The £40bn ($43bn) plan announced in the early days of Liz Truss’ government to support energy traders remains a black box. Who benefits, at what price and under what conditions is a mystery that the Treasury and the Bank of England have not yet explained – with three weeks until the official launch of the fund. The Energy Markets Finance Scheme is not getting much attention as it has been overshadowed by energy bailouts for households and businesses which could cost up to £160billion over the next two years. It’s also far more technical than the easy-to-understand freeze of energy bills for families, further discouraging attention. But it deserves careful consideration. Done right, it’s the right policy and can end up costing a fraction of the overall £40billion. But if implemented poorly, it could end up funneling billions of taxpayers’ money to speculators.
To understand the scheme imagined by the Chancellor of the Exchequer Kwasi Kwarteng, we must delve into the bowels of the energy market. There, utilities hedge or lock in the electricity price they charge. By selling futures, they may have taken a position that loses money if prices rise. When this happens, exchanges such as the Intercontinental Exchange and the European Energy Exchange require payouts – or margin calls – to cover potential losses. Ultimately, when futures contracts expire, utilities do well: losses in financial markets are offset by equal gains from their actual sales. But as they wait for contracts to mature – for as long as several months or even two years – they need cash to meet margin calls. A lot of money. With gas and electricity prices in Europe skyrocketing, sometimes by up to 25% in a single day, margin calls can be brutal. For example, when Wien Energie, a municipal utility in Vienna, asked the Austrian government for a bailout, it revealed that it had faced a margin call of 1.75 billion euros (1.7 billion euros). dollars) in a single day. Ultimately, the size of margin calls can overwhelm a business. The new scheme is “a source of additional liquidity support for financially sound energy companies to meet extraordinary variation margin calls”, the UK Treasury said. Who are these energy companies? This is the key question that the UK Treasury has failed to answer. When the scheme was announced in early September, he said it would help companies that “have a UK presence” and “play a significant role in the UK electricity and gas markets”. On Friday it changed its focus, saying it will help “those who make a material contribution to the liquidity of UK energy markets”. Pressed on the issue, the Treasury said it was still working on “eligibility criteria”. The key word in the new statement is “liquidity”. Because the biggest providers of liquidity in the UK and continental European energy markets are not the utilities that sell electricity to households and businesses, but the big banks, commodity traders and hedge funds . So far, most European governments have focused on providing liquidity for margin calls to utilities. The UK scheme, however, could open up the public wallet to many others, including City of London banks like Goldman Sachs Group Inc. and Morgan Stanley, hedge fund speculators in Mayfair and commodity traders like Vitol Group and Glencore Plc. London should follow the Europeans’ narrow guidance: limit aid to companies that produce – or consume – electricity and natural gas. Support should be tied to physical flows of energy and real fixed assets, such as gas-fired power stations, wind farms or nuclear power stations located in the UK, rather than just a cash injection. It should also focus on companies that pay most of their tax in the UK, leaving it to others to help companies incorporated in low tax jurisdictions or tax havens.
And, of course, conditions must be attached: the loans must be expensive and the companies must disclose their trading books, not only of their hedging activity, but also of any speculative activity; maybe even limits on bonuses. The details, aggregated to avoid disclosing proprietary data, should become public. The collapse of many energy retailers in the UK last year showed that the government was allowing a regulatory environment in which ‘tails I win, tails you lose’ was common. Many of these failed companies looked more like commercial enterprises than utilities. The UK Treasury has promised to convene an advisory committee as part of a “robust review process”. It’s welcome. But speed is key – the program goes live in just three weeks. And everything, from the criteria to the conditions, including the composition of the advisory committee, remains undecided.
To sum up, we now have a 135-word statement to explain a £40billion policy. It’s just not enough.
More from Bloomberg Opinion:
• Truss going the wrong way on UK energy bailout: Javier Blas
• Market crash sends warning to UK government: Mark Gilbert
• Get ready for Britain’s big sellout: Chris Hughes
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former Bloomberg News reporter and commodities editor at the Financial Times, he is co-author of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”