Recent weeks have seen a global energy crisis, with the price of a number of important energy carriers and electricity starting to increase sharply, and the increase is no longer limited to Europe or to a narrow range of products: natural gas, oil, coal, and electricity prices have all surged.
Source: Portfolio.hu
In today’s presentation, Gergely Szabó explained how we ended up here, outlined the risks the price increase may have, primarily as regards energy sector actors, and outlined some solutions for how companies can handle the present situation.
Soaring energy prices
On Wednesday morning, the regional gas exchange closing price was EUR 81/MWh, started his talk Gergely Szabó, Regional Chairman of MET Central Europe, at the Portfolio Energy Investment Forum. This means that the price of gas and electricity has risen five-fold and three-fold respectively, since the beginning of 2021, with Brent Crude oil increasing by 50%.
According to Gergely Szabó, there are at least three key factors that played a part in getting us here.
- First, an increase in demand in the Asian region, capable of purchasing large quantities of LNG on the world market which effects Europe and thereby Hungary as well.
- Second, serious concerns have arisen concerning Nord Stream 2 in recent months, and the dilemma was not resolved by the German elections held last weekend. Until the market is calmed as regards the issue, this may continue to drive up prices.
- The third factor is connected to the rise in CO2 quota prices, by which Hungary has started to pay for the cost of energy transition in the EU.
Many players may decide to give up
The increase in energy prices may have the following consequences:
Energy-intensive industries (sectors where a significant part of the cost structure is energy-based) will be forced to face significant increases in costs, Gergely Szabó emphasized. This means that companies that are not able to produce suitable cover for the increased costs will end up in dire straits. One of the consequences is that these companies will stop production (such as European fertilizer manufacturers) or try to transfer the costs to their own consumers. Even now, we can already see that energy-intensive industries are facing liquidity problems.
The other substantial problem affects the so-called “short-runner” energy companies and energy users. Short running means that the actor is unable to cover its own energy needs at the time they are incurred, rather opting to hope that prices will decrease in the future. However, due to the sharp rise experienced this year, many companies may be forced to throw in the towel, leading to a domino effect of bankruptcies in turn resulting in loan risks across the entire economy.
Another challenge companies with stretched financing may also have to face is that working capital financing has also increased several times over. “As a result, there are 1 or 2 traders every week in England or Germany who announce bankruptcy... and that is probably just the tip of the iceberg,” said Gergely Szabó.
In a situation like this, the amount that the household, SME, or corporate sector – which contracted at lower fix rates and generally require heating – will end up consuming in the coming winter months may have a great impact. A cold winter may easily bring hardships to the entire energy sector.
The expert also warned of a rise in loan risks, as supplier and customer risks also increase several times over as a result of the steep price rise.
Possible solutions
With price rises this steep and with such little time, there are few options for a solution, especially as regards the short term. According to Gergely Szabó, there are three general approaches available for finding a solution:
First, all industries with energy exposure should do their best in the area of sales to optimize risk profiles. This involves harmonizing the various purchasing and sales periods and conditions.
On the purchasing side, a solution could be to develop long-term energy supply solutions for actors who have less of an insight into the energy market and to restructure traditional buyer-seller relationships as true partnerships.
It is very likely that energy prices will remain just as volatile in the upcoming period. A production company needs energy efficiency solutions to be able to reduce the risk stemming from this volatility. According to Gergely Szabó, regional production companies have not yet started seriously dealing with the solution to this problem. As the closing thought of his presentation, he urged all stakeholders to work together to seek out these types of solutions with their energy providers, as whether this volatility affects 20% or 15% of the company’s cost structure is far from indifferent.