Eon UK boss Chris Norbury has warned there is a risk of the energy retail market seeing a repeat of the “gold rush” of badly run suppliers entering the market and later collapsing, leaving consumers to pick up their costs.
Norbury was speaking to Utility Week following the recent publication of a report by the Public Accounts Committee (PAC) which raised concerns about the amount of taxpayer money used to facilitate the sale of Bulb to Octopus.
The report further states that prior to the government’s approval of the Energy Transfer Scheme, which enabled Octopus’ acquisition of Bulb, Ofgem identified risks around “low levels of investor support and its over-reliance on customer credit balances for cash to fund its businesses activities”.
Following the publication of the PAC’s report, the Eon boss has raised his concerns about the future of the retail market. In particular, Norbury fears that as wholesale costs continue to decline, there could be another surge of poorly run retailers collapsing.
He said: “The recent PAC report is yet another reminder of the many failures across our industry in recent years and of the need for our industry to put its house in order rather than stumble into repeating the mistakes of the past.
“The PAC is right to highlight the need to ‘promote healthy competition in the energy market while only granting licences to suppliers with the necessary financial resilience to survive challenging market conditions’, especially as Ofgem is already concerned about companies with low levels of investor support and an over-reliance on customer credit balances to fund their businesses activities.
“The PAC report shows us that this risk has not gone away, in fact as the market recovers and wholesale costs begin to fall, the risk is that we see a repeat of the ‘gold rush’ of recent years. We saw it a few years ago, dozens of badly run companies that should have never had a place in such a vital industry, which collapsed leaving consumers to pick up their bills.”
Norbury said that the background to this was a lack of proper financial controls on new market entrants.
“Their risk-taking was never properly managed and that allowed them to effectively use and lose customers’ money, leaving a trail of destruction when they failed, with the British public picking up the tab,” he added.
Almost 30 energy suppliers failed when wholesale prices rocketed as the world came out of the pandemic and the Russian invasion of Ukraine had a knock-on effect on prices. Many in the sector accused these retailers of not being properly capitalised.
As a result, Ofgem has brought in stricter rules around financial resilience including the ringfencing of customer credit balances in certain circumstances and minimum capital requirements.
Norbury added: “We’ve constantly argued for greater protection measures in this market that would stop suppliers gambling with customers’ money and we welcome Ofgem’s steps to establish rules that mean customers’ money cannot be used to fund a business when suppliers have no equity on their balance sheet.
“At the same time as helping customers with their own needs we must rebuild the foundations of the energy system to prevent any future repeat of this scandal and the impact of failure on customers. I welcome Ofgem’s decision on stronger capital requirements for suppliers and ringfencing customer credit balances, they will put the retail market on stronger foundation.”
The PAC report warned that there are “substantive risks” about Octopus’ ability to pay back around £3 billion of taxpayer money to cover the cost of placing Bulb in the Special Administration Regime (SAR) and used to support the failed supplier’s wholesale energy requirements until 31 March 2023.
As such, the committee has warned that consumers could ultimately be saddled with any unrecoverable costs.
The most recent estimate provided to Bulb’s administrators Teneo is that Octopus is expected to repay £2.8 billion to the government by September 2024 but this payment could be deferred for a further year if wholesale energy market conditions worsen before then.
This level of repayment will leave an estimated shortfall of £246 million, including a charge for accrued interest, which the government expects to recover from energy consumers.
To mitigate risk and to protect the taxpayer from potential losses, Bulb has been placed in a legal ringfence within the Octopus Group until the taxpayer funding is repaid.
Despite concerns raised by Ofgem about the level of investor support in Octopus, the group has previously reported having had $1.5 billion of equity investment placed into it.