Sylvia Pfeifer, Energy Correspondent
February 11, 2018
The lights went out at Future Energy this year after the Newcastle-based company said it had ceased trading. As the second independent supplier to shut this winter, its collapse has sparked new debate about whether Britain’s household energy market is working.
Over the past few years, there has been a rush of new entrants as companies have sought to break the dominance of the “big six” suppliers such as British Gas and Npower. Competition has worked; the incumbents’ market share has dropped to 80 per cent, and there are now about 60 independent suppliers compared with 11 a decade ago.
Yet while larger “challenger” companies such as First Utility and Co-op Energy have built sustainable market shares of more than 1 per cent, the recent failures have raised questions about the smaller suppliers that control about 8 per cent of the domestic energy market. Is the regulatory environment right and is the market ripe for a shake-out? Are consumers getting a fair deal?
“The marketplace is difficult for challenger energy suppliers, which lack the financial advantages of larger, national energy firms,” said David Stroud, chief executive of Future Energy, last month. “We have been unable to convert sufficient customers to enable us to forward purchase energy at the most competitive rates.”
Future Energy, which had about 10,000 customers, is not the only one. GB Energy collapsed in 2016 after wholesale prices spiked. And in early January this year Brighter World Energy, a minnow which was believed to have several hundred customers, closed its doors and passed its customers to partner Robin Hood Energy which is run by Nottingham City Council.
Industry executives predict more small providers will be at risk this year, especially in light of recent wholesale price volatility. Some small companies do not hedge their purchases and so are forced to buy energy on the spot market, exposing them to price swings. At the same time, however, they offer fixed tariffs to their customers.
One of the problems, say analysts, is that it has become too easy to set up as an independent supplier. Rapid changes in technology have lowered the barriers to entry and some consultancies now offer off-the-shelf billing and customer relationship management systems. It is also relatively easy to win new customers simply by offering a low tariff.
“It is not that difficult to get up to around 10,000 customers through price comparison websites if you have a keen price,” said Ryan Thomson, energy and resources partner at consultancy Baringa. “There is then a question of sustaining this.”
Ofgem, the industry regulator, is under increasing pressure to toughen its licensing controls. Victoria MacGregor, head of energy at the Citizens Advice charity, said “there should be much greater scrutiny of companies’ business plans before they are able to start trading”.
“It’s a fine line to tread. In a proper functioning competitive market you would expect some companies to fail, but there is a potential question mark whether there should be more collateral posting to ensure companies are properly funded,” Mr Thomson said.
Ofgem said it had “strengthened” its “monitoring of supplier performance and wider risks to the sector”, but added it was “considering the timing of a wider review of our approach to awarding supply licences”.
One change that industry executives believe is long overdue is to alter the threshold that exempts suppliers with less than 250,000 customers from paying certain environmental and social costs. They believe it should be much lower, or dropped altogether to make it harder for new entrants. For although Ofgem protects customers of failed suppliers, this comes at a cost that is spread across all energy consumers, regardless of their supplier.
“We all want a vibrant market,” said Lawrence Slade, chief executive of Energy UK, the industry trade body, “but we also need to build consumer trust — notwithstanding the fact that companies will fail occasionally — and that means ensuring market entry tests are robust to limit any risk to consumers.”
The retail market is set for more upheaval. At the top, large companies are muscling in. Royal Dutch Shell bought First Utility in December, while Vattenfall, the Swedish group, bought iSupplyEnergy, a supplier with 120,000 customers. SSE is in the process of merging its UK household business with that of rival Npower. And greater regulation, in the form of the looming price cap on the most popular tariff, will create more volatility.
“The market is a success story but from a regulatory point of view the question is, can all these companies offer the right services,” asks one industry expert. “People forget how difficult it is to run a gas and electricity supplier.”