## Annex I. Corporate health post-pandemic and the impact of the energy crisis

## Source details

**Canonical URL:** [Annex I. Corporate health post-pandemic and the impact of the energy crisis](https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023197-print-pdf.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/wp/2023/english/wpiea2023197-print-pdf.pdf.md)
- [Structured JSON version](/-/media/files/publications/wp/2023/english/wpiea2023197-print-pdf.pdf.json)

---

### Overview and key facts
- Wholesale natural gas and electricity prices in Europe surged after Russia’s invasion of Ukraine; futures imply prices will remain more than twice their levels prior to October 2021.
- Energy costs amount to over 5 percent of the total production value in some countries.
- According to the 2022 EIB survey, the share of firms reporting an increase in energy costs as a barrier to investment rose to 87 percent in 2022 from 69 percent in 2021.
- Between the start of the energy crisis in September 2021 and March 2023, over EUR 600 billion was earmarked across the EU to shield consumers from rising energy costs (Bruegel estimate).
- Energy prices are likely to remain volatile due to: (i) shift from oil-indexed long-term gas contracts to spot pricing; (ii) increased reliance on LNG imports exposing Europe to global LNG supply/demand shocks; and (iii) transitional volatility during the switch from fossil fuels to renewables.

### Economic impact on firms
- The energy price surge produced a sizable cost-push shock, leading to:
  - reduced activity,
  - increased business failures,
  - higher inflation.
- Exposure is higher among small businesses and select energy-intensive sectors.
- Policy implication emphasized: even where intervention is warranted, support should be limited in size, strictly temporary, narrowly targeted, and accompanied by strong safeguards and conditionality.
- Preserve price signals where possible to avoid market distortions and to encourage energy conservation.

### Case for and against government intervention
- Differences vs. the Covid-19 pandemic:
  - Covid-19 involved forced firm shutdowns; energy price surges are supply-side/terms-of-trade shocks that firms can adjust to.
  - Covid-19 was temporary; energy prices are expected to show heightened volatility, making private sector adjustment desirable.
- Rationale for intervention rests on market imperfections that hinder adjustment:
  - Financial frictions leaving viable firms without financing (mainly small firms).
  - Impaired balance sheets limiting investment ability.
  - Failure to internalize upstream/downstream supply-chain externalities.
  - Market adjustments not internalizing energy security and green transition public-good aspects.
- Costs and risks of intervention:
  - Undermining climate and energy security objectives (support may reduce incentives for energy efficiency or lead to suboptimal fuel choices).
  - Adverse spillovers and distortion of level playing fields within trade blocs.
  - Tensions with macro policy objectives, including inflation control.
  - Fiscal costs given recent public debt build-up.
  - Creation of zombie firms and delayed resource reallocation.
  - Moral hazard (expectations of future bailouts, reduced hedging).
  - Political economy challenges in terminating support policies.

### Design principles for optimal support
- Target support to viable firms using forward-looking stabilization assessments; leverage information from investors and creditors and align incentives via shared losses or co-investment.
- Prevent moral hazard by:
  - Delegating supervision to entities with expertise at arm’s length (e.g., a development bank) or private-sector managers with financial skin in the game.
  - Making support conditional on energy-transition investments (energy efficiency, fuel substitution, less energy-intensive production).
- Prevent adverse selection by involving private sector participation where possible; use public registers and tax records where private credit histories are inadequate.
- Avoid distorting international competition; pursue international coordination and adhere to best-principles frameworks (e.g., Temporary Crisis Framework for State Aid measures in the EU).
- Minimize rewarding energy-inefficient firms by conditioning support on efficiency improvements.
- Ensure support shields firms from excessive losses rather than raising profits:
  - Size support proportional to balance sheet damage.
  - Include claw-back clauses (example threshold: profits rising above 90 percent of pre-crisis levels).
  - Impose temporary restrictions on capital distributions (dividends, share buybacks).
- Avoid double compensation where both firms and households are supported for the same energy-price increase; monitor intermediate producer margin-setting.

### Instrument choice and practical considerations
- Distinguish between liquidity and solvency needs:
  - Use subsidized loans or guarantees (possibly with repayment grace periods) for liquidity shortfalls where balance-sheet positions are otherwise stable.
  - Use solvency instruments (non-repayable advances, equity injections) for financially vulnerable firms to re-establish creditworthiness.
- Avoid measures that weaken price signals (price caps, lower energy taxes) as they are poorly targeted, expensive, and hard to reverse; consider design improvements to price caps to reduce distortions (see paper for Box 1).
- Tailor instrument types to firm size:
  - Micro firms and SMEs: consider grants or hybrid instruments.
  - Larger or listed firms: equity instruments may be preferable.

### Exit and phasing strategies
- With recent falls in energy prices, authorities should use the window to phase out untargeted support and reduce state-aid dependencies.
- Prefer planned phase-outs over renewal or extension absent new large temporary shocks.
- Reasonable exit strategies include clear sunset clauses tied to realized energy-price paths or integrating a floor on price support beyond which support would not be deployed.

