BoE to act as energy lender of last resort

September 15, 2022|Written by |Bank of England, European Central Bank

The Bank of England (BoE) is to become the lender of last resort to UK energy companies under a new scheme launched jointly with the Treasury. The Energy Markets Financing Scheme (EMFS) will make up to £40 billion ($46 billion) available to wholesale gas and electricity suppliers experiencing liquidity difficulties as a result of high and volatile fossil energy prices.

The opening date for participation in the programme will be published by the end of October.

Unprecedented market prices for fossil fuels in the wake of Russia’s invasion of Ukraine mean that energy wholesalers must put up large amounts of collateral or accept significant credit exposures in order to enter into contracts that insure against price fluctuations. Largely as a result of these exceptional liquidity requirements, 29 UK energy suppliers have failed since July 2021.

The new scheme will be designed to be used as a last resort and will be structured and priced accordingly, the BoE has said in a statement released last week. It will be open to firms that can prove that they are otherwise in sound financial health, have a UK presence, and play a significant role in UK electricity or gas markets. It will include a rigorous assessment process and a series of yet to be specified conditions.

Advocacy groups are calling for the conditions of the EMFS to include requirements for action on reducing greenhouse gas emissions. “It’s positive that policymakers appear to have learned the lessons of previous corporate bailout schemes, signalling that the EMFS will be priced as a ‘last resort’ and access will be subject to conditions,” said Fran Boait, executive director of the research and campaign group Positive Money.

“The terms of the scheme should ensure that beneficiaries aren’t able to use cheap funding to enrich shareholders through share buybacks and dividend payouts, and that firms are committed to decarbonisation.”

The BoE may not be the only central bank offering support for beleaguered energy firms faced with market volatility and skyrocketing liquidity requirements. A policy background paper seen by Bloomberg News suggests that European policy makers are examining the possibility of credit lines from the European Central Bank, along with the introduction of new products as margin collateral and temporary suspensions of derivatives markets.

This page was last updated September 15, 2022

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