Energy market trends as of September 2022

The varied impact of the energy crisis – and the responses to it

Recent developments on the geopolitical (particularly Russia-Ukraine) and macroeconomic fronts have propelled the cost and availability of energy within the broader context of the energy transition to the forefront. Depending on their local supply and demand dynamics, different countries are adopting slightly different responses.

The impact of the energy crisis varies from sector to sector too. Energy companies themselves face a number of major risks:

• Margin calls for hedging contracts or to support credit exposure under power purchase agreements (PPAs)
• Disrupted generation resulting in a failure to fully meet PPA obligations, triggering cash crises as suppliers are forced to buy energy on the spot market to avoid breach of contract
• Counterparty risk along the entire supply chain (including construction contracts)
  

It’s not just the energy industry that’s affected. Rising prices are creating distress across the corporate world, and not just for high energy users:

• October’s energy contract renewals (contracts are generally renewed in April and October) are seeing massive (300%-plus) price increases, adjustments to payment cycles (for example payment in advance rather than in arrears) and large deposits
• Some corporates that have lower credit quality or use large amounts of energy are finding it impossible to secure any contract at all, and will have to live with price risk over the winter months
• Increasing prices are creating major working capital issues; without energy contracts, businesses find it hard to forecast future costs and set future prices for their goods
  
  

Tips for businesses securing new energy contracts

Against this backdrop, we expect to see some B2B supplier failures this winter. Corporates should therefore bear a few key points in mind when securing new energy contracts:

1. Businesses do not enjoy credit balance protection. If their supplier fails, they will lose whatever they have paid in advance.
2. If your supplier fails, your contract is also void, and you will find yourself having to pay spot prices for energy, literally overnight.
3. It may not be possible to secure a new deal in the middle of winter, especially if the weather is cold.

This means that when entering into new contracts, businesses should be comfortable with their supplier’s credit quality. Note that many suppliers, seeking to manage their own energy demand/supply dynamics, are currently trying to exit corporate contracts.

Pre-pandemic ‘normal’ prices and 2021-2022 TTF natural gas prices
(EUR/MWh)