a key pipeline to Europe.

Traders, analysts and energy executives say natural gas and electricity prices – already high – are likely to jump after state-controlled Gazprom PJSC extended the shutdown of flows through Nord Stream late Friday. Moscow blamed technical problems for the shutdown.

European governments described it as an economic attack in response to their support for Ukraine. Officials fear that the loss of Nord Stream imports could cause a further spike in electricity prices and burden utilities with cash payments to energy trading exchanges that they may struggle to meet. A wave of failed payments could undermine financial stability, officials said.

“This had the ingredients for a kind of Lehman Brothers of the energy industry,” Finland’s Economy Minister Mika Lintila said on Sunday.

Swedish and Finnish government officials worked over the weekend on programs designed to ensure power producers can meet exchange payments known as margin calls. Stockholm is home to

Nasdaq

Clearing AB, a subsidiary of

Nasdaq Inc.

which handles most derivatives transactions in the Nordic energy market, which includes Finland and the Baltic countries.

Under the Swedish plan, the government would provide guarantees to eligible companies, which could then use the guarantees to borrow from banks and pay the exchange clearing house. The Swedish government will be licensed to provide guarantees of up to 250 billion kroner, or $23 billion, a finance ministry official said.

The Finnish government plans to offer €10 billion or $10 billion in guarantees.

Nasdaq Clearing spokesman David Augustsson said the measures would help the electricity market operate in an orderly manner on Monday. “This is a time of extreme uncertainty and the addition of government liquidity guarantees will add an additional level of stability,” he said.

Last week, the European Energy Exchange AG, Europe’s main non-Scandinavian electricity trading venue, said Germany and other European Union members should help companies finance margin payments. A spokesman did not respond to requests for comment Sunday.

Russia’s state-controlled PJSC Gazprom extended the suspension of flows on the Nord Stream gas pipeline late Friday.


photo:

HANNIBAL HANSCHKE/REUTERS

Armed with the guarantees, utilities and other energy companies would find banks more willing to lend money to cover margin payments, the Swedish official said. The Swedish parliament will vote on the program on Monday, and it will come into effect the same day if approved. One concern is that the clearing house itself may default, the official said.

“This threatens our financial stability. If we don’t act soon, it could lead to serious upheaval in the Nordic and Baltic countries,” Swedish Prime Minister Magdalena Andersson said Saturday at a press conference where she outlined the plan. “In the worst case scenario, we could end up in a financial crisis,” Ms. Anderson added.

When utilities agree to deliver gas or electricity, they lock in prices by selling futures contracts. Exchanges charge a single payment known as initial margin when trades are made to collect collateral. They then claim or return money each day depending on whether the position gains or loses value.

As prices rise, utility short positions lose value and companies pay the exchange. They recoup their money when they deliver gas or power, but the time difference has led to huge cash flows that some firms struggle to finance. Sometimes a vicious cycle occurs where extreme price movements increase margin calls, prompting companies to back out of trades and causing more volatility.

“No one has the money to pay to trade,” said Justin Colley, an analyst at Argus Media. “Making these margin payments every day just creates problems for everybody — not just the small companies, but the big companies, the national utilities.”

The guarantees could add to rising costs for governments to support households and businesses through a historic rise in energy prices, caused in large part by Moscow’s move to cut gas exports. Germany on Sunday introduced its third energy aid package this yearworth 65 billion euros, to protect consumers.

European gas and electricity prices are extremely volatile. They hit record highs in late August before collapsing last week after the European Union said it would change the structure of the energy market to lower prices for consumers and businesses. Scandinavian and Baltic prices were particularly turbulent, in part because drought limited Norway’s hydropower production.

Tom Marzek-Manser, gas analyst at ICIS, said he expected gas and electricity prices to rise again on Monday in response to the Gazprom shutdown. “Meeting the demand, whatever it turns out to be, is going to be much more difficult,” he said.

To some extent, energy markets were already ready for Russia to completely stop gas supplies. Gazprom reduced Nord Stream flows to 20% capacity in the weeks before the shutdown.

A number of factors could act to lower prices after an initial spike, traders and analysts said – including actions taken by Scandinavian governments. Weather forecasts suggest there could be more electricity production from wind farms, reducing demand for gas.

Uniper,

one of the two the largest buyers of Russian gas in Europe until recently said last week that it had fully drawn down a €9 billion credit line from German state lender KfW. The company said it had asked to borrow an additional 4 billion euros to make margin payments and buy gas to compensate for lost supplies from Gazprom.

Write to Joe Wallace at [email protected]

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