UK plans government intervention as gas crisis hits energy companies

The UK government is considering bailout loans to help energy suppliers weather the current gas price crisis.

UK Business Secretary Kwasi Kwarteng told Sky News on Tuesday that “many options” were currently being considered, including potential state-guaranteed loans. However, he suggested that not all energy suppliers would be eligible to benefit from such a program.

“Every year between five and eight companies exit the market and I don’t want to support failing companies, I don’t want there to be a reward for failure,” he said. “I don’t think we should be throwing taxpayers’ money into businesses that, let’s face it, have been mismanaged.”

Fears that some UK energy suppliers may find it difficult to stay afloat have increased in recent weeks as wholesale gas prices continue to rise to unprecedented levels across Europe.

The October gas price at Dutch hub TTF, a European benchmark for natural gas trading, was volatile on Tuesday, trading just above 74 euros ($ 86.9) per megawatt hour early in the post-war period. noon in London. Last week, the contract hit a record 79 euros per megawatt hour.

Since January, its value has increased by more than 250%.

The UK gas price in October traded lower on Tuesday to around £ 1.88 per therm, but continued to hover around recent highs.

Kwarteng said on Tuesday that the UK should ensure its “supplier of last resort” mechanism – which helps customers switch to a new energy supplier if their current supplier collapses – is strengthened before the winter to ensure a continuous supply of energy.

“It costs a business to absorb up to hundreds of thousands of customers of a bankrupt business, and that could well be an allowance for some kind of loan – this was discussed,” he said. at Sky News.

“When I became Minister of Energy over two years ago, there were 65 suppliers. Today the number is around 55. Am I going to bail out the 55 of those companies? No I don’t think we could do that cause a handful of they would have come out [the market] In any event.”

The financial situation of companies can be examined to assess whether they should benefit from potential financial support from the government, said Kwarteng, who met with some of the UK’s smaller energy companies on Tuesday.

Start-up Bulb, the UK’s sixth-largest energy supplier, is seeking a bailout, while four smaller competitors recently went out of business, the BBC reported.

Meanwhile, the managing director of challenger Green’s supplier told BBC Radio 4 on Monday that the prospects for the company were “bleak”.

“We are currently in talks with the government and Ofgem on measures that can be taken to deal with the situation and these ongoing talks will include domestic suppliers of all sizes,” Energy UK trade body said in a statement on Monday. .

“There are no easy solutions, but the priority of everyone involved is to protect clients as much as possible, and whether additional support needs to be provided to them in addition to existing mechanisms, while trying to minimize further disruption in the retail market. . “

A spokesperson for Energy UK told CNBC by email on Tuesday that it was “clearly a very difficult market for suppliers,” but so far discussions with the government had focused on client protection rather than direct financial assistance to businesses.

Gas is crucial for the UK’s energy supply, playing an important role in heating, industry and power generation. More than 22 million homes are connected to the country’s gas network.

The country’s largest source of gas is the British Continental Shelf, which accounted for around 48% of total supply last year. However, UCS is a mature source, which means that it must be supplemented with gas imported from international markets.

The UK has limits on how much suppliers can charge consumers for energy, with price caps reviewed by the government every six months. Some companies are reportedly lobbying the government to lift those caps, but Kwarteng stressed on Tuesday that he would not repeal the regulation.

As the UK works to mitigate the impact of the crisis, its impacts are also being felt across Europe, and industry sources have warned that the problem is a global problem.

The surge in wholesale prices has been partly caused by increased demand, particularly from Asia, as economies emerge from lockdowns induced by Covid-19. A cold European winter and spring also meant that supplies had already been severely depleted in the summer.

Meanwhile, declining domestic production, adverse weather conditions in the United States and essential maintenance work have created a tight gas market and made it difficult to restock gas before the coming winter in the region.

In a note released Tuesday, analysts at Barclays warned that another harsh winter could keep prices high until 2022 and push core price inflation sharply higher.

“We see the surge in gas prices so far adding 1 percentage point year-on-year to the UK CPI this winter, through most of 2022, ”they said, referring to inflation. “In the EA [euro area], we see a 0.5 percentage point contribution to HICP inflation at the end of 2021 and early 2022. We estimate that each sustained 10% increase in consumer gas prices generates 0.1% of headline inflation in the UK and 0.2 percentage point in the EA. “

Limited pipeline imports, caused by the tightening Russian market, also contributed to the crisis.

“Without additional Russian supplies, European buyers will have to compete fiercely with their Asian counterparts to attract the necessary LNG shipments,” analysts from research firm Engie EnergyScan said on Tuesday in an update on their website.

The Spanish government this week issued a decree to cap retail energy prices amid the crisis. Some experts have speculated that the gas crisis could hurt the EU’s green ambitions, as governments may prioritize keeping energy cheap rather than transitioning to greener alternatives.