*Source: IMF Working Paper — Annex I. Corporate health post-pandemic and the impact of the energy crisis.*

---

### Box 1: Guidelines to Improve Price Cap Measures

#### Preserve price signals and rationale
- Price caps impede pricing of the marginal unit of energy at market price, reducing incentives for energy-conserving behavior and energy efficiency investments and are not cost-effective.
- While generally sub-optimal, price caps were prevalent during the recent energy crisis; guidelines are provided to minimize distortions.

#### Design guidance for price caps
- Targeting and temporariness:
  - Price caps should be narrowly targeted (e.g., to micro firms and SMEs), temporary in nature, and accompanied with a pre-announced path for phase out.
- Incentives for demand reduction:
  - To retain incentives for demand reduction, nominal price caps could apply to energy usage below efficiency benchmarks by sector, and be more subsidized (i.e., set lower) for energy-intensive sectors, because these firms face larger reductions in earnings and lower average operational margins in some energy-intensive sectors.
- Burden sharing:
  - The level of the price cap should be set above the pre-crisis price for electricity and natural gas (e.g., twice the pre-crisis market price).
- International coordination:
  - International coordination of price caps, at least for large firms, would limit cross-border competitive distortions and help preserve a level playing field within the EU single market.

#### Targeting of support
- Support should be narrowly targeted towards firms exceptionally affected by the energy price shock.
- Practical targeting approaches:
  - Use firms’ past usage of energy consumption as a share of total costs/turnover rather than current energy consumption.
  - If firm-level targeting is complex, use sectoral classification to identify energy intensity.
  - A combination of sector and firm classification can further narrow targeting while preserving public resources.
- Trade-offs:
  - Sectoral targeting may be simpler; firm-level targeting is likely more accurate.

#### Viability assessment and exclusion criteria
- Aid types:
  - Aid can compensate damage caused by the shock or stabilize balance sheets.
- Viability assessment:
  - Forward-looking viability assessments should underpin eligibility when support aims at solvency stabilization; reserve such assessments for systemic/very large firms and conduct in collaboration with development agencies or the private sector.
- Exclusions:
  - Avoid supporting firms in pre-existing financial difficulty (e.g., firms in arrears to the tax authority, or subject to bankruptcy proceedings).

#### Complexity, duration, and exit strategy
- Trade-offs between simplicity and targeting:
  - Simpler schemes reduce delays and administration costs but may be imperfectly targeted; complex schemes increase administrative burden and potential for lobbying and fraud.
- Duration and exit:
  - Interventions must be temporary, state-contingent, and accompanied by options and incentives for early redemption or accelerated exit.
  - Schemes should be short and clearly defined, possibly as a function of wholesale prices; open-ended schemes creating expectations of perpetual support should be avoided.
  - Alternatives include clear sunset clauses dependent on realized paths of energy prices or integrating a floor on price support beyond which support would not be deployed.
  - Direct equity support (ordinary or preferred shares) can be more suitable for large or listed companies where an easy exit is possible.

#### Size of intervention and burden sharing
- Liquidity vs solvency:
  - Liquidity support should be linked to liquidity needs caused by the crisis and to liquidity needs associated with energy investments.
  - Solvency support to energy-intensive firms should be linked to pre-crisis energy usage, or to current usage but accompanied by energy conservation requirements.
- Caps and metrics:
  - Public intervention size should be capped at the level necessary to ensure continued viability as a going concern.
  - Operationalize caps using financial metrics of creditworthiness (e.g., a target level for net debt-to-EBITDA, debt-to-equity ratio, or equity value) under baseline or stressed conditions.

#### Governance and safeguards
- Transparency and audits:
  - All support measures should include public disclosure requirements on beneficiaries and amounts to reduce fraud and increase legitimacy.
  - Introduce ex-post audits (random and risk-based) with large penalties for misuse.
- Anti-competitive and remuneration restrictions:
  - Impose restrictions on managerial remuneration, dividends, and share buybacks for solvency support; include claw-back clauses to recover aid granted on false representation.
- Equity support safeguards:
  - Direct equity support for large firms should incorporate strong safeguards and be supplemented with measures to reorganize or restructure companies where necessary.

#### Conditionality and incentives
- Scaling cost with duration:
  - Increase the cost of liquidity support with the duration of support.
- Pass-through and conversion:
  - Require intermediating banks to pass on financial benefits to end users.
  - Scale the degree of compensation up or make it (partially) convertible (loans to grants) conditional on investments in energy efficiency and reduction of carbon emissions.

#### Key summary principles
- Support must be carefully calibrated: limited in size and strictly temporary; preserve price signals to encourage energy savings; narrowly targeted; avoid overcompensation; and be accompanied by strong safeguards and conditionality.

