The collapse of Usio Energy this week has prompted predictions that other small energy suppliers could also close before the end of the year.
Industry experts and insiders have warned suppliers will need to have a “robust plan” in place if they want to survive past winter.
Around 7,000 Usio customers are waiting to find out which supplier they will be transferred to under Ofgem’s supplier of last resort process (SoLR).
Wholesale prices and pricing strategies have been cited as possible problems for some small suppliers.
Greg Jackson, founder and chief executive of Octopus Energy, told Utility Week: “Rapid increases in wholesale costs have really stretched suppliers who’ve been selling below cost.
“Sadly, whilst the market is dominated by two tier ‘tease and squeeze’ pricing, it’s impossible for most companies to compete without either very deep pockets, or charging loyal customers exorbitant prices to subsidise loss-leading prices.
“This is good for no one.”
Ian Barker, managing partner at BFY Consulting warned some suppliers could struggle due to a lack of hedging or hedging at the wrong time.
“Suppliers will need to have a robust plan to get through winter and make sure they have a close eye on daily cash flow,” he told Utility Week.
He suggested that several suppliers who had “not hedged at all” have started hedging in the past few weeks.
“It is great to see steps being taken to minimise risk through the winter, however, there is a risk that if the wholesale price plummets they could face cash pressures with mark-to-market margin calls dues to hedging at the wrong time.”
Barker suggested there are “still a number of suppliers who are struggling with hedging all of their volume”.
He added: “The more sophisticated supplier may well know that hedging at high prices will ‘lock in’ unrecoverable losses and that leaving an open position is the only plausible option – and may have taken a deliberate calculated risk.”
Barker explained that some suppliers may be “accelerating growth” during the winter to increase the cash flow coming into the business while others may be “struggling with credit limits with their trading partners” and may not have the cash to purchase in advance.
“The Elexon changes this winter may make things even more difficult and expensive for suppliers who are allowing volume to spill over into imbalance – the change to PAR1 [price average reference] and the increase of the credit assessment price to £75 will impact both suppliers’ cash flow and their profit and loss,” he said.
Elexon said it is delivering Ofgem’s regulatory changes.
Taking to Twitter William Marchant (@richonlyinname), said: “It’s looking extremely unlikely that Usio will be the last energy supplier to fail this year. Whether through SoLR or more orderly exit paths like trade sale, I’d expect others will follow.
“It’s a crowded market, with too many lacking the deep pockets and/or USP needed to survive.”
Speaking at Energy UK’s conference yesterday (16 October), Ofgem’s chief executive Dermot Nolan, said: “We will soon be announcing proposals to tighten up the supplier licensing regime.
“It’s important to ensure that all suppliers, particularly those coming into the market, are financially viable and able to provide a decent level of customer service.”