Nordic Lawmakers to Scrutinize $33 Billion Power Backstop

(Bloomberg) -- Lawmakers in Sweden and Finland are on Monday set to review their $33 billion emergency backstop plans devised over the weekend to prevent utilities from defaulting after a fresh surge in energy prices.

On Sunday, the two governments announced liquidity facilities made up of loans and credit guarantees to avoid some power companies going into technical defaults as soon as Monday over climbing collateral requirements. The aim is to prevent Russia’s energy curbs from sparking a financial crisis.

With price swings across the European energy space higher than ever, there are members on Nasdaq Inc.’s power market that are “facing hard times,” spokesman David Augustsson said on Monday without elaborating. The initiative for a guarantee package came from government and not the exchange, he said. 

“This is an extreme time of uncertainty and the addition of government liquidity guarantees will add an extra layer of stability to support orderly trading and energy companies,” he said by email. Overall margin requirements for traders using the power exchange are now four times higher than a year ago, he added. 

Finland’s Economy Minister Mika Lintila said on Sunday that several companies had been identified that could potentially be facing a liquidity crisis “quite quickly.” Vattenfall AB, the region’s biggest utility, said in a response to emailed questions on Monday that its finances were “stable,” and welcomed any initiatives that would help stabilize the market. 

The Nordic power market is the world’s oldest and was for a long time the most liquid too, until it was overtaken by Germany. Activity was gradually declining even before the massive price jumps that began last year. And in markets with low liquidity, prices tend to jump even more, which then inevitably leads to higher margin calls. 

There were fears the market would spiral out of control on Monday after Russia kept its Nord Stream pipeline to Germany shut for the time being. But activity on Monday morning was “relatively calm,” according to Augustsson, with the benchmark next-quarter contract gaining 12% to 280 euros per megawatt-hour. It traded as high as 421 euros on Aug. 26. 

On Sunday, Sweden’s Finance Minister Mikael Damberg had warned that failing to act “could have contagion effects on the rest of the financial market,” even as the “issue is currently isolated to energy producers.” Sweden is home to Nasdaq Clearing AB, which sits at the heart of the Nordic power market, and also acts as the central counterparty for exchange and over-the-counter trades in equity derivatives and fixed income derivatives, among others.

Sweden’s Riksdag is set to take a decision after 3 p.m. in Stockholm, following a debate, the parliament said in a notice on its website. The Finnish motion was sent to lawmakers on Monday as part of a third supplementary budget for 2022. 

Europe Scrambles to Respond as Gas Prices Surge: Energy Update

“This has, in a way, the ingredients for an energy-industry Lehman Brothers” moment, Lintila said at a news conference in Helsinki on Sunday, referring to the US investment bank whose name has become synonymous with systemic risk after its collapse set off the global financial crisis in 2008.

Sweden is extending as much as 250 billion kronor ($23 billion) in credit guarantees, while Finland’s program worth as much as 10 billion euros ($10 billion) includes loans and guarantees. 

Norway’s government is closely monitoring developments in the financial power market but said it currently sees no need for measures of its own, and Denmark is reviewing the situation for its energy companies, newspaper Borsen quoted Business Minister Simon Kollerup as saying.

Collateral Demands

The skyrocketing price of energy in Europe has made it more expensive for utilities to buy and sell electricity, because of the collateral required to guarantee trades. Fortum Oyj said Aug. 29 its collateral rose by 1 billion euros in a week to 5 billion euros, excluding funds posted by its German subsidiary Uniper SE.

The utility welcomed the government action, and said its discussions on liquidity support continue with the Finnish state, its majority owner. It had turned to the state for assistance to secure its liquidity needs until its hedged power contracts go to delivery and collaterals are released. Uniper, which has also sought further liquidity help, is not eligible for funds under the Finnish plan. The German company was bailed out just weeks ago after a massive shortfall in deliveries of natural gas from Russia led to huge losses.

The European Energy Exchange AG has also asked for more government support to traders to guarantee their buying and selling as billions of euros put up as collateral for trades are sapping liquidity and making prices even more volatile.

While the Finnish program has no set limits per company, the European Commission may impose such restrictions, the government said. As many as 30 companies are eligible to seek two-year loans under the plan, and the loans are a last resort after companies have exhausted options from banks and their owners, the government said.

The Swedish guarantees will be provided by the National Debt Office, and are primarily aimed at Swedish companies, though entities based in other Nordic and Baltic countries can access them during the initial two weeks, or until their governments provide support. The move comes a week ahead of Sweden’s election, in which a constellation of conservative and liberal parties are seeking to unseat the Social Democratic minority cabinet, led by Prime Minister Magdalena Andersson.

The European Union is also preparing to step into the energy market to dampen soaring power costs. European leaders have been working for months to try to offset the impact of Russia’s squeeze on gas -- a move they describe as the weaponization of energy. Ministers gathering for an emergency meeting on Friday will discuss measures from natural gas price caps to a suspension of power derivatives trading, according to a draft document seen by Bloomberg News. 

(Updates with margin requirements in fourth paragraph.)

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