*Source: Box 1, "Guidelines to Improve Price Cap Measures," IMF Working Paper excerpt.*

---

### Energy Support for Firms in Europe: Best Practice Considerations and Recent Experience

### Key statistics and program composition
- Firm Support Schemes: Instruments (Percent of total programs, average across countries)
  - Liquidity: 30.0
  - Solvency - general (grants, equity): 31.1
  - Solvency linked to energy (price caps, rebates): 36.4
  - Other: 2.5
- Firm Support Schemes (Percent of GDP: average across countries)
  - Liquidity: 0.83
  - Solvency - general (grants, equity): 0.40
  - Solvency linked to energy (price caps, rebates): 0.63
  - Other: 0.02
- Solvency related instruments account for, on average, about 1 percent of GDP (with higher envelopes in Greece, Italy and Netherlands).
- Budget envelope notes:
  - Budget envelope refers to amounts set out in national budgets as of February 2023, and may differ from spending outturns due to changes in energy prices.
  - Malta, Andorra, North Macedonia, and Luxembourg are excluded.
  - Countries with a sum of budget envelope for the above categories lower than $1.3bn are excluded from some charts.
- UK scheme limits and parameters:
  - Maximum unit discount: £40.0/MWh for gas and £89.1/MWh for electricity.
  - Support is restricted to 70 percent of energy usage volumes.
- Dutch Energy Investment Allowance:
  - Offsets 45 percent of investments in energy efficiency against reductions in corporate income tax.
  - Targeted at investments with costs ranging from €2,500 up to €126 million.
  - Investment asset must be maintained for at least 5 years.
  - If the firm sells these assets within 5 years and the total value exceeds €2,300, it must repay a proportion of the allowance via the disinvestment surcharge.
- Disclosure threshold mentioned: EU disclosure obligations currently triggered at €100,000.

### Fiscal costs, take-up, and macro implications
- Fiscal costs for supporting firms are substantial but could be lower than budgeted given lower than expected energy prices.
- Solvency instruments related to price caps entail significantly higher budgetary costs (on average) compared to those linked to grants and equity.
- Liquidity support measures are larger mainly because they reflect contingency support through government guarantees and subsidized loans, but take-up has been low so far.
- Large grant-based support packages concentrated on large firms could tilt the playing field within the EU single market unless mitigated by:
  - Size limits per firm
  - Governance provisions in the EU Temporary Crisis Framework
- The EUR 200 billion German “Protective Shield” package (including a gas price brake) is cited as requiring enhanced vigilance to preserve a level playing field and incentives to save energy.

### Design elements and examples of good practice
- General guidance:
  - Aid should first and foremost be in the form of liquidity support to relieve cash flow pressures.
  - Solvency support (grants or equity) may be warranted for firms highly affected by energy cost increases and/or loss in turnover triggering substantial deterioration in creditworthiness.
  - Targeting: exclude firms already in financial difficulty (e.g., in tax arrears or in bankruptcy proceedings) and focus on those severely affected by the crisis (e.g., gas-intensive sectors or firms unable to adapt production short-term).
  - Include per-firm caps to avoid distorting competition.
  - Ex-post conditionality could include energy efficiency improvements, conversion of loans to grants/equity for meeting environmental protection requirements, claw-back clauses contingent on an earlier-than-anticipated decline in energy prices.
  - Clear exit mechanisms and time-bound deadlines; consider tying amount and duration of support to developments in energy prices.
- Illustrative national schemes with good design elements:
  - Germany (Liquidity): Scheme targeted at highly affected firms (including energy-intensive firms or energy traders); support via guarantees and subsidized loans with guarantees’ premiums and credit risk margins increasing with duration; SMEs offered loans with lower credit spreads; loans can be granted up to December 2023; ex-post conditionalities include dividend restrictions and restrictions on management bonuses for beneficiary firms; transparency provisions require publishing information on each individual aid above EUR 100,000.
  - France (Energy-related solvency — price caps): Electricity tariff shield (Amortisseur électricité) compensates companies that signed higher energy contracts with a reinforced unit aid ceiling defined by an indicator on invoices and quotes; targeted to energy intensive smaller firms (less than 250 employees and power use greater than 36 kVA); avoids double compensation and is integrated into the firm’s electricity bill; scheme is closed-ended and set to expire on December 31, 2023.
  - UK (Energy-related solvency — energy bill relief): Scheme targets energy and trade-intensive (mostly manufacturing) firms with a discount on high energy costs based on a supported price; maximum unit discounts of £40.0/MWh for gas and £89.1/MWh for electricity; support restricted to 70 percent of usage volumes; time-limited bridge to allow businesses to adapt.
  - Spain (General solvency — grants): Targeted at gas-intensive sectors (e.g., manufacture of artificial and synthetic fibers and ceramics); direct grants capped per firm and temporary with set expiration; obligations may require beneficiary investments in renewable energy consumption shares, energy efficiency (e.g., per energy audits), or electrification to reduce natural gas consumption.
  - Netherlands (Solvency — equity / tax allowance): Energy Investment Allowance offsets 45 percent of energy efficiency investments against corporate income tax reductions; eligibility exclusions for firms already eligible under other investment credit schemes.

### Governance, targeting, and competition concerns
- Many schemes broadly target firms or sectors most affected by the energy crisis, but heterogeneity is large and many programs lack precise targeting.
- Few schemes involve viability tests and/or ex-post conditionality; absence of these features can increase fiscal burdens.
- The Temporary State Aid Framework caps duration and size of schemes in the EU, reducing a race to the bottom, but aid levels and firm-level outcomes remain highly uneven and could distort competition depending on take-up.
- Governance quality ranges from exemplary to insufficient; transparency could be enhanced by lowering the support threshold that triggers EU disclosure requirements below €100,000.

