Utilities in the eurozone: thinking through the unthinkable
29 November 2011, Gas, Electricity
Utilities will be exposed to a complex transition should politicians decide to unwind more than 10 years of monetary union among the 17 eurozone member states. This would certainly wreak short-term havoc among utilities with regards to budgeting, hedging, tariff setting, investment plans, and forecasts.
Utilities with operations in any country where a pre-euro currency is reinstated will need to implement immediate, and frankly heroic, currency hedging to cover the inevitable currency revaluation. It will be small comfort to utilities that their problems will be secondary to both banks with eurozone exposure, and the national governments of the eurozone countries.
Ultimately utilities should take the long view. Any transition will be painful, but ultimately most suppliers already have experience in successfully managing operations spanning multiple currencies. Most eurozone-exposed suppliers already have operations in the EU member countries which do not use the euro, namely Bulgaria, Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland, Romania, Sweden, and the UK, and some even have operations outside the EU altogether, for example in Russia, the US, and Latin American countries. Suppliers will be able to partition currency-affected operations where they are not already separate, along familiar models.
The biggest issue to be faced will be in countries that leave the eurozone and subsequently experience severe currency devaluation, as would be expected in the case of Greece for example. This would increase the relative cost of imports, especially energy imports, raising the question of the affordability of ongoing energy imports.
Energy is a political commodity, and residential energy consumers would in almost any circumstance expect their government to provide energy security. National energy champions will stand in to be retailers of last resort should pan-European suppliers undertake a swift exit and imports will be secured where needed, although financial conditions will make this level of guarantee difficult to provide. This makes energy supply crises a possibility in distressed ex-eurozone countries that are not energy self-sufficient.
In the eventuality of a national energy supply crisis, pan-European energy suppliers should recognize the political leverage inherent in providing a continuous energy supply. Although negotiating too hard will risk accusations of "carpetbagging," suppliers should look to the potential for deals involving increased market access, ownership of national assets, and favorable long-range terms, in return for a bridging energy supply.
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