Bloomberg: The great bailout of the European energy market is just beginning

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Three decades ago, Europe decided to open up energy markets to promote competition, a move aimed at bringing lower prices to consumers across the continent, Bloomberg reports.

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As 2022 speeds by, bills have skyrocketed while once-stable utilities struggle to stay afloat. As a result, governments are realizing that they cannot leave energy security solely in the hands of the markets. Berlin is in talks to rescue Uniper SE, France is considering nationalizing Electricite de France SA, while Britain has placed gas and electricity provider Bulb Energy Ltd under its control.

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“This is just the beginning of increasing government intervention in markets,” said Leslie Palti-Guzman, president of New York-based consulting firm Gas Vista LLC.

The underlying causes for each bailout may differ, but they are all rooted in a simple truth: there is no longer enough energy for everyone. Russia is severely curtailing supplies to Europe, French President Emmanuel Macron is grappling with an aging fleet of nuclear reactors and a lack of regulatory oversight has meant British gas and electricity providers have been selling cheap energy without considering the return of a commodity supercycle that brought high prices.

And things could get even worse. Over the years, Europe has become increasingly dependent on Russian natural gas, which President Vladimir Putin has now weaponized in response to the global backlash against his invasion of neighboring Ukraine. Gazprom is cutting exports through all major pipelines to Europe, complicating the continent’s efforts to store enough gas ahead of the winter heating season.

Gas prices in the Netherlands, a European benchmark, are already eight times higher than normal, and power trades signal that the crisis may last into next year. Electricity for delivery in 2023 is changing hands at prices six times higher than the 5-year average in Germany, Europe’s largest market.

This raises costs not only for consumers, but also for energy-intensive industries, from steel furnaces and metal foundries to cement factories and chemical plants.

“There is a limit to how long this situation can be sustained, the market will not balance itself until 2024,” said Gergely Molnar, an energy analyst at the International Energy Agency. “Until then, these economic tensions will be in place.”

Looming congestion and soaring prices prompt governments to intervene. Europe has ordered countries to replenish their storage facilities, and nations such as Austria and Germany are paying dear dollars to store natural gas in their storage facilities.

The German government is handing out lump sum payments to households this month to soften the blow from energy bills that Economy Minister Robert Habeck called “bitter news” for consumers. France plans to double the 25 billion euros in spending and tax cuts it has already earmarked to protect consumers and businesses from soaring energy costs.

Italy is set to spend almost 40 billion euros to subsidize energy bills for consumers, while the United Kingdom has put in about 37 billion pounds ($44.7 billion) to ease the impact on consumers. The nationalization of Bulb alone will cost consumers around £2.2 billion.

In the Czech Republic, state-controlled utility CEZ is in discussions with the government about measures that could protect liquidity in extreme events, such as a gas cut from Russia. In total, some analysts estimate that the broadest international consumer support packages will reach €100 billion in total aid.

“The fact that governments are increasingly forced to bail out energy companies is an indication of their failure to consider the impact of price shocks on their policies,” said Kathryn Porter, a consultant who has worked for Centrica Plc and EDF Trading . “This is a serious oversight that will add to the already high costs faced by consumers.”

Beyond simple financial aid, Germany has strengthened its powers to stabilize energy markets. A law passed in May gave the government the ability to seize critical energy infrastructure in an emergency. Habeck said such “dramatic” powers were necessary to counter Russia’s use of energy to retaliate against Europe for sanctions over the war in Ukraine.

Measures already on the table include utility bailouts, price caps on natural gas and liquefied natural gas, and subsidies to protect citizens’ purchasing power.

A generation ago, European energy markets were dominated by monopolies that gave consumers few choices. It was not until 1996 that the European Union decided to gradually open markets, as government policies were more influenced by the belief that more competition would enhance security of supply, reduce costs and tackle energy poverty.

This prediction did not turn out exactly as planned. Over the years, Germany has become increasingly dependent on Russian natural gas, which has been further exacerbated by its decision to shut down all of its nuclear power plants. Britain has been extremely lenient in its licenses to set up an energy supplier, leading to a chaotic market that has resulted in the collapse of more than 20 companies in the past year alone.

France has remained heavily dependent on EDF, in which it already owns 84%, and is now grappling with faulty reactors that are increasingly turning the country – known for supplying its European neighbors with surplus nuclear electricity – into an energy importer . In Eastern Europe, many countries continue to depend on natural gas from Russia, giving Putin the ability to influence some of the former Soviet bloc states.

Europe is now paying a heavy price for the false sense of political security it enjoyed after the end of the Cold War, which left it so dependent on intermittent renewable energy production and the Russian gas supply it thought it trusted. Germany was forced to seize and bail out a former Gazprom unit, which held about 20% of the country’s storage capacity, and Wingas GmbH, a key business supplier.

Uniper is in dire straits as it receives only about 40 percent of Russian gas orders, which analysts estimate costs the company about $30 million a day. As a result, the company said on June 29 that it is discussing a possible increase in government-guaranteed loans or even equity investments to secure liquidity.

Other companies may soon find themselves in a similar predicament. Energy trading houses, for example, are also being forced to replace contracts with Russia, often a costly liquidation of existing agreements.

“We fear a knock-on effect in the industry,” said Timm Kehler, president of the German gas industry pressure group Zukunft Gas. “The state should step in to support it.”

In France, EDF’s financial situation continued to deteriorate, even after the government injected €2.7 billion in April as part of a €3.2 billion capital increase. Chief executive Jean-Bernard Levy is urging the government to nationalize the company as soon as possible, according to a person familiar with the discussions.

An EDF spokesman declined to comment on a possible need for nationalization, saying the company needed “visibility to be able to continue its investment” in the country’s energy transition.

Governments are even planning to tax energy companies for their profits. Spain and Portugal have put a cap on the price of natural gas used to generate electricity, while Britain is considering decoupling electricity markets from the cost of natural gas. During a meeting of Group of Seven leaders in Germany last weekend, Macron called the way electricity prices are set “absurd” and called for market reform.

“We may not exactly get to nationalizations, but I wouldn’t rule out governments taking significant stakes in some companies, especially if these prices continue for another year or two,” said Jonathan Stern, a researcher at the Institute for Energy Studies in Washington. Oxford.

Source: Capital

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