---

### Annex I — corporate health and sectoral vulnerability (selected findings)
- Corporate bankruptcies have risen since mid-2022, particularly in the UK and Spain.
  - UK: corporate insolvencies increased by 57 percent in 2022 (y/y/) and reached a record high since 2009.
  - Spain: changes to insolvency law prompted a surge in court filings that more than doubled in the second half of 2022.
  - Spain: Bankruptcy Declarations index value reported as 280 in 2023Q2 (Index, 2015=100).
- Vulnerability by sector and firm type:
  - The share of “energy intensive” firms (energy costs exceed 3 percent of production value per EU regulation) differs markedly across sectors; highly affected sectors include agriculture, transportation, basic metals, minerals, and water treatment.
  - Half of EU countries have the average ‘Industry’ firm above the 3 percent energy intensity threshold.
  - Under October 2022 WEO baseline conditions, up to one third of manufacturing firms could become vulnerable (ICR<1).
  - Under an adverse scenario (two-percentage point increase in interest rates and a 10 percent decline in corporate earnings), the share of vulnerable firms in manufacturing could increase by 10 percentage points.
- Simulated impact of gas price shock:
  - A simulation replicating the threefold increase in natural gas prices in the TTF market on February-March 2022 suggests the average firm operating in an energy intensive sector could see a decline in its earnings margin of up to 40 percent.
  - In highly affected sectors (Minerals, Basic Metals) the average energy intensity is over 4 percent of sales compared to 1 percent in less affected sectors (Pharma) for the median EU country.
  - A reduction in EBITDA of at least 40 percent could qualify an energy intensive business for a higher share of energy cost compensation under the EU Temporary Crisis Framework.

*Source: IMF staff survey supplemented by Bruegel, IMF Working Paper: Energy Support for Firms in Europe: Best Practice Considerations and Recent Experience.*

### Annex I. Corporate health post-pandemic and the impact of the energy crisis ......................................... 17

### Annex I. Corporate health post-pandemic and the impact of the energy crisis

### Overview and key facts
- Wholesale natural gas and electricity prices in Europe surged after Russia’s invasion of Ukraine; futures imply prices will remain more than twice their levels prior to October 2021.
- Energy costs amount to over 5 percent of the total production value in some countries.
- According to the 2022 EIB survey, the share of firms reporting an increase in energy costs as a barrier to investment rose to 87 percent in 2022 from 69 percent in 2021.
- Between the start of the energy crisis in September 2021 and March 2023, over EUR 600 billion was earmarked across the EU to shield consumers from rising energy costs (Bruegel estimate).
- Energy prices are likely to remain volatile due to: (i) shift from oil-indexed long-term gas contracts to spot pricing; (ii) increased reliance on LNG imports exposing Europe to global LNG supply/demand shocks; and (iii) transitional volatility during the switch from fossil fuels to renewables.

### Economic impact on firms
- The energy price surge produced a sizable cost-push shock, leading to:
  - reduced activity,
  - increased business failures,
  - higher inflation.
- Exposure is higher among small businesses and select energy-intensive sectors.
- Policy implication emphasized: even where intervention is warranted, support should be limited in size, strictly temporary, narrowly targeted, and accompanied by strong safeguards and conditionality.
- Preserve price signals where possible to avoid market distortions and to encourage energy conservation.

### Case for and against government intervention
- Differences vs. the Covid-19 pandemic:
  - Covid-19 involved forced firm shutdowns; energy price surges are supply-side/terms-of-trade shocks that firms can adjust to.
  - Covid-19 was temporary; energy prices are expected to show heightened volatility, making private sector adjustment desirable.
- Rationale for intervention rests on market imperfections that hinder adjustment:
  - Financial frictions leaving viable firms without financing (mainly small firms).
  - Impaired balance sheets limiting investment ability.
  - Failure to internalize upstream/downstream supply-chain externalities.
  - Market adjustments not internalizing energy security and green transition public-good aspects.
- Costs and risks of intervention:
  - Undermining climate and energy security objectives (support may reduce incentives for energy efficiency or lead to suboptimal fuel choices).
  - Adverse spillovers and distortion of level playing fields within trade blocs.
  - Tensions with macro policy objectives, including inflation control.
  - Fiscal costs given recent public debt build-up.
  - Creation of zombie firms and delayed resource reallocation.
  - Moral hazard (expectations of future bailouts, reduced hedging).
  - Political economy challenges in terminating support policies.

