Supplier failures in 2021 could cost more than £2bn

The costs to the rest of the retail sector of supplier failures in 2021 could reach more than £2 billion and push the price cap over £2,000 when it is reviewed, new analysis has suggested.

Research published this week by Investec suggested the next default price cap, already at a record level of £1,277, will jump by as much as 56% when it comes into effect in April, taking it to £2,000.

Elsewhere, Cornwall Insight predicted that, following soaring wholesale energy costs and the costs associated with the raft of supplier failures, the summer 2022 cap will rise by 46% to approximately £1,865 per annum, with a forecast of £2,240 per annum for winter 2022/23.

Further research published by NERA Economic Consulting has suggested the bill for supplier failures in 2021 could be between £1.7 and £2.1 billion.

NERA broke down the costs into three main components that are likely to be recovered from remaining suppliers and passed on to consumers: wholesale energy costs, customer credit balances and Renewables Obligation (RO) shortfalls.

For wholesale costs, NERA believes Suppliers of Last Resort (SoLRs) will have incurred costs of around £1.5 billion due to the need to purchase large volumes of energy at higher prices than are allowed under the price cap.

SoLRs can recoup these costs through Last Resort Supply Payment (LRSP) claims. If approved by Ofgem, the payments are made by distribution networks and then recovered from suppliers through distribution charges.

With regards to credit balances, NERA scaled up the roughly £46 million of LRSP claims for credit balances approved by Ofgem in 2018 and 2019 by the number of customers affected by supplier exits so far in 2021 to produce a figure of £100 million.

However, NERA said this is likely to significantly underestimate the bill for 2021 as in previous years SoLRs have not reclaimed the full costs of honouring the credit balances of acquired customers. It said the higher wholesale costs mean they are likely to claim back a greater proportion of these costs and on this basis gave an estimate of £345 million.

NERA estimated that RO mutualisation costs may add a further £252 million. Its analysis assumed any supplier that failed between April and October defaulted on its entire obligation from the previous year and the current year, pro-rated to the share of the year that has elapsed so far. A supplier that defaulted between November and March would default only on the latter.

The consultancy said the £252 million figure therefore represents an upper limit as some suppliers that ceased trading in September or October – accounting for £147 million – may have presented ROCs by the 31 August deadline to submit certificates.

NERA added that the total costs to society will “depend critically” on how SoLRs respond to the challenge of acquiring new customers in current inflated market conditions.

The consultancy noted the government has additionally granted Bulb a £1.7 billion loan, meaning the total cost of supplier failures could amount to as much as £3.8 billion.