Energy producers extended £40bn ‘last resort’ liquidity facility

The UK government has insisted its new £40bn facility to bolster electricity producers’ financial liquidity should only be used as a “last resort” as it became the latest country to announce emergency measures to prevent power companies from running out of cash.

The Treasury and Bank of England are working on a joint scheme to provide short-term financial support to electricity generators that face “extraordinary” collateral requirements on the futures exchanges where they hedge their supply contracts.

The £40bn support would “provide resilience to both energy and financial markets, and the economy, and reduce the eventual cost for businesses and consumers”, the Treasury said, although it added that it must only be tapped as a “last resort and will be structured and priced accordingly”.

Wholesale gas and power producers minimise the risk of losing out from fluctuations in market prices by taking short positions in futures markets. As prices have spiralled ever higher, they have been forced to post additional collateral with exchanges to cover these contracts.

Full details of the £40bn facility are yet to be released but the government insisted it would only be open to companies operating in the UK “that can prove that they are otherwise in sound financial health”.

Adam Bell, head of policy at consultancy Stonehaven and former head of energy strategy at the Department for Business, Energy and Industrial Strategy, welcomed the £40bn facility, warning there would otherwise be “a real risk of sector collapse”.

Some UK energy suppliers — which market to consumers but do not always have their own generating capacity — have privately told the Financial Times they may face similar liquidity issues to those of producers if wholesale gas and power prices suddenly plummet. Suppliers also hedge their future energy requirements to fulfil their contracts with customers.

The intervention follows a plea on Sunday from UK power companies for help as other governments in Europe step in to provide emergency liquidity.

Countries including Denmark, Finland, Sweden and Switzerland have announced emergency measures to prevent a cash crunch in power markets that some experts warned could become the energy sector’s “Lehman Brothers” moment, referring to the 2008 collapse of the US bank.

The Financial Times also reported this week that British energy group Centrica was in talks with commercial lenders to secure billions in extra credit in case collateral challenges spiralled.

The £40bn support package was one of several market interventions and reforms announced by Liz Truss on Thursday designed to stabilise the energy market and reassure customers.

The prime minister said the government had entered negotiations with nuclear and renewable electricity producers to persuade them to sign new long-term contracts to sell their output at fixed prices well below current wholesale rates.

The proposal, originally devised by academics at the UK Energy Research Centre, has been backed by big renewable generators such as SSE and is partly intended to move some companies off highly lucrative legacy contracts that date back to the early 2000s that pay companies a subsidy on top of prevailing wholesale rates.

It is also seen as a stepping stone to a wider overhaul of energy markets to decouple wholesale power prices from gas. Under the current system, the most expensive power plant called on to meet demand sets the price for all generators, even though solar and wind produce much more cheaply. The government launched a consultation on decoupling gas from power prices in July.

Energy UK, a trade body representing about 100 companies, has suggested the fixed-price contracts could reduce energy bills in Britain by up to £18bn a year from 2023, although one energy company suggested most renewables companies had already sold 50 per cent of their expected output for next year so overall savings could be considerably lower.

The new contracts are expected to be voluntary, but John Musk, analyst at RBC Capital Markets, said that “optically” it was “likely to be difficult for renewable operators not to partake in this new scheme”.

But the idea is not universally popular, as it could lead to generators receiving higher prices in future than they otherwise would have if wholesale rates fall back.

Ed Miliband, shadow energy secretary, told the BBC Radio 4 Today programme the scheme “would lock in massive windfall profits for these electricity generators”.

“What Energy UK have said is we’ll accept slightly lower prices now, so we can have much higher prices over the following 15 years,” Miliband added. “This would be a terrible deal for the British people, a terrible deal for bill payers.”

Truss also pledged to undertake “fundamental reforms” to the oversight of the energy market through a review of regulator Ofgem, although she did not provide further details.

Additional reporting by Gill Plimmer in London