BAKU, Azerbaijan, Aug.1. Energy companies may need liquidity support (so they can meet their margin calls and continue making purchases on wholesale markets), Trend reports with reference to the International Monetary Fund (IMF).
“Special considerations apply to companies that play a critical role in importing and distributing energy, especially natural gas. The sharp increase in gas prices in recent months are imposing financial strains on companies that purchase gas on wholesale markets and distribute it to customers on fixed-price contracts. To help ensure the solvency of critical energy companies, and avert the possibility of energy shortages that would entail sizable economic losses, governments might need to make sure that energy companies can pass on cost increases to end-users on otherwise fixed-price contracts, complemented with further targeted support for vulnerable households,” IMF report reads.
The report reveals that any support to firms should be temporary, targeted to otherwise viable firms, and ideally should include incentives to reduce energy use.
“Determining which firms are at risk due to the energy price spike but viable in the long run is highly challenging in practice. Most large, energy-intensive firms have access to working capital and can absorb or pass along a temporary cost shock. By contrast, small- and medium-sized enterprises (SMEs) tend to be liquidity constrained or have weaker balance sheets, and are therefore more likely to need support.
Ideally, support should take the form of temporary liquidity assistance, and be conditional on hedging energy price exposures going forward and, where feasible, on increasing energy efficiency and lowering GHG emissions. In cases where governments choose to provide grants or subsidies, these should not be proportional to energy usage but should ideally be offered on a lump-sum basis (or linked to past levels of energy usage) to incentivize energy savings. It is critical that support for firms be strictly temporary and extended only in exceptional cases, given the practical and political difficulties in targeting the support well, and the unintended side effect of limiting the demand response to high energy prices,” says IMF.
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