Four energy providers have already gone bust this month and industry sources said another four were on the brink of collapse. One insider said the sector was braced for a “bloodbath”. Analysts say as many as 30 companies could go under this winter, although a senior energy executive said they didn’t recognize that number.
Natural gas prices have soared 70% since the start of August and 14% in just the past week. The surge has pushed UK day-ahead electricity prices to record levels.
The Government’s energy price cap means suppliers can’t immediately raise prices to reflect the higher wholesale costs. As a result, many operators are now losing huge sums servicing customers on unprofitable deals. The problem primarily affects smaller operators, as large companies will have hedged their exposure by agreeing prices to buy electricity in advance.
However, any collapse will send shockwaves through the wider industry. When a company fails, the Government asks remaining operators to take on their clients. Exposure to these customers won’t have been hedged, meaning each new customer will likely lose the provider money. Credit Suisse said absorbing 10% of customers in the market would cost the industry an estimated £1 billion.
“If there is a rash of failures and other suppliers have to take on lots of customers on the regulated default tariff, that will be an expensive option for the new supplier, which will want compensation from the regulator for being the supplier of last resort,” said Henry Edwardes-Evans, an energy analyst at S&P Global Platts.
Energy stocks fell in anticipation of rising costs. British Gas owner Centrica dropped 1.1%, National Grid fell 1.1%, and Eon fell half a percent in Germany. Shell, which operates a consumer energy brand alongside its main oil business, fell 1.3%.
Energy companies have been holding crunch talks with the Government and regulator Ofgem over the weekend to try to agree emergency support measures. Business secretary Kwasi Kwarteng today hosts another round of talks.
Sources said the energy industry had presented a range of possible measures, including: state-backed loans linked to new customer numbers; a financial crisis-style “bad bank” to service unprofitable customers left behind by bust companies; and a temporary halt to green levies and other policy costs. A source close to the discussions said all options were being considered.
The Financial Times reported that challenger energy brand Bulb is seeking new funding to help weather the crisis. A spokesperson said the company was exploring “various opportunities” in light of record gas prices.