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Sunday, May 26, 2024

Bank of England offers safety net in volatile energy market

A new £40 billion scheme will enable energy firms to apply for loans to secure their commercial futures amid unstable wholesale costs.

The Energy Markets Financing Scheme (EMFS) launched by the Bank of England and The Treasury, aims to help firms facing short-term finance issues.

Record gas prices were reached in the summer following Russia’s invasion of Ukraine.

The EMFS will allow commercial banks to provide larger credit lines to approved energy firms that are unable to meet extraordinary margin calls due to large moves in energy prices.  

Energy companies usually sell power in advance to secure a fixed price but to guard against default, must maintain a minimum margin deposit before they supply any power.

But the soaring costs of gas have left companies struggling to find funds to cover it.

The government hopes the intervention will help boost wider confidence in the energy market, and could help reduce the eventual cost of energy for businesses and consumers. 

Loans will be available to those playing a current significant role in UK energy markets including generators, shippers and suppliers. They must have an entity which is ofgem-licensed.

Firms have to prove they are facing large liquidity needs from margin calls when hedging their energy price risk.

However, the Bank of England also said that under its scheme conditions, energy firms are not allowed to issue dividends, share buybacks, return of equity, discretionary bonus payouts, or make changes to senior management wages.

Newly-instated chancellor Jeremy Hunt, said: “A resilient energy market is vital as we all grapple with the consequences of Putin’s horrifying invasion of Ukraine.

“Today we are continuing to act to ensure the market itself is secure, significantly reducing any risk of market failure.”

State-owned firms and energy firms owned by financial institutions and commodity trading houses cannot apply for the scheme.

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