Cash constraints will limit suppliers’ ability to absorb new customers

Even well-hedged energy suppliers with “deep pockets” may be unwilling or unable to absorb the customers of some of those exiting the market, industry analysts have warned.

Although companies taking on new customers through the supplier of last resort (SoLR) process are able to recoup associated costs through an industry-wide levy, analysts from the ratings agency S&P said there are limits to the amount of cash they will be able to access to cover these costs in the meantime.

“This is a fairly unprecedented situation,” said Aarti Sakhuja, director for Europe, Middle East and Africa (EMEA) utilities at S&P Global Ratings. “This process has not been stress tested for such large numbers of exits and for large numbers of customers being acquired, so there remains some uncertainty around how many more new customers can be absorbed.”

Speaking to Utility Week, Sakhuja said although the large suppliers S&P rates are in a much better position than many of their smaller rivals – with more hedging in place, stronger balance sheets and better access to credit – they have still been negatively affected by rising wholesale energy prices.

“And taking on new customers does have implications for hedging,” she added. “Suppliers have potentially hedged for the amount of energy they expected to buy to cover existing customers, so if they are going to take on a large customer book it will affect costs and liquidity immediately, especially in the current environment.”

She said that “given the scale of the problem – we’ve already seen some 2.4 million customers go under the SoLR process” – companies’ ability to absorb new customers will ultimately “boil down to the liquidity that these players have access to.”

Julien Bernu, associate for EMEA utilities at S&P Global Ratings, said claiming back the costs incurred by acting as a supplier of last resort can currently take up to two years.

He said companies will additionally have concerns over maintaining the quality of their service: “There is also the experience for existing customers. You want to make sure you have enough capabilities to serve all those new customers.”

In this context, Bernu questioned how valuable the new customers will actually be: “If the majority of these customers are being acquired through switching websites, for example, they are probably going to be a less sticky customer base than if that wasn’t the case. That’s the sort of trade off that suppliers are considering.”

“It remains to be seen whether those customers that have been acquired will actually stay with the suppliers that acquired them,” said Sakhuja.

Their comments come amidst media reports that the government is accelerating contingency plans for the potential collapse of Britain’s seventh largest energy supplier, Bulb, which is estimated to have around 1.7 million customers and is thought to be too big for the SoLR process. The special administration process, which has never been used for an energy company, has been mooted as the most likely solution should Bulb exit the market.

They were speaking to Utility Week shortly before Ofgem announced plans to review the energy price cap and reduce the amount of time it takes suppliers of last resort to recover the associated costs.

“I think a lot of suppliers would want to have the price reset mechanism react more swiftly to situations like this where prices are going up sharply but I think it’s politically quite contentious,” said Sakhuja.

She noted that the higher energy prices have also coincided with the end of the government’s furlough scheme and the phasing out of the temporary £20 uplift to universal credit during the coronavirus pandemic, making any effort to accelerate the passthrough of costs to consumers “quite unappealing”, especially in the winter months.