04.05.2022, 19:10
| Media release
Lausanne – Alpiq supports the Swiss Confederation’s efforts to secure Switzerland’s power supply. The bill is intended as a preventive subsidiary measure. It is intended to ensure security of supply for the general population as well as businesses in the current extreme market environment impacted by geopolitical forces. Alpiq sees several items in the draft that are counterproductive and consequently risky for business. In its response to the broad review, Alpiq pointed out the critical points and suggested significant adjustments.
As a preventive measure, the government wants to compel systemically important energy companies to submit to a federal protection umbrella. Since the market conditions are extremely tense and the high volatility on the energy markets leads to systemic risks, this type of commitment can be purposeful and stabilising. It can relieve speculation and tension on the market. This is attributable to the fact that the companies have sufficient liquidity, but all contingencies of a pan-European upheaval cannot be ruled out. Consequently, loans from the government should also be accessible to all energy supply companies.
However, with the mandatory status, the present bill provides for a wide range of obligations that intervene in the strategic and operating business of companies – irrespective of whether a company makes use of a loan or not. This is a massive intrusion in economic freedom. The current proposal is therefore prejudicial and disproportionate. The measures must not pave the way for potential nationalisation of energy companies.
The current extremely high liquidity requirements in energy trading on the exchanges are driven exclusively by record-high energy prices. The sale of electricity futures on the energy markets (two to three years in advance), is an internationally recognised hedging instrument. The goal is to minimise risks and ultimately to secure the supply of energy, which is a central foundation for the economy and society, to residential households, commerce and industry.
The bill jeopardises the goals of the Energy Strategy 2050
The framework conditions for subsidiary measures must avoid restricting the attractiveness for investors in the credit and capital markets as well as other providers of borrowed capital; drastic measures in that regard, along with a de facto investment stop, would make it difficult to raise the required financing from third parties. It would blow up the goals of the government’s Energy Strategy 2050 as well as the expansion plans with regard to closing the winter electricity gap.
Proposed framework conditions threaten the existence of businesses
The bill also provides for an extremely high risk surcharge of 20% or 30% on the total loan amount. In its proposed form, the risk surcharge could thus lead companies from a liquidity crisis to a profitability crisis. It could even evolve into an insolvency risk due to the high interest payment. This would mean that the proposed stabilisation measures to ensure security of supply would endanger the companies rather than support them, which can hardly be the intended goal. Alpiq therefore proposes a market-oriented risk premium in line with credit and capital market conditions.
From Alpiq’s point of view, the current environment makes it necessary for Switzerland, in a joint effort with other European countries, to work towards adapting the framework conditions of the power exchanges in such a way that market volatility does not require tying up excessive liquidity. A proposal to this effect from European trade associations with a corresponding concept is available, which Alpiq considers a sensible solution approach.
What is electricity price hedging all about?
The average annual amount of electricity generated by a power plant portfolio is generally consistent and predictable over two to three years. However, the price that will be paid for this electricity production in the future is unknown. To reduce this price risk and improve cash flow planning, electricity companies sell their future power production on the energy markets two to three years in advance. These so-called hedging transactions are proven and well established risk management instruments for minimising risk. Hedging for electricity produced in Switzerland is mainly transacted on the European Energy Exchange EEX in Leipzig; Switzerland does not have its own power exchange. The electricity companies sell the production with so-called futures contracts (energy derivatives or futures). These products are linked to the wholesale price for electricity, which applies to delivery at the specified time. These futures are subject to a clearing obligation and must therefore be cleared by a recognised or authorised central counterparty. The central counterparty enters into the contractual relationship between the original counterparties (i.e. buyer and seller of the futures) in exchange for collateral and assumes their default risk. To hedge their counterparty risk (i.e. that one party does not deliver or the other does not accept delivery), the clearing houses (financial institutions) require a security deposit (so-called margin), which is calculated from the market prices and their volatility (initial margin) and the difference between the transaction price and the market value (variation margin). The amount of these security deposits is not based on the original sales price; instead, it is determined by the up-to-the-minute electricity prices. As a rule, these collateral security deposits are paid by the market participants to the clearing houses as cash collateral. The extreme and exceptional price mark-ups since last year have led to a massive increase in the collateral to be deposited for futures contracts from the last 2–3 years. This is the reason for the considerable liquidity needs of the electricity companies.
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