British Gas owner Centrica is in talks with banks to secure billions of pounds in extra credit to meet ballooning collateral demands as a result of extreme volatility in energy markets.
People familiar with the talks described the FTSE 100 company’s request for additional short-term financing as “pre-emptive” in case the situation deteriorates.
The move by the UK’s largest supplier of gas and electricity to households is the latest sign of the strains spreading across the energy sector as Russia’s cuts in gas supply to Europe send wholesale prices soaring.
The sums that electricity generators across Europe are required to post as collateral with trading exchanges have shot higher as wholesale prices continue to surge, with the Finnish economy minister warning that the problem could deteriorate into the “energy sector’s version of Lehman Brothers”.
Finland and Sweden both announced emergency financial measures for their electricity generators at the weekend to avoid a liquidity crisis from paralyzing their power markets and spilling over into the financial sector. European gas prices jumped 20 percent on Monday, with Russia saying it was unlikely to restart the Nord Stream 1 pipeline unless western sanctions were lifted.
Centrica’s request for additional funding from banks may heap pressure on Liz Trussthe incoming UK prime minister, to consider additional short-term financing help for the energy sector.
Energy UK, the industry body representing around 100 energy companies, on Sunday called on the government for assistance saying they are “really concerned about the situation this winter in relation to [financial] liquidity”.
Centrica’s attempt to secure additional short-term lending shines some light on the kind of sums utilities are having to post with exchanges.
Three years ago the company said that it had secured a £4.2bn committed revolving credit facility with 21 banks that would last until at least 2024. Energy traders say companies across the sector have come close to tapping out their credit lines.
One person familiar with the situation said Centrica’s approach reflected chief executive Chris O’Shea’s “conservative” approach to managing balance sheets. Another said it was born of “an abundance of prudence”. Centrica declined to comment.
Eurelectric, which represents 3,500 European utilities, warned on Monday that the sharply rising collateral demands facing electricity generators were of “grave concern”. Its secretary-general Kristian Ruby called for companies to be allowed to put up non-cash collateral such as bank guarantees to avoid a liquidity squeeze.
Analysts at RBC Capital Markets warned that “even the strongest utilities are facing huge pressure in terms of collateral payments”.
Energy companies around Europe, and in particular Germany, have been scrambling to secure additional committed liquidity facilities from banks this year as their collateral demands surge, according to people familiar with the financings.
The facilities usually last between 12 and 24 months and are designed to be either drawn in place of companies’ back-up revolving credit facilities, or as a supplementary buffer if those corporate credit lines are fully drawn, one of the people said.
So far, bankers have been willing to meet clients’ requests because most energy providers have investment grade credit ratings and they expect there to be significant state-level support from governments, the people added.
However, even additional facilities have not been sufficient to cover snowballing margin requirements at some energy companies that are simultaneously seeking expensive alternative non-Russian gas supplies.
In July, the German government agreed a €15bn rescue package for Uniper, Europe’s largest buyer of Russian gas, after it drew the entirety of a €9bn credit line from state development bank KfW raised in January.
Uniper’s majority owner, Finland’s Fortum, recently warned that its collateral requirements had risen by €1bn to €5bn in a single week.