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Trouble in the Utility Sector - Will More Suppliers Fail in 2021?

28 January 2021

Back in December, our resident utilities expert Sandy Duckett predicted further consolidation in the energy sector due to continued financial pressure, extended forbearance and a worrying accumulation of problem debt. 

Just four weeks into 2021, this forecast seems prescient.

Yesterday, Ofgem confirmed that two energy suppliers – Green Network Energy and Simplicity Energy – will cease trading with immediate effect, impacting around 400,000 customers.

So, what does this mean for the Utility sector?

We caught up with Victoria Oliver for her thoughts on the current situation.

What happens when energy suppliers go bust?

When energy companies go bust, their customers are automatically switched to a rival, via the Ofgem safety net. This ensures that customer energy supplies are secure and domestic credit balances are protected. 

For the supplier, money from a central pot is used to cover some of the debts from the failed supplier, helping suppliers take on the accounts of the failed firm. In total, 4 million energy customers moved suppliers last year due to failed energy suppliers going bust.

“When something impacts 4 million people, it’s headline news” says Victoria who adds that Ofgem have recently tightened rules for new entrants following the failure of over 23 suppliers who have gone bust since 2016.

As reported in The Times, the energy market is currently retreating from a period of intense competition which saw the number of suppliers boom from 13 in 2004 to a peak of 70 in 2018 as brands entered the market, challenging the dominance of the traditional big six. 

Unfortunately, Green Network Energy and Simplicity Energy may not be the only suppliers this year who struggle to operate with low margins given the financial pressures of the ongoing coronavirus pandemic.

How are Ofgem responding to the current situation?

Ofgem are responding to the current disruption with a comprehensive package of measures to support the industry, ensure competition, promote sustainability, security of supply and deliver on the government’s net zero target for carbon emissions. 

Two measures stand out this quarter. Firstly, the energy regulator has instituted a new ‘fit and proper’ requirement which significantly tightens the rules governing the entry of new suppliers into the market. 

Secondly, Ofgem has also proposed a lift to the current energy price cap by £21 to help suppliers cover additional coronavirus costs. This will help to offset the cost of extended forbearance and the reduced collections as the economic fallout from Covid-19 continues. 

These measures should go some way to restoring confidence in the sector – both by restricting unrealistically cheap deals and by allowing energy suppliers to collect additional revenue from over 97% of customers who continue to pay their bills.    

“I think everyone in the industry recognises the vital support Ofgem are providing” comments Victoria “but as the second lockdown continues, these measures may not be enough to prevent more failures like we saw with Green Network and Simplicity”

Reasons why energy suppliers may need further support

The biggest reason to expect more disruption in the energy sector is also the most obvious – coronavirus is still with us, and a UK-wide lockdown remains in place. As people stay at home, utility bills are rising as our electricity, gas and water consumption increases. 

Prices rose +30% in December according to The Telegraph, prompting concern that households will be ill prepared to meet what could be unexpectedly high bills as government support schemes expire. 

Furthermore, customer arrears are mounting fast. Citizens Advice report over 600,000 households fell behind on energy bills in 2020, owing an average £760 for electricity and £605 for gas, amounts that are now weighing on the finances of suppliers nationwide. 

And finally, there is the open question of just how much lasting damage will be caused by the coronavirus crisis. For the time being, the unprecented package of support from the government in the form of furlough payments, bounce back loans, forbearance and tax breaks have undoubtedly helped to save jobs. 

"The elephant in the room is how long the government will choose to borrow in order to provide coronavirus support." adds Victoria reflecting on the ongoing decisions faced by HM Treasury ahead of the March budget. 

This week we saw unemployment rise above 5% for the first time in 4 years – but this figure is almost certain to increase in 2021 as government support expires and the economy attempts to return to normal over the next 6 months.

Victoria Oliver is the Director of Client Development at Just.

Victoria has over 19 years’ experience working in debt recovery, having held senior roles at Fredrickson International, Lowell and Qualco working with clients in the utility, telco, banking, retail and government sectors.

Find out more about our debt recovery solutions for utility companies