Energy supplier debt crisis creating “house of cards”


Energy suppliers have liabilities of hundreds of millions of pounds and more are likely to go bust. Those left standing will have to pick up the tab and pass it on to their customers, according to Chris Bowden, MD of business clean energy supplier Squeaky Energy.

Bowden has decades of experience in finance and energy, working in commodities with Rothschild & Co and Merrill Lynch before founding Utilyx in 2000 and selling to Mitie in 2012.

Even as a “stable, liquid supplier” operating in the non-domestic market, the current situation is making him “very, very worried” about the impact on the sector.

“The market is in a complete mess, I have never seen it so bad,” he said. “And it’s going to get worse, significantly.”

He thinks controls on who can enter the market are a bit late and that business models based on loss leading acquisition are doomed if people keep switching to other loss making tariffs.

Switching spiral

The suppliers that have gone bust to date have been relatively small. But Bowden points out that some of the larger independents are borrowing big sums, are eight figures overdrawn and trading significant other payables.

If they keep growing while managing to keep customers and raise tariffs over time, they can pay off debt and survive. If not, “the domestic market could implode”, warned Bowden, with potentially even a big six firm at risk of going under.

Chris Bowden: things are going to get worse

The problem is, “the only way they have been able to grow to date is by attracting loss making customers”, he said. The incoming price cap compounds their challenge.

“All the margin over the last 10 years has come from retained customers [those that don’t switch and subsidise those that do]. The price cap kills that,” said Bowden.

“It is the perfect storm. I feel genuinely sorry for the big six. If they can ride it out, they will be fine, but there will be a lot of bloodletting during this period.”

That’s doubly bad for consumers, said Bowden, because those struggling to survive will “just keep cutting corners”.

Market oversight

As Extra Energy and Spark Energy collapsed last month, Ofgem announced plans to ensure new suppliers have adequate capital and resource before they are granted licences.

Bowden thinks checks and balances should have been in place years ago.

“I like to see new entrants shaking up the market, but it is hugely complex. Why were so many people who do not know what they are doing given licences?”

Bowden outlines the costs associated with becoming a supplier – software contracts are “at least six figures”, plus trading, marketing and other direct costs.

“It is not cheap to become a supplier and unless you know what you are doing, it is very hard to build a low cost model. You end up with a relatively high fixed cost, you have to manage complex risk and yet the only real way to win customers is on price,” said Bowden.

“That’s why the big six have been bleeding customers – but all of those customers ‘won’ from them are completely loss making for the acquiring supplier.”

Missing money

As a result, and as wholesale prices rise, a number of independents used up the money they were supposed to pay into environmental policy funds (primarily the Renewables Obligation buyout fund, administered by Ofgem, which is £59m short).

Bowden cannot see how Ofgem will recover that money and thinks that the regulator has its work cut out in managing the scale of the problem.

“I suspect they are trying to hide the mess and organise it away,” he said. “But the mechanism to spread the mess is the other suppliers, which increases the cost for those still operating, in turn increasing costs for consumers.”

Combined with other loans to stay afloat, “the borrowing gap is getting bigger,” said Bowden. “There are several hundreds of millions of liabilities. It is a massive house of cards.”

Related stories:

Extra Energy goes bust

Spark Energy shuts down domestic supply business

Ofgem tightens supply licence rules as money goes missing

Big cracks emerging in energy retail

Risk mismanagement: More suppliers will go bust

Utility Warehouse: More independent suppliers will go pop

GB Energy goes belly up

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