### Design principles for optimal support
- Target support to viable firms using forward-looking stabilization assessments; leverage information from investors and creditors and align incentives via shared losses or co-investment.
- Prevent moral hazard by:
  - Delegating supervision to entities with expertise at arm’s length (e.g., a development bank) or private-sector managers with financial skin in the game.
  - Making support conditional on energy-transition investments (energy efficiency, fuel substitution, less energy-intensive production).
- Prevent adverse selection by involving private sector participation where possible; use public registers and tax records where private credit histories are inadequate.
- Avoid distorting international competition; pursue international coordination and adhere to best-principles frameworks (e.g., Temporary Crisis Framework for State Aid measures in the EU).
- Minimize rewarding energy-inefficient firms by conditioning support on efficiency improvements.
- Ensure support shields firms from excessive losses rather than raising profits:
  - Size support proportional to balance sheet damage.
  - Include claw-back clauses (example threshold: profits rising above 90 percent of pre-crisis levels).
  - Impose temporary restrictions on capital distributions (dividends, share buybacks).
- Avoid double compensation where both firms and households are supported for the same energy-price increase; monitor intermediate producer margin-setting.

### Instrument choice and practical considerations
- Distinguish between liquidity and solvency needs:
  - Use subsidized loans or guarantees (possibly with repayment grace periods) for liquidity shortfalls where balance-sheet positions are otherwise stable.
  - Use solvency instruments (non-repayable advances, equity injections) for financially vulnerable firms to re-establish creditworthiness.
- Avoid measures that weaken price signals (price caps, lower energy taxes) as they are poorly targeted, expensive, and hard to reverse; consider design improvements to price caps to reduce distortions (see paper for Box 1).
- Tailor instrument types to firm size:
  - Micro firms and SMEs: consider grants or hybrid instruments.
  - Larger or listed firms: equity instruments may be preferable.

### Exit and phasing strategies
- With recent falls in energy prices, authorities should use the window to phase out untargeted support and reduce state-aid dependencies.
- Prefer planned phase-outs over renewal or extension absent new large temporary shocks.
- Reasonable exit strategies include clear sunset clauses tied to realized energy-price paths or integrating a floor on price support beyond which support would not be deployed.

*Source: IMF Working Paper — Annex I. Corporate health post-pandemic and the impact of the energy crisis.*

### Box 1: Guidelines to Improve Price Cap Measures

### Box 1: Guidelines to Improve Price Cap Measures

### Preserve price signals and rationale
- Price caps impede pricing of the marginal unit of energy at market price, reducing incentives for energy-conserving behavior and energy efficiency investments and are not cost-effective.
- While generally sub-optimal, price caps were prevalent during the recent energy crisis; guidelines are provided to minimize distortions.

### Design guidance for price caps
- Targeting and temporariness:
  - Price caps should be narrowly targeted (e.g., to micro firms and SMEs), temporary in nature, and accompanied with a pre-announced path for phase out.
- Incentives for demand reduction:
  - To retain incentives for demand reduction, nominal price caps could apply to energy usage below efficiency benchmarks by sector, and be more subsidized (i.e., set lower) for energy-intensive sectors, because these firms face larger reductions in earnings and lower average operational margins in some energy-intensive sectors.
- Burden sharing:
  - The level of the price cap should be set above the pre-crisis price for electricity and natural gas (e.g., twice the pre-crisis market price).
- International coordination:
  - International coordination of price caps, at least for large firms, would limit cross-border competitive distortions and help preserve a level playing field within the EU single market.

### Targeting of support
- Support should be narrowly targeted towards firms exceptionally affected by the energy price shock.
- Practical targeting approaches:
  - Use firms’ past usage of energy consumption as a share of total costs/turnover rather than current energy consumption.
  - If firm-level targeting is complex, use sectoral classification to identify energy intensity.
  - A combination of sector and firm classification can further narrow targeting while preserving public resources.
- Trade-offs:
  - Sectoral targeting may be simpler; firm-level targeting is likely more accurate.

### Viability assessment and exclusion criteria
- Aid types:
  - Aid can compensate damage caused by the shock or stabilize balance sheets.
- Viability assessment:
  - Forward-looking viability assessments should underpin eligibility when support aims at solvency stabilization; reserve such assessments for systemic/very large firms and conduct in collaboration with development agencies or the private sector.
- Exclusions:
  - Avoid supporting firms in pre-existing financial difficulty (e.g., firms in arrears to the tax authority, or subject to bankruptcy proceedings).

### Complexity, duration, and exit strategy
- Trade-offs between simplicity and targeting:
  - Simpler schemes reduce delays and administration costs but may be imperfectly targeted; complex schemes increase administrative burden and potential for lobbying and fraud.
- Duration and exit:
  - Interventions must be temporary, state-contingent, and accompanied by options and incentives for early redemption or accelerated exit.
  - Schemes should be short and clearly defined, possibly as a function of wholesale prices; open-ended schemes creating expectations of perpetual support should be avoided.
  - Alternatives include clear sunset clauses dependent on realized paths of energy prices or integrating a floor on price support beyond which support would not be deployed.
  - Direct equity support (ordinary or preferred shares) can be more suitable for large or listed companies where an easy exit is possible.

