Blog: GB Energy – business failure or market failure?

I have seen energy companies come and go. There was the original “challenger” Independent Energy born out of market apathy and killed by its inability to forward hedge. Then there was TXU killed by its inability to bill and collect debts and then its parent cutting off its credit line. There but for the grace of good risk management, go I.

Then there was the winter of 2007 where half the nuclear fleet in the UK was out for safety reasons and the market was scratching around trying to buy power. That winter claimed at least 5 scalps, including Team Energy and Utility Link.

So should customers care? Nobody gets cut off, right? Perhaps failures in this market could just be seen as a cull that helps keep the market alert, and makes sure people are investing in the future?

Commentators have been predicting some market failures since we saw prices starting to rise in September. And at Good Energy, we have been saying for a while that some new entrants are vulnerable to spikes in wholesale prices. .

GB Energy was the most recent casualty of a tricky wholesale market to navigate.

Over the past couple of months we have seen consistently high prices between the hours 5pm and 7pm, sometimes peaking at over £1000 per MWh.

But why is this? Over 30 per cent of the French nuclear fleet is offline and continuing closure of power stations in the UK has left a gap for when the aging nukes, whether in the UK or in France fall over.

Amendments to the balancing and settlement code, which changed the calculation of imbalance price, failed to take into account what flexible generators might be able to do in this market place.

The key period is 5pm-7pm. Historically, suppliers could buy ’shapes’ of power in the market relatively easily from the bigger trading companies. However, increased perceived risk has meant that it’s now far harder and more expensive to buy “shaped power”, as the trading companies recognise the increased risk from these code changes. This leaves a gap which smaller, non-vertically integrated suppliers generally have cover using the day ahead market. High bids into the balancing market have fed directly into the day ahead market, driving up the cost of covering that gap..

There are some suppliers who have done direct deals with big traders, and they will be more protected. But those who either don’t have their own generation, or haven’t done a deal with a big trader, will be struggling.

The complexities of the market continue to make it a place not for the faint hearted, through the combination of regulation and competing against the big balance sheets of other players.

If the regulator and the government want to continue to see the smaller players play a role, then they need to reconsider the regulations now before we see any more casualties, and take another look at the functioning of the wholesale market. It’s sad for the staff and customers of GB. But it’s also sad that we don’t seem to be able to learn how to run a competitive energy market transitioning to a low carbon future, without tinkering and making it so complex that this is the result.