– Soaring power prices have rattled energy companies across Europe, forcing Germany’s Uniper to last week secure credit lines of up to $11 billion.
RWE, another of the Germany’s largest utilities, said that it too had made credit provisions.[NG/GB][EL/DE]
On Tuesday, fellow German utility STEAG said it had secured at least 100 million euros ($113 million) in extra funding to shield it from skyrocketing prices and market volatility.
The surge in European prices, up 250%, has left some companies exposed, requiring them to deposit extra funds to cover payments tied to hedges, known as a margin call.
Margin calls arise when the gap between ‘spot’ power prices and the level at which utilities have sold their output on a forward basis becomes too wide, forcing them to post the margin as proof that they can deliver in the unlikely event of default.
On delivery, those contracts are usually unwound and the money flows back to the utilities, which is business as usual as long as price swings are not too dramatic.
However, recent volatility has changed this dynamic, leading utilities to seek more financial headroom.
Below is an outline of how margin calls function:
- Wholesale and exchange-based commodity markets of gas, power, coal, oil and its products routinely require down payments for operators to cover open liabilities, which rise when there are unprecedentedly wide fluctuations.
- Selling future output ahead necessitates paying buyers a safety deposit in case the producer cannot deliver. Once the supply is received, the producer gets their money back.
- When prices double, treble or quadruple as in recent weeks, the forward shipments gain in value and must be secured with more cash.
- Independent trading firms, brokers and producers’ trading floors also speculate on production, export and imports, for example by selling short positions with view to repurchasing later, at a lower cost.
- Margin payments can be waived in bilateral and confidential deals when partners believe they are safe from counterparty risks.
- When companies optimise their hedging measures, they routinely seek to use cross-margining and netting opportunities to cap overhead costs and exposures.
- This is because borrowing money to fund margin involves paying interest and entails outlays which companies then do not have available to spend on other areas of investment.
- Europe’s energy crisis has been easier to navigate for sector leaders with deeper reserves, whose profits also stand to gain heavily from the higher revenues due to price rallies.
($1 = 0.8821 euros)