It’s not the Bank of England’s job to help ailing energy companies

The writer is a former external member of the Monetary Policy Committee of the Bank of England. Anne Sibert, professor of economics at Birkbeck, University of London, co-authored this article

The focus in recent weeks on the Bank of England’s emergency gilt-buying programme has distracted attention from a significant, and dangerous, initiative that it announced last month: the Energy Markets Financing Scheme (EMFS).

Under the terms of the scheme, which opened for applications on Monday, the BoE will work with the Treasury to “address the extraordinary liquidity requirements faced by energy firms operating in UK wholesale gas and/or electricity markets” and offer “short-term financial support to wholesale firms”. 

There is so much wrong with this unfortunate initiative, which threatens the BoE’s operational independence, and the government policies leading to it.

In a free market, energy suppliers would pass on rising costs to households, companies, and other final consumers of energy. The appropriate response would have been to allow this and address its impact on the poorest through a lump-sum transfer to the lowest-income households. Instead, the government has instituted a costly array of transfers to households, both poor and wealthy.

The energy sector has liquidity problems because it has solvency problems. Many energy suppliers who competed aggressively over prices ensured that the industry was not very profitable even before the recent energy-price shock. Ofgem’s price caps further undermined the energy firms’ viability, and in the winter of 2021-22, 21 suppliers failed.

The BoE is not supposed to make loans to insolvent firms. If a firm’s collateral is impaired, there must be recourse to a solvent counterparty. If a regulated financial firm has liquidity problems, then regulation and supervision by the BoE provide the bank with the information necessary to judge whether that firm is solvent. Without this regulation and supervision, this essential information is missing.

So the bank should not lend to unregulated financial companies and nor, it follows, should it lend to non-financial companies that it does not regulate. The BoE should also not act as a market maker of last resort, buying energy company debt if the private sector ceases purchasing it. The market for such debt is not systemically important, and there is a material risk of default.

The BoE is also unlikely to be able to induce a return of private market makers and normal purchasers of energy companies’ debt by acting as lender of last resort to the banks that funded the buy side of that market when the energy sector was deemed financially viable. The absence of willing creditors for the energy sector is not a liquidity problem caused by a self-validating run on the banks or on the market, but rather the reflection of legitimate concerns about the financial viability of the sector.

The Treasury could legitimately provide financial support if the energy firms are deemed systemically important. Ensuring this is not a joint scheme could limit the damage to the BoE. Instead, the bank would solely be an agent of the Treasury, which could have provided the liquidity directly, but preferred to have the operational end of the scheme managed by the bank, which has more experience and expertise in providing liquidity, albeit not to energy firms and other non-financial companies.

Liquidity provision to potentially insolvent energy companies should be an explicitly fiscal exercise. A special purpose vehicle owned by the Treasury could implement it, and temporary staff secondments from the BoE or the private financial sector could provide the necessary technical expertise. But the bank as an institution should not be involved.