Leader: Cold weather could be the death of small energy suppliers

This could be a harsh winter for the UK energy sector – and for once, this is not primarily because of security of supply fears.

As National Grid snuggles into a cold season of higher than anticipated capacity margins, elsewhere in the market, small energy suppliers are exposed. Some say that many will succumb to the elements this winter.

Speculation has been mounting for some months now about the vulnerability of small energy suppliers in a winter that is expected to bring continued volatility in commodity prices. In August, a leading consultancy told Utility Week it thought the winter would bring a cull of small suppliers with immature hedging strategies.

Last month, Ramsay Dunning, general manager of The ­Co-­operative Energy, said he thought peers would go bust because, in their mad scramble for market share, they had set below-cost tariffs that they will not be able to support over the colder months.

Then, at Energy UK’s annual conference this month, energy sector analyst Peter Atherton added grist to the mill of forecasts about small supplier demise. Atherton observed that many small suppliers are “undercapitalised” both financially and in terms of human capital. A period of sharp wholesale energy price rises would therefore ­precipitate a “shakeout” of weak suppliers from the market.

Atherton welcomed this prospect as “useful” for a market that has become overcrowded with opportunist new entrants. Clearly though, if energy suppliers do go bust en masse, concerns about what happens to customers and their money will be acute.

Anticipating this, Ofgem recently introduced a new safety net for consumer credit balances if their supplier goes out of business. This was designed to sustain confidence in energy switching, which has increased significantly this year – especially to smaller and newer market entrants.

Ofgem’s proposed protection regime does come with a small price tag for consumers at large. An industry levy to cover the costs of honouring credit balances would be passed on to them in the event of an insolvency and a failure to identify a supplier of last resort.

If this winter is to be as harsh on small suppliers as commentators such as Atherton predict though, support of this levy may be the lesser of two evils.