Electricity industry financial backstop: FAQs (Archived Dossier)

What purpose does the backstop serve?

Since the end of 2021, there have been substantial price swings on the energy markets. The war in Ukraine has exacerbated this situation. It has greatly increased the liquidity needs of electricity companies active in trading energy supplies. Although Swiss electricity companies are well positioned, in the worst case scenario there could be an uncontrollable chain reaction that could endanger the liquidity of a systemically critical electricity company and thereby jeopardise Switzerland's electricity supplies. The consequences of a prolonged blackout would be devastating. By providing a financial backstop for systemically critical electricity companies, the Federal Council wants to prevent this worst-case scenario. A sufficient and secure electricity supply is essential for the functioning of society and the economy.

Axpo Holding has now submitted a request for temporary liquidity support to the Federal Council because of the extreme price fluctuations on the European markets. After considering detailed assessments and with the approval of the Federal Assembly Finance Delegation (FinDel), the Federal Council decided on 5 September 2022 to activate the financial backstop and to provide Axpo with the credit line of CHF 4 billion that it had requested.

What conditions did the Federal Council attach to its support for Axpo?

The credit line is subject to strict conditions. They include a ban on any dividends for as long as loans or interest payments are outstanding. For the duration of the arrangement, Axpo and the companies in its group may not sell any assets or carry out any restructuring that could jeopardise the repayment of the loans or any collateral. Axpo must also provide the federal agencies concerned, as well as ElCom and the Swiss Federal Audit Office (SFAO), with the information and documentation they require, e.g. on their financial situation, on how the loans are being used and on energy trading transactions. The loans from the federal government are to be considered a back-up and must be replaced as quickly as possible by other funding from the owners and other debt capital providers.

What is the legal basis for the Federal Council's decision?

The Federal Council has based its decision on the procedures set out in the emergency federal act on subsidiary financial aid for electricity companies, which the Federal Council submitted to Parliament in May and the Council of States approved in June. As the National Council was still debating this at the time of Axpo’s request, federal support was provided via an emergency ordinance. Parliament passed the emergency federal law on 30 September 2022.

Will other electricity companies soon be knocking on the federal government's door?

The Confederation is monitoring the situation very closely. In view of the high price fluctuations, Federal Councillor Simonetta Sommaruga had already set up a task force before Christmas 2021 in response to another electricity company requesting temporary liquidity support, a request which that company then withdrew at the beginning of the year.

It is up to the individual electricity companies to decide whether they wish to file a request for support. The Confederation is therefore unable to say whether further requests are imminent. By establishing the financial backstop, the Federal Council wants to prevent an uncontrollable chain reaction that could endanger Switzerland's electricity supplies.

What might trigger a chain reaction of this kind?

The major and exceptional price hikes on the European energy markets have greatly exacerbated the credit risks and led to demands for higher security deposits, thereby increasing liquidity risks for Swiss electricity companies. In the event of a shock price rise, for example as a result of a Russian gas supply freeze, a decision by European states not to buy Russian gas, or a drastic, temporary shortage of actual gas supplies, the liquidity needs of electricity companies can increase so much in a short time that they can no longer deposit sufficient collateral in time. This could result in the uncontrolled failure of a systemically critical company.

The emergency federal act on the financial backstop has been introduced to respond to this worst-case scenario. In other crises, the Federal Council has had to take action under emergency law. It wants to avoid doing so if at all possible. The emergency federal act ensures that Parliament must be involved and thus also has a say in the conditions for providing support. In addition, it means that conditions for granting state aid are made transparent. The Council of States approved the measures in June, but the National Council decided against an emergency debate at that time.

What are the key figures for the financial backstop?

• Only systemically critical electricity companies will receive support (according to the decision of the Council of States, in addition to the large companies such as Axpo, Alpiq and BKW, other electricity companies should be able to receive support in the event of liquidity shortages where failure to do so would jeopardise the security of supply).
  
• The federal government's support is subsidiary, i.e. the companies and their outside creditors and equity investors are the first in line to provide capital.
  
• Strict conditions apply: These include transparency requirements, a market-based interest rate plus a risk premium, and a ban on dividend distributions.
  
• The maximum amount for a direct loan from the Confederation is CHF 10 billion.
  

Which electricity companies are considered systemically critical?

These are Swiss electricity companies that hold a significant stake in the domestic production portfolio and the marketing of the electricity generated. The legislation defines which companies meet this criterion – those with a power plant capacity in Switzerland of at least 1,200 megawatts. These are Axpo Holding AG, Alpiq Holding AG and BKW AG. ElCom may designate other companies in the electricity industry as systemically relevant, even if they have a lower power plant capacity, provided that they are highly interconnected and relevant to the national economy.

