Opening of the Energy Markets Financing Program today
- The ‘Energy Markets Finance Programme’ opens today to help support viable energy companies with major operations in the UK in the face of unprecedented volatility triggered by the illegal invasion of Ukraine by Russia.
- These companies will be able to apply for government-backed guarantees to secure commercial financing and meet large margin calls due to energy price volatility.
- Following a rigorous approval process, a 100% guarantee will be issued to commercial banks on additional loans for approved businesses. The government will only be liable if a company defaults.
The joint UK Treasury and Bank of England Energy Markets Funding (EMFS) scheme will open today (Monday 17 October) for applications.
Russia’s brutal and illegal invasion of Ukraine has led to unprecedented volatility in wholesale energy markets. Over the past month, natural gas futures prices have moved more than 15% per day.
This support scheme will help companies facing temporary short-term financing problems. The EMFS will allow commercial banks to provide larger lines of credit to licensed energy companies that are unable to meet extraordinary margin calls due to large swings in energy prices.
This vital intervention will help build confidence in the energy market and could help reduce the potential cost of energy for businesses and consumers.
The scheme will be open to companies of good credit quality playing a significant role in the UK energy markets, as producers, shippers or suppliers. They must currently operate in the UK energy market and must be, or have an entity, which is licensed Ofgem. Firms will need to demonstrate that they face significant liquidity needs from margin calls when hedging their energy price risk. The EMFS is broadly similar to programs launched in Germany, Finland and Sweden.
Chancellor of the Exchequer Jeremy Hunt said:
“A resilient energy market is vital as we all grapple with the consequences of Putin’s horrific invasion of Ukraine and his decision to militarize Russia’s energy reserves.
“Today, we continue to act to provide security to the market itself, significantly reducing any risk of market failure.”
Bank of England Governor Andrew Bailey said:
“The volatility in energy markets that we have seen in recent months, caused by Russia’s invasion of Ukraine, has caused a number of energy companies to face extraordinary liquidity needs.
“This program will provide short-term financial support to these companies so they can weather this period, while supporting the wider resilience of UK energy markets.”
Starting today, the Bank will review initial applications for eligibility. HM Treasury will then thoroughly review the credit risks and limits before giving final approval. The Bank will then issue a 100% guarantee to the existing commercial bank(s) of the energy companies they call on for additional loans. While using the program, energy companies will be required to comply with a set of policy conditions, such as restrictions on the use of funds, executive compensation and capital distributions.
Businesses have three months to apply and once approved they will be eligible for warranty coverage for a further 12 months.
Public enterprises and energy companies owned by financial institutions and commodity trading companies will not be eligible for the scheme.
The “energy market financing programme” was announced on 8 September 2022 alongside the energy price guarantee, with further details confirmed as part of the government’s growth plan on September 23, 2022.
Further information :
- To see the Contract notice. Further information and guidance, including on the application process and eligibility criteria, will be posted shortly thereafter.
- The program will be open for applications from October 17, 2022 to January 27, 2023.
- In the event of a verified guarantee claim from a commercial lender, HMT will settle the claim in accordance with the 100% guarantee, with the Bank acting as agent in such payment. HMT will fully indemnify the Bank for its role in the EMFS.
- Applications will be assessed initially by the Bank of England and then by an advisory committee, which will make a recommendation to the Chancellor to decide whether to approve or reject an application.
- HM Treasury, backed by UK Government Investments, will manage and monitor the use of the scheme once launched. HM Treasury and the Bank will also undertake and share reports relating to the elements of the scheme for which they are responsible.
- The EMFS comes on top of the Energy Bill Relief Scheme, for all eligible non-domestic customers, and the Energy Price Guarantee, which will ensure that a typical household in the UK pays around £2,500 a year on their bill of energy, based on their use, for the next 2 years, starting October 1, 2022.