Why U.K. Gas Suppliers Are Going Bust, and Who Pays
(Bloomberg) -- The U.K. has one of the most deregulated energy markets in the world, designed to keep prices low and competitive. Customers can buy natural gas for their homes directly from large suppliers or smaller ones who purchase gas from the wholesale market and sell it on. The system works fine in normal conditions but was breaking down as winter approached under pressure from record prices caused by supply disruptions in Europe and surging post-pandemic global demand. Domestic fuel bills rose in October and looked set for more increases in 2022 even with price caps to protect households.
1. In what way are things breaking down?
As of early October, 10 small U.K. energy suppliers had gone out of business in just two months, forcing some 1.7 million homes to switch providers. More companies may go bust this winter, Kwasi Kwarteng, the U.K.’s business minister, and energy regulator Ofgem have warned. The largest U.K. energy suppliers are seeking a fund to help cover upfront costs estimated at about 1,000 pounds ($1,358) per household. In October, the Energy Intensive Users Group, a lobby organization, urged the government to roll out emergency measures quickly, including containing costs on gas, power and carbon prices, to help industrial energy users keep producing essential goods.
2. Why can’t the suppliers just raise prices?
The U.K. regulator, Ofgem, sets a cap for energy prices for consumers on default tariffs and reviews it twice a year. Bills already climbed 12% for about 15 million households from Oct. 1 after Ofgem’s most recent cap increase, and could rise a further 30% in April 2022, according to energy market analysts Cornwall Insight Ltd. (Rising bills were putting upward pressure on inflation in the U.K., which unexpectedly leaped above the Bank of England’s 2% target in the past few months.) The smaller suppliers can profit by undercutting their larger rivals when prices in the wholesale market are lower than those locked in by suppliers to long-term contracts. When wholesale prices soar, as they have recently, the smaller companies are squeezed.
3. What happens when a gas supplier goes bust?
In theory, Ofgem simply assigns customers of a failing supplier to another company. The solution works when those customers are profitable for a rival to take on but is tougher to impose when they bring losses. That’s why larger suppliers are seeking financial support from the government to ease the hit they were being asked to absorb. The pressure on the government to intervene increases as more suppliers collapse. There were parallels to the global financial crisis a decade ago, when healthy banks were asked to help rescue failing rivals and separate institutions had to be set up to handle bad loans.
4. Why does the U.K. market work this way?
Deregulation of the market dates back to the Conservative government of Prime Minister Margaret Thatcher in the 1980s, part of a drive to reduce the role of government in the economy. The aim was to cut costs for consumers and give them more choice in their source of supply. During the past decade, the government has encouraged a large number of suppliers to enter the market, contributing to the current high level of competition.
5. Which gas suppliers are affected?
Igloo Energy Supply Ltd., Enstroga and Symbio Energy, with a total of 233,000 customers, joined Utility Point, which sells gas and electricity to around 220,000 domestic customers, and People’s Energy, with about 350,000 domestic customers, in announcing they would stop operating. Utility Point’s customers were assigned to Electricite de France SA. Pfp Energy and Moneyplus Energy with a combined 94,000 customers both went out of business and Ofgem transferred their customers to Centrica Plc’s British Gas unit, which also took on customers of People’s Energy. The industry warned that of more than 50 companies in the sector, fewer than 20% could be in business by the end of 2021.
6. What about households?
According to research by two academics at the University of York, cited by the Guardian, more than 2.5 million households in the U.K. are already in fuel poverty, where more than 10% of net income is spent on energy bills. Energy price increases over the coming year could push that total close to 3.5 million. Former Prime Minister Gordon Brown warned hundreds of thousands of families would be unable to pay energy bills in coming months, or only be able to do so by going short of food.
7. Is this just a U.K. issue?
No. Natural gas prices have surged in Europe as well, due in part to Russia, a key supplier, capping additional flows to the continent. With the start of the heating season, the amount of gas stored underground at sites across Europe was below the 10-year average, although adequate to cover winter needs, according to EU energy chief Kadri Simson. European countries have stepped in to help consumers, with Spain easing the cost of energy bills and Greece announcing a subsidy for all households.
8. What are the possible solutions?
Under existing rules, when a provider fails, the regulator appoints a new one in a process known as Supplier of Last Resort, or SoLR. If a larger firm or several smaller ones fold, the government can step in as a special administrator. While that step has never been taken before, there’s concern that the current crisis is so severe that it will test the capacity of the SoLR process.
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