Energy Economy

08 Sep 2022

European Utilities Rally as EU Unveils Rescue Plan

08 Sep 2022  by   
Just hours after the European Commission proposed caps on power prices across the bloc, European utilities have rallied, with stocks gaining on indications that a price cap plan will include ways to increase liquidity for energy companies facing over a trillion dollars in margin calls.


More than anything, European utility stocks seem to be rallying on more clarity about what is to come, with RBC Capital Markets’ Fernando Garcia telling Bloomberg that the price cap proposal “might remove uncertainty for the sector and make it sustainable for consumers again.”

Beyond a reduction in electricity uses, the plan is broad and includes a price cap on Russian gas imports, a tax on fossil-fuel producers and measures to increase energy company liquidity.

At 11:30 a.m. EST the Stoxx Europe 600 Utilities index was up 2.31% on the day, with Germany’s RWE utility up nearly 9% and Madrid-based EDP Renovaveis SA up nearly 3%. Energias de Portugal SA was up over 4% at the same time.

While European utilities have been selling power at record-high prices, lack of cash is choking them, with Finland recently warning that the sector could meet a “Lehman Brothers” fate if government’s fail to step in with help.

The liquidity problems stem from a setup in which power generators rely on futures markets to guarantee prices, de-risking power sales to customers through short positions in futures markets. This protects them from sudden drops in prices, or allows them to cover shorts if prices are higher, as explained by the Financial Times.

That has worked fine until now, in the midst of an intensifying energy crisis in which collateral requirements for hedging power sales have skyrocketed and energy companies face $1.5 trillion in margin calls.

EU energy ministers are set to discuss the plan at an emergency meeting on Friday.


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