EU set to intervene to ease liquidity strains in energy markets

EU set to intervene to ease liquidity strains in energy markets
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(Sept 7): The European Union is poised to take steps to ease the mounting stress in energy markets caused by surging collateral requirements, as companies cry out for government help.

Amid growing signs of stress, and as energy firms “face difficulties financing those margin calls for lack of cash collateral,” the EU’s executive arm wants to take dramatic action as part of a broader package of measures to tame the crisis.

“The commission will engage with the relevant securities and banking regulators to explore ways to enable market participants to find the collateral to meet margin calls,” according to a document published on Wednesday.

Energy Ministers meet on Friday to discuss the unprecedented plans to step into energy markets. Russia’s move to switch off the crucial Nord Stream pipeline ramped up pressure on the bloc to curb the spike in energy prices and avoid social upheaval as Europe heads into winter.

Ministers will discuss plans for a levy on fossil-fuel producers — based on pre-tax profit — and a limit on excess revenues of companies producing power from sources other than gas. The idea is to rechannel profits to support consumers.

They may also consider a proposal to cap prices of Russian gas imports — a move that risks ramping up tension as Moscow has made clear it won’t supply gas to countries signing on to price caps. There’s also a proposal for a mandatory target reduction of electricity use.

“We are confronted with astronomic electricity prices for households and companies and with enormous market volatility,” Commission President Ursula Von der Leyen told reporters in Brussels on Wednesday. “Therefore, we will put forward a set of immediate measures that will protect vulnerable consumers and businesses and help them adapt.”

According to a draft regulation seen by Bloomberg News, a cap on the price of power for generators that don’t use gas could be set at 200 euros (US$198.07) per megawatt hour.

Shares in some of Europe’s biggest power producers rose Wednesday. Credit Suisse senior analyst Jens Zimmermann said the EU price cap proposal “is high enough so as not to discourage future investment in non-gas producing technologies.”

Once the commission gets the political nod from governments, it will put forward legislative proposals that will include more details.

“I think the commission’s approach looks good as it tries to lower the electricity price for consumers while maintaining the focus also on energy savings and reduction of peak demand,” Ville Niinisto, a member of the European Parliament from the Green party and a former environment minister of Finland, said. “Together these efforts have to maintain the investments into cheap renewable energy and energy efficiency as a sustainable way out of this energy crisis caused by the use of fossil fuels and the price hike of fossil gas.”

The EU is planning to propose two demand reduction targets. The first would require governments to put in place measures that would cut overall electricity consumption from all consumers by 10% to 15%. The second would target the most expensive hours of production and would call for a mandatory cut of at least 5% in net consumption during peak hours, according to the draft.

The Czech Republic will try to exclude the issue of a possible price cap on Russian gas from the agenda for Friday’s energy ministers’ meeting, the Czech Trade and Industry Minister Jozef Sikela said Wednesday in Prague. Sikela, whose government will be charing the talks, said any cap would be a political tool, rather than a step that would solve the current energy crisis in Europe.

Russian President Vladimir Putin said Wednesday that a potential price cap on Russian gas and oil is “another stupidity.”

Von der Leyen also said Wednesday that the bloc will consider whether to include liquefied natural gas in the price caps, along with Russian gas imports — a move Poland has suggested. The bloc is also considering creating a new benchmark for LNG pricing.