Why did all the energy companies go bust?

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In total, 28 energy suppliers in the UK went bust in 2021. Here’s what happened and what it means for the future.

The rapid and alarming rise in energy prices has affected almost every person and business not only in the UK but around the world. After more than 20 years of stable energy prices, the sudden rise has shocked consumers and destabilised many businesses already struggling as a result of staff shortages and supply chain issues.

For energy companies, it has been a similar story as the supply of gas became scarcer and the price per unit rose rapidly to unsustainable levels. Here, we examine the driving forces behind that change.

What is happening to wholesale gas prices?

There has been a huge squeeze on gas prices globally and this has been reflected in the energy bills customers are facing. Reasons, which come alongside the wider supply chain and staffing issues so many industries have faced, include:

  • A cold winter in Europe last year put pressure on supplies and, as a result, stored gas supplies were low;
  • A relatively windless summer meant it was difficult to compensate for those lost gas supplies; and
  • There has been increased demand from Asia – especially China – for liquefied natural gas.

Those first two points, though are crucial. The UK, despite its vast wind farms and increasing use of other green sources, is in not in a position to expand its use of alternative power sources when one or more fuel sources fails. As such, it is beholden to the global market for gas.

There are a number of technical and geopolitical issues at play as well. Chief among them is the £8.3bn Nord Stream II pipeline from Russia to Germany via the Baltic sea, which means many countries across Europe are grappling with the same problems. Nord Stream II, which could vastly increase the gas supply in Europe, has become a political hot potato as it could place the continent’s energy security in Russia’s hands.

Meanwhile, China’s increased demand for liquefied natural gas has been driven by its efforts to shift away from coal and transition to greener sources of energy. China, like many states around the world, regards gas as a key transition fuel in the move to more sustainable energy.

What has this meant for energy suppliers?

That inability to readily tap into alternatives to gas has meant that for many providers, it is grimly simple: the cost of producing energy is greater than the income they are able to generate.

Regulator Ofgem lifted the price cap on household gas and electricity bills by 12% to £1,277 in October last year. It is due to rise again by 54% in April. However, a large number of firms collapsed because they were unable to pass on the wholesale price rise to the consumer as a result of the cap. In fact, 28 energy companies have collapsed since January 2021 (see table on p15), affecting a total of nearly 3.5 million customers. Bulb, the largest to collapse, was the UK’s seventh-largest provider, with 1.7 million customers.

Scottish Power chief executive Keith Anderson told the BBC in November that the energy market was “broken” and the price cap was largely to blame.

“We’ve already seen the price cap go up by £150-180 and… in April, the price cap will go up by several hundred pounds,” he said.

His assessment has more recently been backed up by Chris O’Shea, chief executive of British Gas owner Centrica, who said the price pressures would remain in place for up to two years. This is, he says, because of the same reason China’s demand for gas has risen: gas as a transition fuel.

“As you turn off coal-fired power stations in other countries, there isn’t an abundance of gas that you can just turn on quickly,” O’Shea told the BBC in January.

How are businesses affected?

Unlike consumers, businesses in the UK are not beneficiaries of a price cap. As a result, businesses across the country are fully exposed to the rising prices.

In the Federation of Small Businesses’ (FSB) latest quarterly survey, 45% of the nearly 1,300 firms that participated said their costs had increased in the past three months because of rising utility bills.

“The picture we’re seeing is that unplanned-for bill increases are hitting firms when they’re already up against other major headwinds – supply chain disruption, inflation heading for 6%, increasing late payment from large business customers, and the biggest tax increase in small business history coming in April,” says Craig Beaumont,
the FSB’s head of external affairs.

Firms can, of course, shop around as they seek better deals, but all energy providers are experiencing the same pressures, meaning savings are hard to come by.

As is the case with consumers, if a business’ energy provider collapses, the advice is to do nothing while Ofgem places affected customers with a new supplier.

When the new supplier gets in touch, businesses then need to negotiate a new energy contract – notwithstanding the current market’s issues, this is usually a good time to shop around and switch, as exit fees are not charged at this point.

If your business had a switch in progress when your supplier went bust, the move to your new supplier should continue as arranged.

What is the impact on consumers?

Despite the price cap shielding them from the worst of the rising gas prices, consumers have still been hit hard, with the cap raised in October to a record £1,277. Introduced in 2019, the price cap is adjusted twice a year in October and April, meaning many of the steepest rises in wholesale gas and electricity prices in the past few months will not hit households until the spring, when bills tend to decline as heating demands reduce.

In December, trade body Energy UK warned consumers that bills could rise by as much as 50% in the spring, meaning the cap could soon exceed £2,000. Around 11 million households on default tariffs will see their bills increase straight away when the cap is raised.

Indeed, consumer charity Citizens Advice estimates supplier failures since August 2021 will cost consumers £2.6bn – around £94 per customer from 2022 – not including the £1.7bn of taxpayer money the government has set aside for Bulb’s failure.

Lessons for finance teams

  • Fix energy costs where possible to limit further exposure to price rises and make expenditure more predictable.
  • Make adjustments elsewhere in the business to help fund the increased outgoings. Can you find cheaper suppliers or raise prices, for example?
  • Set cash aside to help absorb future price rises.

Calum Fuller Calum Fuller is editor of AT and 20 magazines. He's previously served as editor of Credit Strategy, assistant editor Accountancy and began his career at Accountancy Age..

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