Energy crisis also hits major suppliers; Uniper had to borrow billions of euros

Exceptional volatility and rising energy commodity prices have forced major German suppliers to secure additional funding. Companies that have recently had to do so include Germany’s Uniper, STEAG and RWE.

Although energy commodity prices have fallen in recent weeks thanks to warmer weather and LNG imports, it is becoming increasingly clear how great a burden this represents for energy companies. It is not only small suppliers that are hit by extreme energy commodity prices. Larger ones can also face liquidity problems.

This is also illustrated by the example of Germany’s Uniper. In connection with high gas prices, it had to secure additional credit lines worth EUR 10 billion (compared with a total market capitalisation of around EUR 15 billion): EUR 8 billion from its parent company Fortum and EUR 2 billion from German state-owned bank KfW.

Another German utility, STEAG, found itself in a similar situation. While the exact amount of the credit line was not disclosed, it is reportedly in the low hundreds of millions of euros. RWE likewise had to increase its financing, although it did not disclose the volume of additional credit.

During the autumn, Gunvor had already highlighted the problem when it had to reduce some of its positions and secure additional funding of EUR 2.5 billion.

Suppliers pay the price of collateral requirements

The reason for the additional funding in the above cases was always buyers’ demands for additional collateral, known as margin calls. If a trader sold electricity or gas through forward contracts (for example, a year or more ahead) at a price lower than the current exchange price, the counterparty will generally require collateral in case the supplier is unable to fulfil its delivery obligation.

The amount of collateral often depends on the difference between the forward contract price, at which the commodity was sold, and the current price, protecting the buyer against a potential supplier collapse. With current increases reaching several tens of percent, and several hundred percent in the case of gas, these can be significant amounts, particularly for large suppliers. The example of German utilities demonstrates this as well.

It should be added, however, that this is only temporary collateral. Once the obligation has been fulfilled, meaning the electricity or gas has been delivered under the secured contract, the entire amount of collateral is returned.

Temperatures through the end of winter will determine further developments

Temperatures through the end of winter will determine whether extreme energy commodity prices return to Europe in the coming weeks and months.

Given record-low natural gas inventories in European storage facilities, prices could rise substantially again in the event of freezing weather. Storage fill levels have been well below the average of the past ten years since the start of the heating season.

Although the pace of withdrawals from storage slowed at the end of last year, storage facilities fell below the 50% fill level at the fastest pace since 2011.

EUROPEAN ENERGY CRISIS: European gas storage has now dropped **below the 50% level**, the earliest the half-empty mark has ever been reached, beating the previous record by 7 days (and usually, it doesn't happen until early-to-mid Feb) Chart by @hechartshttps://t.co/y2755U73KXpic.twitter.com/1n6FL2T0uD

— Javier Blas (@JavierBlas) January 13, 2022