Government intervenes dramatically, as energy market risks blowing up Swedish financial system

Four days ago we posted on LinkedIn that Swedes should “Be afraid” after it was announced that one of Sweden’s 6 nuclear reactors was going to be out of operation for the Fall. Here’s 2 reasons why.

Reason #1: The entire financial system could crash 
It didn’t take long to find out what to be afraid of. According to PM Magdalena Andersson, the risks go as far as bringing Sweden’s entire financial system down, and on Saturday she acted promising hundreds of billions of Kronor to support electricity companies. (for those not familiar with the exchange rates, that equates to a promise of tens of billions of US dollars – serious money) Andersson’s claims were backed by Stefan Ingves, the head of Sweden’s Riksbank, Erik Thedéen, the head of Sweden’s FSA and her Finance Minister – all standing next to her at the press conference. 

For completeness, we point out that it was not just the fact that one reactor has gone out unexpectedly. There is of course the war in the Ukraine and Putin using gas as a weapon. And there is a long list of poor or inadequate decisions and policies taken over a decade that have hollowed out Sweden’s reserve capacity. But that is water under the bridge. Whomever is in power today needs to deal with today’s challenges. Today! Even if there is an election campaign ongoing, and even if it can mean that Andersson is being accused of making a decision for political reasons. In honesty, it would be surprising if she doesn’t have some political motives. Nonetheless, we find the fact that Ingves and Thedéen were prepared to endorse her views suggests that those at the heart of Sweden’s financial system agree with the main argument that without vast amounts of support, Sweden’s very financial system is at risk.

For everyday people not accustomed to how financial markets work, this might require some explanation. Beginning with the role of a clearinghouse, also known as a Central Counter Party (CCP) which sits at the heart of a trading system. The CCP is the seller to every buyer of financial products and the buyer to every seller. That means that sellers dont need to worry about whether the person who is the ultimate buyer is going to be able to pay them if they go bust, because the CCP sits in between. In the energy markets some deals are made years into the future, so there is quite a big risk that buyers (& sellers) will default over that time frame. In fact, Uniper, a huge German company would have been at extreme risk of defaulting this summer if it wasn’t bailed out by the German government. The CCP ensures that it has the money available to pay sellers in the event of a default by holding a margin (or collateral) from everyone using the CCP. The margin is paid back to traders when the trade is completed.

And the CCP calculates how much margin to hold through formulae that depend on several factors, including the price of the trade. As the price goes up, so does the margin. As market volatility goes up, so does the margin. A market where the price has increased tenfold over a year, often via extreme daily movements is going to require a lot more collateral. If traders dont have that available then they are in default, then the CCP automatically closes out their trades. This automated process may causes losses of millions (or billions). If the CCP takes losses, then it is also at risk of default. And if traders suspect that a CCP is at risk of default, then they will not trade. Instantly the entire trading system can crash, as fear and suspicion spread like wildfire. And, as the same clearinghouse administers both the energy and other financial markets in Sweden, Andersson is not wrong in pointing to the risk of Sweden’s financial markets crashing – however theoretical that risk may or may not be.

Reason #2: Your energy bill could be SEK 20,000 per month by Christmas 
In January, Mundus International had a Zoom call with a colleague from a leafy Stockholm suburb. As she was wearing a woolly jumper, we jokingly asked her if she had a cold. She replied no, but they’d just got their electricity bill, which was SEK 22,000 (>USD2,000) for the month of December. Our bill of SEK 5,000 had been bad enough, but we wondered how hers got so high. Evidently family had been visiting at Christmas time and they had run the dishwasher and washing machine constantly, in happy bliss until the bill came in. Based upon the SEK 2.3 / kWh average price at that time that we paid, our colleague must have used around 10,000 kWh of electricity for the month.

Lets roll it forward to this winter. Currently the average price is around SEK 4 / kWh. If she makes no changes, our colleagues bill could hit SEK 40,000 per month. But there’s nothing to limit prices to SEK 4 / kWh. The spot price already trades at up to SEK 8 / kWh. In theory, she could be paying an unlimited amount, that would send her broke, but she would probably have closed down the house and flown to Phuket before it got that bad. And fortunately, she has already made changes. I suspect that the clothes dryer wont be running full time for a full house this winter. And Mundus also recommended to her to use Tibber as her electricity supplier, and to use its great app to help decide when to do the washing. But short of spending the winter in the tropics there’s only so much that you can do if you have a big, poorly insulated house. So, it would be safe to run your budget assuming electricity bills of up to SEK 20,000 per month. That’s if you have a house of around 200 m2. Those who live in a small apartment, will be more relaxed.

If you’re thinking that it couldn’t get that bad, because the entire economy would meltdown, then you’re beginning to understand why a week ago the government instructed Svenska kraftnät, the electricity transmission system operator to work out how to pay households SEK 60 billion in fees that it was receiving. That’s around SEK 6,000 for every Swede, or SEK 12,500 per household. Svenska kraftnät was given until November 15 to come up with a plan for how to do it. In some ways this is an impressive policy response from the Government. Certainly it will be a big bill for the state to pay. However, there are a number of problems with it. Households will still need to finance the bills that they are receiving between now and November. And it assumes that the Swedish state will move at breakneck speed to be paying millions of Swedes a special bonus cheque before they have to pay their winter bills. Also, impressive as the amount sounds – for any household paying SEK 20,000 per month, an average rebate of SEK 12,500 is not going to go very far.

There are also valid arguments about how Svenska kraftnät is going to be able to finance the build out in power transmission capacity now that it can’t keep the money that it was allocated for that purpose. And economists are going to be pointed in their concerns that giving people rebates only hides the problem, and that what Swedish householders need to do is to work out how to make their houses more energy efficient. But for many of us, these are going to be second order concerns. Surviving until spring is going to be front of mind …

Photo: Magnus Liljegren/Regeringskansliet