Banks’ exposures to the energy system increased in several waves, dictated by the increase in energy prices, combined with the compensation schemes imposed by the state. The sector risk has increased to unprecedented levels and, despite the banks’ appetite to finance the sector, there have been limitations dictated by risk, at the level of the country or group of companies, claims Oana Mogoi, Sector Head, Energy, ING Bank Romania, in within an exclusive interview for Energynomics. “The significant worsening of the financial statements, both of the suppliers due to the fact that, initially, the energy purchase costs were not fully recognized in the reimbursement of the subsidies granted, and of the distributors, due to the non-recognition in the tariffs of the entire cost of network consumption, may have as an effect the worsening of the credit rating and the restriction of access to financing,” says Oana Mogoi. “The temporary return to regulated prices throughout the chain could be a solution in these moments of crisis, but the legislative framework must be clear and assumed by the authorities.”
How has the banks’ exposure to energy customers evolved over the past year and what are the short- and medium-term prospects, especially for energy suppliers that have credited the capping and clearing system?
Banks’ exposure started to increase since the second part of last year, when energy prices entered an upward trend, which primarily increased the need for working capital, but also for greater facilities for issuing instruments of payment that traditionally secure transactions in the energy market. The situation has intensified amid Russia’s policy towards European gas supplies, and at the beginning of last winter prices exploded due to potential constraints in terms of meeting demand in the cold season. Obviously, banks’ exposures have evolved with rising prices.
A second important reason was the establishment by the Romanian state of the support scheme for energy consumers, through Ordinance 118/2021, which provided for compensation measures and price caps. The payment deadlines of the emergency ordinance immediately resulted in a new need for working capital for energy suppliers, but these deadlines were not met for various reasons. These include the inability of suppliers to bill customers due to a lack of rules implementing the ordinance and the need to adjust their billing systems to reflect the subsidy scheme, delays by energy regulators in creating a registry system and a proper analysis of the documents needed to approve the reimbursement of subsidies… All this resulted in a wave of financing requests from energy suppliers that meant increases in bank exposures in the order of billions of lei. And in the midst of the energy crisis, the conflict in Ukraine broke out, which generated a new increase in prices, accentuated by the wave of sanctions imposed on Russia.
In order to further protect the economy against inflation generated by the increase in energy prices, the Romanian state has extended the subsidy scheme from the initial 5 months (November 1, 2021 – March 31), for another year, including at the same time other categories of beneficiaries. Coupled with delays in repaying suppliers, this further increased the need for financing, which peaked this summer, with sums reaching tens of billions of lei.
In addition to the supply side, distributors also felt acute financing needs due to the losses induced by the non-recognition in tariffs of the costs increased by their own technological consumption, at least 5-6 billion lei coming from this area as well.
Banks have had and still have an appetite to finance utility companies, but we must understand that there are limitations in terms of maximum exposures per country, per energy sector, per subsidy scheme itself – which entails a high legislative risk, per group of companies… It is known that across Europe utility companies have accessed funding at an unprecedented level, which means that bank exposures on groups of companies are approaching the maximum set at the centralized level of each bank. In addition, the significant worsening of the financial statements, both of the suppliers due to the fact that, initially, the costs of energy purchase were not fully recognized in the reimbursement of the subsidies granted, and of the distributors, due to the failure to recognize in the tariffs the entire cost of the consumption of the networks, can have the effect of worsening the credit rating and restricting access to finance.
Also, the volatility and instability of the legislative framework give negative signals regarding the recovery of amounts owed to utility companies. We are talking about the recovery of the costs of own technological consumption through tariffs that should be carried out over a period of 5 years, or the recovery of subsidies that becomes doubtful by the introduction of the threshold of 1,300 lei/MWh by ordinance 119/2022, which contravenes the European regulation 2022/1854 of October 6, 2022, by which each state is obliged to compensate energy suppliers in the event that energy supply measures below the cost of its purchase have been imposed. In addition, if the market price is higher than this threshold, the regulated margins applicable to suppliers can no longer be reached, so we are dealing with legislative provisions that are in conflict.
