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Are energy suppliers about to collapse?

Are energy suppliers about to collapse?

Max Alexander-Jones

14/02/2022

Reading time: three minutes

Since my previous LCN Blog on the current UK gas crisis, six British energy suppliers have been identified being at the maximum risk of closure.

According to accountants Price Bailey, twelve are in the red of the 22 gas and electricity suppliers left outside of the largest six. Of these twelve that have a negative balance, six are technically insolvent, at risk of collapse and deemed “maximum risk” because of their poor credit scores.

Some of the companies that are about to collapse include suppliers that have taken on accounts from other failed firms. If these firms collapse, that means that customers could face the inconvenience of being transferred multiple times.

Energy crisis

Since the energy crisis began last autumn, 27 energy firms have gone bust, roughly half of suppliers. Natural gas prices have climbed six-fold, but the energy price cap imposed by Ofgem has prevented companies from immediately passing costs on to customers.

This month Clydebank-based Together Energy, which had 170,000 customers, became the latest firm to collapse. The largest supplier to fail so far was Bulb, which was put into special administration as it had too many customers to be taken on by other firms.

Price Bailey's Matt Howard said: “The winter of discontent for the energy supply sector is unlikely to end soon. These businesses will find it almost impossible to access extra funding unless directors provide personal guarantees, and few are likely to do so in the current climate.” Howard added “we are seeing a domino effect.

Every time a small energy retailer goes bust, that increases the financial strain on the rest of the ecosystem, making those businesses more vulnerable to collapse.

From April, the energy price cap is widely expected to rise, which would shift some of the burdens of wholesale prices away from suppliers and onto households. The Government is also under increasing pressure to intervene, with a potential cut to VAT on bills reportedly under consideration.

Last month a damning report from charity Citizens Advice said regulator Ofgem had “failed to act against unfit energy suppliers for nearly a decade”. Dozens of new energy companies were launched in the past decade but many had little financial backing.

In their report, Citizens Advice claimed the regulator failed to act even as evidence of financial weakness in the market grew. Their report concluded with an estimation that the latest spate of supplier collapses would add £94 to the typical household energy bill.

Two major downsides

Many have their fingers crossed that the April price cap rise will provide many small-cap energy companies with the necessary room they need to breathe. Such a reliance however, has two major downsides.

Firstly: inflation. Following exceptional government borrowing and outstanding bounce-back recovery, covid-19 has caused large amounts of demand-pull inflation. This inflation affects everyone, including these energy companies.

If the companies are struggling to survive now, and the April cap rise is the solution, it seems that it will not be very long until inflation catches up with them. Limited once more by an energy cap, and facing the tide of inflation, the collapse of these companies seems likely again.

The second reason the reliance on the price cap rise is a poor solution is that there are worries about what will happen in the meantime. It’s still a couple of months until the cap rise comes in. As we wait for this alleged solution, companies are likely to sink.

This means that customers will be bounced between suppliers once again, all while concentrating power into the hands of larger energy companies.