Bailout? Or No Bailout? UK Gov't Officials Offer Conflicting Views On Energy Crisis

Tyler Durden's Photo
by Tyler Durden
Monday, Sep 20, 2021 - 04:24 PM

Update (1224ET): Business Secretary Kwasi Kwarteng told Parliament Monday that the UK won't bail out power suppliers, and the government expects some to fail in the coming weeks amid record wholesale costs of natural gas and electricity, according to Bloomberg

This morning, we noted that the government has been strategizing with larger power suppliers regarding small unhedged companies going bankrupt. There have been discussions of how larger companies absorb smaller ones. 

"The government will not be bailing out failed companies," Kwarteng said. "We may expect to see further companies exiting the market over the coming weeks."

Kwarteng said the government remains "confident that electricity security can be maintained under a very wide range of scenarios."

He dismissed the rumors of rolling blackouts and 3-day work weeks by "alarmists" and how they are "unhelpful and completely misguided." 

Kwarteng said the government's top focus right now is protecting consumers. Adding that price caps in power prices will help with that. 

Meanwhile, UK Prime Minister Boris Johnson assured everyone that the government would do everything in its power to prevent a wave of bankruptcies among energy suppliers. 

"We've got to try and fix it as fast as we can, make sure we have the supplies we want, make sure we don't allow the companies we rely on to go under. We'll have to do everything we can," Johnson said. 

Bulb Energy is one power supplier on the verge of financial turmoil as it fails to cope with record-high wholesale prices. The startup has 1.7 million customers and has been advised by financial advisory and asset management firm Lazard to explore "options," according to FT's sources. 

The energy crisis has spread to the closure of fertilizer plants which has rippled down the food supply chain, affecting carbon dioxide production that has disrupted slaughterhouse output and deliveries of frozen products. 

As the crisis rages on, the statements from Kwarteng and Johnson are conflicting, and no one is sure how the government plans to handle the upcoming wave of bankruptcies in the power space. 

* * * 

Kwasi Kwarteng, UK business and energy secretary, will hold talks with energy suppliers Monday about a possible onslaughter of smaller providers going bust in the weeks ahead due to record wholesale costs of natural gas and electricity, according to FT

Sources told FT that the UK's largest energy suppliers asked the government for an emergency support package over the weekend to survive the energy crisis. The intervention calls for creating a "bad bank" to absorb unprofitable customers as smaller providers fail. Large suppliers are expected to receive millions of new customers from bankrupt rivals, which could become a financial burden. 

Kwarteng is reviewing the bad bank proposal and other contingency plans. "We need a lot of contingency plans in place," said one of the sources. 

Benchmark UK natural gas prices had more than tripled this year even before the cold season due to low supplies from Russia. Norway's Equinor, one of Europe's largest gas suppliers, said elevated natural gas prices could persist well into 2022. 

Sources said the formation of a bad bank to shift unprofitable customers from failed suppliers "could get the industry through the current period of crisis." 

"By parking the problem in a bad bank, it would make it easier to sort out the immediate crisis and then take stock longer term. It would allow the government to handle several suppliers going bust at the same time," the source continued. 

Another option would be the government underwriting debt for top suppliers that incur losses by acquiring new customers.

And the last option could be the nationalization of suppliers where the government is on the hook for losses. 

On Sunday, Boris Johnson, the prime minister, said the energy crisis was "temporary," adding that his government will "support the struggling sector and keep the public supplied." 

"I want to give a general reassurance that the problems we're seeing are temporary," Johnson told reporters. "They are caused by the resurgence of the global economy as Covid starts to retreat in parts of the world," he said. 

"On the current supply-chain squeeze, it is fundamentally caused by the global economy coming to life again: the guy ropes are pinging off Gulliver and it's standing up, and it's going to take a while, as it were, for the circulation to adjust," he said, denying the issues could take months to resolve. "I think market forces will be very, very swift in sorting it out, and we're going to do whatever we can to help," he added.

Five suppliers have already gone bust since the start of August as surging wholesale prices have left companies insufficiently hedged. Out of the 55 suppliers, only six to ten could be left after the smoke clears. 

Millions of Britons brace for natural gas and electricity inflation, soaring food prices, and possibly electricity shortages this winter. The broader implications could cripple the eurozone economy.