### Size of intervention and burden sharing
- Liquidity vs solvency:
  - Liquidity support should be linked to liquidity needs caused by the crisis and to liquidity needs associated with energy investments.
  - Solvency support to energy-intensive firms should be linked to pre-crisis energy usage, or to current usage but accompanied by energy conservation requirements.
- Caps and metrics:
  - Public intervention size should be capped at the level necessary to ensure continued viability as a going concern.
  - Operationalize caps using financial metrics of creditworthiness (e.g., a target level for net debt-to-EBITDA, debt-to-equity ratio, or equity value) under baseline or stressed conditions.

### Governance and safeguards
- Transparency and audits:
  - All support measures should include public disclosure requirements on beneficiaries and amounts to reduce fraud and increase legitimacy.
  - Introduce ex-post audits (random and risk-based) with large penalties for misuse.
- Anti-competitive and remuneration restrictions:
  - Impose restrictions on managerial remuneration, dividends, and share buybacks for solvency support; include claw-back clauses to recover aid granted on false representation.
- Equity support safeguards:
  - Direct equity support for large firms should incorporate strong safeguards and be supplemented with measures to reorganize or restructure companies where necessary.

### Conditionality and incentives
- Scaling cost with duration:
  - Increase the cost of liquidity support with the duration of support.
- Pass-through and conversion:
  - Require intermediating banks to pass on financial benefits to end users.
  - Scale the degree of compensation up or make it (partially) convertible (loans to grants) conditional on investments in energy efficiency and reduction of carbon emissions.

### Key summary principles
- Support must be carefully calibrated: limited in size and strictly temporary; preserve price signals to encourage energy savings; narrowly targeted; avoid overcompensation; and be accompanied by strong safeguards and conditionality.

*Source: Box 1, "Guidelines to Improve Price Cap Measures," IMF Working Paper excerpt.*

### 0.1 percent of GDP are also excluded from this chart.

### Energy Support for Firms in Europe: Best Practice Considerations and Recent Experience

### Key statistics and program composition
- Firm Support Schemes: Instruments (Percent of total programs, average across countries)
  - Liquidity: 30.0
  - Solvency - general (grants, equity): 31.1
  - Solvency linked to energy (price caps, rebates): 36.4
  - Other: 2.5
- Firm Support Schemes (Percent of GDP: average across countries)
  - Liquidity: 0.83
  - Solvency - general (grants, equity): 0.40
  - Solvency linked to energy (price caps, rebates): 0.63
  - Other: 0.02
- Solvency related instruments account for, on average, about 1 percent of GDP (with higher envelopes in Greece, Italy and Netherlands).
- Budget envelope notes:
  - Budget envelope refers to amounts set out in national budgets as of February 2023, and may differ from spending outturns due to changes in energy prices.
  - Malta, Andorra, North Macedonia, and Luxembourg are excluded.
  - Countries with a sum of budget envelope for the above categories lower than $1.3bn are excluded from some charts.
- UK scheme limits and parameters:
  - Maximum unit discount: £40.0/MWh for gas and £89.1/MWh for electricity.
  - Support is restricted to 70 percent of energy usage volumes.
- Dutch Energy Investment Allowance:
  - Offsets 45 percent of investments in energy efficiency against reductions in corporate income tax.
  - Targeted at investments with costs ranging from €2,500 up to €126 million.
  - Investment asset must be maintained for at least 5 years.
  - If the firm sells these assets within 5 years and the total value exceeds €2,300, it must repay a proportion of the allowance via the disinvestment surcharge.
- Disclosure threshold mentioned: EU disclosure obligations currently triggered at €100,000.

### Fiscal costs, take-up, and macro implications
- Fiscal costs for supporting firms are substantial but could be lower than budgeted given lower than expected energy prices.
- Solvency instruments related to price caps entail significantly higher budgetary costs (on average) compared to those linked to grants and equity.
- Liquidity support measures are larger mainly because they reflect contingency support through government guarantees and subsidized loans, but take-up has been low so far.
- Large grant-based support packages concentrated on large firms could tilt the playing field within the EU single market unless mitigated by:
  - Size limits per firm
  - Governance provisions in the EU Temporary Crisis Framework
- The EUR 200 billion German “Protective Shield” package (including a gas price brake) is cited as requiring enhanced vigilance to preserve a level playing field and incentives to save energy.

