European Power Companies Demand Subsidies as Russian Gas Is Cut Off From Most of Europe

Pipes at the landfall facilities of the 'Nord Stream 1' gas pipeline are pictured in Lubmin, Germany, on March 8, 2022. (Hannibal Hanschke/Reuters)

European energy companies are requesting at least 1.5 trillion euros in government liquidity to cover their margin calls following Russia’s cut-off of gas supplies to Europe which caused costs to soar, according to Norway’s utility firm Equinor.

Firms in Britain were not included in the Norwegian power company’s estimates.

Several EU nations are already providing billions of euros to assist utilities stuck with extra collateral payments on their margin calls in the biggest energy crisis in decades.

Energy firms habitually sell power in advance to secure a certain price, but must maintain a “minimum margin” deposit in case of default before they supply the power.

The minimum price of a deposit has skyrocketed since Russian state-owned energy corporation Gazprom curtailed natural gas supplies to Europe last week, sending energy prices soaring and sucking up capital to guarantee trades.

Liquidity at many EU energy firms is drying up as companies begin to struggle to find cash to meet their margin calls on the energy derivatives market.

“This has had the ingredients for a kind of a Lehman Brothers of energy industry,” said Finland’s Minister of Economic Affairs Mika Lintila, referring to the 1.5 trillion plan to fund power companies.

When Lehman Brothers, the fourth-largest U.S. investment bank at the time, filed for bankruptcy in September 2008 with more than $600 billion in debt, triggering the worst parts of the U.S. financial crisis.

Price gains are squeezing market liquidity, leaving small and medium size energy firms to struggle, Helge Haugane, Equinor’s senior vice president for gas and power, said at a Gastech conference in Milan.

Haugane noted that even the 1.5-trillion euro bailout estimate is “conservative,” and that more government liquidity is needed, as current state support covers only a fraction of the overall costs.

“It is a function of the price; it keeps going up and up,” he said.

However, an energy liquidity bailout could lead to massive amounts of money being printed in the bloc, which would likely worsen already high inflation, according to some analysts.

A Broken Energy Relationship

Energy prices on Sept. 5 rose even higher after Gazprom indefinitely shut down the Nord Stream 1 pipeline to Germany on Sept. 2, in an escalation of the crisis.

Natural gas prices are now more than five times what they were a year ago since Russia’s invasion of Ukraine in February led to supply disruptions and sanctions.

The Kremlin has warned that gas supplies will not be resumed until sanctions are lifted, after previously claiming that the cut in supply was due to technical difficulties.

The EU and its allies have been increasingly tightening economic sanctions on Russia as the fighting in Ukraine continues.

Uniper, Germany’s largest gas company, has been considering energy rationing following the cut-off of gas from the pipeline.

The German power company said it is considering legal action against Gazprom to compensate its shareholders, after its market value dropped 90 percent since June.

This forced the government in Berlin to rescue the utility in July with a 15 billion euro bailout.

“We cannot rule out that Germany might look at rationing gas as something that might have to be considered,” said Uniper CEO Klaus-Dieter Maubach at the Gastech conference.

Germany has been heavily reliant on Moscow for its energy needs, importing 55 percent of its gas from Russia before the Ukraine crisis.

“I have said this a number of times now over this year and I’m educating also policymakers. Look, the worst is still to come,” Maubach told CNBC, referring to the anticipated rise in prices in the fall and winter.

“What we see on the wholesale market is 20 times the price that we have seen two years ago,” he said.

By June 2022, the amount of imported Russian gas declined to 26 percent, causing the German economy to falter.

Now, after the pipeline shutdown, Germany has lost its entire supply of Russian gas.

Germany “can’t cover its payments without Russian gas and the government is asking citizens to conserve energy to leave more for industry,” Credit Suisse Global Head of Short-Term Interest Rate Strategy Zoltan Pozsar said in a dispatch.

Grasping for Solutions

Two months ago, the EU requested each of its member states to voluntarily reduce gas consumption by 15 percent, in case of a worsening situation this winter, but reductions are not being enforced by many members.

Meanwhile, EU policymakers will have an emergency meeting in Prague on Sept. 9 to discuss various plans on how to manage the power crisis.

Haugane criticized as unworkable the widely discussed G7 proposal for a price cap on imported energy in order to solve the rise in gas and oil prices.

He believes a major reduction in demand is the only real short-term solution for when the gas supply is cut off entirely.

Other plans suggested include a windfall tax on energy and the temporary removal of current EU price control standards for gas-fueled power plants in the 27-nation bloc.

Reuters contributed to this report.