Energy market may be in for a ‘winter of discontent’

By August 2019 a total of five energy suppliers had entered the supplier of last resort (SoLR) process, with a further four to follow before the end of the year. However, despite the economic disruption seen so far in 2020, only one supplier has exited the market – with one other believed to be on the brink. To find out why, Utility Week spoke to several industry experts.

While lower wholesale costs have been a boon to retailers over the summer, winter is coming and for some it may be enough to tip poorly hedged suppliers into the abyss.

Ben Bugg, principal, strategy and transaction advisory, BFY Group, says his company believes there is scope for up to eight retailers to either exit the market or merge with another company before the end of 2020 alone. In 2021, it expects up to an additional 10 suppliers to do so too.

He adds: “Prior to lockdown, some challengers will have been putting out cheap prices that were either breakeven or loss making when based on a 12-month hedge at that time. They’ve gone into the pandemic partially hedged and benefited from the falling wholesale prices.

“Their cash outflow is lower than expected which, without adjusting for payment holidays and cancelled direct debits, is helping them build up a stronger cash balance which is why you won’t be seeing as many suppliers entering SoLR yet. But I think it is not a question of whether they’ve been able to save themselves, they’ve just been able to buy more time.

“What these suppliers need to take into account is domestic customers are consuming a lot more energy and once meter reads start coming through to reflect this they are going to be hit with bigger wholesale costs. There’s also transport, distribution and policy costs too. It can take up to 14 months for the effects to wash through the system.

“They should be collecting more money from customers but the problem is, it’s difficult to ask to increase direct debits at a time when you have lockdown, job insecurity and a recession.”

Ryan Thompson, partner at Baringa Partners, also thinks wholesale costs may have benefited some of the smaller retailers. He believes the upcoming renewables obligation deadline, which has been the downfall of many a challenger previously, may prove too much for some.

“Wholesale prices have continued to be relatively low over the summer which may have allowed some smaller suppliers to creep up their margins and may explain the lack of suppliers exiting the market.

“We always see a few supplier failures in the autumn when the renewables obligation (RO) payments are due and for anyone struggling that might be the thing that tips them over the edge.”

Meanwhile Juliet Davenport, founder and chief executive of Good Energy, thinks the government’s financial support has helped struggling retailers.

She says: “The package of Covid-19 financial support from government has meant that failing suppliers have been able to limp along longer. But this will soon change as the RO deadline approaches and we head into the winter months.

“From past experience the majority of failures have taken place between October and January so sadly the energy market could be in for a winter of discontent.”