In 2016 In 2016 GB Energy ceased trading, transferring their 160,000 customers to Co-operative Energy. This was the first energy supplier exit in eight years. Since then, a total of 22 energy suppliers have gone bust affecting over 4 million domestic consumers, with Green Network Energy and Simplicity Energy joining the ever-growing list in January of this year.
The good news is that domestic consumers are protected under the Ofgem Supplier of Last Resort (SoLR) procedure which ensures that when supplier failure occurs, they are guaranteed continuity of supply. Under Ofgem regulations domestic consumers are also entitled to have any credit balances refunded so that they do not end up out of pocket. However, these guarantees do nothing to protect consumers from the worry and complications of being in the SoLR process – from the overall uncertainty, the frustration of failed processes, the feeling of panic at being contacted by a debt collection agency on behalf of the administrator to the hassle of ensuring your credit balance is correctly repaid.
It is also worth highlighting that if are a business energy customer there are no similar guarantees in place – if your energy supplier goes bust and you have a credit balance, you will need to join the list of other creditors waiting to be paid.
Factors driving energy company collapses.
From 2018 – 2020 the UK energy market saw an unprecedented increase in the number of company failures – peaking in 2020 with a total of 18 businesses going bust as outlined in the below graph:
The reasons for this meteoric rise in the number of energy company collapses are complicated, with rarely one singular factor acting as catalyst but often a combination of external (market) forces and internal (business model/process) failings. The key factors that have been identified as recurring within many of the recent energy company failures are outlined below:
Entry of new to market suppliers
Innovative offerings such as “supplier in a box” have significantly reduced the barriers to new energy supplier entering the market – which was historically dominated by large, well-resourced firms, known as the Big Six. Whilst this has increased competition and consumer choice, these new, smaller firms are often not as well resourced, less experienced and have consequentially often struggled with cash flow challenges in light of market changes such as wholesale energy prices and rising policy costs.
Rising wholesale costs and tighter margins
A major problem for energy suppliers has been increases in the price energy firms pay to buy gas and electricity to supply their customers. This can dramatically affect energy business profit margins and has created a challenging marketplace for small, new to market, energy companies, who are endeavouring to grow market share by offering low prices to their customers. With energy margins already tight, a small change to wholesale prices can mean the company ends up selling energy below cost – creating an unsustainable business model.
This was the case for Iresa Energy who, in the face of increased wholesale prices, was unable to maintain its business model and went bust in July 2018 and for Yorkshire Energy (Daisy Energy) which went bust in December 2020.
“Their (Yorkshire Energy’s) problem, like so many other failed energy suppliers, seems to have been their business model. Losing money by selling energy below cost in a market where everyone else is losing money by selling energy on the cheap, was never going to end well.” Joe Malinowski, founder of energyscanner.com
The cost of government obligations
Energy suppliers are required to cover the cost of government programs designed to help save energy, encourage the take up of renewable energy and support vulnerable customers, such as the elderly. These costs must be allowed for in a company’s pricing structure and business model or the business will not be sustainable. Several suppliers who have tight margins and want to grow their customer base through offering lower prices have struggled to keep up with these costs. This was the case for Spark Energy, Toto Energy, Robin Hood Energy and Tonik Energy to name but a few who have gone bust after failing to meet their Ofgem payment obligations.
A company missing their carbon / green payments is often an early identification flag that an energy supplier may be in trouble. BSB have incorporated this and a number of other factors, including missed VAT / Corporation Tax payments, to help build an early warning model for energy companies in distress.
Poor Customer Service
Many new to market energy suppliers have struggled to provide their customers with an acceptable level service. This not only creates ever increasing demands on the company’s customer service team as the more dissatisfied customers, the greater the volume of inbound customer calls, but can also draw fines from Ofgem or lead to Ofgem to restricting their ability to take on new customers or suspending their licence. All measures which can put further distress on an already struggling business.
Extra Energy, which a went bust in November 2018, did so while being investigated by Ofgem regarding more than 1,160 complaints that had been made against it in a 12-month period. One Select went bust in December 2018 after coming bottom of the Citizens Advice’s star rating table, whilst Economy Energy went bust in January 2019 after Ofgem banned it from taking on any new customers until it improved the standard of its customer service.
Whilst the market conditions are challenging, they are clearly workable, as demonstrated by the continued survival of the “Big Six” and several of the new suppliers. Ultimately what all the energy suppliers that have gone bust have in common is failings in the management of the business. Whether this is in terms of developing unrealistic, unsustainable pricing structures, not allowing for seasonal variations in wholesale fuel prices (gas costs more in winter when cold weather makes it more expensive to pump), inadequate financial planning to meet government obligations or not developing and implementing the appropriate processes and procedures to effectively and efficiently run and energy supply business in the UK.
The UK energy market is economically complex and challenging with high levels of government regulation. The businesses that succeed are either highly experienced in the nuances of the UK energy marketplace such as the established “Big Six” or have a strong commercial vision which is delivered through well-established business processes. The ongoing success of Octopus Energy shows that it is possible for a new business to enter the market and succeed.
Ashley Barratt – CEO Barratt Smith Brown
Leicester based Barratt Smith Brown, has established a strong reputation for providing market-leading debt collection support to the utilities sector. Leveraging CEO Ashley Barratt’s 15 years of experience at Centrica, they have not only provided outsourced support to key industry players such as Business Stream, Bristol Energy and Shell, but have taken a lead role in managing collections for UK energy administration collections – handing over 75% of energy administration cases since 2018. Their expertise in energy administrations led to their key role in helping The Citizen’s Advice Bureau develop their Supplier of Last Resort – Good Practice Guide.