Capital at risk

This article is part of In conversation about sustainable finance & emission reduction systems, a new series by Diego Balverde. You're reading volume two of the The collateral crisis series. Here is volume one

The problem is no longer how expensive energy is but how much capital can be destroyed if energy does not stabilize, in recent years the global system entered a phase where every energy shock translates directly into financial losses, from tensions in the Persian Gulf (a critical route for global oil supply) to the fragmentation of gas flows into Europe, energy prices stopped being a market variable and became a systemic risk variable, electricity in Europe has repeatedly exceeded 200 €/MWh with peaks above 250 €/MWh (levels at which entire industries become unprofitable), gas prices remain structurally above historical averages even after corrections, and that new price floor is rewriting corporate balance sheets in real time, what used to be a cost issue is now a solvency issue. 

Energy costs are destroying balance sheets in real time

In energy-intensive sectors such as steel, cement, chemicals and fertilizers, energy represents between 30% and 70% of total costs, a sustained increase of 40% to 60% in energy prices compresses margins to zero or negative territory, this already materialized across Europe with temporary shutdowns of ammonia plants and reduced aluminum production due to lack of competitiveness, when a company cannot cover operating costs every additional unit produced generates losses, this directly erodes EBITDA (operating profit) and once EBITDA declines the debt coverage ratio (ability to repay obligations) weakens, when that ratio weakens banks reassess risk and adjust conditions, this translates into higher interest rates or reduced credit lines, the key issue is that this process is not isolated, it is happening simultaneously across multiple sectors, creating a synchronized pressure on the financial system. 

The cascade effect inside the financial system

When margins fall repayment capacity weakens, when repayment capacity weakens debt becomes riskier, when debt becomes riskier banks must allocate more capital to absorb potential losses, that reduces their ability to issue new credit, according to the Bank for International Settlements a significant share of bank assets is exposed to energy-intensive sectors, if a meaningful portion of those assets deteriorates simultaneously the impact is not linear but exponential, less credit leads to less investment, less investment slows economic activity, slower activity increases default risk (failure to repay debt), this loop is what transforms an energy shock into a financial crisis, the system does not break at the first loss, it breaks when losses propagate across interconnected balance sheets. 

Inflation and interest rates amplify the pressure

Expensive energy does not remain contained within industry, it spreads across the entire economy through higher production and transport costs, this feeds inflation, inflation forces central banks to raise interest rates (making borrowing more expensive) in order to stabilize prices, higher rates increase the cost of debt for both companies and households, reducing consumption and investment simultaneously, the eurozone maintained elevated interest rates longer than expected precisely because inflation proved persistent, this creates a dual compression effect, operating costs rise while financing costs also rise, companies are squeezed from both sides of the balance sheet, revenues struggle to grow while expenses accelerate. 

Capital is starting to withdraw

Institutional investors are adjusting their portfolios in response to this environment, sectors exposed to high energy costs and volatility are facing capital outflows or higher return requirements, this translates into more expensive financing or complete loss of access to funding, when capital withdraws it affects not only existing operations but also future investment, lower investment reduces the ability to expand, adapt or transition, this is critical because the energy transition itself requires massive capital allocation, yet that capital is becoming increasingly selective, it flows only where risk is manageable and returns are visible. 

Analysis — when energy costs become systemic risk 

The global system is entering a phase where energy costs are no longer just an economic variable but a determinant of financial stability, the risk is not simply how high prices go but how many balance sheets they impact simultaneously, the danger lies in the accumulation of companies with compressed margins, higher debt costs and reduced access to credit, once that accumulation reaches a critical threshold the financial system begins to restrict itself, this is the tipping point where an energy crisis becomes a financial one, and that threshold is closer than markets are willing to acknowledge. 

Conclusion — capital is repositioning, not disappearing

Capital does not vanish, it reallocates, it leaves sectors where risk exceeds return and moves toward areas where stability is greater, energy now sits at the center of that decision, the key question is no longer how much it costs to produce but whether production can still be financed under structurally high and volatile energy prices, the system is redefining which sectors remain viable and which do not, and this process is not gradual, it is accelerating, the question is simple and unavoidable, can your business survive with permanently higher energy costs, can it still access financing under those conditions, because if the answer is no the issue is not cost, it is survival.

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