Insolvencies and rising prices: the energy retail market in flux
In recent weeks, headlines around the UK have declared a crisis in the gas and energy sector: prices rising, suppliers collapsing, and customers – and industry professionals – wondering what has gone wrong.
Though it has only come to national attention recently, the current challenges facing the energy retail market are just another example of fluctuation in an industry that has seen rapid change in the last decade. Historically dominated by the Big Six energy suppliers (British Gas, EDF Energy, E.ON UK, Npower, ScottishPower, and SSE), lax regulations and low wholesale prices in the mid-2010s made it easier for new players to enter the industry, and companies were quick to take advantage: where there were twelve suppliers in 2010, there were over seventy in 2018.
Many of these new entrants to the market were able to attract customers with flashy marketing, slick tech interfaces, and cheap prices, offering lucrative deals that were well below the cost of supply. While this approach may have been sustainable had they been able to scale up, in an already crowded marketplace the customers were simply not there. Furthermore, much of the industry’s stability depends on hedging, and smaller competitors have not typically had the capital to buy future supplies when prices were low. In essence, not only have they struggled to remain profitable with a smaller customer base, the low prices they offered have been unsustainable. Perhaps unsurprisingly, numbers have declined since the peak of 2018: by March 2021, the number of suppliers had fallen to forty-nine; with the current crisis, some experts are predicting that only ten suppliers will make it through the winter.
This year’s spike in prices is a contributory factor to the decline of suppliers, but so too is the way the system as a whole is regulated. Consumers are protected by the energy price cap, which rose to £1,277 at the beginning of October 2021, but Ofgem has put far fewer protections in place for suppliers or for the industry at large. And though in 2019 Ofgem did tighten regulations for new entrants to the industry – requiring them to show that they had sufficient funds to trade for the year and that their senior management team, including major shareholders, were ‘fit and proper’ to hold the necessary licence to operate in the sector – the bar remains low. While these new regulations might help to ensure companies stay afloat when gas prices are low, they do not guarantee suppliers’ soundness to weather the current storm.
Nine suppliers went under in September 2021 and to date, October 2021 has seen another four suppliers fail. In total, these thirteen companies provided power to over two million customers, and supply has continued even as they have ceased to trade. Ofgem’s recovery programme remains consumer-focused, protecting individuals via its supplier of last resort system. This programme sees Ofgem place customers of defunct energy companies with new, larger suppliers or, if all else fails, sees a special administrator appointed to ensure supply continues to reach customers. While this is good for individual consumers, the system places additional strain on remaining suppliers who are already feeling the effects of the price jump. Because customers switched to new suppliers benefit from the energy price cap, suppliers are unable to charge them the actual cost of supply – a shortfall which some analysts calculate to be over £550 per customer. Furthermore, in an industry that relies on hedging, taking on these thousands of additional customers at once and without forewarning adds additional risk, threatening the stability of the suppliers Ofgem is relying upon to carry the industry. While these large suppliers have warned of the strain that they themselves are under, to date the government has been reluctant to intervene.
With prices still fluctuating and the energy price cap predicted to rise to £1,660 in April 2022, the test of the UK’s energy network may be just beginning. It is too early to tell what new policies will be put in place, but with reports of companies taking on new customers days before ceasing to trade, regulatory change in the energy retail market seems inevitable – as does closer scrutiny of energy suppliers’ solvency.