Energy crisis: ‘We are now way beyond the 11th hour’

“The thing that I hope for is a really mild winter. As a person in a retail energy company who sells gas and electricity as his job, he wants people to consume less of it. What does that tell you about the situation and how we perceive the situation, that for the good of the UK population we want them to consume less of our product? It is broken and we need to be sensible to find a way through this.”

As the head of one of the UK’s biggest energy retailers, Andrew Ward is under no illusions of the severity of the crisis gripping the sector. The Scottish Power retail chief executive was speaking to Utility Week just days after Ofgem confirmed a record price cap of £3,549 to begin in October, an 80% jump from its current level of £1,971.

According to charity National Energy Action, the regulator’s latest increase will see the number of households in fuel poverty almost double in October, from 4.5 million a year ago to 8.9 million.

Things are then set to get even worse before they get better, with some analysts predicting the cap could reach more than £6,600 in Q2 next year.

Yet despite these dire forecasts, the government is yet to expand on its Energy Bills Support Scheme and with outgoing prime minister Boris Johnson leaving the problem for his successor to deal with, there are fears time is running out to implement consumer support measures ahead of the October increase.

Asked whether this was a source of frustration for suppliers, Ward says this feeling began “way back last year” and that a lot of the issues in the market that Ofgem is now starting to address started a long time ago.

“Fundamentally, the biggest concern I have is what is going to happen to the UK public this winter. And above anything else that we can see, there is the real risk of fatalities this winter. We need to face this, we need to face it head on. We have been calling for this for months and months and we have not been able to get the government to actually intervene and to look at this.

“The underlying hope last year that energy prices this year would go down, we flagged as a big risk to any plans that they were making and said we think we should plan that prices will go up and be ready for it, and we didn’t…I think it’s more than frustration. It’s concern now, deep concern.”

Ofgem argues that the price cap delivered on its original purpose, but that recent volatility resulted in the need to update it every three months rather than every six.

A spokesperson tells Utility Week: “Having a price cap that was up to 6 months out of date is no longer sustainable and consumers now pay closer to the real price of energy, adding stability to the market, and reducing the risk of further large-scale supplier failures, which can cause huge disruption and add additional unnecessary costs for consumers at the worst possible time.”

While the UK awaits the outcome of the Conservative Party leadership contest, there has been a frantic discussion in the sector as to how to mitigate the worst of the impacts on customer bills.

For Ward, one thing is certain in that the energy crisis is a societal problem which the government needs to step in to resolve. In his view, the situation is now “way beyond” anything that an energy company can deal with.

“We were way beyond it in April,” he adds.

At Scottish Power, the preference is for a deficit fund tariff which would freeze the cap at current levels at an estimated cost of around £100 billion over two years. This would then be recouped over a period of between 15-20 years, when prices have stabilised.

Ward believes that despite the clock ticking ever closer to 1 October, there is still time to implement such a scheme before then.

He explains that the company is already loading the new price cap data into its IT platforms and updating customer prepayment meters (PPM) to reflect the increased costs. Furthermore, the retailer is preparing letters to send to customers communicating the new cap.

He adds: “If we’re going to do the tariff deficit, what we asked to be considered was putting a halt on that for the whole of industry, even for two weeks until we see what’s happening with the new prime minister coming into post. We can then hopefully, if there was an intervention the government was willing to do, update all of our calculations, all of our assessments of the new prices.

“What does that do? It stops a huge amount of waste and a huge amount of stress across customers in the UK who will be receiving these communications from us, looking at what their energy prices are going to be only to be told potentially two weeks later, it’s going to be a lot less.

“So yes, we can still do it. But realistically to get it for 1 October the cut off is probably about 9 September from a Scottish Power perspective. And it’s going to be really, really difficult if we are much beyond that to do anything for 1 October.”

“We are way beyond the 11th hour now,” he adds.

Nationalisation back on the agenda?

While the 2019 general election seemed to put an end to the debate about nationalisation, the issue has once again resurfaced and with some surprising developments.

A recent YouGov poll conducted for The Times found almost half (47%) of Tory voters favour returning the energy companies to public ownership, with 28% opposed and 25% unsure.

Ward dismisses the idea that government ownership would put an end to the problems being faced by the sector and describes running an energy retail company as “horrendous” considering the challenges the sector has faced in recent years.

“There’s no other sector I can think of that has the intervention, the government and regulatory intervention, as we face in energy. It’s really, really difficult. And if we think that the government can run energy better than we can, and remember I’ve 30 years’ experience in this game…if anybody thinks that the government can run it better then I’d like to talk to them about that to see how they believe it.”

To illustrate his point Ward uses the example of Bulb, a disruptor brand which made history last year when it became the first ever retailer to enter the government’s Special Administration Regime (SAR), a move effectively nationalising the retailer.

Ministers have been criticised over their handling of the situation, with the Business, Energy and Industry Strategy (BEIS) Committee recently saying the decision not to implement a hedging strategy for Bulb may have “significantly increased costs to taxpayers”, whilst making the supplier “less desirable” to potential buyers. BEIS itself however argues that Special Administrator Teneo is required by law to keep costs low and that it is continuing to engage closely with them to ensure “maximum value for money for taxpayers”.

With no buyer announced despite nearly a year passing since Bulb entered SAR, some believe the ongoing process will end up costing the taxpayer around £3 billion – a figure which Ward believes will be exceeded.

“My personal view is we’ll probably get to a price tag closer to £4 billion by the time we decide finally what we’re going to do with Bulb. I think that putting it into the Special Administration Regime was a mistake. We highlighted that and we walked through the potential options for it not to go in there.

“And yet, we still did it. As a result of that, everything that’s now happened since that day, we flagged and highlighted and predicted it would happen. So I don’t think the government is in any shape to run energy companies in the UK, based on how hard I know it is and based on the facts that sit there in front of us as they try and run Bulb.”

Although Bulb was deemed too big to be put through the Supplier of Last Resort (SoLR) process, as is the norm for failed retailers, Ward believes had its customer base been split up and put through SoLR, the issue would have already been resolved by now. He says the idea of expecting to sell Bulb knowing that there was no long-term hedging strategy was “flawed”.

“The interesting thing is, if it was split up through SoLR, energy companies would have started to hedge immediately for the energy. An energy company wouldn’t have needed the external support that is now being put around Bulb to keep them to this point in time. Again it’s another concern. I don’t think the general public understands how complicated it is.”

The frictions inherent in balancing net zero, security of supply and affordability are at the core of the agenda for the Utility Week Forum, on 8-9 November in London. Find out more here.