The size and scale of the current energy crisis and the knock on impact on consumer bills is now “beyond what this industry can deal with”, according to ScottishPower’s CEO Keith Anderson.
Speaking alongside representatives from E.ON, Centrica and EDF at a Department of Business, Energy and Industrial Strategy (BEIS) select committee meeting that also saw representatives from Bulb and Avro speak on their collapses, Anderson said his biggest concern is for October, when the price cap is set to rise again, with a particular concern for the most vulnerable and poorest.
Anderson said that with it now being the summer period, consumption will be much lower, making bills more manageable, but October – particularly for prepayment customers – is “going to be horrific”.
“It’s got to a stage now where I honestly believe the size and scale of this is beyond what I can deal with. It’s beyond what I think this industry can deal with, and I think it needs a massive shift, a significant shift, in the government policy and approach towards this,” he said.
Suggestions for ways in which the government can intervene included the creation of a deficit fund, which would take £1,000 off the bills of any household deemed to be in fuel poverty or vulnerable, with this then repayed over a ten year period. Anderson said this could be either spread across the entire consumer base, or the government could part fund it.
E.ON’s CEO Michael Lewis, said short term measures that could be introduced include removing environmental levies and putting them into general taxation, reducing VAT to zero and extending the warm homes discount further. He also suggested an extension of the existing £200 loan to households.
However, the protection of consumers from rising energy bills was not the only focus of the select committee meeting. Focus was also thrown onto the significant numbers of energy suppliers that went under in 2021 – with this then adding to consumer bills through the Supplier of Last Resort mechanism.
Changes need to be implemented to prevent a similar situation occurring again, with Centrica CEO Chris O’Shea stating: “I worry that we may see more failures later this year, and it may actually dwarf the failures that we saw last year.”
He said that Centrica has consistently called for four things, including ringfencing customer credit balances and ensuring those involved in running energy companies pass a fit and proper person test.
Later in the select committee session, CEO and co-founder of Bulb Hayden Wood confirmed that the company did perform fit and proper tests for all senior executives at the company as part of the licensing conditions, with this being a process Bulb ran internally before making a declaration to Ofgem.
Meanwhile, Avro Energy’s CEO Jake Brown told the committee he was not aware of a fit and proper test having been done on himself.
Also included in Centrica’s four calls was the suggestion that there should be proper capital adequacy rules and risk management rules.
“If you don’t have enough capital and you can’t raise that capital, you don’t belong in this market,” O’Shea said.
He added that the insolvency service should pursue the managers, directors and executives of every failed energy supplier. “Those that have misbehaved should feel the full force of the law,” he said.
Avro Energy and Bulb
During the committee session, there was much talk of challenger energy suppliers using consumers’ money for growth, with Lewis stating that something that is fundamental and “has to be got right” is ensuring companies coming into the market put their own equity capital at risk.
“That has not been happening; they’ve been gambling with customer’s money. And they’re not just gambling with their own customer’s money- they’re gambling with our customer’s money, because our customers are having to pay an increased standing charge now as a consequence of all of those failures,” he said.
However, Wood said later in the session that Bulb had not been using customer credit balances to finance its growth, making reference to the various fundraising and investment secured by the energy supplier.
Wood added that during the final months before the company was placed into special administration, the focus was on preventing that from occurring, with a three stage process including attempting fundraising, exploring sale opportunities and lastly exploring a sale of the business that would have been government supported.
Wood said that at this final stage, there were multiple interested parties, but was unable to name them due to non-disclosure agreements. He also confirmed that Bulb did not reject any offers from investors.
“We at Bulb should take responsibility for how the business failed,” he said.
He added that as a newer energy company – having only been set up in 2015 – Bulb did not have access to the long-term hedging markets that the incumbents in the industry did.
Meanwhile, Brown stated that for Avro at the point of administration, “there were no hedges there”.
“The reason for that is we followed a hedging strategy where we tried to buy little and often, looking at opportunities in the market.”
He added that Avro had been in discussions with its trading partners and was of the belief that Nord Stream 2 was likely to come online towards the latter part of 2021, with concerns that this would then collapse the price and Avro would be faced with a massive margin call it would be unable to meet.
Social tariffs in times of stability
Other suggestions for developments in the energy supply sector to come out of the meeting include a move towards a social tariff, suggested by Anderson.
This would be a long-term measure that would need to be implemented when the market is more stable. It would see the price cap changed to a social tariff, which would discount the price to people in poverty, with the cost of that then “borne by those who can pay”, Anderson said.
As it stands, Lewis said that E.ON is expecting a severe impact of the rise in the price cap on customers’ ability to pay their bills, and that while the government measures introduce will help, “it isn’t nearly enough to mitigate the full impact of this price increase”.
He expects there will be significant numbers of people who move into fuel poverty, and a significant increase in bad debt.
If there are no further measures introduced by the government, E.ON expects to see outstanding debt increase by around 50% by the end of the year on its books, which would be an increase of around £800 million.
ScottishPower had 8,000 calls last week from people concerned about their ability to pay as part of a new line set up by the energy supplier.
O’Shea, meanwhile, said that for credit customers who receive a bill, the real effect will probably be in January or December time, meaning there’s still time “to do something on this”.
“We’re seeing an uptick now but it will get worse without any further intervention,” he said.
Indeed, Anderson praised Ofgem for its engagement with the industry over the past six-nine months, stating that the regulator now “fully understands” the issues both the industry and consumers are facing.
He said he believes that between now and October, there will be significant changes relating to the price cap, its methodology and controls for companies coming into the market.
“The one thing Ofgem can’t fix on their own, and it requires government to help and government policy to help, is the ability for people to pay. That, to me, is the biggest issue we face,” he said.