The new Liz Truss government announced a new plan of $43billion (£40 billion) for energy traders. The details of the booster package remain a black box, and no one knows who benefits and at what cost. The Bank of England and treasury department are yet to explain, though only three weeks are left for the formal launch of the fund.
Bailouts worth £160 billion to businesses and households in the next two years have overshadowed the financing scheme in the Energy Markets. There are technicalities in the plan, which is more than just a freeze on household energy bills, and this has resulted in a lack of interest.
However, the plan needs closer scrutiny. It would be the right policy if properly structured and may cost just a fraction of the £40 billion bailout. If implemented poorly, it risks diverting billions of taxpayers’ money to speculators.
The scheme devised by Kwasi Kwarteng, the exchequer chancellor, must be understood. For that, one must get deep down into the energy market. Here, the utilities hedge or lock in the electricity price charged. If it is sold forward, they’re likely to lose money if the price goes up. When this happens, exchanges such as the European energy exchange and intercontinental exchange demand cover margin shortfall to prevent potential loss.
When the forward contract matures, the utilities do not suffer any loss. But because the contract maturity takes several months or even two years, then the cash is required to make up for margin calls.
The volatility in electricity and gas prices in Europe is extreme, with wild price swings up to 25% in a single day. For this margin, calls can be ruthless. For example, Wien Energy, Vienna Municipal utility, asked for a bailout from the Austrian government by disclosing that it faced margin calls of $1.7 billion in a single day.
The volume of margin calls can intimidate a company. According to the UK treasury, the new plan is to provide contingent liquidity support for extra variation in any margin calls to energy companies.
The UK treasury has not yet answered a key question about who those energy companies are. When the scheme was announced early this month, it mentioned that it would help companies with a UK presence and it would also help to play a major role in the UK electricity and gas market.
Last week it tweaked its objective, saying that the scheme will contribute to the liquidity in the energy market and, after further examining, said that the treasury is working on the eligibility criteria.
The key word used so far in the statement is “liquidity’. This is because the biggest liquidity provider to the continental Europe and UK energy market is not the utilities that sell electricity but the banks, hedge funds, and commodity traders.
