Fears among energy providers that colder temperatures will lead to collapse
The UK energy industry fears that, after small providers have gone bust because of the energy cap, now it’s the turn of big companies especially as temperatures go down.
As reported by the Times, even if 13 companies have ceased operations in the last couple of months the UK Government has refused to set up bailout measures.
Business secretary Kwasi Kwarteng said this month that “there cannot be a reward for irresponsible management of businesses”, while Centrica’s chief executive Chris O’Shea explained that some of these companies were offering “cheap, unrealistic deals”, “gambling with their customers’ money.”
According to Energy UK’s chief executive Emma Pinchbeck, the situation not only involves bad companies that were unable to stay afloat but it’s due to a mix of causes that increasingly worries even stable providers.
“Where we’re at now, it’s the gas spike that’s to blame,” she told the Times. “Even very well-hedged, well-run companies that have been in the market for a very long time are looking at the situation and are really, really worried.”
Experts believe that one of the main causes is the energy cap, which was set in 2019 and limits prices for people on standard variable tariffs as well as for those with prepayment meters.
As it is updated every six months, Ofgem set the October cap making calculations based on historical wholesale price, expecting suppliers to buy energy in advance and not realising they actually buy it at the start of the contract.
This resulted in wholesale prices being higher than expected, which prompted customers to end their fixed contracts and revert to standard tariffs instead, costing the industry £2bn.
The cold weather is also playing a part. As highlighted by Ian Barker, managing partner at consultancy firm BFY Group, if it’s colder than expected suppliers need to buy more expensive energy at the last minute and that costs the industry huge amounts of money.
“The price cap was never designed to deal with these challenges, which will be making it very difficult even for well-run, well-hedged suppliers,” he told the Times.