Who is responsible for supporting the other electricity supply companies?

In the case of electricity supply companies that are not systemically critical, the owners are responsible. They must provide the required liquidity and capital. If a company of this type fails, it will be replaced by a competitor.

Could a power plant not simply continue to operate in the event of bankruptcy?

Ideally, yes, but in the worst-case scenario, it could stop operating and then Switzerland's electricity supply could be affected. At present, the companies do not have adequate plans to guarantee continued electricity production and distribution in the event of their insolvency. That is why the Federal Council wants to put precautionary measures in place. The output of the systemically critical electricity companies is crucial for the national economy. If they are in difficulties and are not taken over by other market participants within a reasonable period of time, which for the electricity market means within a few hours, it may no longer be possible to guarantee nationwide supply.

Wouldn't the owners and especially the cantons be responsible first and foremost?

The primary responsibility for security of supply remains with the energy suppliers and their owners. The financial backstop is only used on a subsidiary basis and only in the event of extraordinary market developments in which there is an immediate threat of insolvency. Since it is not certain that supplies could continue if a company were to go bankrupt, the federal government must intervene. Many cantons are not able to provide such large amounts of money at short notice. However, the cantons must bear half of any losses incurred by the Confederation on loans to electricity companies.

What specific conditions are attached to the federal aid?

• The financial backstop is not voluntary: the new law applies to all systemically critical electricity companies. However, a systemically critical company can be largely exempted from the scope of the federal act if it can count on equivalent financial support from its local canton.
• The conditions for federal support are very strict. These include transparency requirements, a market-based interest rate plus a risk premium, and a ban on dividend distributions. Interest on the loans is charged at market rates, with a risk premium of between 4 and 10 per cent. The strict conditions make it clear that the backstop is only intended for extreme situations. In addition, the companies subject to the law pay a commitment fee to at least partially cover the costs incurred by the federal government in setting up the financial backstop.
• The systemically critical electricity companies can enter into an agreement with the Confederation in advance on the conditions of a subsidiary loan in a crisis situation, as assistance must be available within 48 hours in the event of an emergency.
• The new legislation will remain in force until the end of 2026. After that, a series of measures will take effect that will make the electricity sector more resilient and the financial backstop superfluous. These include regulations to ensure that important industries such as electricity production can continue to operate at all times (business continuity management) and a law on the integrity and transparency of wholesale electricity and gas trading. The Federal Council submitted the corresponding bill for consultation on 16 December 2022. Requirements on the liquidity and capitalisation of companies are being defined separately.
  
• The cantons must reimburse the Confederation for half of any losses on loans. The share borne by the individual cantons corresponds to their share of GDP. In return, the cantons will receive a 50 per cent share of the revenue from the risk surcharge.

Why is the financial backstop mandatory for systemically critical companies?

The companies in the electricity market are closely networked. If the electricity network fails, our country will be paralysed. Allowing the systemically critical companies to be subject to the backstop on a purely voluntary basis is not a viable option for the Federal Council because there may be situations in which they can no longer raise the necessary liquidity themselves within the time available and their bankruptcy could spark a chain reaction and even a system collapse. However, the Federal Council is now proposing that a systemically critical company can be largely exempted from the scope of the law if it can count on cantonal liquidity support that is equivalent to the federal arrangement.

Are further measures planned in the longer term?

The financial backstop is a short-term and temporary measure. The federal government is planning additional measures to ensure a sufficient and secure electricity supply in the longer term and to make the electricity companies more resilient:

• Transparency requirements for the large electricity producers, so that liquidity shortages can be recognised early enough ('REMIT requirements': Regulation on Wholesale Energy Market Integrity and Transparency). The Federal Council expects companies to comply with these transparency requirements voluntarily and with immediate effect. They are required to provide information to ElCom so that it can anticipate difficulties and form an overview of the situation. On 16 December 2022 the Federal Council submitted a corresponding bill for consultation – the Federal Act on Wholesale Energy Market Oversight and Transparency.
  
• In order to ensure that electricity continues to be produced in the event of a company's bankruptcy, specifications are required for the 'continued operation of key industries' (Business Continuity Management BCM). These are also being drafted and will go before Parliament in due course.
• Capital and liquidity requirements – similar to those that apply today to systemically important banks – are currently being considered (Remit+). These rules could one day replace the emergency federal legislation on the financial backstop.