Analysis: A bitter winter for some
The failure of GB Energy Supply was a harsh lesson in what happens if you get your hedging wrong – but does it spell danger for other small energy suppliers? Saffron Johnson reports.
GB Energy Supply has become the first supplier to cease trading this winter, falling on its sword last week after conceding defeat in its battle against rising wholesale costs.
Co-operative Energy swooped in to take the failed retailer’s 160,000 customers, dismissing concerns that it may have difficulties handling such a substantial number, especially when it held the dubious honour of being named the worst-performing energy company for customer complaints last year.
The move is one that makes a lot of sense for the independent supplier. Had it had to pay commission for that number of customers, it would have faced a bill of around £9 million. And with the “vast majority” of these customers expected to stay with their new supplier, it should boost revenues and profits in a challenging market. Analysts note that leapfrogging to a bigger size is “logical” given market conditions. Planning ahead and having a good hedging policy and pricing plan is crucial, but so is scale.
Independent suppliers have grabbed a further 3.6 per cent of the market from the big six in the past year, but their success may be peaking. Morgan Stanley bank warns that independents may struggle to make further gains in current conditions, and ironically this warning was foreshadowed by GB Energy Supply itself when it said that suppliers must grow fast to survive.
How many suppliers will make it through the next few months remains to be seen, but as volatility within the wholesale and balancing markets continues and other suppliers face similar struggles to stay afloat, will confidence in independents be knocked and consumers take shelter with the big six?
Utilitywise strategy director Jon Ferris says GB Energy Supply’s failure came about because of its aggressive attempt to be the cheapest supplier in the market, and its 30 per cent price hikes in October this year should have served as a sign of its difficulties managing costs. Ferris says it seems “quite likely” that more suppliers will cease trading and that the next few months will be “critical”.
Other small suppliers have weighed in to differentiate themselves from GB Energy Supply. Bristol Energy emphasises that to be a “responsible retailer”, a company must have trading capability and the ability to hedge.
“When we looked at the prices being offered over the summer and into the autumn we shook our heads,” says Bristol Energy managing director Peter Haigh. “They were so cheap, and that wasn’t just GB Energy. Whether others are better capitalised, or have put some hedge in place, is difficult to judge. However I’m sure that the current wholesale prices are causing concern for a number of them.”
Green Energy’s chief executive, Doug Stewart, says GB Energy Supply’s demise was a result of “loss-making tariffs coming home to roost”.
“The cheapest deal just isn’t sustainable and the failure of GB Energy proves the point. I fear it is the first of many if we have a harsh winter,” he adds.
In June 2016 Ofgem proposed a safety net to protect consumers’ credit balances in the event of a supplier failure, and changes to the process of allocating a new supplier. This sparked speculation that the regulator was predicting the fall of some small suppliers over the winter.
The fear that consumers’ trust in independents in general could be damaged by the failure of a handful of them is shared across the industry because it risks reducing competition.
Flow Energy managing director Andrew Beasley says: “What is important in light of this is that customers do not now feel deterred from selecting challenger suppliers. In contrast to recent years when the big six energy firms held a monopoly, the UK market is now hugely competitive, due almost exclusively to the efforts of challenger suppliers. This must continue if we are to ensure the energy market works for the benefit of consumers in the long term.”
Ferris also says that smaller suppliers with a niche business model are more likely to succeed. He says: “Suppliers with niches are in a stronger position in terms of being able to differentiate themselves from the offerings of their larger competitors. If their ability to offer green energy is backed up by physical generation, then that also reduces their exposure to the wholesale market and gives them an advantage over suppliers that are completely reliant on the financial markets to hedge their customers’ consumption.”
Bristol Energy backs up this point, arguing that customers should be encouraged to “be curious” about their provider and understand its ethos and values. “The key learning from this would be, it is not just about price. If they sell purely on the basis that they are cheap, that probably reflects on the organisation as a whole,” it says. The municipal supplier adds, though, that GB Energy Supply going bust will “certainly not help consumers’ trust of independents”.
On the issue of trust, Co-op Energy’s Dunning says: “Certainly if it was one of the big six which had been appointed by Ofgem [to take on GB Energy’s customers] then I think that would have risked a narrative around taking shelter in the big six.
“The demonstration from Co-op Energy that actually we can look after consumers from other independents, as we have, should encourage confidence in the independent sector.”
A lot must be learnt from the demise of GB Energy Supply but stability will be crucial in the months ahead for the remaining independents. They must not be naïve to the fact that in a competitive market, some business failures are to be expected, but that is not necessarily indicative that the whole sector is struggling. Those who have prepared well for the winter and have sustainable business models should not only survive, but thrive. The others have cause for concern this winter.
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