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The UK’s largest energy retailers have warned suppliers could refuse to absorb the customers of failed rivals unless the government comes back to negotiate a rescue package, arguing that intervention in the sector is unavoidable.
Kwasi Kwarteng, business secretary, this week backed away from arranging a deal for the sector following emergency talks to address the number of suppliers collapsing because of record wholesale prices, saying the industry must resolve the problem of orphaned customers itself.
Bill Bullen, chief executive of Utilita, which has roughly 800,000 customers, said the amount of money required to take on the customers of failed suppliers was so big that “it’s impossible” for anyone but the very biggest businesses to participate.
“Without some kind of backing…it’s highly unlikely we will be able to go ahead and absorb anyone else,” he added.
Keith Anderson, chief executive of ScottishPower, the UK’s fifth-biggest energy retailer, said the strongest companies were being asked to take on billions of pounds of liabilities and to risk weakening themselves in the process.
The maximum companies can charge householders under the UK regulator’s price cap is £1,277 from October 1, but that amount is at least £500 per annum below the cost of providing gas and electricity at current prices to the average household.
“It is not us asking for a bailout. I don’t need these customers,” Anderson said.
“If you think this issue covers 2m-4m customers, because there are a lot of suppliers out there, you could be talking about £2bn, £3bn, £4bn, £5bn [in uncovered wholesale energy costs].”
Seven power companies have gone bust in the past six weeks as wholesale prices of gas and electricity surged to record levels with further collapses soon expected, with the majority of the now sector lossmaking.
Dale Vince, founder and chief executive of Ecotricity, a clean energy supplier, said he feared the government was trying to take an “ideological, free market approach”, refusing to recognise distortions resulting from the price cap.
“This isn’t a free market, so saying it needs to sort itself out is foolish,” he said.
“With a price cap, the market isn’t free if you can’t pass on rising costs to customers. The reality is the only question is how we as citizens of this country end up paying for the record wholesale prices we’re facing. You can’t just pretend they’re not happening.” said Vince.
Under the current system, known as the “supplier of last resort”, when a company fails Ofgem finds an alternative business to keep serving stranded customers. Costs incurred by the new provider are shared across all customers’ bills.
But energy companies are concerned that the system will become overwhelmed if they are forced to take on too many contracts.
Some industry observers have suggested only 10 companies could survive the winter, implying as many as 40 could go bust, although Kwarteng and Ofgem have played down the forecast.
Energy executives have warned that if too many suppliers fail at the same time, Ofgem could struggle to find alternative companies with the balance sheet strength, capacity or willingness to take on potentially millions of new customers.
One executive warned there is a “significant risk” some companies might refuse. “Then you’re in a real crisis,” they said, adding: “We need to plan a viable solution in case the worst happens.”
Some energy companies have argued for state-backed loans, allowing companies to go out into the market and take on debt underwritten by the Treasury to accommodate lossmaking customers.
They suggested that solution would allow losses to be recouped from customers’ bills over 5-10 years rather than a shorter period of typically a year.
The business department said on Friday that it believed the existing system was still “robust”. Ofgem said its “priority” was to “make sure costs to the wider market of doing so are kept as low as possible”.
Kwarteng has said a “special administrator” could also be appointed to run a business if the supplier of last resort system is “not possible”, but executives say that would involve the effective creation of a nationalised energy company.
One energy retail executive said that would probably involve taking over one of the larger failing suppliers, retaining staff and IT systems to help manage the orphaned accounts and to help buy potentially billions of pounds worth of gas and electricity to supply them.
“Special administration doesn’t get the government out of putting money in,” said one executive.
Vince at Ecotricity said that he hoped the government would have to take over a supplier so it could experience how difficult the situation was for established providers.
“I hope the government join the game,” Vince said. “And feel some of this pain.”
Additional reporting by Jim Pickard
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