### Design elements and examples of good practice
- General guidance:
  - Aid should first and foremost be in the form of liquidity support to relieve cash flow pressures.
  - Solvency support (grants or equity) may be warranted for firms highly affected by energy cost increases and/or loss in turnover triggering substantial deterioration in creditworthiness.
  - Targeting: exclude firms already in financial difficulty (e.g., in tax arrears or in bankruptcy proceedings) and focus on those severely affected by the crisis (e.g., gas-intensive sectors or firms unable to adapt production short-term).
  - Include per-firm caps to avoid distorting competition.
  - Ex-post conditionality could include energy efficiency improvements, conversion of loans to grants/equity for meeting environmental protection requirements, claw-back clauses contingent on an earlier-than-anticipated decline in energy prices.
  - Clear exit mechanisms and time-bound deadlines; consider tying amount and duration of support to developments in energy prices.
- Illustrative national schemes with good design elements:
  - Germany (Liquidity): Scheme targeted at highly affected firms (including energy-intensive firms or energy traders); support via guarantees and subsidized loans with guarantees’ premiums and credit risk margins increasing with duration; SMEs offered loans with lower credit spreads; loans can be granted up to December 2023; ex-post conditionalities include dividend restrictions and restrictions on management bonuses for beneficiary firms; transparency provisions require publishing information on each individual aid above EUR 100,000.
  - France (Energy-related solvency — price caps): Electricity tariff shield (Amortisseur électricité) compensates companies that signed higher energy contracts with a reinforced unit aid ceiling defined by an indicator on invoices and quotes; targeted to energy intensive smaller firms (less than 250 employees and power use greater than 36 kVA); avoids double compensation and is integrated into the firm’s electricity bill; scheme is closed-ended and set to expire on December 31, 2023.
  - UK (Energy-related solvency — energy bill relief): Scheme targets energy and trade-intensive (mostly manufacturing) firms with a discount on high energy costs based on a supported price; maximum unit discounts of £40.0/MWh for gas and £89.1/MWh for electricity; support restricted to 70 percent of usage volumes; time-limited bridge to allow businesses to adapt.
  - Spain (General solvency — grants): Targeted at gas-intensive sectors (e.g., manufacture of artificial and synthetic fibers and ceramics); direct grants capped per firm and temporary with set expiration; obligations may require beneficiary investments in renewable energy consumption shares, energy efficiency (e.g., per energy audits), or electrification to reduce natural gas consumption.
  - Netherlands (Solvency — equity / tax allowance): Energy Investment Allowance offsets 45 percent of energy efficiency investments against corporate income tax reductions; eligibility exclusions for firms already eligible under other investment credit schemes.

### Governance, targeting, and competition concerns
- Many schemes broadly target firms or sectors most affected by the energy crisis, but heterogeneity is large and many programs lack precise targeting.
- Few schemes involve viability tests and/or ex-post conditionality; absence of these features can increase fiscal burdens.
- The Temporary State Aid Framework caps duration and size of schemes in the EU, reducing a race to the bottom, but aid levels and firm-level outcomes remain highly uneven and could distort competition depending on take-up.
- Governance quality ranges from exemplary to insufficient; transparency could be enhanced by lowering the support threshold that triggers EU disclosure requirements below €100,000.

### Annex I — Corporate health post-pandemic and impact of the energy crisis
- Corporate bankruptcies have risen since mid-2022, particularly in the UK and Spain.
  - UK: corporate insolvencies increased by 57 percent in 2022 (y/y/) and reached a record high since 2009.
  - Spain: changes to insolvency law prompted a surge in court filings that more than doubled in the second half of 2022.
  - Spain: Bankruptcy Declarations index value reported as 280 in 2023Q2 (Index, 2015=100).
- Vulnerability by sector and firm type:
  - The share of “energy intensive” firms (energy costs exceed 3 percent of production value per EU regulation) differs markedly across sectors; highly affected sectors include agriculture, transportation, basic metals, minerals, and water treatment.
  - Half of EU countries have the average ‘Industry’ firm above the 3 percent energy intensity threshold.
  - Under October 2022 WEO baseline conditions, up to one third of manufacturing firms could become vulnerable (ICR<1).
  - Under an adverse scenario (two-percentage point increase in interest rates and a 10 percent decline in corporate earnings), the share of vulnerable firms in manufacturing could increase by 10 percentage points.
- Simulated impact of gas price shock:
  - A simulation replicating the threefold increase in natural gas prices in the TTF market on February-March 2022 suggests the average firm operating in an energy intensive sector could see a decline in its earnings margin of up to 40 percent.
  - In highly affected sectors (Minerals, Basic Metals) the average energy intensity is over 4 percent of sales compared to 1 percent in less affected sectors (Pharma) for the median EU country.
  - A reduction in EBITDA of at least 40 percent could qualify an energy intensive business for a higher share of energy cost compensation under the EU Temporary Crisis Framework.

### Annex II — Case for intervention: energy crisis versus Covid-19
- Differences in the case for intervention compared to the pandemic:
  - The Covid-19 shock was temporary; part of the increase in energy prices is likely permanent (considering climate and energy security externalities), requiring firm adjustments.
  - During the pandemic governments forced shutdowns; the energy crisis allows some firms to pass through higher energy costs to end users.
  - The energy shock is partly a terms of trade shock (caused by sanctions and countersanctions) and affects upstream firms and transport strongly.
  - The energy price increase presents an opportunity to accelerate the green transition; policy design can link support to energy efficiency and decarbonization incentives.

*Source: IMF staff survey supplemented by Bruegel, IMF Working Paper: Energy Support for Firms in Europe: Best Practice Considerations and Recent Experience.*

### Annex II. Figure 1. Expected Impact of Energy Crisis on the Supply Chain

### Annex II. Figure 1. Expected Impact of Energy Crisis on the Supply Chain

### Scope and visualization note
- The grey intensity of shaded cells refers to the share of energy cost relative to production value in key economic sectors for the average country in the EU drawing on Eurostat database.
- The NACE code is shown in brackets.
- Sectors shown (as presented): Transport (H); Mining (B); Agriculture, Farming (A); Food & Accom (I); Fertilizers (B08; C20); Transport (H); Minerals (C23); Basic Metals (C24); Construction (F); Wood (C16); Manufacturing (C); Retail (G); Arts & Entert. (R).
- A visual comparison is implied between the energy crisis impacts across upstream sectors (NACE codes: B, C) and the COVID crisis impacts concentrated in downstream sectors (NACE codes: I, R).

