The failure of many energy Companies in the UK is being attributed to the hike in energy prices. However, this is a half-truth. The cause of failure has also been due to the fact that many energy providers have been badly run, undercapitalised, chasing customers on low price basis only and not preparing for price increases against a price cap that limits them being passed to customers.
The fact that the hike in energy price is not the real primary factor is illustrated by those failures before the price went up:
Green Network Energy failed and transferred 360,000 customers to EDF in January 2021.
Simplicity Energy failed and transferred 50,000 customers to British Gas in January 2021
Yorkshire Energy failed December 2020 and transferred 74,000 customers to Scottish Power.
This has been a failure of regulation – one that to a degree I believe Ofgem recognised as in June 2019 it announced new entry rules to the market; the two most notable being:
- Ensuring new suppliers are financially stable to support operations.
- Checking directors and senior management are fit to hold a licence.
Sadly, this is too little too late and we have seen 70 suppliers reduce down to about 30 actively trading and, in my opinion, this is likely to reduce further to around a dozen in the future.
When you look at the many failed energy providers Company House records you can easily start to pick up patterns of failure that bear similarities to the financial institutions that failed in the 2008 crash.
The simple fact is that the Big 6 energy providers have better business models and better risk management than smaller ones that have either failed or been forced to merge.
The common faults I have identified:
Inadequate financing – As the smaller firms grew they simply did not have adequate capital to fund their businesses. This is basic small business. They also consistently failed to fund their risk by either getting more investment or by hedging energy purchases using financial tools such as derivatives.
Inadequate price management – many failed companies have attracted clients by price only.
Inadequate credit management – inability to manage unpaid bills and credit risk – in some cases prepared to take on any customer.
Increasing market share regardless of profit – A good example of this is Green Network Energy Limited in 2017 it had 87,425 customers and a loss of £6,301,435 and in the following year had 199,527 customers and a loss of £20,069,177. It does not take a genius to work out this is a failing business model. Indeed “green” energy suppliers have struggled.
Lack of business diversity – smaller providers are not diversified in business and products meaning they are entirely reliant on energy sales for income. Compare this to the big six who provide various services alongside energy.
Poor management – Too many Companies have directors with little or no experience in the energy market or similar risk markets.
Looking back to 2008 we saw similar failings in banking with undercapitalised Banks being run by people with no banking knowledge or experience attracting customers by price only with inadequate management of lending risk.
Similarly you see a pattern of directors and employees receiving financial rewards in failing businesses.
If I can see these obvious failings in energy companies why hasn’t Ofgem?
We appear to have learned nothing and transposed the same mistakes to the energy market.
To resolve this the government needs to ensure that the capital requirements of energy providers are adequate in the future. These requirements should be stress tested against price and supply shocks.
At the same time the government must ensure investment in energy supply and storage to smooth out supply risk and price jumps. It must also seek to reduce reliance upon imports to reduce risk and the chance of political manipulation of our energy market by hostile countries.