EU seeks $140 billion to cope with energy crisis

On Wednesday, the European Union’s executive presented plans to raise more than 140 billion euros (£121bn) in order to address an energy crisis. This has raised the possibility of winter fuel shortages, corporate bankruptcy and economic recession.

European gas prices have soared in the past year due to Russia’s reduction of fuel exports in retaliation for Western sanctions on its invasion of Ukraine. This has left households struggling to pay their energy bills and utilities facing a liquidity crunch.

European governments responded by offering credit and guarantees to stop power providers from collapsing from the weight of collateral demands, as well as limiting prices for electricity and gas.

“EU member states have already invested billions in helping vulnerable households. We know that this will not suffice,” Ursula von der Leyen, President of the European Commission, told members of the European Parliament.

She revealed plans to limit revenues from electricity generators that benefit from rising power prices but don’t rely on expensive gas. She also discussed plans to make fossil fuel companies share the windfall profits from energy sales.

Von der Leyen stated, “It is wrong to receive extraordinary records revenues and profits benefiting war and on behalf of our consumers.”

She stated that the plan should raise over 140 billion euros to help households and businesses in the 27 EU member countries.

However, her announcement did NOT include an earlier EU proposal to limit Russian gas prices. After Russia threatened to cut fuel supplies, this idea caused division among member states. Von der Leyen stated that the Commission was still considering the idea.

The benchmark gas price in Europe rose to 208 euros per megawatt-hour (MWh) according to the comments. This is well below the August record of 343 euros, but more than 200% higher than a year ago.

The European Commission’s full proposals will be made public at 1230 GMT. Reuters saw a draft of the proposal but it did not include a wider gas price cap.

Europe has been working hard to replenish its storage units and has met its target of having them at 80% by November. However, Russia’s actions to reduce supplies, including via the Nord Stream 1 pipeline to Germany make winter uncertain. Moscow accuses sanctions of preventing maintenance of the pipeline. European politicians claim that this is a pretext.

Zongqiang Luo, Rystad analyst, stated that months of geopolitical wrangling had left the European gas market in turmoil. Volatilities stemming from a lack of supply and potential market intervention have led to volatile prices.

VKU, Germany’s local utility industry association, warned of possible insolvencies after several utilities in Britain and the EU collapsed. This is because they are often unable to pass on all the effects of rising gas prices to consumers due to national price cap policies.

“We want insolvencies to be avoided. “I must warn you that if companies go bust, it may become more difficult for all to finance their activities,” Ingbert Liebing, VKU Managing Director, told Reuters. He also said the group was in discussions with the German government.

RTE, the French grid operator, stated that there is no danger of total winter blackouts but didn’t rule out power cuts at peak times. However, RTE stressed the importance of reducing demand.

According to the report, reducing national electricity consumption by 1%-5% in most cases and by up to 15% in extreme situations of gas shortage or very cold weather could help to prevent a power crisis.

RTE stated that organised, temporary, and rotating load shedding outages could be activated as a last resort to avoid widespread incidents.

European regulators are currently examining other relief options.

Von der Leyen stated, “We also know the energy companies face severe liquidity problems in the electricity futures market, which could risk the functioning of our power system.”

“We will cooperate with market regulators to alleviate these problems by amending collateral rules – and taking measures to limit intraday price volatility.”

Utilities frequently sell power in advance but must provide collateral to clearers in the event of default. Collateral requirements have increased as gas prices have soared.

Uniper, a German utility, has secured 13 billion euros worth of credit lines from the state. Most of these it has drawn already. Uniper said Wednesday that it is looking at other routes to keep Uniper afloat. This could include possibly handing the government a larger stake. The state will take 30% under the existing bailout plan.

Uniper’s capital resources have gone completely underwater, so nationalisation is the only way to go. According to Reuters, a source close to the matter said that mathematically speaking, there was nothing more that could be done.

Fortum in Finland, Uniper’s largest shareholder, said that talks with Germany continued. The talks were not reported by the economy ministry.

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