Sweden announces emergency funding for electricity producers

Electricity producers in Sweden are set to be given billions in government support in response to Europe’s energy crisis.

The announcement from then Prime Minister Magdalena Andersson to provide SEK250bn (€23bn) in emergency funding came amid the ongoing conflict in Ukraine and a day after the decision by Russia to stop gas deliveries via the Nordsteam 1 pipeline.

That decision was described by Andersson as a threat to financial stability in the region. “[The] announcement not only risks leading to a ‘war winter’ but also threatens our financial stability,” she said at an emergency press conference with Sweden’s financial regulator, finance minister and central bank governor.

Their presence underlined the financial implications of the current volatility in Europe’s energy market.

Since the outbreak of war in Ukraine, energy producers have seen their collateral demands on energy exchanges skyrocket, leaving many with a funding problem.

Unless action was taken, the liquidity shortage could ripple through the Nasdaq Stockholm, Sweden’s main clearing market, causing a financial crisis.

While several energy companies have profited heavily from the rise in gas prices, sparking talks of windfall taxes in parliaments across Europe, this is not the case for all energy producers.

Those reliant on gas to produce electricity are particularly exposed to the current crisis, even more so if there is a prolonged shutdown of the Nordstream pipeline.

One of the biggest problems concerns the way that many energy companies pay for energy by using short-term funding.

Many often use electricity futures contracts to hedge their transactions but such is the volatility in the market that margin calls and collateral demands have shot up, leaving many producers in a liquidity crisis.

The concern is that this could lead to the collapse of a major energy producer, raising the risk of a financial crisis as well as blackouts, and the adverse impact this would have on Swedish manufacturing firms and food producers.

One of Sweden’s biggest bakeries, Pagen, has warned that a one-second interruption to electricity supply in June caused four weeks of disruption in its production process and a spokesman described the prospect of recurring outages as “mind-boggling”.

Meanwhile, Swedish utility Vattenfall has put back the restart of the Ringhals 4 nuclear reactor by two months to the end of January 2023, in a further blow to power supply in the Nordic and Baltic region.

Sweden’s concern is shared by EU policymakers, who have just announced plans for a “deep and comprehensive” reform of the energy markets to cope with the current crisis.

These measures include temporary state aid, the decoupling of gas and electricity prices, and a cap on energy companies’ profits, designed to raise €140bn to cushion consumers.

To add further complexity to the crisis, Sweden has just emerged from a tightly-fought general election between the incumbent centrist-left Social Democrats and a coalition of right-wing parties, something that could threaten the implementation of any proposed response plans to the energy crisis.

At the time of writing, incumbent Prime Minister Andersson had conceded the election, paving the way for the coalition of right-wing parties, including the far-right Sweden Democrats and the centre-right Moderate Party.

Ratings agency Fitch has stated that Sweden’s energy crisis response will “take full shape after the elections”, adding that the crisis will “weigh on economic activity” in the second half of the year.

According to Fitch, A government formed by the right-wing grouping would likely see further tax cuts and increased expenditures. “The Moderate Party has promised lower taxes on labour income and investment savings, and for pensioners,” stated Fitch.

“It also aims to increase expenditure on policing and to raise defence spending to 2.0% of GDP more quickly than the incumbent government. The Sweden Democrats have a broadly similar tax policy and also favour lowering employer contributions.”

However, there is more alignment between the incoming and outgoing governments when it comes to the loan guarantee scheme, stated Fitch, which suggests that “emergency response measures could still be enacted”.