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Britain’s energy regulator has launched a £350m support scheme to avoid the collapse of distressed electricity and gas suppliers that have been hit by customers failing to pay their bills during lockdown.
Under the proposals announced by Ofgem on Tuesday, first outlined in the Financial Times, weaker energy suppliers that lack an investment grade credit rating and find it harder to raise finance elsewhere will be allowed to defer payments they must make to network operators such as SSE, ScottishPower and Northern Powergrid.
These charges to maintain Britain’s electricity and gas grids make up about a fifth of a typical energy bill.
However, the scheme has already been challenged by some energy suppliers with more robust balance sheets that claim it will prop up weaker rivals that were in trouble before the coronavirus pandemic struck.
Nearly 20 smaller suppliers went bust between November 2016 and March 2020 as fierce competition in the sector, compounded by price caps for 15m households, put pressure on profit margins. Some smaller suppliers also did not hedge sufficiently against volatility in wholesale markets.
Doug Stewart, chief executive of Green Energy UK, called the £350m scheme a “sticking plaster for an open wound”.
He added: “It’s just going to put off the fateful day that lossmaking suppliers are going to hit the buffers.”
Another supplier, which spoke on the condition of anonymity, called it a “backdoor bailout” and an “astonishing handout to the worst run companies”.
But Juliet Davenport, chief executive and founder of smaller supplier Good Energy, defended the move. “It’s important that sustainable and well-run businesses aren’t forced into failure by this crisis,” she said.
“We don’t believe this new scheme directly impacts Good Energy, but it will allow some companies the breathing space to adapt to the ongoing upheaval and ensure a level playing field,” she added.
Companies including market leader Centrica have warned of rising bad debt as households and businesses that have been hit hard by the lockdown imposed at the end of March struggle to pay their bills. Suppliers have also seen a significant drop in energy demand due to business closures.
In an open letter to energy supply and gas shipping companies, to which the scheme also applies, Jonathan Brearley, Ofgem’s new chief executive, said he expected the scheme would only be accessed as a “last resort”.
Businesses with an investment grade credit rating can access economy-wide support schemes that were introduced by chancellor Rishi Sunak at the start of the pandemic and so would not be eligible for Ofgem’s support, Mr Brearley added.
Businesses that apply for the payments holiday, allowing them to defer 75 per cent of their monthly networks bill for a maximum of three months, would have to repay sums owed by the end of March next year. The deferrals would be subject to an interest rate of about 8 per cent.
The scheme is capped at £1.6m for each supplier and £1m per gas shipping group.
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