Bankruptcy risks abound for utility industry this winter
Natural gas price volatility presents systemic liquidity and solvency risks for utilities globally
Originally posted on my Power and Markets Substack, please feel free to share and subscribe to my newsletter to get these articles in your inbox!
Some consumers may be scratching their heads when opening their utility bills this winter. The letterhead could be from a different entity than they’re used to. It may look like a scam, but utilities in Europe are folding like chairs. In the UK, a dozen suppliers have succumbed to record high natural gas prices over the past 10 weeks alone.
If you wander over to Pure Planet’s homepage, a UK provider, they admit due to the global energy crisis, they are unable to continue operations. Many utilities and market participants are bumping up to their credit limits being forced to add collateral. For some, this simply isn’t possible.
Utilities buy and sell power in wholesale electricity markets on an hourly basis. These markets are by far the most volatile in the world. From one moment to the next, prices can easily spike 100-fold without warning. In other markets, demand destruction exists. With electricity, that simply isn’t possible. It is produced and consumed instantaneously with minimal storage capacity. Reliability is the core focus of the industry. That means demand must always be supplied, no matter the financial cost.
Wholesale prices are set by the marginal producer. Typically the lowest cost power plants operate first in order to keep markets efficient. The price of electricity is then calculated at the cost of the online unit serving the next megawatt demanded.
The marginal producers tend to be natural gas power plants as they are the quickest to react and the easiest to dispatch to manage the grid. When natural gas prices spike, this drives up the costs of natural gas power plants, which then pushes wholesale electricity markets higher. Right now, natural gas prices are at record levels in Europe with fears of a cold winter ahead.
The European wholesale electric markets are facing considerable strain with these energy prices. Sustained strength in natural gas is pressuring market participants to post more collateral or request increases in lines of credit. It makes doing business untenable as runaway prices are resulting in bills a dozen of these companies so far cannot pay.
Natural gas exports in the form of LNG, liquefied natural gas, are flowing out of the United States to help quench the demand in foreign markets. This in turn has pushed NYMEX natural gas prices to levels we haven’t seen since 2009 for this time of year. It’s simply going to be very expensive to heat homes this winter around the northern hemisphere.
Given there is no end in sight as inventories are well-below last year’s levels, some of us may be receiving utility bills from different entities in the months ahead. This may be the least of our worries, though, as the world wanders into an unexpected energy crisis.
