The bell is tolling for small energy suppliers, with two more going to the wall on Wednesday, and the risk is that the price competition that helped curb household bills in recent years could die with them.
This week Newcastle-based energy supplier Green, and Avro Energy from Hinckley, became the latest casualties of the UK’s record wholesale gas market prices. They bring the total number of suppliers that have gone bust in a little over six weeks to seven. A tsunami of supplier failures is expected to follow.
At the same time, Green has joined Symbio Energy and AM Power on the list of suppliers in default with the market operator. And Colorado Energy, Igloo Energy Supply, Symbio Energy, Neon Reef and Whoop Energy have been named on a list of companies that have failed to pass on the renewable energy subsidies collected from their customers.
1.9m UK homes lose supplier after two more gas firms go bustRead more
An inability to cover these basic costs is often a telltale sign of deep financial trouble, and has raised fears that the next string of collapses is not far off.
At the beginning of the year there were about 70 suppliers in the market. The total number could shrink to lows of about 10 by the end of winter, according to Ellen Fraser, a partner at the consultancy Baringa.
Emma Pinchbeck, the chief executive of Energy UK, told MPs on Wednesday that the crisis had exposed the vulnerability of the country’s retail power sector, meaning even “good, well-run companies will fail”.
The grim prognosis for the UK’s small suppliers has raised fears that the energy crisis could bring the death of market competition, and a return to the days of limited energy deals, a small cabal of dominant suppliers, and high prices.
“I’m not tolling a death knell for competition,” said Dermot Nolan, who served as the chief executive of Ofgem for six years before he stood down in 2020. “But it will be a significant shock for the supply market.”
Nolan oversaw the boom in energy suppliers after Ofgem changed its policy to encourage more new energy upstarts to join the market, by dropping the barriers to entry. The plan was to create a healthier energy market by creating competition for the so-called Big Six: British Gas, SSE, EDF Energy, E.ON UK, npower and Scottish Power.
In many ways this competitive pressure worked. Millions of customers abandoned the big six, lured by rock-bottom deals offered by a raft of plucky startups; some in possession of little more than a basic software package, a website address and an Ofgem-approved licence.
There were viable energy market breakthroughs. But there were also plenty of tales of fly-by-night supply outfits that offered terrible service and little hope they would survive a difficult winter.
The boom in suppliers brought a surge in the number of price comparison websites and energy brokers, and further tales of unscrupulous behaviour from some. All face an uncertain future in a more succinct energy market.
Greg Jackson, the chief executive of Octopus Energy, believes there was bad behaviour from both large and small suppliers in the past – but a balance should be found to protect competition in the future.
“Undoubtedly, there are idiot companies out there who offered bonkers low prices when the market was low, and seek bailout now it’s high. They don’t deserve a place in a critical market. And the [big six] habitually overcharged for their bloated operations through opaque prices,” he said on Twitter.
“The key now is for a calm resolution to the ‘idiot companies’ problem without losing the competitiveness which prevents oligopoly pricing behaviour from incumbents,” he said.
Nolan believes a leaner market need not be a less competitive one.
“It’s not evident that we’ll return to the market of 10 years ago. I believe there was going to be a shakeout over the next two to three years anyway where we’d see a wave of acquisitions and mergers to consolidate the market. This will be more abrupt, and more vicious,” he said.
Fraser added that the market may be healthier overall.
“The loss of small suppliers would clearly constrain the number of tariffs available to customers in the short term,” she said. “But in reality many small suppliers were offering tariffs which were well below the cost of supply and used to prop up unsustainable business models. That’s not the sign of a healthy market.”
Concerns that a core group of 10 “survivor” energy suppliers may show signs of behaving like the big six energy suppliers of the last decade also overlooks the strides made in recent years towards innovative tariffs and new business models.
“The energy market has moved on materially,” said Fraser. “There are new suppliers which behave very differently, such as Octopus Energy and Ovo Energy, which have big, stable customer bases and healthy balance sheets. These companies think very differently [to the legacy big six],” she said.
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Nolan believes that enough of the new market entrants may survive to drive a different kind of innovation, built around the push to create greener homes. These could include sales of heat pumps, access to electric car charging or hydrogen boilers.
It’s likely that the old guard of energy suppliers thinks differently too, Fraser added. After a “sobering wake-up call” n recent years driven by the steady creep of challenger brands, the Covid-19 pandemic and the energy crisis they are unlikely to be complacent about remaining competitive in the market.
“They are alive to the challenge of the market,” Fraser said.