Consequently, both the short- and medium-term perspectives are characterized by uncertainties, which makes access to financing problematic, especially in view of the exposures already assumed, which have reached a significant level. It is true that by the end of this year, most of the necessary amounts of energy have already been contracted, the average price being below the threshold of 1,300 lei/MWh, but for 2023 things are very unclear. The temporary return to regulated prices throughout the chain, from energy producers to suppliers/distributors and final consumers could be a solution in these moments of crisis. But the legislative framework must be clear and assumed by the authorities, and the impact on the financial statements of utility companies must be positive, so that they can continue to finance themselves.
How has financing evolved in the case of energy projects recently? What is the trend, especially in renewables? What kind of projects are most often funded?
Over the past year, financing in the energy sector has been directed mainly to utilities for the reasons explained above, and in general all efforts have been and are directed towards solving specific short-term liquidity problems.
It is true that renewable energy is gaining momentum again, but the uncertainties in the market and the impossibility of making forecasts result in most cases in postponing the decision to invest. In addition, the delicate situation of energy suppliers who are the traditional partners in PPA type contracts makes it almost impossible to make firm long-term commitments. And in the absence of these PPAs, access to financing becomes problematic. And the delay in the approval of the support scheme based on contracts for difference gives a negative signal regarding the development of new electricity production capacities from renewable sources. However, positive signals come from the area of non-reimbursable funds, which aim, among other things, to develop networks to help increase the capacity to connect new wind and photovoltaic parks.
There are also funds for energy efficiency measures, through the implementation of projects aimed at reducing primary energy consumption, such as the installation of photovoltaic panels on the roof of buildings, whether we are talking about industrial or household consumers, and the pace of installation is a quick one.
What has been the trajectory of interest rates for corporate loans, especially financing for investments but also working capital, and what can we expect in 2023?
Interest rates on loans for non-financial companies experienced a minimum in August 2021, when they reached 3.92%, and entered a visible upward trend starting from October 2021, when the National Bank started the current key interest rate increase cycle. Average interest rates for corporate loans have gradually increased, reaching 9.82% in September 2022.
It is important to note that the successive interest rate changes of the NBR were accompanied by an increasingly firm control of the liquidity in the money market, which caused the interest rates on company deposits to grow at an even faster pace than those on loans.
Regarding the structure of these loans, the National Bank’s data only provide information regarding the breakdown by maturity and not by destination. With some degree of approximation, we can still assume that loans with a maturity of less than one year were mainly related to working capital, those with a duration of more than 5 years – to investments, and those between 1 and 5 years being probably a mix between the two. From this point of view, the evolution of interest rates was relatively homogeneous, with relatively small differences between the various categories. For example, from August 2021 (when interest on loans reached a minimum) and until September 2022, the average difference between loans with a maturity of less than 1 year and those with a maturity of more than 5 years was of only 0.17pp.
For 2023, ING economists anticipate a quasi-stagnation of interest rates in the first part of the year and even a slight return to a downward trend starting in the second quarter. Thus, after the 3-month Robor peaked around 8.20%, we anticipate a gradual decline towards 7.40-7.50% by the end of 2023. This should happen against the background of the key rate hike cycle stopping from the NBR (currently we see no more increases from the NBR in 2023) but also from a gradual improvement of liquidity in the money market.
How do we stand in terms of concluded PPAs and when will we see a higher volume of such contracts in the market?
PPAs mean making firm long-term commitments and ideally fixing the price of energy. But in crisis situations, when price volatility is very high and predictability is low, the task of concluding such contracts becomes very difficult. Consequently, a large volume of PPAs primarily implies market stabilization and increased confidence.
ING co-financing instruments for projects with European funds
For investment projects financed from European Funds, we offer several types of financing solutions dedicated to supporting their successful implementation:
- Bridging credit, for the financing of eligible non-refundable expenses related to investment projects and which ensure the necessary financing until the settlement of the amounts from the European Funds;
- Credit for financing the beneficiary’s own contribution, both for eligible expenses (co-financing) and for ineligible expenses;
- Letter of bank guarantee for the advance, for the amount of the advance requested by the beneficiary within the investment project;
- Letter of bank guarantee for participation in auctions;
- Credit for VAT, for financing the value of VAT related to the investment project.
Complementary to special financing solutions, we issue Comfort Letters for our clients, necessary for submitting the project for approval by the Management Authority or for signing the non-refundable financing contract. The comfort letter aims to analyze the client’s eligibility from the perspective of the financial capacity to support the proposed project.
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This interview first appeared in the printed edition of Energynomics Magazine, issued in December 2022.
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