Europe could see catastrophic ‘Lehman Brothers’ event as power producers face $1.5 trillion in profit margins — here’s how governments across the region are stepping in

Europe could see catastrophic ‘Lehman Brothers’ event as power producers face $1.5 trillion in profit margins — here’s how governments across the region are stepping in

Wild swings in the price of natural gas — exacerbated by the disruption of supply from Russia’s Nord Stream 1 pipeline — are putting pressure on European power producers who are now facing liquidity challenges and margin issues from brokers.

Governments in Europe are considering their options to help producers, who will be critical to heating the continent during a looming winter – possibly without natural gas flowing from Nord Stream 1, Europe’s most important supply line.

Much of Europe has aligned against Russia’s invasion and months of attacks in Ukraine, and Russia has often signaled its readiness to halt Nord Stream 1 in response. Now that this has happened, the markets have predictably responded with volatility. Prices have risen and fallen at breathtaking speed, turning cost certainty into, well, a dream.

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Running between the Russian city of Vyborg to Greifswalk in northern Germany, Nord Stream 1 is a vital line that if shut down could plunge Europe – just emerging from the intense summer heat that strained the network – even deeper into a energy crisis.

Russia’s move to halt Nord Stream sent gas prices soaring, adding to the continent’s woes amid a sinking euro and falling financial markets.

For European utilities, the risk is more complex than Nord Stream running dry. Some wonder if this marks a kind of “Lehman Brothers” moment for the euro’s electricity providers, recalling the days of the United States’ housing crisis in 2008, when risky mortgage loans expired that buyers ultimately could not afford.

Russia’s cutoff and its effect on natural gas pricing have prompted a series of margin calls, which occur when an account’s equity falls below a minimum amount required by the broker. When this happens, brokers usually require depositing additional funds into the account or selling assets.

The scenario highlights a long-standing practice of energy utilities, which typically sell power well in advance to guarantee a price. In a volatile market, this strategy becomes a weakness, as utilities must maintain a minimum margin in the event of default before supplying the power.

With prices soaring, brokers are making margin calls and forcing utilities to shop for cash.

Sensing the potentially devastating effects on Europe’s ability to harness reliable power during a cold winter, governments such as Germany, Sweden and Finland have stepped in to prop up utility bills.

Germany is providing a 7 billion euro package to companies, while Finland and Sweden announced an emergency liquidity package of $33 billion — using loans and credit guarantees — to help troubled producers.

For everyday Europeans, the consequences of market volatility underscore its deep dependence on Russian gas and its reluctance, at least so far, to adequately curb energy consumption in the face of a widening crisis.

In July, all 27 EU member states voluntarily agreed to cut gas demand by 15% this winter, but European countries have so far been slow to heed the call. The EU has already signaled that mandatory energy cuts will be considered.

There is some room for optimism. European countries were busy stockpiling natural gas before the shutdown, and many believe Russia’s pause marks its most influential play yet against European sanctions on Ukraine.

However, the first job may be to understand how many European electricity firms may be at risk of failure due to margin requirements and what EU governments are prepared to do in response.

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This article provides information only and should not be construed as advice. Provided without warranty of any kind.

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