There’s not a lot of cheer to be found in this piece by Bloomberg’s Javier Blas:
Every week, the people who trade electricity in the UK get to quiz the managers of the national grid for an hour. The conference call, which anyone can monitor, offers an insight into what the men and women on the front line of the power market are worried about. Listening to them is getting scarier by the week — and suggests keeping the lights on this winter will be a lot more challenging than European governments are admitting.
Prices are worrying enough. British households were told on Friday that their power and gas bills will increase from Oct. 1 by 80% . . .
But the industry’s teleconference suggests the problem is broader than just rising costs. Increasingly, the words “emergency” and “shortages” are being used, with participants focusing on when, rather than if, a crisis will hit . . .
Here’s a question from last week’s session: “Are you war-gaming possible options for if/when cross-border trading collapses under security of supply pressures this winter?” And another: “Can we have a session where we talk through the emergency arrangements?” Another participant said that the forecast for demand-and-supply electricity balance showed “how bad the winter could be for anyone who can do the maths.” The same caller was blunt about the grid’s own predictions: “I don’t think you believe what you’ve written, and nobody else does.”
One intervention was particularly revealing. “Based on where winter ‘22 products are trading, where does this position yourself with respect to securing power over the winter?” asked one participant. The background? In the forward market, UK power for December 2022 is fast approaching £1,000 per megawatt hour, up 50% from current prices. The implication? Power shortages. . . .
It’s almost as if the British government’s climate-change driven focus on renewables over the last few years (a focus, incidentally, supported by all Britain’s major parties, although it will be the governing Conservatives who will be blamed by the voters if the worse does indeed happen) has turned out to be a reckless gamble with the country’s energy security.
Angela Merkel’s (undeserved) reputation for competence has been destroyed by the mess in which Germany now finds itself. The only thing that will save Boris Johnson (and his predecessor, Theresa May — remember her?) from the same fate could be that May has long since lost hers, and Johnson never had one.
Blas:
To be sure, the call should focus on potential troubles ahead — it exists to anticipate and solve problems. But having listened in on multiple occasions over the last few months, I have three takeaways. First, the looming power emergency is worse than many industry executives publicly acknowledge, and a lot more dangerous than the government admits. Second, high prices are a big problem, but security of supply is at risk, too. Third, time is running out to prepare before temperatures start to drop.
The manager of the Finnish grid, in a rare example of the kind of transparency that’s badly needed, told citizens earlier this week to prepare for shortages this winter . . .
And Italy?
The Financial Times:
Hedge funds have lined up the biggest bet against Italian government bonds since the global financial crisis on rising concerns over political turmoil in Rome and the country’s dependence on Russian gas imports.
The total value of Italy’s bonds borrowed by investors to wager on a fall in prices hit its highest level since January 2008 this month, at more than €39bn, according to data from S&P Global Market Intelligence . . .
Italian bonds have already sold off in recent weeks as investors respond to the rising uncertainty. The yield on Italy’s 10-year debt has risen to 3.7 per cent, pushing the gap, or “spread”, with Germany’s debt — a key risk barometer — to 2.3 percentage points from 1.37 percentage points at the start of the year . . .
Does that mean a euro-zone crisis is in the works? Quite possibly.
But:
Some managers remain wary of the trade, saying that the ECB’s recently announced transmission protection instrument will limit upside to yields. The new tool was designed to keep borrowing costs in highly indebted eurozone countries from rising too far above core nations such as Germany.
“It seems to me [it’s] like playing a game of chicken with the ECB,” said Decio Nascimento, chief investment officer at hedge fund Norbury Partners, who is avoiding the trade.
However, BlueBay’s Dowding argues that the TPI is little deterrent to placing a bearish bet.
“[The ECB] can’t just buy Italy,” he said, adding that such a move would act as a signal that the central bank would provide support to countries lacking fiscal restraint.
If I had to guess, we’ll see a drama in two acts. The first will be growing panic about, yes, a return to the euro-zone crisis, except this time with Italy, the currency union’s third-largest economy, rather than a minnow like Greece. The second will be that the ECB will indeed “buy Italy.” With the prospect of energy-induced turmoil across Europe this winter, fear of an Italian debt crisis and its possible effect on the euro zone is the last thing that the ECB will want to see. It will deal with the fiscal damage (which may, in fact, become a tool to advance EU integration) and, in all probability, the wrath of Germany’s constitutional court later.