Energy supplier failures explained

Energy supplier failures explained

As more suppliers go bust, we ask Stephen Evans, Head of Industry Charges, to explain more about why this is happening and what the impact to all energy consumers will be.

Q: Why are we seeing so many suppliers failing?

A: A combination of factors including:

  • High wholesale prices – gas and power prices have increased fourfold from 12 months ago (for more on why, see our recent blog)
  • Unsustainable pricing and hedging strategies – by pricing tariffs at a cost lower than the purchase price for energy, suppliers are loss making
  • Rapid growth – some small suppliers have grown very rapidly, but their systems, people and commercial strategies have not been able to keep pace
  • Ofgem’s Standard Variable Tariff (SVT) price cap – this has limited suppliers’ ability to price higher market-reflective costs through to customers
  • Difficult recovery from Covid – the pandemic has affected suppliers in numerous ways, from bad-debt to increased operational costs. These costs will have hit suppliers’ balance sheets ahead of the inflated energy prices

Q: How many have failed?

A: Over the last four months, 14 suppliers (with 3.7 million accounts) have entered Ofgem’s Supplier of Last Resort’ (SoLR) process – where their customers are transferred to new suppliers after they’ve become financially unviable. To put this in context, between 2016 to July 2021, 16 suppliers (with a combined total of 3.2 million accounts) went through the SoLR process, while another 30 were either acquired or wound down. As of 1 November, there are now only 80 remaining unique Ofgem electricity supply licences.

Q: Will we see more suppliers fail?

A: We are expecting further suppliers to go under in the remainder of this year – most will be very small but there will likely be some larger ones.

Q: Is this due to the same factors?

A: In part – but also to some additional pressures which include:

  • Elexon Credit Assessment Price (CAP) – this is the price that supplier’s expected credit exposure is priced against. It increased from £137/MWh on 3 October to £184/MWh on 21 October and then to £259/MWh on 4 November. This means suppliers must post more money upfront with Elexon, exacerbating working capital constraints. If they fail, it can result in suspension from the Balancing and Settlement Code (BSC) – which means they can’t acquire any new customers – and then an expulsion notice before being expelled (at which point they can no longer act as a supplier). This process takes about two months
  • The demise of gas supplier/shipper CNG – CNG has ceased trading, leaving the 15-20 small suppliers they provide with gas to find alternative shippers. This could make it difficult for those suppliers to continue operating
  • Renewables Obligation (RO) payments final deadline – suppliers must transfer the RO contributions they’ve collected throughout 2020 as part of customer bills, with 31 October 2021 the final deadline. As of 31 August, the deficient was £692 million. If this remains the case, Ofgem will issue final orders to pay, while also beginning proceedings to revoke suppliers’ licence (which takes two-plus months). While this deadline has now passed, Ofgem has not yet announced total non-payment

Q: When will we know which suppliers have gone under?

A: Several suppliers appear to have passed the point of no return. However, it appears that insolvent suppliers only have their licenses revoked when Ofgem can accommodate them into their SoLR process. This means that rather than a glut of supplier failures, we’re more likely to see a regular pattern of a few failures at regular intervals. In addition, there are only a small number of larger, stable suppliers with capacity to take on SoLR customers. So, any SoLR pipeline needs to be delayed to give these suppliers time to take on existing SoLR customers.

Q: What does this mean for industry costs?

A: There are two major cost impacts to customers caused by failing suppliers:

  1. Socialisation of Last Resort Supplier Payment (LRSP) – this is when a failed supplier’s customers are taken over by an existing supplier (always through a SoLR process) – and then all suppliers then have to fund the IT, credit and wholesale costs incurred by that new supplier. As a result, Distribution Use of System (DUoS) for power and Local Distribution Zone (LDZ) charges for gas increase.
  2. Mutualisation of Renewables Obligation (RO) costs – this is when a supplier goes bust without paying their Renewables Obligation (RO) bill, and all energy suppliers then have to pick up the shortfall on their account. As a result of this, RO costs go up for everyone.

For more information on these costs, see our recent blog.

Q: What’s the impact on the market?

A: In short, increased costs (as above) and fewer suppliers. While there will still be a very large number of electricity suppliers in the UK, the largest eight or nine will control well over 97% of the market. But typically, existing very small suppliers price very aggressively to claim market share and will therefore grow rapidly. There also remains a significant risk of large supplier failures in the future.

For more information about the impacts to your business of increasing industry costs, speak to your Client Lead (existing customers). Or contact us via nBS@npower.com

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