One of the big stories in the retail sector last winter was the closure of GB Energy Supply. The challenger supplier was forced to shut up shop after being caught out by rising wholesale prices in the power market, prompting concerns within the industry that others could follow suit.
This winter has so far seen the closure of two further suppliers – Brighter World Energy in December and most recently, Future Energy last week. In the instance of the latter, the reasons given for the closure read very similar to those given by GB Energy Supply.
In a statement, Future Energy chief operating officer David Stroud said the company had been “unable to convert sufficient customers to enable us to forward purchase energy at the most competitive rates”.
He added: “The marketplace is difficult for challenger energy suppliers, which lack the financial advantages of larger, national energy firms.”
Ryan Thomson, energy and resources partner at Baringa Partners, says Future Energy may have fallen victim to a major spike in gas prices in December, which fed through to the power market.
Gas prices shot up to multi-year highs after a number of events – including a deadly explosion at an important gas processing facility in Austria and the closure of the Forties Pipeline System (FPS) integrated oil and gas terminal due to a crack – coincided to create a perfect storm.
“What you might have found with someone like Future Energy is that they are buying quite close to delivery, buying a lot on the spot market, and have suffered quite badly from that situation,” Thomson tells Utility Week. “It doesn’t look like they hadn’t managed to secure a wholesale trading agreement from the likes of Shell or BP, which a lot of the other small suppliers have managed to do.”
Without such an agreement, Thomson says Future Energy may have lacked the collateral and creditworthiness to forward buy energy in sufficient volumes to adequately hedge against price shocks. “There’s definitely quite a few out there that will be in similar situations, that might be running low on capital,” he adds.
That might be worrying for the array of small investors backing the minnows of the energy retail market.
Following the supplier’s collapse, a report in The Times claimed its investors had been stung to the tune of “millions of pounds”. The newspaper reported that shareholders had been asked to invest more money in the company late last year, after it struggled to hit growth targets and buy power in the wholesale market.
Investors elsewhere will now be on the lookout for similar warning signs, and may be more willing to support mergers and acquisitions with market players who can offer security in scale while the going is good.
Robert Buckley, research director at consultancy firm Cornwall Insight, warns against reading too much into the closure of Future Energy and predicting the failure of others on that basis.
He says the company, whose 10,000 customers were centred around the North East and Yorkshire, had a “very particular business model focused on a particular region and customer group, and we’re not close enough to know what went wrong for them”.
That said, Buckley does believe the market is ripe for consolidation: “If you just look at the distribution and the number of companies in the market and the number of customers that they’ve got, you would think that some kind of consolidation might occur.”
He says Cornwall’s analysis has found a high level of customer churn in certain segments of the retail sector, “particularly in the price-sensitive online fixed market”.
Thomson agrees: “With everyone competing at the lowest rates at very marginal prices, it’s going to be difficult for any of them to get to a sustainable revenue position”.
Although challenger suppliers may have relatively cheap customers to service when compared with the big six – mostly paying in advance by direct debit – they also lack the economies of scale of their larger, more established rivals. Thomson also questions whether there are enough skilled staff available to support effective operations at the 60-odd suppliers now in existence.
He says many challenger suppliers believe they need to attract between 50,000 and 100,000 customers for their business models to become sustainable over the long term. Consolidation could help them to pass that threshold.
Should Ofgem do more?
The closure of Future Energy also puts the spotlight back on Ofgem’s arrangements for entry and exit to the market.
Shortly before GB Energy Supply went bust in 2016, Ofgem unveiled plans to beef up its procedures for protecting customers in the event of a supplier failure. It said the new system ensured a “safety net” for customers that would carry them through the process of transferring to a new supplier, without the need to worry about credit or debt on their old accounts.
At the time of publication, the regulator was still in the process of appointing a supplier of last resort to absorb Future Energy’s customers.
An industry source quoted by the Telegraph suggested a big six supplier will probably be most keen to take on the role in an effort to curry favour with the regulator.
But Buckley says the calls received by his office in the 24 hours following the closure indicate “there’s a lot of interest from suppliers of all different shapes and sizes in acquiring the customers of Future Energy”.
He expects the appointment process to be “very competitive”, adding: “I don’t think it’s a question of doing favours for anybody. I think there’s a lot people out there who are interested in taking on these customers.”
Again, Thomson agrees: “The big six suppliers will certainly go for it. I think some of the mid-size suppliers as well. I think there might be one or two smaller ones too, especially if they’re operating on the same IT and back-office systems as Future Energy. A lot of the small suppliers are on the same systems, which means that it’s relatively straightforward to transfer customers across.”
However, Utility Week understands this is unlikely to be the case for most small suppliers as Future Energy – struggling to pay its license fees – recently switched to a less popular billing system.
Thomson thinks the supplier of last resort process is “quite robust”, despite relying on “a lot of goodwill from the rest of the industry”. He says it worked effectively when GB Energy Supply went under, protecting its 160,000 customers throughout.
But others have concerns about Ofgem’s safety net. As part of the regulator’s rebooted arrangements, the supplier of last resort has the option to reclaim part or all of the outstanding credit balances of customers of the defunct supplier via an industry-wide levy on energy bills.
Speaking to Utility Week in 2016 as Ofgem introduced the process, Green Energy chief executive Doug Stewart questioned: “Why should consumers’ bills go up to support entrants who play fast and loose with customer money?”
He said the regulator would be better off stress testing aspiring suppliers to ensure they are financially resilient, before they can start trading, than developing new ways to clean up the mess when they fail.
Such calls have not fallen on deaf ears. In early 2017 Ofgem promised to review the criteria for awarding supply licences. Since then, the regulator says it has strengthened its monitoring of both suppliers and the wholesale markets.
An Ofgem spokesperson told Utility Week: “This strengthened monitoring regime, combined with our existing safety net, which ensures that consumers’ credit balances are protected in the event of a supplier failure, means we are confident in our approach.
“We will be considering the timing of a wider review of our approach to awarding supply licences, as part of next year’s work plan.”
Thomson says, whilst there are in place that prevent companies from entering the market without sufficient resources to meet their commitments – for example, the requirement to post collateral with various industry bodies – there may be more the regulator can do in this arena. “There is a debate whether there should be a certain amount of money put into escrow or equivalent to slightly raise the barrier of creditworthiness,” he notes.
Citizens Advice head of energy Victoria MacGregor goes further, insisting it is still “too easy” to obtain a supply licence: “Companies can set up and begin trading without even informing the regulator when they are going to start serving customers.
“Ofgem should strengthen the rules around licensing energy companies. For example, there should be much greater scrutiny of companies’ business plans before they are able to start trading,” she adds.
However, whether the closure of Future Energy prompts Ofgem to go further remains to be seen.