Launch Of The Energy Markets Finance Scheme
17th October 2022
HM Treasury and the Bank of England are today opening the Energy Market Financing Scheme (EMFS) for applications.
The EMFS was announced by the Prime Minister on 8 September, and in The Growth Plan the then Chancellor confirmed that it will provide a 100% guarantee to commercial banks to provide additional lending to energy firms.
Delivered with the Bank of England, this scheme addresses the extraordinary liquidity requirements faced by energy firms operating in UK wholesale gas and electricity markets as a result of margin calls.
Energy prices have been high and volatile in recent months. As a result, large amounts of collateral are required to enter into contracts firms use to effectively insure themselves from price fluctuations, or otherwise firms must accept large credit exposures to their counterparties.
The details of the scheme are being announced today, and firms can start to apply via the Bank of England. Applications will be accepted for a period of three months.
The scheme is aimed at providing a backstop to support energy firms facing large and unexpected margin calls. Pricing and conditions will reflect this objective. The scheme will provide resilience to energy markets and therefore help to reduce the eventual cost for businesses and consumers.
Further details on the structure of the scheme can be found on the Bank of England's website and the market notice published today. To apply to the scheme please contact EMFS-Applications@bankofengland.co.uk
Scheme Eligibility
As part of the application process, firms will need to demonstrate that they meet the eligibility criteria.
The EMFS is intended to support energy firms who are facing short term liquidity challenges but would be otherwise in sound financial health. Eligibility will be considered based on the following criteria:
Firms must demonstrate they are in sound financial health (firms must be otherwise solvent and solvency will be assessed through robust due diligence processes)
Firms must be Ofgem-licensed (or have an Ofgem-licensed entity), and have a pre-existing relationship with an approved commercial bank or banks;
In addition, firms must also demonstrate they are making a material contribution to UK energy markets through meeting one or more of the requirements outlined below:
They make material contribution to the UK electricity or gas markets and can demonstrate that they are likely exposed to large margin calls;
They are heavily inter-connected and the loss of activity would have a significant impact on markets or other energy firms.
Eligibility will be assessed by the Bank of England and an Advisory Committee convened by HMT, who will make a recommendation for the Chancellor to make a decision to approve or reject each application.
Eligible firms who wish to apply for a guarantee will be required to comply with a set of policy conditions, such as restrictions on executive pay and capital distributions. For the full list of conditions, please refer to the market notice.
Financial institutions, state owned enterprises or commodity trading houses are not eligible for this scheme. State owned enterprises should seek to access alternative support from their relevant governments before approaching the Government.
Application process
Firms can apply to the scheme for the next three months. Each loan facility agreement will last up to 12 months and will begin from when the guarantee is issued by the commercial lender.
Applications will be assessed initially by the Bank of England, and then by Advisory Committee, who will make a recommendation for the Chancellor to decide whether to approve or reject an application.
To apply for the scheme, please email EMFS-Applications@bankofengland.co.uk. For further details on the scheme, please visit https://www.bankofengland.co.uk/markets/market-notices/2022/october/joint-hmt-boe-emfs-market-notice-17-october-2022
More
The ‘Energy Markets Financing Scheme' opens today to help support viable energy firms with major operations in the UK from the unprecedented volatility triggered by Russia’s illegal invasion of Ukraine.
These firms will be able to apply for government-backed guarantees to secure commercial financing and meet large margin calls from energy price volatility.
Following a rigorous approval process, a 100% guarantee will be issued to commercial banks on additional lending for approved firms. The Government will only be liable if a firm defaults on their repayment.
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 been changing by more than 15% a day.
This backstop scheme will help firms facing temporary short-term financing problems. The EMFS will allow commercial banks to provide larger credit lines to approved energy firms that are unable to meet extraordinary margin calls due to large moves in energy prices.
This vital intervention will help support wider confidence in the energy market and could help reduce the eventual cost of energy for businesses and consumers.
The scheme will be open to firms of good credit quality playing a significant role in UK energy markets, as generators, shippers or suppliers. They must currently operate in the UK energy market and must be, or have an entity which is, Ofgem-licensed. Firms will need to demonstrate they are facing large liquidity needs from margin calls when hedging their energy price risk. The EMFS is broadly similar to schemes 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 horrifying invasion of Ukraine and his decision to weaponise Russia’s energy reserves.
“Today we are continuing to act to ensure the market itself is secure, significantly reducing any risk of market failure."
Governor of the Bank of England, Andrew Bailey, said:
“The volatility in energy markets we have seen in recent months, caused by Russia’s invasion of Ukraine, has resulted in a number of energy firms facing extraordinary liquidity requirements.
“This scheme will provide short-term financial support for these firms so they can weather this period, while also supporting the wider resilience of energy markets in the UK.”
From today, the Bank will screen initial applications for eligibility. HM Treasury will then robustly assess the credit risks and limits before giving final approval. The Bank will then issue a 100% guarantee to the energy firms’ existing commercial bank or banks they use for additional lending. Whilst using the scheme, energy firms will be required to comply with a set of policy conditions, such as restrictions on the use of funds, executive pay, and capital distributions.
Firms have three months to apply and once approved will be able to benefit from a guarantee for a further 12 months.
State owned firms and energy firms owned by financial institutions and commodity trading houses will not be eligible for the scheme.
The ‘Energy Markets Financing Scheme’ was announced on 8 September 2022 alongside the Energy Price Guarantee, with further details confirmed as part of the Government’s Growth Plan on 23 September 2022.
