Summary
- Margin calls in Europe surpass 1.5 trillion euros – Equinor exec
- Seen squeezing market liquidity – Equinor’s Haugane
- Demand reduction only practical fix to crisis –Haugane
European energy companies require at least 1.5 trillion euros ($1.5 trillion) to cover the cost of their exposure to sky-high gas prices, Norwegian energy group Equinor has evaluated, and that does not take into account firms in Britain.
Some European countries are offering billions of euros in support to power suppliers exposed to extra collateral payments on their trades – known as margin calls – but Equinor’s analysis indicates such support is a faction of the overall cost.
Utilities usually sell power in advance to obtain a certain price, but must maintain a “minimum margin” deposit in case of default before the supply of the power. This has shot higher with surging energy prices stoked mostly by Russia cutting gas supplies to Europe, leaving firms scrambling to find cash.
Equinor’s senior vice president for gas and power, Helge Haugane, told Reuters that in Europe exempting Britain, the total of such margin calls was likely higher than 1.5 trillion euros, squeezing market liquidity and leaving several small- and medium-sized firms straining.
“It is a function of the price, it keeps going up and up,” Haugane said, adding this also required government intervention.
“The market can function a lot better than what it is doing right now further out in the curve because people don’t have enough liquidity to play,” he said on the sidelines of an international gas conference in Milan.
Gas prices, which have skyrocketed to five times their level a year ago owing to Russia’s invasion of Ukraine, surged further on Monday after Moscow closed the main Nord Stream 1 gas pipeline indefinitely.
PRICE CAP
Haugane said he thought that large-scale demand reduction would be the only practical short-term solution to Europe’s power crisis if Russia shuts off gas supply completely.
He also said that a European Union proposal to put a price cap on gas used to produce electricity and imported gas would not resolve the continent’s underlying problem.
Haugane said at the Gastech conference:
“In case the Russian volumes halt completely, the demand reduction needs to be even larger than what we so far have experienced, and no price cap or anything like that can solve the underlying problem.”
EU ministers will discuss in a meeting on Friday several alternatives including a price cap on gas used to produce electricity, a price cap on imported gas, or temporarily eliminating gas power plants from the current EU system of setting electricity prices.
Advocates of the price cap say that it would hinder some derivatives transactions to prevent margin calls but Haugane was skeptical.
“Demand reduction is very hard political work for those who can do something about that….but there is no other fix in the short term”.
The EU in July asked its 27 member nations to lower gas demand voluntarily by 15% this winter, with mandatory cuts possible in case necessary. However, governments have been slow to cut consumption.
($1 = 1.0108 euros)
