There are 12 suppliers in the UK that are technically insolvent and therefore at risk of collapse, according to analysis from accountants Price Bailey.
It looked at the credit risk scores and balance sheet information of the 22 remaining suppliers – with the analysis excluding the big six and two businesses with suppressed risk scores – and found that 55% had negative assets on their balance sheets.
Of these 22, ten had a Delphi Risk score – the commercial risk assessment scorecard provided by Experian – of above average or higher risk. Six of these fell into the maximum risk category, which suggests they would find it difficult to access funding.
“The winter of discontent for the energy supply sector is unlikely to end soon,” said Matt Howard, partner at Price Bailey.
“Around half of suppliers have already gone bust and at least another half are technically insolvent and at imminent risk of collapse. These businesses will find it almost impossible to access extra funding unless directors provide personal guarantees, and few are likely to do so in the current climate.”
In 2021, 27 suppliers collapsed, including Zog Energy, Orbit Energy, Entice Energy, Social Energy Supply, Neon Reef, Omni Energy, MA Energy, Zebra Power, Ampoweruk, CNG Energy (electricity and gas), Bluegreen Energy Services, Goto Energy, Pure Planet, Colorado Energy, Daligas, ENSTROGA, Igloo Energy, Symbio Energy, Green Network Energy, Simplicity Energy, Avro Energy, Green Supplier, Utility Point, People’s Energy, PfP Energy, MoneyPlus Energy and Hub Energy. Together Energy became the first supplier to collapse in 2022, leaving behind 176,000 domestic customers and one non-domestic.
Additionally, Bulb went into special administration in 2021, after failing to find funding opportunities amidst high power prices.
The 27 shuttered companies were absorbed by the Supplier of Last Resort (SoLR) mechanism, and their customers placed with new suppliers.
“We are seeing a domino effect,” continued Howard. “Every time a small energy retailer goes bust, that increases the financial strain on the rest of the ecosystem, making those businesses more vulnerable to collapse. Customers are passed on to surviving suppliers but exposure to those customers won’t have been hedged, meaning very often they are being taken on at a loss. It is possible that only one or two of the challenger brands will be left standing alongside the big six this time next year.”
The cost of the extensive use of the SoLR mechanism stood at approximately £2.4 billion in December, according to analysis from Cornwall Insight, adding £90 per household to bills assuming 27 million customers can cover the sum. This will further impact supplier bills, which are expected to increase by nearly 50% when the price cap is reset in April, predominantly due to record high wholesale gas prices.
Thus far, consumers have been largely protected from rising gas prices – which surged by around 500% in 2021 – due to the price cap. However, without intervention the increase in the cap to £1,865 could push up the number of fuel poor in Britain to 6.3 million.
While it has protected consumers it has squeezed particularly small suppliers, who were less likely to be hedged against the rising wholesale prices, creating a “perfect storm”, according to Price Bailey.
The accountant critiqued the strategy of many small suppliers, who have undercut the larger market participants in order to gain market share when power prices were low. But using the spot market to do this, instead of hedging power prices, left them exceptionally vulnerable to rising prices, he said.
Additionally, the larger, more established suppliers have the benefit of being more diversified, often including some energy generation assets or operations in other markets.
In addition to the squeeze of the rising wholesale costs and the restriction of the energy price cap, Price Bailey pointed to the impact of the renewable power obligations on small suppliers. Indeed, the mutualisation of the Renewable Obligation (RO) was triggered for the fourth year in a row in December, after supplier exits left a shortfall of £218,300,151.73.
“When a supplier cannot meet its obligations, that cost is passed on to other suppliers. Ofgem wants a competitive energy market but by forcing struggling businesses to pay the debts of failed suppliers and pushing some towards insolvency, the renewable obligation scheme is undermining that aim,” said Howard.
Calls to protect suppliers and consumers from the pressures of the current energy crisis have been growing, with suggestions for the best path forwards including changes to VAT in the short term and a windfall tax on north sea oil and gas companies, while the government is reportedly also assessing the possibility of cutting the Energy Company Obligation – this however has been criticised by many as very short-sighted.
Ofgem will announce the new level of the price cap on 7 February, before it comes into force in April. Government is expected to act before then, but as yet its pathway is unclear.