### Comparative assessment of crises and net benefits of intervention
- The benefits of government intervention are likely to be smaller than during the Covid-19 crisis.
- Benefits more significant during the energy crisis:
  - Addressing scarcity of supplies and potential disruptions in supply chains is likely to be more significant during the energy crisis.
- Financial fragility and debt-servicing risks:
  - Firms affected by both the pandemic crisis and by the increase in the cost of energy/other commodities are likely to have their debt servicing capacity impaired in a context of higher interest rates.
  - This could put into question the activity of businesses which otherwise would be profitable, particularly smaller firms with deteriorated creditworthiness from the ripple effects of Covid-19, which are also more likely to face financing constraints amid the current tightening of credit conditions.
- Fiscal and cost constraints on intervention:
  - Most European governments have less fiscal space now than they had before they deployed large support packages during the pandemic (notwithstanding the recent unwinding of those packages).
  - Higher government yields due to central banks rate hikes to fight inflation mean higher borrowing costs on a larger stock of debt (thus a larger interest bill).
  - Costs could also be higher as governments now have to deal with weakened (“zombie”) firms hit by two consecutive shocks, as well as states with deeper pockets providing larger support to their firms and un-leveling the international playing field.
- Net benefit perspective:
  - While the benefits are smaller and the costs higher than during Covid-19, there could be some arguments for government intervention in cases where the energy crisis leads to substantial liquidity needs and considerable losses that may put into question the viability of otherwise viable firms, with systemic repercussions in economic activity and employment.
- Drivers of financial stress differ across crises:
  - During Covid, the risk of massive bankruptcies was due to the widespread impact of containment measures.
  - During the energy crisis, inefficient exit could occur due to the debt overhang built during the pandemic.
  - Supply chain externalities are considered more disruptive in the energy crisis because the firms most affected operate in upstream sectors (NACE codes: B, C), by contrast to the downstream firms affected by the covid crisis (NACE codes: I, R).
- Illustration conventions (Figure 2):
  - The size of the bubbles refers to the qualitatively judged magnitude of the benefit (in green), cost (in orange and red), and net benefit (in blue); dashed bubbles are potential benefits (costs) that can be triggered (avoided) by conditionality provisions attached to support schemes.
  - Costs of intervention also include indirect costs, e.g., via distortions.
  - The perspective of net benefits of intervention is motivated by the aim to avoid the undue exit of otherwise viable firms.

### Best-practice considerations: liquidity instruments before solvency support
- Overarching principle:
  - Resort to Liquidity instruments before considering solvency support.
- Goal:
  - Liquidity: Liquidity support for future cash-flow needs.
  - Solvency: Solvency support for incurred energy costs.
- Targeting / Eligibility (examples drawn from country practices):
  - Exclude firms in arrears to the tax authorities or subject to bankruptcy proceedings (France).
  - Guarantees for SMEs and small mid-caps (Italy).
  - Subsidized loans operating in highly affected regions (Poland).
  - Exclude firms in arrears to the tax authorities or subject to bankruptcy proceedings (unrelated to the crisis): Firms in high energy intensive sectors (Portugal) or high turnover losses due to the energy crisis (Italy).
  - Beneficiary operates an energy management system in line with international standards (Germany).
  - To alleviate cost burden of livestock farmers and greenhouse food producers and maintain food security in the EU (Sweden).
- Ex-post conditionality:
  - Liquidity instruments convert into grants conditional on energy efficiency investments or banks to pass on financial benefits to borrowers.
  - Share of compensation linked to accelerated rollout of renewable energy/decarbonization.
- Duration:
  - Limited duration: program runs up to December 2023, and should be adapted as energy prices fall, or comes with sunset clauses (most programs).
- Size:
  - Amount covers longer period of future liquidity needs for SMEs than large firms (most programs).
  - Nominal amount capped and differentiated across sectors depending on energy/gas intensity of the sector and scaled by firm size (Spain).
- Governance and safeguards:
  - Banks need to prove that guaranteed loans carry more favorable conditions (Poland).
  - Guarantees are linked to a ‘shortage of certainties’ requirement (the loan would not be provided otherwise) (Netherlands).
  - Ex-post audits (random selection and risk-based).
  - Restrictions on management remuneration (Germany).
  - Restrictions on dividend distribution and share buybacks.
  - Beneficiaries need to submit financial audits and claw back provisions apply (Germany).
  - All aid must be disclosed (for e.g., EU currently requires disclosure over €100,000).
  - Ex-post audits (random selection and risk-based).

*Annex II. Figure 1. Expected Impact of Energy Crisis on the Supply Chain — extracted from the provided IMF working paper content.*

---


_Source: https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023197-print-pdf.pdf_